Merit Medical Systems Inc (MMSI) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Merit Medical Systems, Inc. first quarter 2014 earnings conference call.

(Operator Instructions)

I'd now like to pass the call over to Fred Lampropoulos, Chairman and CEO. Please go ahead, sir.

Good afternoon, ladies and gentlemen. This is Fred Lampropoulos broadcasting from Salt Lake City with our staff assembled in our conference room. We'd like to start the meeting today by having Rashelle Perry, our General Counsel, discuss our Safe Harbor policy.

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 in such statements. 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 obligations to update such statements.

Although Merit's financial statements are prepared in accordance with accounting principles generally accepted in the United States, GAAP, Merit's 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 of such operations. The tables included in our release and discussed on this call set forth supplemental financial data and corresponding reconciliations to GAAP financial statements.

Investors should consider these non-GAAP measures in addition to, not as a substitute for, financial reporting measures prepared in accordance with GAAP. These non-GAAP financial measures exclude some items that affect net income. Finally, these calculations may not be comparable with similarly titled measures of other companies.

Rashelle, thank you very much, and good afternoon, ladies and gentlemen. Thank you for joining us. We're delighted to discuss with you today the results of our first quarter. Before I get started I'd like to just go over a couple of issues that we hope that you will keep in mind.

As you look at our sales effort, I think you would all agree that this is a great performance. We're very, very excited about the sales results. It's approximately $5 million ahead of our internal forecast. If we take a look at our earnings, those earnings are ahead of our internal forecast, and we reaffirm the numbers that we put forth in our guidance in our call in February. So we're actually ahead of where we thought we would be.

Now, I recognize that it was a little difficult as we were discussing some of these expenses that would come into play in the first quarter, things like the 401(k), which we have now put back into place, and I think we shared those numbers or those -- the issues of why we felt that was necessary after a year or three quarters of being taken away; a pretty substantial increase in healthcare costs, approximately $1.8 million of healthcare costs; some ongoing litigation that we discussed with you, and I'll get into more detail with that; and then some building allocation costs in which we are -- we really essentially have two facilities in Texas right now, one in Angleton, Texas, and the new facility in Pearland, Texas.

For those who may not recall, several years ago we were hit by Hurricane Ike. We've been in a facility that's more than 60 years old, and we felt that we needed to make some changes. We moved a portion of that business to Salt Lake City, and we then built this new facility, which will withstand winds up to the 150-mile-an-hour range, in a new facility closer to Houston and the medical center in which we conduct substantial business.

So, those are a number of the issues that go into play. I think -- I continue to, I think, be optimistic about our sales, the efforts. I would like to discuss for a moment before I get into a few of the numbers one of the developments that we've kept, I'm going to say, somewhat under wraps, and that is that effective the first of January we have divided our sales force.

A little detail on that: We first of all spent almost a year in planning and evaluating how we would do that. Why did we do that? We did that because we have such a large bag that it was very difficult for our sales force to be able to be proficient in selling products that are very, very complex, that range all the way from embolic therapy to the placement of pacemakers and coronary sinus guides and the various types of things associated in the EP and CRM business. And so with the emphasis coming in radials, emphasis coming in other very complex areas, we just simply could not and did not feel that our salespeople could handle all those products.

And so we redirected now a sales force that has about 35 direct salespeople in our interventional business and a balance of about now 90 salespeople that are in our cardiovascular division. Since the end of the year we added about five direct salespeople and one or two clinical-type folks, and that was done to kind of balance out the various holes and various areas as we put this together.

I think the thing that's so pleasing about the performance from our point of view is both of these organizations in the very first quarter of operation were at or above the forecast that we have. And I think our guys did a terrific job.

What will it mean in the future? Well, products like our snares or our peritoneal dialysis catheters, our coronary sinus guides and some of these products will get more attention, more training and consequently we will benefit from more sales.

An example of one today: An account today ordered almost $20,000 of catheters that we get about a 65% gross margin, and those particular products we think will continue to grow rather dramatically throughout the year. And this is kind of -- I don't want to say a surprise, but I think we are pleased, very pleased, at the results that we see from these efforts in this split.

Why didn't we talk more about it? It's simple. We did not want our competitors to be aware of what we were doing. We didn't think that it had a material effect on the business. But we felt that in the long term it was necessary.

We actually did it a couple of years ago, then made a transaction on the BioSphere side and we had to kind of bring it back together. So this time it stays this way for good, and we think that our products, our salespeople will be better informed, they'll be better trained, and consequently they'll be able to train and have better dialog with physicians.

If we think about our embolic business, I think we're off to a very good start. As you can see from the first quarter we're up 28%, and I think we're seeing a substantial interest and kind of a rebirth of our Embosphere business, along with I think a very nice increase in our HepaSphere business.

And I can say that not only did we get the orders near the end of last year that would've been in that fourth quarter, and there was a lot of it there, but we've continued to see that demand increase, or continue may be a better word, and recently, just in the last day or two, we received another $1 million order from Japan that will be delivered in the second quarter for our HepaSphere product. We're now selling directly through our modified direct sales program our HepaSphere in China, and we're receiving orders, and, by the way, the margins on that approach 90%.

