Merit Medical Systems Inc (MMSI) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Merit Medical's third quarter 2012 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) I would now like to turn the conference over to Fred Lampropoulos, Chairman and Chief Executive Officer. Please go ahead, sir.

Good afternoon ladies and gentlemen. We're delighted to have you join us. We are broadcasting from Salt Lake City, where it is snowing today and where we're getting ready for the ski season out here. We have with us assembled members of our general staff and we'd like to start our meeting by having our Safe Harbor agreement or our statement read by our General Counsel, Rashelle Perry. Rashelle?

Thank you, Fred.

In the course of our discussion today, reference may be made to projections, anticipated events, or other information which is not purely historical. Please be aware that statements made in this call, which are not purely historical may be considered forward-looking statements. We caution you that all forward-looking statements involve risks, unanticipated events, and uncertainties that could cause our actual results to differ materially from those anticipated in such statements. Many of these risks are discussed in our annual report on Form 10-K, other reports and filings with the SEC, and available on our website. To the extent any forward-looking statements are made in this call, such statements are made only as of today's date and we do not assume any obligation to update such statements.

Although Merit's financial statements are prepared in accordance with principles which are generally accepted in the United States, Merit believes that such -- certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of Merit's ongoing operations and can be useful for period-over-period comparisons of such operations. The table included in our quarterly earnings release, which will be discussed on this call, sets forth supplemental financial data and corresponding reconciliations to GAAP financial statements. Investors should consider these non-GAAP measures in addition to financial reporting measures prepared in accordance with GAAP. These non-GAAP financial measures exclude some, but not all, items that affect net income. And finally, these calculations may not be comparable with similarly titled measures of other companies.

Rashelle, that was so beautifully done. Would you like to do that again?

Well, it is on the bestseller list.

Oh, it's on the bestseller list, good. All right. Yes, thank you very much and we appreciate it.

I think to start out with today, I suppose that the theme for medical device companies today is, if we were to put out a new book, would be the search for growth. And what I would like to be able to do today is to talk to you about our third quarter. But I think equally important is to look down the road a little bit into the fourth quarter and a little bit into next year to talk about some of the products and some of the ideas and why we believe that the growth prospects for the Company continue to be something we think will be of interest to you.

Now, as you all know and many of you have followed our Company for years, we almost always guide down in the third quarter and that guide down is usually about 5%. It's something that's seasonal that we see because of people that simply go on vacations, people that want to forego procedures and particularly we see it in the international markets. We see it particularly in Europe, in Germany, which is our largest market, and France, our largest markets in Europe, as well as our dealers who just simply take time off in August and very candidly, going into a little bit of September.

So that's what we saw and we saw it down about 5% from the previous quarter. I think, however, if you look beyond that and then look at the financial response that we had to this, you'll see that year to date our gross margins continue to improve. And if we look year over year from last year, you saw that our gross margins improved and you even saw a sequential reduction in SG&A charges. And so I think, from a financial point of view, we are pleased that we're making progress on a number of fronts that will give us better returns and financial performance.

There are a couple of other things that I think are very interesting and, candidly, it's so nice to have some of these things finished up. As you know, during the quarter we received our 510(k) on our Laureate guide wire. That was, I would suppose, the way I'd like to state it is just an unfortunate set of circumstances. The fact of the matter is it's now been resolved and you will see that yesterday we made a very brief statement that we received a letter from the FDA and they've closed out the warning letter.

Now, we didn't expect that to take place until sometime in the first quarter, so I think from that perspective, we're pleased to have that behind us. I think it was a valuable lesson in things we learned a lot about it, but it also releases a lot of our resources. It takes a lot of time to work on these things and I think we had agreed and were making monthly reports. I want to commend my staff, particularly my regulatory staff, for the work that they did to get this issue behind us.

Now, in terms of our sales, the last time I checked and I do have to tell you that I just got back from the TCT late last evening and so I haven't got the most recent update. But about five or six days ago, in a matter of less than 30 days, we had already returned approximately a third of the customers that we had before we had to pull the product from the market. It's our belief that we will have a very, very high percentage; I'm going to say in the 90% or better.

But I think equally of interest is the fact that we're opening up new accounts every day. In fact, in a discussion that we had today with our production facility in Ireland that produces the product, we essentially produced a record amount of these products last month.

So this is a great product. You've heard me talk about in the past that I believe that this represented a $50 million opportunity for Merit and I believe that continues to be the case. We had these unfortunate circumstances, but we continue to believe that this is a great opportunity for us.

We're also continuing to see demand for the Laureate in China and I will tell you that we're seeing demand for our products kind of across the board. Today we received an order, for instance, a brand new order in a product that was just approved and I won't go into the name right now, but -- well, I will, for one of our microcatheters from a customer where it was just approved for over $100,000, which is a nice order. Not material, but again it shows that the demand is out there for many of our products and we continue to be very enthused about that.

A couple of other things of interest and this is something that I'm very pleased to discuss with you. And that is that if we take a look at our Endotek business, our loss for the quarter was $86,000. Now, the interesting thing about that is, if we go back a year ago, we'd lost almost $900,000 and so we've reduced those losses. We have a number of new products that are coming out in the Endotek area, the TIO.

