Merit Medical Systems Inc (MMSI) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Merit Medical Systems, Inc., fourth-quarter and year-end 2013 earnings conference call. (Operator Instructions). I would now like to turn the conference over to Mr. Fred Lampropoulos, the Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you very much. Good afternoon, ladies and gentlemen. We are broadcasting from Salt Lake City where we have assembled our staff in what I think is very favorable 50-degree weather out here on what is almost a spring day.

We will start our meeting today with giving and thanking you for joining us, and we will have Rashelle Perry, our Chief Legal Officer, read our Safe Harbor comments.

Thank you, Fred. During 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 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.

Many of these risks are discussed in our annual report on Form 10-K and other reports and filings with the SEC, available on our website. Any forward-looking statements made in this call 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 accounting principles generally accepted in the United States, GAAP, Merit management believes that 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. The table included in our release and 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, and not as a substitute for, 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.

Thank you, Rashelle, and she did all that from memory, and I think that's terrific. She will now recite the Gettysburg Address and -- okay, now thank you, Rashelle. I appreciate that.

Ladies and gentlemen, again, we're delighted that you have joined us. Just a couple of issues and some housekeeping things. We had initially intended to discuss our guidance and business plans for 2014 today. However because of some scheduling issues with our Board and some travel, President's club, and a number of issues, we still have a few things that we need to get together for our Board and we are planning on meeting on Friday.

We have scheduled a meeting for 1 o'clock on Monday -- excuse me, 3 o'clock Salt Lake time on Monday to go through a complete business update for the year. We apologize for the inconvenience, but again, as a matter of policy, we think it's only prudent to make sure that the Board, who has to see this, and this Board meeting is scheduled for Friday.

By the way, that Board meeting has been scheduled for a while, and there are a lot of these other issues -- people having surgery and this and that -- and we just could not get everybody together to get our final review done. And so, as much as I am sorry to disappoint you with that, I think one week is prudent, and we will have that done -- Kent will be traveling to Orlando to attend a medical device conference the following day, and we will be able to discuss those results, as well as questions on the call.

So we appreciate your understanding and we are sorry to disappoint you in terms of the timing.

We are here today to talk about the fourth quarter and the year, and I think there are some very interesting things here to talk about. We hope that you find interest in them today.

I think the numbers and some of the accomplishments for the year are in front of you. Needless to say, we are all aware of some of the challenges that we had during the year, and particularly as we started out the year with a new transaction, the acquisition of Thomas Medical. And as we all know, that started out on a rocky road.

I would say today that as we take a look at where we are with Thomas that clearly we have made substantial, I think, improvement in the opportunities. Let me give you a couple of things that we've done.

We took a lot -- took some of the OEM business and have converted it to direct. And we believe our goal this year will be at a $10 million ramp rate by the end of the year of 2014. We finished last year at a $5 million ramp rate, and that was essentially from a dead start.

We are filing today our new steerable catheter, and we had great results in the first case today, and we will talk about that steerable catheter, which is a $1,200 to $1,500 device, and we will talk with you more about that next week.

I think equally important, and this is just a one month and not a forecast for the year, but in January, our sales were up over 50% on our Thomas Medical line, and so, that business is coming along. And we think it's an important part of our overall business.

Kent, you would like to add something.

Just that we ended up over $28 million in that business, and when we reforecasted it after -- in April, we had $26 million. So we beat that forecast, as well, for the year.

Yes, and I think that leads me into the next broad discussion, and that is when we go back and look at our guidance, and we're going to talk about our old 2013 guidance, and then we came out in April with new guidance, the very interesting thing to note is that if we look at all those numbers on the old guidance, we hit every parameter except for the sales number, in which we fell about $5 million short.

And on the new forecast that we came out with in April, we hit every one of those parameters. So of all the parameters and forecasts and things that we gave last year, save the one revenue number, which we had reduced because of this situation which I just discussed, we hit every one of those numbers that we had forecasted. So, I think that speaks for itself that despite starting out really -- I don't want to say on the wrong foot, but a little flat footed, I think we made substantial improvements during the year.

You will also recall that we moved into a 275,000-square-foot facility, shut down and consolidated a facility, and I think we did that very, very well. I also believe that the SAFEGUARD transaction, which we did with Maquet, was also essentially seamless. And by that I mean that that particular business never had an interruption to customers. To the best of my knowledge, we didn't lose any customers, and we were able to integrate it into Merit's sales bag, and we think that there is going to be some opportunities that we will talk about next Monday in regards to the new radial product line and our whole radial initiative that is starting to gain more momentum.