So as we look at the business and the things that we've put in place, we look at the facilities, we look at the continued consolidation in Salt Lake City of our facilities here, as an example. We moved into those facilities about one year ago. This is the new 285,000-square-foot facilities in here in South Jordan. It takes time. We'll get those things up and running, get the flow correctly. We, as you know, shut down one facility and moved and consolidated it here, and I think we're starting to see the benefits of that.

We have two major automation projects that will come on this month. One is we've automated our transducers. That's a project we've been working on now for approximately 18 months. Our new automated shipping systems that literally from when the order comes into our system to when it goes on the truck it was really essentially free of human hands, and we think that that is going to be a great saver in cost and will help us to be much more efficient and proficient and accurate in moving products and increasing the velocity of products that move out of here and thereby decrease the need that we have for facilities in the future. It would just simply move things faster, and I think that's good news.

If we go over to Europe and think about the results both on the EMEA side as well as in the direct sales side, I think you can look at those numbers, and they're up about 31%. It's an extraordinary effort, 31% increase in sales. These are dealers and direct. It's substantial.

You can see the China results, and this is -- this does not include, by the way, very much on the embolic side. Very little of the increase that we're seeing in China is from the embolics, but we expect as go forward that you'll see a substantial contribution from our Chinese efforts in our embolics. This comes from a broader acceptance of products and registrations that we have put into place in which products like our infusion catheters, our guiding catheters, our sheaths and other products are now starting to take hold in China.

And then, finally, before I ask Kent to kind of weigh in on some of the financial issues, I think it's very important to know what's going out in Malvern. Many of you will remember that this is really the Thomas Medical, now known as the Malvern Division of Merit Medical. Sales in that particular effort were up 49%.

You'll recall that the first quarter that we had following the transaction last year was I guess somewhat of a disaster. We had lost a major customer, and it put a lot of pressure on us, and but what did we do? We went to our sales force. We went direct with the product. And we picked up a good portion and have ramped up to a good portion of the recovery of what we lost.

In addition to that, I think one of the surprises out of Malvern has been the acceptance and enthusiasm worldwide for our coronary sinus guides. And these are ways to cannulate the vessels necessary for electrophysiology and for CRM procedures. So we also have Meritized the business, and by that I mean we have a very active research and development program out there. We have several new products that I think will help us not only take back some of that business that we may have lost but will be substantial contributors to growth.

Now, if my recollection serves me correctly, Kent, and I'm just kind of going off some numbers I recall, we did almost $3 million in the month of March, which would put us on the $36 million ramp out there. So that's pretty exciting. I think when we bought it it had a $26 million ramp, so -- or sales actual I think is where it was. I could be off by a little bit, but the point is is that that business is growing, and we're excited about things that are going out there.

I could talk to you about smaller pieces of the business like our sensor business, which is up 117%, and others. But I think all in all the sales efforts are things that I'm pleased with, particularly when you start out that new year and you get a little -- you're a little bit sluggish for probably the first half of January, so -- and, you know, there was weather. I think that was an issue for a lot of people. You heard about it. I don't want to hang my hat on it. But there -- we just couldn't get product places. It's hard to think about that as we're looking out the window now and we see trees in bloom. But we can tell you that whether it be shipments to Europe or shipments to the East Coast there were a number of delays. Despite that, I think we hit numbers that we're very pleased with.

So, Kent, I'm going to turn some time over to you and let you talk about the things that you dream about at night, the numbers.

I'd like to just recap some of the major points. First, we hit $119 million in the quarter, just short of last quarter's record of $120 million. We are up 15%. I think that's more significant that's Fred's really been talking about.

Our non-GAAP net income was $5.4 million, or $0.12 a share, and that was up from last year's $4.3 million. Our GAAP income was $2.8 million or $0.07, and that was also up a lot from last year's $671,000 for the quarter.

We also had -- he talked about our sales growing, and I'll recap a few of them. Malvern was up 49%. BioSphere, that group of products was up 28%. The standalone products were up 18%, and those were some of the best groups growing. I was impressed with our inflation devices, actually, up 10%. They've been growing slower, so it was nice to see that, and our OEM customer actually added to it instead of taking away from it on that one.

Non-GAAP gross margins were 46%, compared to last year's 44.4%. So, again, we had improvement year to year on that. And the GAAP margins were up as considerably, 43.6% compared to 41.4%.

We've seen some loss of momentum in the gross margins, but year to year we're doing well, and we expect it to accelerate through the year as we're able to produce and sell more products according to our sales forecast.

Income from operations, then, which is a key point, was $10.3 million, or 8.7% of sales, and we were up 40% on that metric over last year's $7.4 million. So we've seen really improvements year over year in almost all the areas of our business as far as the income statement goes.