We continue to have a lot of interest in our Big 60. We have other products that are in the pipeline there. And we believe that with the reduction of cost of our stents -- some of you will recall that we had discussed last year that we are moving to a new vendor and that that would save about $2 million a year. Well, if you take that $2 million and you look at this $86,000 loss for the quarter, you divide that up, that's $0.5 million or so on a quarterly basis and you can see it brings that division into profitability. And that's where we are and where we expect to be in the first quarter.

We completed that, right on schedule, at the end of August. We will now finish and flow out the existing inventory that we have in place at the higher price. But as we roll into next year, then the other inventory, which is on the shelf and now being replenished, we'll replace that. It'll make us more competitive. It'll make us more profitable. And I want to thank everybody on the staff that has worked really so hard to make this.

It was a little longer than we thought, but the bottom line is we expect to build this division to $100 million. We expect it to be as profitable or more -- in fact, that it's more profitable than our general overall business and we expect it to be a contributor to growth and gross margins in the future.

Kent, you look anxious to make a statement on there, so I'm going to go let you just kind of jump in here.

Well, I just wanted to add that Endomax is really adding both -- well, it was our number four growth product for the quarter and adding nearly $600,000.

This is our new stent.

And our gross margins are improving in that area and contributing to the overall gross margin expansion for the Company. So, really, we are seeing that, which is the fundamentals, I think, for the future profitability of that department.

Yes.

And contributing for overall profitability.

So, yes and let me add that I mentioned the TIO. The TIO is a three-in-one bite block that incorporates essentially a built-in tongue depressor. It has the ability to deliver oxygen as well as a bite block. We recently introduced that product at a trade show and it was one of those shows where we had a ten-foot booth and we had them lined up four deep and all the way across.

And so this is a product that we're now building first lots to stock on the floor. We'll be releasing it in the next week or so and it's something that when you hear comments like, "Why didn't I think of that?", "This is a great idea!", "Why didn't somebody else get this to us?", "This is a long-time need." Those kinds of comments are both reassuring and allow us to have great optimism for this product that's in this division. So I don't want to spend too much time on this, but I think that we're excited about where the business is going and the contributors of growth across the planet.

We also are going to -- and are showing down at the TCT this week our ONE Snare single loop device. We've received the CE Mark on the product. It is with the FDA and we hope that sometime before the end of the year that will be approved. And we're excited about the opportunity that that creates for us to bundle snares together.

There's no doubt in my mind that a few years down the road that Merit will be the market leader across the board in snares. We're about a 30%, 35% market player right now. I believe that we'll be well over 50%, maybe approaching 60% of that market, so we're excited about this product.

We're also, I think, very excited about this little BowTie guide wire insertion device. I'm not going to go into a lot of detail on it. It's on our website. We'd invite you to go there and look at it. I will tell you you'll hear comments like "game-changer", the same "Why didn't I think of that?" And this will help us in our vascular access, our microcatheters, our radial artery procedures, as well as our micropuncture business. So we're excited about that.

The PHD, which is a new hemostasis valve; the Concierge guiding catheter. You know Merit believes and has believed for a long time that we could have great success in the guide catheter business. We've been selling this product in Europe, but have waited in the United States until a number of other situations cleared. They're now cleared or expired and Merit's going to be in a position by the end of the year to launch this product, which I'm sure we'll be talking a lot about as we move into next year.

So the net of it is we have cost savings in place. We have a lot of growth drivers. Our markets continue to be exciting in places like Russia. The Gulf States -- a very, very exciting place for us. The Far East, China this year will have gone from about -- will grow at 35% or 40%. And so we continue to be excited about our footprint, whether it be in the Balkans, the Middle East, the Far East, the US to some extent.

But I think it's no surprise and everybody knows this, that the US markets have been a little bit sluggish. Merit has been growing at about the 4.5% or 5% range in the US, but a lot higher in our international markets.

Our OEM business continues to grow. Our science and technology business continue to grow and so I think we have the footprint to continue the growth. And in light of what we're seeing others do, I suppose in some ways -- I don't want to say we're the exception, but I am pleased, not just where we are today, but where we'll be a year from now when we're talking based on the opportunities that we have in our business.

Let's see here. Another little thing we'd like to add and this is kind of an interesting opportunity. And I believe the owners are on the phone as well today. And that is that we've acquired a -- when I say we have acquired, we have reached an agreement in principle and we hope that in the next couple of weeks we'll have closed this transaction, a company called Medigroup, which is in the Illinois area, that makes peritoneal dialysis catheters.

Now this is a great company that's been around for about 30 years. They're -- I mean, I don't mean to offend anybody by using the word ma and pa business, mom and pop, but that's what it is. It's a business that does not have much depth in terms of their sales representation, but they have great products. They have great patent portfolios and a lot of loyalty to their products -- couple of million dollars in terms of revenues.

But to give you example of what I think the opportunity is, last year the company sold about 1,500 to 2,000 catheters. And we received a bid for a quotation just this weekend from a country in the Middle East for 11,000 units. And I think that when you take a look at it, that's almost an order of magnitude and in a lot of countries outside the United States, places like Mexico and in Canada and in Hong Kong, parts of China, in Scandinavia, peritoneal dialysis is their primary go-to source of doing dialysis.