The fourth quarter was interesting from the standpoint that our core growth in the fourth quarter was up 12%. For the year -- revenues were up 17% for the quarter, up 14% for the year. And I think that from a sales point of view that you would all agree -- we hope that you agree -- that short of the issue that came up that first quarter on the Thomas deal that the revenues were pretty impressive.

In fact, for the fourth quarter one of the concerns I had, and I expressed this in my comments following our third-quarter call, was can we beat the number that was only $5 million ahead of what we had proposed or suggested. In fact, we had guided down, if you'll recall, in the third quarter, because of the summer quarter, and ended up having this what we think is a terrific quarter and it raised concern of our ability to do that and to beat that quarter, and we did. We beat it by almost $5 million in the fourth quarter and, I think, had a relatively strong finish overall. Kent, do you want to comment on that?

No, I think that -- and the other thing that is nice is how broad based it was. As we did in the first quarter -- I mean, the third quarter, we see sequential revenue momentum in almost all the product groups and geographies. So, it's nice to see how broad based it is to across the breadth of our line.

Now we were able to do this when, of course, we had the Affordable Care Act. That cost us in excess of $4 million last year, but again, one of the other, I think, important things is to take a look at Merit's breadth of product sales across the planet.

Almost 40% of our revenues come from the international markets, and we continue to believe that both from a manufacturing point of view at our facilities in Europe, as well of our sales. If we take a look at the sales of direct products in Europe, our direct sales were up almost 20% last year, and, let's see here (multiple speakers), EU direct was up -- dealers were up 22%.

So as we look -- if we look at direct up 13% -- that's correct, it is 13%, and dealers in Europe, let's also include the Middle East, that's almost 22%.

China continues to be a star. And that was almost 20% growth in China last year.

And direct was 41%.

And our direct sales is 41%, and some of you will recall that we have some dealers we sell into the United States that sell that, but our direct effort was up over 40% last year.

So there are places in the business that I think performed well. Even our Endotek division, which started out relatively slowly, as we moved out through the year, it started to regain some of its momentum once again, and I believe that was 9% for the year.

Yes, 9% for the year and 25% for the quarter.

Yes, so the fourth quarter was very strong.

So, a lot of, I think, very interesting sales numbers, interesting product drivers, like our microcatheters and even our embolics. Our QuadraSphere last year grew very, very nicely, and that business now is almost $8 million from really zero when we made the acquisition. So I am pleased with that.

Now on the other side of the coin, we did see a slowdown in gross margins in the fourth quarter as compared to the second and third quarter. You'll recall that we had promised that we would deliver 60 basis points per quarter for the next six quarters, and we delivered 140 in the second, 150 in the third, but we only grew at 20 basis points in gross margin in the fourth. That's 310, as opposed to 180. So we beat it, I think, significantly in terms of improvement in gross margins. We, of course, will talk about these products and everything going forward next Monday.

We reduced our debt by about -- almost $25 million in the fourth quarter and paid down our debt. So I think we have that. All of our covenants, Kent, I want to make sure this is correct.

Yes (multiple speakers)

Every one of our covenants (multiple speakers), every one of our expectations are in line with the bank, and again I will remind everybody that on the Maquet acquisition, it was the bank that stepped up for what I feel is very equivalent to our Snare product that we acquired several years ago. This is an 80% patented product that we think fits very well into our strategy for the future, which we will, again, as I mentioned, talk about next week.

Let's see. Kent, do you want to just add anything that comes to mind here?

Yes, I think we can talk about some of the star products that we had. I think Laureate is an exciting one. It was up almost $4.5 million in new revenues contributed. Our trays added $5.6 million.

We had some good gains in some of our catheters. For example, the radial sheaths were really strong. The peritoneal dialysis was a new product that added a lot. So we have got, again, a broad-based product. The EndoMAXX stent in the endoscopy business was strong and it was well accepted by the market.

A couple of other financial issues that I think were important, even when you take into account the acquisitions and particularly the Maquet deal in early October, and with the growth, we were still able to decrease inventories last year by $2.3 million while growing the business substantially. I think that's a big accomplishment, and our inventory turns changed from about 2.75 up to over 3 (multiple speakers). So it's about 3.05.

So I feel like we did a good job there in terms of managing those particular issues, while keeping in line for the quarter generally our SGA and R&D expenses, which you can see are stated in the statements.

Just a couple of more thoughts. Our planning EBITDA is about $70 million. DSO is at about 46. As I mentioned, we did move into our new facility here, and we have completed the facilities in Pearland, Texas, and we're in the process over the next several months of moving into that facility.