Okay, Kent, thank you. You know, I -- we want to, I think, speak in candor with all you guys, and one of the things we were talking about, and I'm going to say it so that you won't, but we were talking about that last year we were talking about particularly off that first quarter was improving quarter to quarter, and we were talking today about, well, what we want you to look at is the improvement from this quarter over the first quarter of last year.

So Kent was teasing me a little bit and saying, gee, quarter to quarter improvement, but now we're telling you something different. And, again, we're focusing on the comparison. And I don't feel that bad about where we are sequentially, even though sales were off slightly. We had an extraordinary fourth quarter. But I think the thing that is important to remember are all these other issues that came into play that we discussed with you in our guidance call, and that is the litigation and so on and so forth.

Let me tell you where we are on the litigation. We spent during the quarter just about $300,000. I don't like spending money on litigation, but there are times when you have to draw a line in the sand, and that's what we have. We're to the point now where we're coming down to the back stretch, and we will be working on expert witnesses, and by the time we get down to August or September this thing should be resolved.

We're confident it's going to be resolved in Merit's favor. We would not have brought the case -- and just to refresh everybody's memory, we are the plaintiffs. So we've got more work to do on this and we'll keep you briefed as this particular situation plays out.

We've talked about the new facility. We've talked about the things in automation and the programs that are going on here. Truly, we need to have more leverage. But I will tell you it's also a tough business. There is price pressures out there. We don't have a lot of elasticity in pricing, as many of you know.

One of the things about splitting out the sales force is it allows us to work in the areas that will give us higher margins, and these are specifically the embolics. So if we look at where we are with embolics today, if we look at a year ago we lost in the domestic market almost $3.5 million worth of revenues on our embolics. Now if we take a look at the business today on a global basis, with the work that we've put in in the last couple of years in China and Japan as well as the United States and Europe, we are starting to see, because of this focus and effort, I think we're starting to see that this thing is turning in the direction we want, and essentially the product that gives us the highest margins.

We'll be attending the GEST meeting in about a week, which is the Global Embolization meeting in San Francisco, and we're this week at the ECIO, and I just got a report before this meeting that our booth is very, very active, and the guys over there feel very positive about our efforts there.

Kent, you wanted to add something?

Yes, I just wanted to add on the QuadraSphere/HepaSphere product it's up 70% year to year on that particular product line, so it's exciting to see that grow.

Yes. Our inventory turns have improved. We're very pleased about that.

The other thing is the integration of the [McKay] Datascope was really absolutely seamless. That is going to become a big player as we now introduce our new sheath at the Paris PCR. This is a hydrophilic sheath.

So one of the areas that you will hear a lot about and that you will see a lot of results from is really the continuation of our radial business. So that product will be released next week in Europe. It is submitted to the FDA, so it is in the review process right now with the FDA, and our expectation is and our hope is is sometime in the late second, early third quarter that this will be approved in the United States.

When you add that along with our Safeguard closure devices, you add it with our boards, our wires and all the other products, it's a very, very big deal. So we're very excited. The pipeline includes a lot of products that are coming out, whether they be crossing catheters, whether they be our steerable catheter, we could go on to gel foam, which we hope to introduce this year.

ASAP -- I was looking at the numbers today, and our aspiration business was just about $1 million in the first quarter, just about a $4 million business, and something that I think that we're going to be very exciting about, and something we've been waiting for for a very long time. Sometimes this business, it could be very frustrating. It's frustrating to you sometimes and also to us.

But our biliary catheter, which really fills out our drainage catheter, becomes a very, very big deal. Incidentally, this is going -- this particular product is going to be standing now shoulder to shoulder with a business that's up 54% in the first quarter. When we add that biliary catheter that then means that a customer can buy all of their drainage catheters from us versus some of those, that's a big deal.

And I expect that -- I'm not going to say that it's going to go up -- you know what? I might say that. We might see this business up 50% this year. And in the first quarter we're talking about business then just on the walking side did $1 million. So this is another product. We have a number of areas in our portfolio that are going to continue to grow very, very, very rapidly, and I think our worldwide effort.

So, we've got a nice business. Can it be a better business? Of course it can. And we work every day trying to improve the business here to give returns to our shareholders.

One other point I want to make, and I won't stay on it long. There were no bonuses paid to anybody here last year on this general staff, and so I won't say anything more than that. You can read our proxy statement for our shareholders' statement, but there were no bonuses essentially paid for the general staff last year.

But we want to get some bonuses this year. In order to do that we have to meet all our goals and exceed them, and so we are going to work very hard to accomplish that.

I think that pretty well says what I want to say, so I think what we'll do now, we'll go back to Lorenzo, and, Lorenzo, let's open up the line and see who's in the queue or who's getting in the queue for us.

Yes, sir.

(Operator Instructions)

Thom Gunderson, Piper Jaffray.

Hi, thank you, and good afternoon, guys.

Good afternoon, Thom.