And so the business was set up that there were no stocking dealers. All of these accounts go directly to the hospital, so they'll be integrated and shipped immediately from Merit's stock, as that's moved here. And we will go through the process of training and launching this product worldwide. It fits into the dialysis franchise that Merit is building.

So at 75% gross margins, it's going to be accretive to the tune of about $0.01 a share, net after taxes the first year and we believe that we bought it at a fair price that represented value to Merit and clearly value to the owners.

I will say and I want to be -- I guess I don't want to be careful about this. I'll just say what I think and that is I believe that you'll see a lot of situations where businesses like this who have to face capital gains tax, have to face the device tax, have simply decided that that is a very difficult environment for them to work into the future.

And I think that's, in some ways is certainly to our benefit, but it's somewhat unfortunate, as I think about what's happening to the medical device industry in the United States, as it plays out against both an administration and policies, which I think are abject to medical device companies. And I think you're all aware about how I feel and I'm sure that many of you are well aware of the challenges that face medical device companies.

Fortunately, for Merit, we have new products. We have a broad distribution network. We do have the international aspect of it. So, yes, even for instance where a number of companies were reporting various issues relative to their gross margins and that sort of thing based on currency, Merit is somewhat insulated from that. Not totally, but probably as much as you'll see anybody, because of our manufacturing that we do in Europe in a number of locations. So that helps to offset and puts that natural hedge in place that you're all aware of. So, again, very excited about Medigroup.

We continue to be very active in opportunities. We are seeing a lot of opportunities out there and we have ongoing conversations, as we do almost with every call. Some opportunities are substantially larger and things that we think would be of interest to Merit. But these things all go through a process that Merit is involved in and as they develop and when it's appropriate, we will discuss those with you.

Kent, I'm going to maybe turn over a second to you. You love to talk about these wonderful numbers and I'm sure that you're just eagerly waiting to enlighten all of us with some of your observations. Kent?

Yes. Just some of the financial highlights.

The growth in the topline, as Fred mentioned, was 6%. It makes it 9% for the year. It's a little slower than we've projected, but it's still strong enough that we have seen the bottom line -- actually we beat most of the consensus numbers by $0.03 in both the GAAP net income as well as the non-GAAP presentation for net income.

As you go down through the statements our gross margins, like we said, improved 190 BPs from last year and they're up sequentially through the year as we're getting stronger. We've had very strong production numbers and higher.

In fact, I'd like to address one of the issues there, is the inventory levels are higher and we have some good reasons for that. We've been transitioning some of our production from Angleton, Texas to Mexico and we have extra inventory in raw materials, work-in-process, and finished goods in that process.

Yes. If I could also say that there's the extra inventory that we had that we put in for safety stocks on the new -- on the Endotek product, as well as the new ones we are building as well. So that's another factor, Kent, that would feed into that.

That's right. We've got several new products that we've added inventory. The new P.A.D. from Scion, the Endomax stent is up over $0.5 million. The Osteo Pro. The Blue Diamond we're putting in the kits now. We've also made a strategic plan to increase our available inventory in our high margin Biosphere products worldwide, so we added $700,000 in that area to make sure we were stocked everywhere we needed to.

Another important thing coming up is we've got the Christmas shutdown in the near future, as well as the transition, or consolidation, of our facility. So we're moving much of our operations folks across town and across campus into a new facility that will be much more efficient, when we can get it up and running together, in lowering the handling costs and Lean manufacturing.

But in the meantime, we have to have -- shut down lines and move them and so we have to have some extra inventory for that. So part of this is also a shift in some of our forecasts and some of our production levels are going to have to shift a little bit, too, because of changing growth rates.

When we go to SG&A costs and talk about operating expenses, we have seen that, as a percentage of sales, equal last quarter and up still from last year. But I am proud to say sequentially we cut out $1.3 million, or 4.4%, in our SG&A costs sequentially, so we're seeing progress. As we said earlier in the year, we could start to see leverage in that area as we got more efficient in our SG&A expenditures.

We've seen some increase in research and development. We do have two trials that are restarting, I guess you could say, the one for the high quality study. And we're preparing as we announced -- and maybe Fred wants to spend more time talking about the IDE that was approved.

So the other thing that I think is valuable to talk about is the tax environment. We were able to save more taxes in several areas than we had even expected. We've gotten new research and development credits in France and in the Netherlands and our ending credit for the US ended up higher than our expectations. When we went through the process of detailing out all that we can get for a credit, we got more than we had accrued for.

We also were able to, this quarter, reverse finishing up an audit from the IRS. We were able to pull out what's called FIN 48 reserves that were no longer needed. And so, when those came rolling through, we were able to reduce our taxes considerably for the quarter as it dropped to a 20% tax rate for the quarter and 26% for year to date.

So, all in all, we had a good performance and I think exceeded expectations in most of the areas of our financial statement.

Thanks, Ken. Just a couple of the highlights and things of interest. Our Basix COMPAK, which is kind of our flagship in our inflation devices, was up 16% for the quarter, 18% so far for the year.

Our EN Snare business is up 10% and we think that the growth rate for that product will go up as we bring on the ONE Snare. It won't cannibalize it. It'll simply help to enhance that, as Merit will be the only company with two different offerings. And by the way, these snares are oftentimes used for different types of procedures, so they do in fact complement each other. So we're excited about that.