And that is going to be a significant opportunity for the Company in terms of our capacities. And maybe more importantly, for some of those who may not recall this, we had a situation when Hurricane Ike came through several years ago that created a bunch of havoc and a bunch of challenges. It essentially shut the business down for a month as we had to go through and had to make repairs to the roof and other things.

This is a 60-year-old facility that was essentially a shopping -- a strip center. And I'm just grateful that we have dodged what I think is a bullet there. And so, we are into this new facility that will withstand, I think, winds up to 155 miles an hour, and closer to Houston, so both from a recruitment point of view and from a weather point of view and a capacity point of view, it is going to be a facility that will serve us well into the future. Kent?

Another point on weather and so forth is one of the biggest dangers is flooding, and they can have awful big storms down there without the high winds, and we have got a building that is basically on a pedestal, and so it lifts it out of the flood plain.

Yes.

I think that's important.

So again, I think when you are looking at performance and all the numbers, one of the things we look at out here and one of the things that our Board requires us to do is to really make risk assessment of where can our business be hurt and what are the challenges, and one of them that was right up on the top was the issue relative to this facility, and had that storm been 25 miles to the west, there wouldn't have been an [agrogin] facility left. It would have leveled it, with those types of winds.

So we were fortunate to escape, I think. From that point, we said we have got to do something to improve where we are and to update the facility. So that has been completed.

We have a number of new products. Our pipeline continues to be full. Again, we will talk about that in detail next week, and I think the numbers speak for themselves. They are a little bit, I don't want to say, confusing, but they're a little bit difficult because you have a lot of transactional costs that are in because of the Thomas deal and a lot of issues both on GAAP and non-GAAP. We will let you sort through those, but I think one important number is that our non-GAAP number for the fourth quarter was up 52% from the fourth quarter of 2012. That is a significant, I think, accomplishment to see that type of improvement.

Kent, do you want to talk anything financially before we turn the time over?

Yes, I want to mention the progress we made in the SG&A expenses, that they were down significantly. If you look at the non-GAAP numbers, for example, we were down to 26.7% compared to 28.9%, so when you compare those quarters, that is over 220 basis points comparison year to year. And it's really nice to see that progress.

Then for the year, we were 27.1% compared to 29.2%, so again, 210 for the year in the quarter, so that was part of why we made such progress in our bottom line was that SG&A expenses really were coming down and we were getting leverage there.

We are through our building cycle, so to speak. We have a few things that we have to finish up and some smaller projects, but we spent a lot of money adding capacity and capabilities over the last two to three years, and I think -- we will talk about this in more detail, but I think generally we are looking to create about $51 million or better than $50 million worth of cash flow to go to reduce debt next year, and again, that is a significant number.

And we had very, very low rates and very hedged rates. In fact, our rates will be dropping as of the first week of May pretty substantially. And I won't go into those details now, but we are looking forward to having a conversation with you next week. We'll give you detail about the business, forecast, earnings, opportunities, challenges, and so on and so forth.

So, I think that pretty well covers it. Again, in summary, a year that started out a little tough, one in which I think we focused on the things that needed to be done. We moved, we built, we developed, and I think we ended up, I think, salvaging the year, at least in my opinion, despite a number of challenges, including the Affordable Care Act.

So that's it, I think, from this side. We will go ahead and now open it up for questions. And so, Operator, we will go ahead and let you line them up for us. Thank you.

(Operator Instructions). Thom Gunderson, Piper Jaffray.

I have three, I think, quick questions. I will start with the quickest. Kent, headcount at the beginning of 2013 and at the end of 2013? I think you were going to try, after the discussion in April, to reduce. How did that go?

Do we have the number here?

Hold on a minute.

Okay, let me just look at it, Thom. I'm going to answer. I got it sitting here.

It didn't go down.

It didn't go down. It looks like we added about 120 people, give or take.

A lot of those were in Ireland and China and places (multiple speakers)

Yes, so let me give -- manufacturing was almost 80 of those individuals; regulatory, one; R&D, add 15. That was, again -- but we did not -- we didn't reduce the number.

Now, hopefully with the new facility and some of the things that we are doing for efficiency, that will slow down. But I will have to tell you, I just had a conversation, Thom, before the meeting, and it's a challenge for us to make sure that we can keep these numbers, so I am glad you asked the question because we were having this conversation just before we went online. So that's the answer.