So, I guess a lot of upside surprises here, Fred. I guess the biggest one for me was on the embolics. Is that -- can you give us a little bit more color on where you thought that growth came from? Was it maybe a US or OUS split? And then is this -- do you think this is a new base level that we can look at for embolics, or was there some first quarter kind of things going on in there?

Well, you'll recall, Thom, that we got approval from the Japanese government in the fourth quarter, and we have some initial shipments. Most of those I suppose you could say were really filling the pipeline. But we've had a couple of reorders, substantial reorders, and I mentioned that just yesterday we received another $1 million order for delivery by the end of the second quarter for our HepaSphere product.

So both Embosphere and HepaSphere both in China and in Japan are in very, very big demand. I think the biggest opportunity is really going to come out of China. And remember that with this you also have the microcatheters and all the vascular access products that go along with it.

Now, we've also had a substantial increase in our effort and our attention in Europe. And one other thing I think it's important, we have a small other product, a product PVA, polyvinyl alcohol, and that is also embolic material. And then we have another embolic material coming out, and we have three or four more embolic projects that are very exciting projects in the next several years.

I mean, these are not things that are easily done, and they take time, but we have an embolic program, and we are getting reach in Central and South America, in Asia, in Europe. The United States is kind of bumping up pretty dramatically.

And one of the other things that we're doing, we're getting smarter, and let me give you an example. In the embolic side for UFEs, we're doing a lot of things with social media, we're doing a lot of things in terms of advertising that we think reaches a lot more people and is a lot less expensive than some of the things that were done at BioSphere and kind of the things that we inherited.

Now, that's not meant to be a criticism of them, but it is saying that I think we're becoming a little more hip in terms of understanding how to reach our customer base, and particularly with physicians, who then get those referrals, and what it means for our ability to bring customers to physicians and improve their business. So we're getting much better at this. And so my expectation is is this is just the beginning of a global improvement in this business.

And, as I mentioned, in the fourth quarter, or in the third month, we're at about a, let's see, I forget what the ramp was, so I'm going to just withdraw the comment. But we're busy. We're growing dramatically. And that's a long answer to your question, but we're very excited, and very excited about next week down at the GEST meeting.

By the way, here I go, getting a little longer, we've started the BEST study, and this study for PAE is a very, very hot and exciting subject amongst interventionalists around the world. We've also, as part of this -- and I was up in Vancouver last week -- there's now other discussions of other areas of interest, whether it be gastric artery embolization or other types of areas where people are now starting to look where else I can I do this that would be helpful.

So there's a lot of conversation. And I think what's happened, and I'll close with this, is that Merit's standing and Merit's posture and investment in this particular market is appreciated by physicians who happen to buy most of our other products, as well. So I think that's part of it. Long answer, but clearly we're excited about the embolic business.

Got it, thanks, and thanks for the color. So my only other question for this round is China, you've mentioned it a few times in your comments here, and it's a big part of what's going on in a number of product areas. But I'm curious where you are in converting regulatory approvals of the entire catalog of Merit products into China products.

Yes, well, we have an active program in which we are actively having products all the time that go through the -- through that process. Right now we're going through the process of getting some of our stents approved.

Incidentally, so I won't forget, our AERO stents, our pulmonary stents, have just been approved in Japan. We just attended a show there. That's another exciting opportunity in our endoscopic business.

But if you were to have looked at our embolic business or at least our China business four years ago, you would've seen that there were five products that were approved, almost on any given day I would say about a third of our entire product line, but probably representing better than half or so of the revenues that come from the Company. By that I mean the ones that generate the largest revenue, a good portion of those are now just starting to be sold. So we have active registrations. We get new registrations.

And one of the other things that's important in China is not just new registrations, but the renewals is something that you really have to be on top of because you can run out. One of the things that's different than the US is you have to renew these things every three or four years, and in the US you get a 510(k), unless there's some significant change it kind of lasts forever, so to speak.

So we have probably 30, 40 products that are now approved versus that 5, and we continue to register those products as we see those demands, or the demands for the product and interest in the product. So it's an active, ongoing, never-ending process of new products -- crossing catheters, hydrophilic sheaths, stents, embolics, not just in vials but maybe in syringes. So it's a long process and one in which we have dedicated probably three or four people and put our staff right there in China. So it's a busy, busy situation.

One other thing, too, is not only is this stuff coming from the north, but it's also coming from our Shanghai office, our Hong King office, and our business in all of Southeast Asia is growing dramatically. So it's kind of across the board, Thom, and something in which we invested a lot of money to get started there, and I think we're getting the results.

And our margins are, by the way, higher than our corporate average. So we get better prices in China than we do in the United States and in Europe. So it's a great place to be. I think we now have about 60 or 63 -- how many, [Louise]?

53.

53 full-time employees in our Beijing office. So exciting business opportunity. I'm glad we're there. I'm glad we made the investment.

Yes, thanks, Fred, and that's it for me.

Thanks, Thom.

Jayson Bedford, Raymond James.

Good afternoon, and thanks for taking the questions. Just a few. I guess just to follow up on Thom's question, on the embolics, how does it roughly break out between UFE versus oncology and maybe US versus international?