The QuadraSphere business is still up 116% for the year. Our ASAP Aspiration Catheters, up 71% for the year. Our Radial Sheath business -- as you all know, there's a shift going on in the United States in which we're seeing more radial procedures, but we're seeing these worldwide. That business year to date is up 339%.

And so we continue to believe that the radial business is an exciting place to be. In fact, Merit has a new hydrophilic radial sheath, which we will introduce during next year. I think that my -- this is kind of -- make a lot of people nervous, but I believe that will double our existing volume today. So that's how excited we are about those opportunities. It's going to more than double. And we're talking about a business that, on an annual basis, is going to be doing somewhere around $5 million or $6 million. I think that first year or 18 months out, that'll add another $5 million or $6 million on top of that. It's a very exciting opportunity.

All in all, we have a lot of exciting products. We have a full pipeline. I think we have built capacity and [turned it] to be able to support the growth going forward. We have the global footprint out there and the business continues to get stronger in terms of our presence worldwide. So, I'm excited about the opportunities.

Our regulatory department is functioning very well. We just received approval in Japan for a couple of key products. So, all in all, ladies and gentlemen, I am pleased with the business. Glad to be out of the summer, ready for the snow and ready for growth to continue, particularly in what I think of arguably as maybe the most difficult times medical device companies have seen.

But let me again, once again, remind you of our diversity. So we have an OEM business. We have different areas -- cardiology, interventional radiology, and endoscopy. So we have areas that we have the business.

We have the geographic capabilities. From having 45 folks on the ground in Beijing and in Shanghai, Hong Kong, in those areas, to boots on the ground in Dubai and in Moscow, in the Balkans and that direct sales force in Europe. You know we've actually done very well in Europe despite all of these troubles that we've seen in Europe in terms of currencies and a slowing economy.

So, all in all, I'm pleased with the business. I'm excited about the future, the product pipeline and the opportunities that we'll have going forward, both in our existing business and those others that might like to join the Merit family.

So I think that that pretty well says what we want to say and we'd be happy now to turn the time, Lorenzo, back to you and we'll have you queue up who would ever would like to ask questions for us.

(Operator Instructions) Larry Solow, CJS Securities

Hi.

Hi, Larry.

Hi, Larry.

Hi, Fred and Kent, how are you?

Good.

Just on the topline growth. It slowed a little bit. Could you maybe just discuss, was there anything geographically that stood out and can you maybe just -- usually you break out those numbers. Do you have some of those breakouts?

Yes, yes, we haven't broken them. I mean, it was a little bit slower in Europe, which you would expect, we expect every year, because of the summer vacations and that sort of thing. So, both in the dealers and the EU direct, they were slow. But it's not anything that we wouldn't expect or that we didn't guide to in the past.

But we're now into this quarter. Things have picked back up. People are back to work, procedures are starting. So I don't think there was anything in here, nor -- and I want to again remind you, Larry, that with this Laureate guide wire coming back in, that that adds a real boost, both in terms of our presence and the ability to pull through a number of our other products.

Right. And can you remind me, actually, on the Laureate where was the sales number in the US alone when it was pulled? And I believe that I know. I think in outside of the US it actually has past that already, right?

Yes, I think so. It was back in February, or looking at '11, which is the prior year --

Right. Right.

-- we had sold about $3.2 million that year and $2.2 million of it was domestic, or US-based.

In 2011, okay.

Yes, so that's a couple million dollars and remember, that took place around in February.

Right.

And people used their inventory up, but we stopped selling it right there. But we've more than exceeded that in the international markets now.

Right.

And now we have this back on here. So it was unfortunate, but it's past us now. So the best thing for us to do is to talk about, on this particular case, the future, not the past.

And in that market, Fred, it's whatever, $200 million plus, I guess, right? And with Terumo it basically has pretty much the whole market. What prevents you guys -- I mean, is $50 million a cap? Or I mean, what prevents you from overtaking (multiple speakers) that market?

Yes, well mostly -- it's a good question. Most people, when I say $50 million, kind of look at me like I'm a lunatic.

Right.

So when I get to $50 million, we'll start talking $75 million. But I think we've always had our goal and our eye on the fact that we could do very well here. And I think the other parts of it is that in some areas, like for instance the Far East where they have a presence there, it's going to be difficult for us to penetrate a lot of that business in Japan, as an example

Got it.

But we're not -- but we're still -- by the way, our Japanese distributor is so excited about it we're still going forward to have it registered. And I think they don't waste their time or their money -- so the fact that they believe that they can compete there. We've seen what we're able to do in China and that's kind of the fastest-growing area for right now where we're approved. So we're enthused about the opportunity here.

And did you -- I know you discussed that particular Laureate in China. How about China in general, did you -- I don't know, I may have missed that -- did you talk about how it did this quarter?

Yes. China -- here, Kent, maybe you can help me. What do you have for China?

It was 27%.

Yes, there you go. So it was up 27%, Larry, not bad.

No, that's solid.

Now, that's summer. That's still not bad. We're happy to do that. That business -- again, if we go back a few years ago, there were a few of us, a few that doubted. We had to spend some money in SG&A expense to get that registered. As it all works out, we have a terrific business over there. It'll be a $100 million business in the next five years or so.

Okay, great and then just lastly just on the -- I know you identified this $2 million in cost of goods sold. You've talked about other cost savings. Is there anything -- I think there was one other particular thing you cited that have signed [up.]