Got it. Thank you. And then, a broader question. I have been picking up anecdotally through cath labs around the country that things are particularly busy. There is a seasonal busyness at the beginning of the year, because of the winter, et cetera. But things, according to the docs I was talking to, are particularly busy, and they are not sure if it is flu or ACA or something else. But I was just wondering if you were picking up any of that, and if you had any macro thoughts on busyness in the cath lab?

The answer to that is we're not seeing that. We are seeing growth, but I don't think we are seeing extraordinary types of things that you are suggesting. No, we're not.

Okay, and third and last question for this round is -- I may have missed the news announcement, but maybe you could give us an update on HepaSphere in China?

Yes, let me back up for a second. I want to come back to that previous question.

If we looked back to the third and fourth quarter, I think that's in fact exactly what we saw. If we take a look at January, specifically, and I want to be careful I don't step over the line here, I wouldn't say I saw that same type of explosive growth in one month. Now that's not unusual, because you usually have a startup kind of get through the year and then get going about 10 January or so.

So we did see it in the third and fourth quarter, and I think that's what these numbers reflect.

Let me go to the -- specifically your question on the HepaSphere. We have received our license for -- our dealer received their license for HepaSphere. I think one of the areas that we are very pleased with is on the Embosphere, we are seeing, I think, substantial demand for that product, and we believe that we will start to make additional deliveries because we are transferring the license from the distributor into Merit direct as we speak.

We have great hopes and aspirations for China on the HepaSphere. We are seeing HepaSphere in Taiwan growing dramatically and we're also seeing dramatic increases in HepaSphere in Japan. In fact, I can say that many of the orders from our distributor there, they have actually moved May orders up for delivery in February.

So, I think that the HepaSphere is going to be a product this year that is going to see substantial growth, and again, we'll talk about that and the actual numbers -- maybe since you asked the question today, we will talk a little bit more specific about that next week. But it's a pretty substantial opportunity.

Again, I would remind everybody that when we bought that business, the numbers were essentially zero, and this year I think it finished at just under $8 million, and we should see substantial growth going forward.

That's it for me. Thank you.

Jim Sidoti, Sidoti & Company.

Good afternoon, Fred. Can you hear me?

I can, Jim. It's nice to hear your voice.

Great, great. A follow-up on the employee headcount, specifically the sales force. Can you give us some indication, are you happy with the size you have now in the US and outside the US, or will you be adding people in 2014?

We will add some people in 2014, but I think, Marty and Joe, probably maybe a total of four or five in the US and then we will add some other support personnel in Europe. So I would say that we will probably add 10 maybe worldwide.

So, I guess I would answer it by saying you never have enough sales people, as many as you would like to have, but I think we will probably be looking at no more than 10 worldwide this next year. So I don't think that's a significant increase. It's under 5%, and again, without getting into what the growth is, it's substantially below what we would expect to grow at. So, I guess that's the best way to answer that.

Okay, and then on the R&D side, I know you had a pretty significant step up in costs over the past couple of years with the clinical trials you started for the BioSphere products. Do you see that starting to level off at this point or do you think, with things like the new BPH trial, that you will continue to see R&D costs accelerate?

I think what we want to try to be able to do, Jim, is to keep it in that 7% to 7.5% range. You can see maybe it pop a little bit and then drop back, like we saw in the fourth quarter. I think -- and I don't have it right in front of me, but if my memory serves me correct, it was a little bit lower in the fourth quarter as a percentage of sales.

So I think -- we have a full plate of new products. We have got plenty, and we don't see any significant step ups.

I will say this, and I have discussed this in the past, I said this before we started. The first $0.5 billion in this business, as I look back at it from where we are today, was relatively easy. And by that, I mean a lot of sweat and toil from a lot of people.

The next $0.5 billion starts to cut into some of the flesh of our competitors. And so, it is going to be a lot tougher. So one of the things we have done here as part of this R&D spend is that we are looking at projects and working on a couple of projects, and this is not the trials, but these are projects that have the potential, the $50 million to $100 million worth of revenue a year. Some of these projects are five years out. Those expenses are included in this number. It is not just short-term products and, very candidly, Jim, it's not parts and pieces.

Merit has to look at it and has been more focused on systems and other products, like our EVT stent, our EndoMAXX EVT stent, and some other stent products that we hope to bring out that we think fill niche markets. And remember, a niche market for a stent for Merit is $50 million to $100 million; many of the larger stent companies wouldn't even touch that. It's in the noise for them.