Yes, I'm going to -- Kent, he's got the numbers right in front of him.

Well, I have the product, so I'm not going to go by procedure or utilization, although QuadraSphere/HepaSphere is mostly what you're talking about. So it was $2.4 million for the quarter on the QuadraSphere/HepaSphere, and it was $6.7 million on Embosphere. There's another $400,000 that's on the PVA and some miscellaneous catheters and wires, for a total of $9.5 million (inaudible).

So it's going to be about two-thirds, one-third then, right now?

Yes.

Yes, Jayson, this --

But I don't know the international split. We don't have it.

Yes, we don't -- we can't give you the international. We could get that for you maybe as a follow-up.

But I think the other thing that's important to note is that when we bought this business revenues in that particular area I think were less than $1 million. So, I mean, we have come a long ways with building this product essentially from almost the basement into a pretty good-sized franchise. And I expect that it will grow dramatically even from here.

I would not be surprised, Jayson, if in five years this business wasn't $30 million just on the HepaSphere. This overall business has the potential to become $100 million. Now, that's a long ways from now, but that was kind of always our view. It will need other things to take place, a couple of other (inaudible). But I'm not adding some of the what I think are huge opportunities. I'm talking about the basic products we have now have that kind of opportunity as we talk.

Now, remember, we're investing in things like the HiQuality study. We have the BEST study. So we're doing things that we think are necessary as well as smaller studies that a number of physicians are doing to take a look at kind of local populations and smaller issues. So I think we're very active in the area. And it drives a lot of other product sales. Remember, it has to be delivered and it's got to be accessed. So it has a lot of pieces, and those things are, I think, somewhat unique to Merit.

That's helpful. On the expense side, I just wanted to tackle the -- whether you want to look at it year-over-year, quarter-over-quarter bump-up in SG&A. So I've got a few questions here just trying to (inaudible) out some of the factors. You're running two facilities in Texas right now, in Angleton and Pearland. When do the costs related to Angleton kind of fall off, and are we working through a period of kind of elevated spend at Pearland that will, again, kind of shed some of these costs as the year goes on?

Yes, it's a good question, and I'm really glad you asked it. Right now we have an operation running in Pearland. We opened the facility about a month ago. And we are transferring it up. That transfer will be completed in September. In the meantime, the expenses show up in the SG&A line. But as it moves closer to September and a higher percentage of the production that is done there, it will kind of ramp down in one area and ramp up and move from the SG&A into the cost-of-goods section. Now, that's how it will ramp out, and by September it will all be completed.

Incidentally, if this is a point of interest, there are a number of economic incentives that go along with this with the state of Texas and the local authorities there, but -- so these deadlines of September will be hit, and I think we'll have a much better business.

I think maybe of more importance of that -- kind of that one part, we have a new management team down in Angleton -- or, excuse me, in Pearland, and Angleton right now. They kind of move between the two.

And one of the other things that we're doing, Jayson, is we're moving a lot of products that were being done out of house to the new Pearland facility. I can think of two major projects that right now Merit makes a 65% gross margin on these products, but some of the shafts and some of the work are being done out of house.

Now, it seems silly to me that we can extrude, braid and finish catheters and we have other people doing it for us, in fact, I think it's nonsense. And I think our new management team and our new chief operating officer, and there's just kind of this whole blend of thinking is moving to bring all of those things in-house, and those will help to offset the increased costs that we have down there.

So if we were to look at Angleton moving to Pearland and we look at this business maybe two years from now, you're going to see a substantially different business, with a lot of that work being done and applying those overheads to offset the costs of these new facilities.

Now, that being said, I may sound a little disrespectful to our previous management team and so on and so forth. That's not the intent. They didn't have the facility to move into. They did a very nice job of dealing with what they had to in a very limited and very old facility.

So I think I've answered the question on how the expense is going to kind of modulate. But in the first quarter we spent in the SG&A almost $900,000 that's in the SG&A line that eventually will be up in the other line.

Now, the good news is is we're moving a number of products there, and even some of our stent packaging and delivery systems. I mean, we're moving several million dollars of expenses that are going out of house moving them all into house into this new facility over the next year to 18 months.

So those are exciting things. It means we're going to have higher gross margins on those products, and they'll offset these new expenses. And we have plenty of capacity.

I think that's another thing that is something I want people to hear today, and that is if you come to the Merit facility -- and, incidentally, we will be announcing sometime in the very near future an investor day. We think it's important to get people out here to see what we have.

I had one of our largest investors here recently. They came out. They were looking at all the things. They had some concerns about our business and so on. They came here and they said, you know, Fred, we listen to you talk and all the various aspects, but seeing what you're saying and understanding it makes a huge difference.

And, Jayson, you've been here. I'm not going to ask you to give us a testimonial, but we believe it's time to have an investors day out here. We're going to bring shareholders old and new and bring them out and show them what we're doing, and we're going to convince them that what we're doing is right. We're going to convince them that there's great opportunity in this business.