Yes. Well, there's two of them. One is a big one, of course, that Kent alluded to in terms of the catheter production that we're going to do --

Right.

-- that's actually now starting to ramp up, that we'll get out of our catheters that we're making in Mexico.

Right.

And then, the other couple of million come from our stent manufacturing. Now, let me just go on to say that every year we have a cost savings objective of at least $5 million and these are other ongoing automation projects. And in fact, I think last year, as we finished the year, we finished up with about $8 million worth of these cost savings.

Okay.

And by the way, those go to offset price increases and you have oil and all those kinds of things. So, if you didn't have these programs and you weren't paying attention to them, then you couldn't have higher gross margins as you go along. So it's always been something that Merit has kind of paid attention to.

But particularly in this division, once you pull that expense out and you get the growth, we are very enthused about what that whole Endotek division can mean to the Company. I mean, from last year, I mean, at this time through three months we'd lost, what was it, two point -- what was it, Greg? We had lost --.

(Multiple speakers) months?

Last year we'd lost almost $2.8 million. This year, $694,000 year-to-date, okay, in that division.

Right.

But for the last three months it was only $86,000.

Right.

So you can see where that whole thing is trending. So, now, with this $2 million or $500,000 a quarter, give or take if we just divided it out, you can see what that does. It brings us into profitability. Plus it's still growing and last quarter it grew at 31%, 32%, 33%, so -- and we continue to believe that those growth opportunities are still there. So everything's moving in the right direction in that business.

Great. Okay, great. Thanks so much, guys.

All right. Thanks, Larry.

Brooks West, Piper Jaffray

Good afternoon. It's Dan Garofalo for Brooks. Thanks for taking the questions.

Okay, Dan, is Brooks out of harm's way down there? Is he still down at TCT?

He's still down there. I think he's trying to get out of the way of a hurricane, from what I understand.

Yes, see I told him to get out yesterday. I came home, so I mean -- but anyway, give him my best.

I will. I will.

Okay.

Congrats on the quarter, particularly the operating leverage. Your last couple quarters have been right around the 10% range in terms of operating margins. Just wondering if that's a fair level for us to expect moving forward or kind of where you see that trending over time.

Well, go ahead, Kent. Go ahead.

I believe that we can see growth in that. I think it's going to be gradual and steady. I think we can pick up some BPs on the SG&A line. I think we can pick up some BPs on the operating -- I mean on the gross margin line. Then the one challenge we will have to that is R&D is picking up, in part because of trials we're going to experience next year.

So the clinical trials are sort of a new thing that we're adding into our operating expenses that will counter that somewhat, but those are -- the emphasis we're having is continuing improving gross margins through mostly mix and that was a big part of this quarter. So we're selling higher-margin products, many of the ones Fred's talked about such as the Quadrasphere, such as these stents and some of the new other new products are adding to the average gross margins of our growth.

And then, when we continue to push back against price decreases and inflation through efficiencies and cost savings programs we've been discussing, then that, I think, keeps us moving forward on the gross margin line. I think we'll continue to be more efficient, particularly in these foreign markets. We've made investments. As they start picking up India, Brazil, Russia, some of these places will start returning those investments, even though there's still more to make.

Yes.

I think we're going to see improvements in the SG&A.

Yes, let me just jump in there just quickly, because you mentioned India. I mean, our sales in India this year are going to grow at 300% over where they've been on average for the last three years. So we'll do more this year in India than we've done the last three years combined.

And India is a challenging market. But, as we move forward in that market, we're going to see the kind of results, percentage-wise, from the base that we've seen in China. It's not going to be a $100 million business there, but it could very easily reach $20 million to $30 million over the next seven years. So these international investments that we've made in the past are going to help us a lot.

Sure. Great. That's helpful and then that's a good segue. Just a follow-up. I wanted to drill down a little more on the geographic mix in the quarter, I guess. What was the breakdown between US and OUS? I don't know if you'd provided that. And then, just the respective growth in either category?

Yes. The mix is now 38%. It's up 1% from last quarter in international, so 62% domestic. And we had -- I don't know if you want me to give you more information. I mean, like the China was 27%. Worldwide distributers were -- where did that go -- they're 26% growth rate. Those are some of the highlights.

That would be Central and South America. That was --.

And Southeast Asia.

Yes. Yes.

And all those dealers in the Pacific Rim are combined in that group.

Okay. And then what was, I guess, constant currency growth of the international segment?

Oh, that's a good question. We had about $1 million in reduction compared to last year. We're 1%, and this is overall.

Okay.

So our revenues were hit about $1 million or 1%. On the other side, our cost of sales were reduced by that currency effect of $1.2 million.

Okay.

So this goes to the comment --.

So it actually helped our gross margins by about 45 BPs.

Yes. But this goes to the comment where we said that we have kind of this natural hedge in place because we have labor costs over there, but then we have the advantage of the currency that we can translate. So I think all in all in terms of currencies, we do a pretty good job. I was looking at some other folks that had substantially larger hits in revenue.

Oh yes. A lot of them have 4% and 5% hits in revenue.

Yes, yes.

Ours was 1%.

1%.

And then we have more than that -- it actually helps us in the bottom line.

Got it. So, then, so international growth was -- constant currency international growth was -- ?