So, as part of this R&D spend, there are a lot of these more advanced products, but they have larger market opportunity. I'll give you an example of one we will talk about a lot next week, and that's our new hydrophilic sheath in the radial market. We have talked about that in the past. I think next week we will spell out a little bit more clearly about where we're going with that business, which we think has substantial opportunity and which really was the focus of the Maquet acquisition, and that is to -- that we brought in a board from another company that we purchased and we brought in this new radial closure device, compression device.

But the point is 7% to 7.5%, longer-term projects, and probably more projects that are going to release this next year than we have ever done in Merit's history.

One other significant thing, Jim. We have done a couple of other things that have to do with this headcount that Thom talked about when we talked about adding 15 people last year. One of the things that I think will have a significant impact on the Company is in the past in, let's say, Ireland, Ireland has been a serial producer of new products.

As part of this development last year that's in the numbers, we have now made Ireland a center of excellence for guide wire development. We will probably introduce by the end of this year four new guide wires that include both diagnostic and interventional guide wires. They have never been able to do that in the past, but with that new facility that we built, they have the facilities to do so.

We are doing the same thing in Malvern. Malvern has been, I think, and I have got, by the way, the two Malvern guys sitting in the office here today, but I would think it's fair to say that over the last several years that research and development has been a very slow process in Malvern, and we have a number of new products that were released this year and a number of new products for next year with essentially the same people that were there before.

So we haven't added -- maybe one, maybe two, but we have got them thinking in the development mode in terms of where they were before. They had the headcount, but they just didn't have the output.

You will see the very same thing in Angleton, and that is -- I will give an example of a couple of things. And I'm sorry I am so long in this response, but a number of catheter shafts for advanced catheters that Merit makes are made in other facilities by other people, not Merit. And one of the things that you will start seeing is the very same type of issues where there will be three or four or five new products a year coming out -- these are advanced catheters. These are catheters that sell for $300 to $500 a pop, and you will be able to see that essentially with the same people. Maybe a couple added here and there, but not a lot of increase in headcount to get what we think -- and it's kind of a change.

Why are these things happening? One, they have the facilities, and so they don't have to share manufacturing. Secondly, they have the charter, and we have leadership in place in these locations.

So one of the, I think, great things that we are doing is you will see it in Salt Lake, but what you have seen here, you'll also see it out of Ireland. You will see it out of Malvern and you will see it out of Texas at Pearland, and you also see it in France at our Roissy facility.

And again, this is with the same people, but because many of those were in, I will call it, acquisition mode, they weren't really doing a lot of things. They were -- I am going to offend some in my room here -- they were placeholders. They were just marching and marching in place. And I am a military guy. Marching in place, you don't get anywhere.

So, that's a long answer to your question, Jim, but part of what we will talk -- we will be more specific in terms of what those products are going forward. But I think R&D, we will keep it at 7% to 7.5%, but what you'll see is a substantial increase in product outputs that move the dial.

That leads me to my last question. It seems like looking into 2014, the focus will be more on developing products internally and paying down debt as opposed to acquisitions. Is that a fair assumption?

It is. It is. But I do hope that I might -- you never know when you might get one of these little SAFEGUARD deals or a Snare. These aren't major acquisitions, but they're major contributors.

So I don't want to go on the record as saying we are not going to do anything. I would say the major focus is to pay this down to give us more opportunity. We think there is a reasonable level of debt, but it's probably no more than half of where we are today, and we would like to pay this thing down.

There may be -- like I said, if I look at the EN Snare and I take a look at the SAFEGUARD, they will generate about $20 million of revenue, give or take, this year at 80% gross margins. So, if one of those comes along and it's digestible, it would be something I would look at.

But you won't see any major acquisitions beyond that kind of structure if something comes along. It may or may not.

Thank you.

Jayson Bedford, Raymond James.

I'm just following up on the last questions on the hemostasis line. Have you launched the radial device? I don't know if you are still calling it the AIR-BAND or not.

Yes, we are now calling it the Safeguard Radial. So we have the Safeguard product. It was launched effectively in our sales meeting in locations in Europe and in the US, but essentially just getting started in January. So it's just starting.

I will say, and pleasingly, that we are growing the entire Safeguard business, so we had forecasted, if you will recall, in our initial discussion of the acquisition that we used, I think, 8%. I think we're going to see substantially higher opportunities with those products, particularly bundled with our entire radial product line. And we did -- last week, we did trials of our hydrophilic sheath in South Africa, and I would say that the best way to describe it was very, very successful.

So, we will be launching that product first in Europe and we will be filing for regulatory clearance in the United States. And again, we will go into all of this detail. To answer your question, we have launched this Safeguard Radial in the United States and worldwide.