And I sound like I'm trying to cheer up my football team before they hit the field. But I'll stop there.

No, I appreciate the detail there. I guess just on Angleton it sounds like you're still carrying costs there. When does that facility get shut down such that you won't carry those costs?

By the end of September. There'll be a little bit of maintenance, but it's also up for sale. We own the facility and I think 14 adjacent acres. I just had a note this week where there's some interest by the city, the county, and it's a big area for Dow Chemical and a number of other businesses. So by the end of September we'll be out, we'll be fully relocated, and we'll either sell that facility.

If we can't sell it we're going to take and knock down that old facility. It shouldn't have any effect really on our balance sheet or anything like that or income statement. And then we'll see what we can do to sell that I think probably almost 20 acres down in Angleton. But we will be fully relocated at that particular time into the new facility in Houston -- Pearland.

Okay. So my last question just on this topic, and then I'll drop here, but, again, just still trying to reconcile the jump in SG&A. Now, the healthcare costs, the 401(k) true-ups that you mentioned, are those heavier in the first quarter?

Well, remember, yes, the 401(k) was in the first quarter last year, but it is incrementally higher. In the second, third and fourth quarters last year, remember, we held back on that. We discontinued it. And so this expense as we get into these other areas will be higher. But those are our estimates. That's on that SG&A side.

On the health insurance side, that's starting right from month one, and that's up dramatically just simply because of the increase we received. However, we have a number of plans and a number of things that I won't go into a lot of detail, but we get a lot of things here to help lower and to manage our healthcare costs. And sometime in the future I'll talk to you about this. They're not material to our discussion today. But there's a lot of exciting things that we're doing here to (inaudible). We're [kind of] taking it into our own hands. And I'll kind of leave it at that for right now. But, Kent, do you want to comment?

I just wanted to reaffirm that most of these costs are -- they're step up sequentially because they're either additions or new costs that we didn't have last year, maybe. But as far as moving forward they're pretty well constant. I mean, the health coverage is, the 401(k)'s in place for expected for the year, the building costs are going to be one place or another in the statements. Principally right now they're in SG&A, and they'll move out of that into cost of sales. Does that answer your question?

It does, to some extent.

[I mean, we'd be glad] to clarify. I mean, the other big thing is you've got increased headcount. It's probably the largest increase as far as comparing year to year the number of people in different positions, and salaries and wages are the biggest line item increase in there, and then some of the others we've been talking about.

Okay. Thanks, guys. I'll get back in queue.

Jim Sidoti, Sidoti & Company.

Good afternoon. Can you hear me?

Yes.

Yes, Jimmy, how are you?

Good, how are you?

Good. I'm coming to San Francisco to meet with some of your investors.

Yes, we got that. We're setting that up. Thank you very much.

You're welcome. What can I do for you, Jimmy?

There was an FDA warning, and I think it was last week, against power morcellation of uterine fibroids. How is that going to affect your business for the embolics?

We've had -- we're well aware of that. It was a subject that was actually brought up several months ago, and then kind of hit the journal. I think it's probably better -- I'm not a medical doctor, so I'll just kind of stay away from other than saying that that business is moving up. Women have choices. And I think that they need to consider UFE over any of the other treatment [modems].

I think it's -- if it were my family, my wife, whoever, those are the things we're going to look at, and I think those -- it's a great opportunity for Merit, and particularly when you have that kind of choice. Think about the morbidity and the mortality associated with hysterectomy. Think about all those things. And I think this is a great alternative, and clearly, what, 30,000 women a year are having a UFE procedure. So, and I think there's really more.

I think some of the things we're doing, Jim, and maybe I can share this with you sometime soon, is really some of the things we're doing to increase this awareness. Because, given the choice, it's got to be the first choice. You have to consider it. I mean, you're talking about essentially an outpatient procedure versus a lot of changes and major surgery. So that argument's always been there. I think the more people that know about it the more opportunity Merit's going to have to help patients and to treat them.

So do you expect to increase your direct-to-consumer advertising?

Yes, but it's interesting how you ask the question. What you should -- if I could have a little fun with you -- do you expect to increase your direct-to-consumer advertising and reach a lot more people at lower cost? The answer's yes. By the way, if you get a chance, go to our Ask4UFE website, and go take a look at this new website that we just launched, and take a look at it. You're going to love it.

But more importantly, Jim, I'd love to explain to you how we're getting over 30,000 hits a month on this website -- 30,000 hits a month. And those hits are turning into patients going to physicians and being treated, and they end up using a Merit product. So go take a look at that. I think -- and it's (inaudible) Ask4UFE.com, and I think you'll be very pleased. And sometime, maybe on investors day out here or whatever, I'll sit and kind of go through all of the stuff that supports all of this and how we think it'll generate substantial interest and opportunities and give choices to women.

Yes, I guess what I'm really asking is if you can leverage this FDA warning to help get some more -- get the information out to more people.