I don't have the percentage of that.

(Inaudible)

Well that, no, that's the mix. He's asking what the growth rate was. I'll have to calculate it out for you.

Okay.

I can get it before we get off right here.

Okay. How about the US growth?

US growth -- direct was 3.8%, if you want to know that number. That's the -- there's other parts that are domestic and OEM and stuff, but that was the direct sales.

Yes and I think that's what I alluded to, that the US market is the slowest part of what's going on right now and not unexpected. However, what is interesting is some of these new products that we have, when you put the Laureate back there, you're going to see the growth in US accelerate pretty substantially.

We had fewer sales days this quarter.

Yes and we also had one fewer sales day for the quarter. That's not a big deal, but I mean, it is a factor. But I think, going forward, with the Laureate and the BowTie and a number of these other products that you'll see those, we'll see those sales substantially higher as a percentage going forward, particularly as we pick up that business that we lost in the -- with the pullout, I'll call it, whatever we want to call that little issue with the FDA.

Great. That's all for me. Thanks again for taking the questions.

Okay, I'll tell you. I calculated 12% was the overall growth rate for international.

Okay.

For the quarter.

Thank you.

Jayson Bedford, Raymond James

Hi, good afternoon. Can you hear me?

We can, Jayson. You getting hunkered down?

Sorry?

You getting hunkered down waiting for Sandy to come visit you?

Yes. I'm watching it right now. So a couple questions. On the guidance, it implies that growth snaps back and kind of accelerates in the fourth quarter. Is that largely the impact of the Laureate coming back on or are you seeing a pick up here in the base business, ex the Laureate?

No, no. I think you're right. I think part of it is the Laureate. I think part of it is our OEM business. I think it's our international business as well.

I mean, I can give you an example that just in the last couple of days we've received orders. And this is not singularly material, but over $1 million in orders that we had not expected have come in just in the last two or three days, some from OEMs, some from international markets. So I think we expected all these things to snap back, but the Laureate is a part of it. I mean, of course it is. Yes.

Okay.

But not all of it, Jayson, not all of it.

Okay.

And by the way, if I could just add maybe a little more color? If there was a product I wanted to snap back that's the one, because that's the one that has the largest probably upside potential of any product.

Okay.

Right at this time, so.

Okay. Switching, on the cost of goods line have you seen an impact from the change in stent manufacturing?

No.

Or is that all on the come?

No. I think what we said was this, is we have about 90 days of inventory of the old product now that will move out. The other inventory is going on the shelf. And so there's two sides to that. One, we have a little bit more inventory because we had to cover both of them and to make sure that we had them in place and so we have not seen the effect of that, but it is on the shelf and we'll finish this out.

I think one of our guys was selling probably in January, so we'll see a substantial improvement in the gross margins in the business and profitability in that division will come from this. Along -- as I'd pointed out earlier, the growth they're seeing for the quarter I think was up over 30%.

So you'll see the gross margin impact in the first quarter of '13?

We'll see some of it then, yes. And then, by the way, I want to go back to your question about it snapping back. That's the other thing. The growth that we're going to see with the TIO and a number of other products in our endoscopy business are also going to be one of the things that propel our growth going forward as well. That business is starting to perform much better and again, like I said, even in the summer quarter was up over 30%.

Okay. And then I don't know if you can comment since the deal hasn't closed yet, but what are you paying for Medigroup? And then how many sales folks did they have generating that $2 million in sales?

Yes. You know, Jayson, we are not going to disclose the sales price per our agreement. But let me just say that it's I think of real value to Merit. I will say that we expect to get about a 25% return on our capital, which is, if you take a look at our return on equity, you'll see that that's substantially higher.

And the good news about this business is that they had worked through sales reps and so they do, they hold all the inventory. They ship and they collect [to] the hospital. And so we will just cross over all of those accounts and we'll pick up that business immediately and we'll continue to ship to those accounts.

But another part of this was that they have an absence of coverage. For instance, if you look at the entire Northeast, there's an absence of coverage there. If you look at the Northwest, an absence of coverage in the entire Northwest, as well as pockets in the Midwest and internationally.

So that's where we think there's an awful lot of opportunity. And you may have missed this, but we received a bid over the weekend, or a request for a quotation, for over 11,000 catheters in one Middle Eastern country, which would be almost an order of magnitude greater than what they sold last year. This is one country and we have a very strong business in that country and it'll be a great opportunity for us.

So peritoneal dialysis is something that's not well known in the United States. It is growing at around 6% to 8%, but it is a business that we think is one we want to be in for the long haul, particularly in our international markets and, as you know, we have a lot of strength in those markets.

He was wondering how many sales people they (multiple speakers) --

Oh. They have one sales person. They have a sales -- a vice president of sales and marketing does all of it.

And independent reps were what, four, five?

Oh, they have four or five independent reps, but they're all paid on commission. And the bottom line is we'll integrate this immediately into our business.

So I think it was seven, Jayson. You were wondering how many it took to get that $2 million and I think that's what they were working with mostly.

So the basic strategy is you like the product, it expands the portfolio and you've got a lot of firepower, much broader distribution that you hope can accelerate sales.

Yes.

Is that kind of the head of the deal?