Okay. And when you look back at 2013, if we back out the Thomas deal, with low single-digit growth in the first half of the year, double-digit growth organically in the second half of the year, not necessarily believing that is sustainable, but why do you think growth was so much better in the second half than the first?

That is the question of the day. We ask -- listen, we were surprised with the growth in the third quarter. We were stunned. It was just something we hadn't expected. We always hedge that, because of the summer.

I do think that we are doing some things in terms of our business in Russia, the Middle East, clearly in China. Those areas are really driving the growth, but we saw a substantial improvement in the second half of the year on our domestic sales, as well. So it was very slow the first half; the second half, that increased.

You added that altogether, I think that's important. I will say this, that having a direct presence in terms of leadership in Europe, I think, has also made a difference, and that's why you are seeing some of those numbers. And you just clearly have boots on the ground.

Now, will that continue? We did this despite all the issues in Egypt, which has been a big market for us, Tunisia, Libya, all of the stuff in the Middle East, including Syria, where we sell product, all legally under the guidance of the Treasury Department, I should mention. I thought that would have an effect.

I will tell you where the area of the most concern is right now, and that is what's going on in places like Venezuela, Brazil, and Argentina. And I think anybody that is in the medical device or any business right now -- now those aren't significant contributors like Russia or China, but they all add into that pot, and that's an area that I think is going to be of some concern.

I will give you an example. I shared this. In one of those countries, our dealer wanted to place a $1.7 million order. The government would -- this is interesting, and God bless America, because the government would only let them order $170,000 and then they had to have the issues of currency. They couldn't get it.

So I am saying those are the kinds of challenges that I think exist out there in the world sometimes, and fortunately, living in America and in many of the European countries, we don't have those issues. But some of those countries are struggling and it is going to affect -- for our business next year, it is really one of the areas of concern, but not a significant factor overall, but nevertheless a concern.

Joe, is that a fair statement? I was just referring to Joe Wright, who runs that particular area of the workforce.

Okay. Inflation devices looked strong in the quarter. Is this the start of a bigger contribution from the basixTOUCH?

I think that the basixTOUCH is the best inflation device in the world. I don't think there is -- there are other inflation devices, but I do not think that there is anything better than this device, both in terms of its pressure range and its performance. So, I think that's an important point.

One of the things, Jayson, going forward is that we will be over time, and I'm going to say this over the next 12 to 18 months, we will essentially be putting that platform, it will at least be available on our IntelliSystem, our digital and on our --

Analog.

Analog, yes. So I think that's an important issue.

There is also a new hemostasis valve that we hope to introduce called the PhD in Europe, and that will have a significant impact on inflation devices, as well. In addition, that's one of the highest gross margin products in the Company; our whole hemostasis line is very big.

Another pleasant issue is that we are seeing, I don't want to call it a resurgence, because that would be maybe overstated, but I think we are very, very pleased that we are starting to see a little bit of a revival in one of our OEM customers, a little bit more than we thought, which essentially has been in a pretty steep decline over the last several years, but all of a sudden, we are starting to see a little bit of improvement, instead of decline.

So maybe it's leveling off and maybe finding a little higher level. So that's part of it that we will see going forward.

Okay, I guess last for me, and I will jump back in line here, on the margin side are you still capturing incremental margin from the new facility in Salt Lake?

Let me -- I think the answer to that is I think we had an initial surge because we dropped off some, but we are still putting into place, as an example, a delivery system that will be in place in April for -- this is to deliver goods out of the automated warehouse to the trucks that are leaving, and we won't see that until April.

And I think one of the other things that we saw is that there was this new pneumatic system and all these things. I think people, it's taking them some time.

So will we see more? I believe absolutely there is substantially more. I think we saw an initial surge. I think that it leveled out, and then I think what we will do now is we will start to see that improve throughout this year, and that will go to the issue of headcount. That will go to the issue of margin.

One other area that I think is one that we hope to talk about next week, and I will plant the seed right now, and that's the one is that the Company is in the process of switching to digital work orders, digital systems that eliminate paperwork completely from our operational systems. That's a two- or three-year process. I actually went through the first production line last week, or two weeks ago, but that's another significant contributor where you don't have to have 15 people signing off a work order; it's done from station to station.

Now that has to go through FDA approval and validation. We're in the process of doing that. It's with existing headcount, so we are not hiring new people to do that. In fact, what you will do is you will see a decrease in headcount coming from those things.