I think women have choices, and I don't want to comment on somebody else's misfortune.

Okay. And then overall it definitely seems like the top line was ahead of where I expected it. Bottom line it sounds like overall is, if anything, a little above where you thought you would be at this point?

It is above where we thought we would be at this point. But to make our numbers we have a very steep climb and we have a lot of work to do here. Everybody that's sitting in this room knows that there's a lot of things that need to be done.

But I would say that with these embolics and these higher margin products and these product releases, these programs like Think Radial, which is a broader program doing kind of the same things that we're talking about in UFE but talking about radial, if we start talking about PAE, the prostate artery embolization, we have a lot of, I think, neat drivers that are going to continue to build the business. So we're enthused. But we have a lot of work to do.

Now, the sales from Thomas, it seems like the level has gotten almost back to where you thought it would be when you did the acquisition. Is the mix the same or has the mix changed to where you thought you were going to be a year ago?

The mix has changed a little bit. I think the biggest surprise there have been the Worley coronary sinus guides. These are catheters and delivery systems used to deliver leads and assist physician in proper placement of leads for pacemakers and defibrillators. That's kind of a big surprise. And it was one kind of -- that I'm pleased is the way that we were able to get access.

When we did the acquisition we did not have access to those products, but subsequent to the acquisition we cut a deal, and we are the exclusive manufacturer, by the way, of these products, which is very important, and we have a dual distribution. So there's another player out there. But I think the thing that we're doing, we're getting involved with many of the CRM players. If you go out there's a list of them. You know who they are. This is not the field, but we put together these programs. They get trained. They may buy somebody else's hardware, but they're buying Merit software.

Again, one example today, right here in Salt Lake City an account purchased $20,000 of these catheters. I saw another company, another hospital in Florida earlier this week that bought $20,000 worth of catheters. It's a very pleasant surprise with a product that gives us about a 65% gross margin. So it's going to be something we'll be talking about.

But maybe more important than that, Jim, is the new stuff we have in the pipeline. We're going to be showing some of that at the Heart Rhythm show. I think that's over in Denver. I think it's -- where is that Heart Rhythm show, guys? Anyway, it's coming up. It's in San Francisco. But it's coming up. We'll be showing some of our new products there. And rather than tip our hat at this point we'll just kind of -- or tip our hand, not our hat, but tip our hand we have some new products there that we think are increase the business.

And you know what? We've got a lot of really good people out in Malvern who worked hard and stuck with this. We stuck with it. I love the technology. I mean, we did the transaction. You can criticize, and it's a fair discussion, Jim, on pricing and all this and that. But if we look at the vascular access and take a look what Merit does on radial and general access and micropuncture, and then you take a look at these things, Merit probably has the broadest portfolio of vascular access products in the world, and the best ones.

So I think that that platform works in UFE, it works in PAE, it works in HCC. All of these various therapies you have to get there, and Merit will bring you there, and then deliver the product that's necessary to be successful.

All right, Fred. Well, all I can say is what a difference a year makes. We'll talk to you in a couple of weeks.

All right. Thanks, Jim.

Greg Macosko, Montrose.

Yes. Hi, Fred.

Hey, Greg, how are you?

Very good. Good. Just one question. Perhaps I had missed it. I was a little surprised I didn't hear more discussion of the change in the sales force. That was, I guess, not preannounced the way you said it, but it sounds like a decent idea. Talk to me about is the 125 that you now have the right number to have, and can you say that -- I mean, you had a good sales growth quarter. Was there -- did you feel any of that from the way this was changed, or is it really -- maybe it was a drag on sales growth in the first quarter with this change, and might we see more upside in coming quarters?

It's a good question. Thank you, Greg. I actually think it was a drag, and I'll tell you why. We had to go through the exercise and all of the administration of splitting out the sales force, working it all out. And I will tell you that Marty Stevens and Kevin [Sterva] and Monroe May, the three architects, but primarily Marty did what I think was an extraordinary and difficult job. It took them one year, and they brought in the programs and we looked at them.

But if you take a look at the weather, you take a look at new people going out into the accounts and taking over areas that they hadn't been before, and all of that, our expectation is that it was going to be a drag. In fact, our general thinking was it could be a drag for maybe the first six months of the year.

Now, that being said, that drag was just a few rivets out of place on the wing, because we had a lot of momentum in China, a lot of momentum in Europe. So as we looked at the business we didn't think it would have a big effect, and, very candidly, the US is kind of one of the slower areas.

My expectation is, though, and we're seeing this play out in embolics, because this is one of the areas that we separated out because it requires a lot more attention and a lot more work, in the coronary sinus guides that we talked about and the Thomas medical products, when we talk about snares and some of these other areas, these are the areas that, including peritoneal dialysis, so think about how complex these procedures are, and you've got someone selling a manifold kit or a pack, and then you're in there and you're talking about how you're going to deliver a therapeutic dose of a doxorubicin-loaded HepaSphere or QuadraSphere into a tumor. There's a lot of work.