That's it. It's great gross margins, 75% gross margins, and a great patent portfolio as well. So it's not just a me-too product. There's a great patent portfolio here. And these folks that are selling us the business have a great reputation for their products. They just simply didn't have the depth of distribution. They also have a lot of great ideas and stuff going forward. So there's a lot of new things that will come out of this as well. And we're going to keep them on as advisors and they have some skin in the game going forward as well, but it's really based on performance.

Okay. And did I hear you right that you said you have one less selling day this quarter than last? Is that right?

That's correct. Yes.

That's correct.

Okay. Okay.

So that alone would add --

About $1.5 million, average.

-- about $1.5 million, so that's -- you can do the (multiple speakers).

Another 1.5% (multiple speakers).

Another 1.5%, yes.

Okay. I'll jump off and let someone else in.

Alright. Thanks, Jayson. Good to hear your voice.

Jim Sidoti, Sidoti & Co.

Good afternoon. Can you hear me?

We can, Jimmy. How are you?

Very good. It's good to hear your voice, Fred.

Good. Thank you, sir. Thank you.

All right. So just some of the boring stuff. You reiterated the topline guidance, which implies a rebound in sales growth in the fourth quarter. How about on the bottom line? I think earlier in the year you had said $0.55 to $0.60. It doesn't seem like you should have any problem with hitting that number.

Yes, we -- again, as you know, we don't update the growth and I don't mean to bore you to death, but we feel comfortable with all the numbers going forward and we'll meet or exceed all of our numbers, Jim.

Okay.

So we are ahead of the game on those bottom line range that we gave you.

Yes. Yes, I just want to make sure that's still the situation. How about the plant in Ireland? You talked a lot about that on previous calls and ramping up production there. Has that started?

Yes. Yes, we opened the plant up about a month ago. Of course there's people moving in, there's production starting up. But Ireland is very, very busy. We're thrilled with our operation in Ireland. They're a great contributor and we have a number of new things that will be coming out of there, including the stent, some new inflation devices, some new hemostatic valves, some other products out of our technology company.

So we're thrilled with what's going on. But it'll take some time, Jim, to fill it up. I mean, that's just the nature of the beast. But I'm sure glad we have it. We built it at the right time. We built it when it was reasonably priced to build a product and then we had the opportunity. Because, now, particularly with the Laureate back online, had we not done this and we started to move towards those higher numbers, had we not built this thing we simply wouldn't be able to respond to this opportunity in the future. So it was something that we needed to do.

All right. So, now that that's up and running, Kent, will the CapEx numbers start coming down and what was CapEx in the quarter?

I know its $48 million for the year to date. I'm trying to remember what it was in the quarter. It's 20-something, or around there. Let me just find out. I have to subtract the second quarter from it. Anyway, it's $48 million year to date on CapEx. And yes, it's still going to continue at a high level in the fourth quarter because we're finishing this major facility on this campus here and we're also beginning one in Texas that'll take a year or so to build.

So those CapEx's will carry heavy in the fourth quarter. They'll start coming down in the first quarter as we finish paying off the final invoices and retentions and things from the Utah facility. And then there will be some facility costs through the rest of the year at a smaller level for Texas.

All right. And then, on the income statement, there was an in-process R&D charge. And you said you hadn't closed the dialysis deal yet, so what was that for?

The dialysis has no R&D charges associated with it and doesn't expect it to. So that was a product we bought that's in a prototype stage and we have to do an expense of the cost of that, because it's under development still. It's an R&D project.

Yes, Jimmy, specifically it was a device that a group of guys have that is patentable. It was relatively inexpensive and we think it fits very nicely into our product line, but because of the requirements, it requires an in-process research and development expense, so a one-time -- it's a hit. Yes.

What was that device for? Can you tell us or is that something you want to keep under wraps for a while?

Oh, you'll be hearing about it in the near future. I'm not going to reveal it now, but I will say this. I just came back from TCT yesterday. And if you walk out on that floor, about 80% of the companies there use one product or another of Merit on an OEM basis.

This is a product that is proprietary. It's the kind of product that could produce $4 million or $5 million a year in revenues and for $250,000 plus the development costs, which would probably be $0.75 million, we get the kind of returns. That's a nice little product. It's a terrific product. But it's not time to, you know -- but for that price, that's a nice price to get all the intellectual property and all the engineering -- not all of the engineering work, but it's a nice product, yes.

All right.

Yes.

All right and then just two more. Accounts receivable jumped up a little bit in the quarter. Is that just because it's summertime or was there something else (multiple speakers)?

No, it was -- well, it was heavily [late] . We had a lot of shipments the last week or so. I can tell you that the average days receivable is still 42, very respectable and consistent with our other periods. Sso we aren't seeing that -- there's not a big rise in risk there, if that's what you're worried about. It ebbs and flows to the timing of invoicing and shipping, which tends to be heavy right at the end of the quarter, frankly.

Yes. I mean, and Jim, just as a reminder, as you know in our Chinese business everything is COD. And much of our business in various dealerships, they also have to pay in advance. So I think for the kind of the growth and the international exposure, 42 days is -- I'd put that up against anybody's.

All right. And then the last question on the device tax. Kent, do you have any idea how you're going to account for it on your P&L? Is it going to be above the operating line or is it going to be below the operating line and where will you book it?