So those are significant, but all it would really have to do with your question is that is the building and its capabilities. Do we see more opportunity there, and the answer is yes.

Okay, thank you.

And I hope your cold goes away.

Thanks.

I think all of us in this room had it, so we're glad to see it's moved to Florida. Hope you get well soon.

(Operator Instructions). Mike Petusky, Noble Financial.

Fred, I guess you maybe sort of answered this, but I just want to make sure. So in terms of the radial opportunity that you see longer term, it sounds like you are probably just as excited, at least, as you were a few months ago. Is that fair to say?

Mike, I would say I am more excited. The reason is that we have essentially validated our new product. There is still work to do out there, but we have that new hydrophilic sheath. That's a significant issue, I think, with just the release of the Safeguard Radial, which used to be called the AIR-BAND, but that's just getting started.

And we are going to continue to see this growth rate. Again, some people will say 16% to 20% in the US. I believe that over the next five years, that very well could approach 50% in the United States. And we are seeing it because physicians are contacting us. There is more training. There are more seminars, and more and more people are looking into it.

And another one that just popped up this week, and this is one that I think is also significant, interventional radiologists are now starting to talk about how they can do things like liver embolization and to do other things by doing it through the radial artery, too.

So this is a movement. This is a significant issue and opportunity. So I would say that the opportunity is increasing. Kent, do you want to add to that?

I just want to add the Rad Board has been a surprise, pleasant surprise, at the interest in that, and it's a small item in revenue, but I think it's important to the whole procedure.

Yes, we get a couple of thousand dollars, and again, we ran an article this month in Cath Lab Digest. And, n fact, Mike we will send you a copy of it if we can, legal; I think we can do that. But it shows this lineup of radial products, and it is significant, whether it be from the set-up to the board -- to the sheath, access, closure, and the catheters that are used to do the procedure.

So we have, I think, a significant product line here, and I think next to our -- there is one other leading Japanese company that has really been the leader here for a number of years, and we have everything they have and more. So I am pretty excited about that opportunity.

Great. Kent, do you by any chance have -- because I didn't see it, and if you mentioned it earlier, forgive, but what was the breakout between domestic and international revenues? Do you have those percentages just overall?

Yes, it's about (multiple speakers)

It's 38% (multiple speakers)

Just short of 40%, that's a round number. Just about 40%.

All right, great. And then, do you have a CapEx number for the quarter?

Kent, do you have that CapEx for the fourth quarter?

For the fourth quarter, no, I would have to subtract from the third quarter. I have the year.

Okay, okay. Mike, Kent will call you back on that number. He doesn't have it right in front of him, but we will call you back on it.

And let me just ask the last question, just circling back on the basixTOUCH. So there is certainly an element, I guess, of cannibalization there. Fred, what do you believe -- fully mature, a few years down the road, how much incremental, like true incremental, revenue do you think you can get out of that product?

Mike, let me tell you what's been going on and just give you just a little history of how this started. When angioplasty first came about, we were talking about devices that operated at 10 to 15 atmospheres. Then they went to 20, 25 to 30, 35. 40 is now the new horizon.

And the reason is they have a device that you can use at the hospital to [rebuild] the PTCA, do a PTA, or you can do these fistulas that all require high pressures, and some of those will go as high as 30 atmospheres.

I am aware of a product over in Europe in which they have a coronary balloon that goes to 40, and I believe that the horizon that is out there is somewhere around 55 atmospheres.

That being said, you go on the lower side and get down into the endoscopy business and you are talking about 8 atmospheres, and this is our BIG60, and our BIG60 last year -- again, we lumped that over in the endoscopic side, but Kent, what is the number on the BIG60 for growth last year?

I have the other number you wanted, too.

But it should be on this sheet right here, on the 2013. So go to --

Let's see, Endotek for the year was $1 million.

Yes, but what was the growth?

The growth was 95%.

There you go. So 95% in this one segment, and then, again, what I think with the products that we have, the breadth that we have, and the fact that we are staying out in front of it. I know a number of my competitors, these are big -- these are part of the big four, have devices that go to 25 or 30, and we believe that pressures are going to continue to move higher as we go down the road. I mean, I think that's what history would teach us, and Merit is out in front of that, not behind that.

So, I said a couple of years ago that I believe that the TOUCH platform could be one of the largest products in terms of percentage of revenues for Merit, and it's almost $100 million a year in terms of our inflation device business. So it's a pretty significant part of that.

I also said that I believe that we could grow our market share from about 55% to closer to 65% over the next several years. So, I think that's about a 20% increase. It could take us up another $20 million to $30 million in revenues.