So, we worked hard to go through and look at it. By the way, I'd also point out, we didn't lose any salespeople. Now, I think that's the proof that's kind of in the pudding is that the salespeople are enthused about it. They're enthused about the educational process.

And a question that was asked previously, well, what about these SG&A expenses? Well, there's a little bit of costs that go into kind of balancing someone going from a product line that's relatively small from a full bag, so we've had to balance that. Those costs are in there. As time goes on there's no doubt in my military mind that we will see that this was what needed to be done.

When will it be implemented, Fred?

(Inaudible) it needed to be done.

When do you figure it'll be implemented and complete?

It is implemented and complete today. I mean, it's done.

But the ramping and the comfort, the comfort level of the sales force.

Oh, I would say that that six-month period of which we're three months, so another two or three months, I think. We've had to train people, but we have less to train and we can be more focused on that training. So another two or three months, I think -- our estimate it would take them six months to get in the saddle.

But we're already seeing the effects, the positive effects of this right now. But there's work to be done. There's work to be done.

You don't feel you'll add to the sales -- you'll need to add people as a result of it?

We did. We added four or five, and we added a couple of clinical people to kind of balance out the portfolio of the geographical locations. That's already in the expense. We don't think we're going to have to add any more. But we kind of did this as, again, it's a balancing issue. We had a territory and you had this amount of procedures. And so we had to balance it up, and that was part of this exercise that we went through and challenged and modeled and challenged again for that first year and then executed the plan.

And, again, we didn't say much about it because we didn't think it had a material effect on the numbers. It had a little bit of an effect. But we also didn't want our competitors to know that there might be a -- any disruption if a competitor knows it. But the fact of the matter is looks like with the business growing it hasn't had any effect at all, or if it did it's negligible. Kent, do you want to comment?

Well, I was just going to add one other thing that we didn't really talk a lot about, we kind of [bailed] a little bit, there was extra travel expenses in the first quarter due to this training and due to these meetings and communicating all of this. And so we had nearly half a million dollars over last year in travel costs that were higher in SG&A. So that was part of this whole story.

But that's now done.

Okay. And then finally, just along the same line, does that mean that the salesmen are going to be -- I mean, a lot -- a fair number of double calls on the hospital? In other words, instead of one call on the hospital you have two people calling? How much of that is -- of overlap is there, do you figure?

Oh, yes, there's going to be -- they'll cover the products, so there are two people now in each hospital. That's true.

And, by the way, we thought that out, Greg. Think about this for a second. Someone goes down, someone's sick, someone's on vacation, there's somebody to service that account. And we think that we an important factor here to have kind of a back-up plan.

I'll give an example of a situation today. In a hospital out here in the western part of the USA an account was upset with a competitor. They called one of the guys in one of the divisions who used to handle the account, and he and the new guy that's covering the account are going to go in there, and we're taking probably $100,000 worth of business away. So the network worked. If that guy hadn't have been there, if he would've been out someplace else or he was working on another in-service, he couldn't have done that.

So we see a lot of benefits to this, and we just simply could not get deep into the bag. We made a lot of investments, and we just weren't getting the kind of returns that we felt were necessary. And, contrary to what other people think that's going on in the industry, procedures are slow, things are -- but for us, we think there's a lot of opportunity here, and we think we've delivered, we're showing that.

Now, at the end of the day it's all about leveraging those numbers. That's the part we have to do. But I think from a business point of view we have plenty of capacity here. We can build the business. We don't have to build new buildings. We have everything in place. And that tells me that we're going to have opportunity to reduce unit cost, to increase our gross margins and build this business pretty dramatically over the next five years.

Well, it sounds like those bags that they're carrying around have got empty space in them now, and so, Fred, I guess you're going to have to get going on that new product development and maybe make a few more acquisitions. Thanks.

Well, we're not -- we don't have any money to make acquisitions, so other than little teeny things, little, little teeny things. But we do have a very active R&D program here, with lots of new products that we're developing, balloons, new embolics, new catheters, new stents. We've got plenty of stuff to fill that pipeline and continue to keep those saddle bags full. So good to hear your voice, Greg.

Thanks.

Thank you, sir.

Thank you. At this time there are no further questions. I'd like to pass the call back to management for closing remarks.

Well, ladies and gentlemen, thank you again for your time. Kent and I will be available for the next, let's see here, it's about 4:00 -- I have a baseball game to watch my son at about 6:00, so we'll be here for another hour and a half and then I'm leaving to go the ball game.

We appreciate your efforts. We appreciate your interest. We'll be keeping you informed on our investor day. We want to get shareholders, new shareholders, prospective shareholders out here to see what we're doing. We think it'll give you a better understanding of the opportunity here at Merit Medical.

Thanks again for joining us. We're signing off now from Salt Lake City, wishing you a very good evening. Good night.

Ladies and gentlemen, that does conclude Merit Medical Systems, Inc.'s first quarter 2014 earnings conference call. We'd like to thank you for your participation. You may now disconnect.