I'd like to tell you where to book it, but no, it's going to be a cost of sales. So, yes, it's -- that's the way the industry tends to dictate. I think the accounting profession is telling us it's going to be part of the (inaudible). It's a manufacturer's excise tax, I guess is the definition of it, so --.

It's in the cost of goods.

So it's in cost of goods.

Okay. And you will not be putting a line for it on an invoice to a customer then?

We're not going to comment on that.

I don't believe we will be doing that.

We're not going to comment on that. We have lots of plans and things.

Yes.

But we're just -- we're not discussing that. We will shortly, but not today.

All right. That's it for me. Thank you.

Hey, Jim, just for your information, we did do a vote, though and there's been a movement that the election will be decided out of this office here. I want you to know that we're 98% in favor of one of our candidates and then we have a couple of outliers. So we want you to know that we're going to be prepared to call the election here on election night very early.

Well, Fred, I was planning on seeing you on the television in Boston on election night, so.

But, you know just as a point of interest, I actually am invited to Boston, to be there, but I can't make it that evening. I have something going on here in Salt Lake City. But if there's a celebration going in Boston I want you to know I'll be participating in that celebration in Salt Lake. Though it's going to be a tough -- this is going to be a very interesting few days. This is going to be very, very interesting stuff.

Yes. Yes.

Yes.

All right.

All right. Thanks, Jimmy.

Thank you.

(Operator Instructions) Jack [Van Rye]; private investor.

Enjoyed listening to the commentary, Fred, and the progress that the Company is making.

Thank you, Mr. Van Rye.

I just read recently an article by an esteemed international investor who is discussing the condition of the economy come January 1 of [3013.] He says it will make little difference, the change in the presidency. Do you -- as far as business operations go in this country, what's your response to that?

Yes. Well, Jack, first of all, thanks for the question. Listen, I've just come back from the TCT. I'm around business people almost every minute of the day and there's no doubt that there is a concern in this country about what the policies will be and where things are going and people are just simply holding on to their pocketbooks until after the election.

I have no doubt in my mind, if there's a change in administration, that you'll see a substantial increase in capital goods expenditures. You'll see research and development, a resurgence in expenditures in the United States in capital goods. That's my view and I think that's shared by at least almost everybody, every CEO that I talk to in the medical device area.

So, on the other hand, with all of these other issues going following the year, I think that we're very likely to see CEO's and Chief Financial Officers continue to hold on to those strings very carefully. And I will tell you both, whether it be Mr. Cook or not Mr. Cook, but Cook Medical who pulled back, that we will take a much harder look at where our expenses are and where our investments are in the future, depending on the outcome of this election.

So it's a very big election and I know everybody says that this is the election of a lifetime and all this and I can tell you, for a medical device company, any medical device company, it certainly is. It absolutely is the most important election in my lifetime as it pertains to being Chief Executive now for over 35 years in the medical device business.

Okay. Thanks. One last question that's a little specific. What is the situation with MCTec in that wonderful little city of --?

Of Venlo, the Netherlands. Listen, they're growing at about 10% and they have done a very, very nice job. It is now called Merit Coatings. It's part of our technology group that's run by Joe Wright.

It's a nice business and again, one of the things in that business, Joe, whether it be our sensors, our OEM or our technology companies, is they add a lot of diversity and I think take some of risk out of the device side of things by some of the technology that we have. So we've been very pleased with it. It's very profitable and we enjoy and believe that if we go back and look [at it,] -- I think we've owned it now seven or eight years or so.

Right.

It's been a great contributor, so we'll look after the Dutch for you, Mr. Van Rye. We'll look after all those good folks over in the Netherlands for you.

Thank you very much.

All right. Okay, Jack. Nice to hear your voice.

Good evening. Bye-bye.

Thank you and at this time there are no further questions. I'd like to pass the call back to Mr. Lampropoulos for closing remarks.

Lorenzo, thank you very much. Ladies and gentlemen, we appreciate your interest today and the time you've taken. You know I think it was said several times during the call that we expect to snap back. And I don't know that I'd necessarily use that word. I will say that we're comfortable with the projections that we gave and hopefully we'll have an opportunity to exceed those.

I think we are excited about our business, about the strategies that we've put in place, both in terms of the divisions, the products, and the geography. So we have a full pipeline. We have some exciting little tuck-ins that we think will work very nicely.

We're very excited about Medigroup. We think it's -- although it might not excite some of you, we think what it does to our dialysis franchise and what it does to our international markets is very, very helpful. And that's not speaking any less of those 75% gross margins, which we also appreciate.

So, we again appreciate your interest. We appreciate your support. Kent and I will be here for the next couple of hours if you'd like to call in. We can maybe get, answer some questions on the balance sheet and income statement. So, again, thank you very much.

It has now cleared -- well, wait a second. No it hasn't. I was going to say it's cleared up in Salt Lake. Come to Utah, please. Reservations are available. We'd love to have you out here to go skiing and to enjoy this winter wonderland.

Best wishes to all of you and make sure you vote. It's important that you vote, no matter which party. Please get out there and vote and we'll look forward to the results in about 10 days. Now I'm signing off here from Salt Lake City, wishing you a very nice evening. Goodnight.

Ladies and gentlemen, this concludes Merit Medical's third quarter 2012 earnings conference call. We'd like to thank you for your participation. You may now disconnect.