Now when we talk about cannibalization, it's an interesting question, because what we see is there are a lot of the emerging markets that have very low prices, and we can still satisfy that with our BasixCOMPAK. So, we have not seen -- I think it's disparate, but Kent, please, if you disagree, jump in -- I don't think we have seen cannibalization of our COMPAK business at this point. Essentially, the TOUCH business is incremental and taking market share from our competitors. Is that a fair statement?

I know in the quarter, the fourth quarter, it left 16% and over $1 million in the Basix. And the TOUCH was $268,000 in that same period. So it certainly didn't slow it down much (multiple speakers)

Yes, and it's just getting started.

(multiple speakers) just getting started.

So again, Mike, to your question, we are not seeing the cannibalization. We are seeing incremental growth and because we actually -- we can hit the low end of the market and we can go to the higher, I will call it more premium, end of the market, and we have products that fit both.

Interestingly, I should point out the basixTOUCH cost a little bit more money to make. It's got some additional stuff on it. But we have reduced the cost of the BasixCOMPAK, because of some improvements that we've made in manufacturing efficiencies. So I think we have both ends of it, and I think that's a major opportunity where many of our competitors have one device and they don't have a range.

That's always been Merit's strength, by the way, is we have digital, we have analog, and we have a spread of a number of products in the inflation device area. Kent?

So I had the third-quarter file behind me. I was able to pull that out for you. So the change in capital expenditures for the fourth quarter was about $11.5 million in additional expenditures, so that's actually slowing down now compared to the year, because the year was nearly $60 million.

So, say you take it essentially from a ramp of -- so if you take that, you would have spent $49 million in three quarters, or about $16 million plus, so about a $5 million reduction in the fourth quarter, and I think that will continue to move a little bit lower, as well.

All right, guys, thank you so much. Nice finish to the year.

Ross Taylor, CL King.

I will start with just two simple modeling questions. I don't know if you can give depreciation expense -- or depreciation and amortization expense for Q4, and I don't want to get ahead of your call for next week, but can you give any comments on what you think capital spending might be in 2014?

We do have those numbers for next year, but we will have to hold off until next Monday. But Kent, can you answer this one or is this a call back?

No, I can answer it.

Hold on one second (multiple speakers)

(multiple speakers) find it in my stuff here. Where did it go?

Okay, this is --

Here it is.

Here we go.

So, amortization for -- what do you want, the quarter?

Yes, just Q4 is good enough, yes.

All right, so we have year-to-date Q4 -- here we go. So for SG&A, it was $1.1 million, and for cost of sales, it was $2.7 million.

Okay, and then --

This year.

And then, depreciation, do you have that amount as well?

That's the amortization and tangibles. Oh, boy, I will have to (multiple speakers)

You know what, Ross, we are going to have him call you back on this right after the call.

Okay.

Yes, that's fine.

If that's okay. I apologize.

That's fine. And (multiple speakers) last question, and I apologize if you did make some remarks about this already, but can you comment at all about what growth in the US was, core business? I am just trying to figure out how much of the growth came from US versus overseas?

Yes, we can. Kent?

So the growth for the US in the quarter, without the acquisition included, is 5.5%, and it is 7.5, and that's not fair, actually, in one way, because most of that difference is direct sales conversion. So we really didn't buy that business. We went out and got it this year. So I almost -- give you the (multiple speakers)

What was the growth for the year in the direct sales force?

So the growth for the year was 7.4. Okay? Now that does include Malvern product, but again, they didn't get any at the beginning of the year.

And what was it for the fourth-quarter core growth, because it accelerated in the fourth quarter?

It was 11.5 overall.

Overall?

And that includes Malvern product that they had earned direct sales on this year. Billed.

Does that answer your question, Ross?

Yes, that helps. Thank you.

Okay, all right.

Thank you, and I am showing no further questions in the queue at this time. Please continue.

Okay, well, it's approaching about one hour, and we certainly appreciate the questions. Kent and I will be available for the next hour or two to answer questions for you.

We thank you and, again, apologize once again for having to move this out a week, but our policy is to make sure it gets reviewed by our Board. We have had a scheduled Board meeting and we tried to move it and we just couldn't get everybody together with everything that was going on, so my apologies for that. We look forward to talking to you next week on Monday at 3 o'clock Mountain time, and wishing you the very best and thank you again for your interest in the Company, and we will go ahead and sign off now from Salt Lake City, wishing you a good evening. Thank you.

Thank you. Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.