Merit Medical Systems Inc (MMSI) 2014 Q3 法說會逐字稿

Good day and welcome to the MMSI's third-quarter 2014 earnings conference call. At this time I would like to turn the conference over to Fred Lampropoulos, Chairman and CEO. Please go ahead, sir.

Jamie, thank you very much and good afternoon ladies and gentlemen. We are assembled here, our staff in Salt Lake City on a beautiful fall day and we appreciate your attendance. We will start our meeting by asking Rashelle Perry, our General Counsel, to discuss our Safe Harbor provisions. Rashelle?

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 any obligation to update such statements.

Although Merit's financial statements are prepared in accordance with accounting principles which are generally accepted in the United dates such as 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.

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, 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 again, ladies and gentlemen, thank you for joining us.

As you can see from our press release, we had I think, a reasonable quarter. Our revenues were up 12% for the third quarter and as some of you will recall, last year we had a very, very hot third quarter, well above our expectations in terms of revenues and to be able to follow that up with double-digit growth I think we are very pleased with.

I think sequentially the improvement in gross margin which we will discuss a little bit further in a few minutes, we are pleased with. The income from operations is probably from my perspective, the most important metric. In fact, the amount of net income on a GAAP basis that we earned in the third quarter, the summer quarter, is the largest amount of earnings report in the last two years. So it is a pretty significant number.

The non-GAAP number you can read at $0.25. A couple of other business developments and things will be of [interest] to you is we haven't finished our move from Angleton, Texas into our new facility in Pearland and so there will be some adjustments now as most of the cost of that facility now, almost all of that cost, will now be up in the cost of goods, above the line in terms of where we will measure it where in the past a portion of that has been down in the SG&A line and as we have moved in. So there will be some adjustments in moving and SG&A and I will let Kent discuss in just a few minutes kind of the effect in terms of the gross margins.

We just learned a day or two ago that we had received approval for Prelude Ease, hydrophilic sheath. I think that is very significant in that we have just very exciting opportunity worldwide in terms of Merit's radial products. We talk about and allude to the fact that we have recently launched and think radial program not long ago in Salt Lake City, we had a radial training course. I think we had 16 or so physicians, we had some 50 on the waiting list. We have another one coming up in Miami for our international markets and the last time I heard we had about 50 or 60 on the waiting list plus a full class.

So there are people, customers and physicians, interested in the products that Merit is coming to the market with and this kind of fills out our line in that area in terms of having the stick to stitch concept that we talk about.

We have a full line of new products that are coming. We have a number of products that we think are I won't use the word imminent but we have a number of other approvals we expect in the next 30 days that we think are significant products for Merit. And so we think by the end of the year we will have again, two or three more approvals and when those come in we will certainly let you know.

But more importantly I think is the work that Merit is doing and that is we are very serious about improving the business and I think a thing that we are concerned about is we don't want to have these booms and busts, the W's as people call them, up and down and kind of the same old thing. And I think all the staff is sitting in here. We have developed a plan or we are working on our plan for 2015. I would say and I would like to remind just a couple of things that will be of interest to you and that is that we intend to have our first investors conference at Merit on or about March 5 of next year. We will send out invitations and we hope to have folks in town so that we can share with you and answer questions for you and show you our facilities and discuss our plan which we will share with you in the late part of February, give or take when we get our audits and get things that need to be done from a statutory point of view.

We are going to come to you and we are going to discuss a three-year plan that will talk about our forecast, our margin goals, it will talk about our operations and operational profit goals, talk about where we expect to be in terms of our earnings and what we expect in terms of CapEx. We will give you a plan that we expect to be held accountable for. We are working very hard on that plan and starting to develop that, starting with next year's forecast and then we will work forward. But we will have that for you sometime in February. So I think it will give you a clear view of the business as we see it over the next three years.

Now of course as you well know, things can change and this will be something that is just based on what we see and what we have, not what might pop in. But we will talk about that levels and we will talk about all those sorts of things and our plans to reduce that debt and to increase our operational efficiency.

I personally am pleased with 9.4% operating profit and I'm going to take a minute now and turn some time over to Kent Stanger and Kent, I am going to go ahead and let you just go ahead and just chat a little bit about some of the financial performance. Kent?

Thank you. First of all, I think we had a very strong finish to the third quarter in revenues. I think it was broad based. We still had very nice growth domestically and the US direct sales force was in double digits at 10%. Our Pacific Rim and worldwide dealers was at 24%, China was at 27%, Europe direct was at 25% and the EU dealers was 28%. Those are quarterly growth numbers and they are similar for the year to date, if not higher.

It was also pretty broad based across our product lines and some of the stronger ones was our embolics. We were up 63% in the quarter on our QuadraSphere HepaSphere product which is a high-margin product and our Embospheres were up 17% and were real growth areas for us. Our basics COMPAK and our SAFEGUARD, which is a new product, were big contributors to growth as far as the revenues and products.

It was gratifying to see sequential growth in many areas of our Company. The gross margins improved significantly, 140 basis points from the second quarter to the third quarter and a lot of that can be attributed to improving production levels and margin improvement, it has to do with sales in China that were strong, product mix that I just mentioned on some of those. So we were happy with that.

When you look down in the operating expenses, we saw gains particularly in the SG&A expense sequentially. So we are seeing progress through the year as we predicted and expected that. We were able to lower cost significantly, nearly $3 million from the second quarter to the third quarter and we were able to hold the line and actually reduce a little bit but hold the line and reduce as a percentage of sales the R&D expenses as well.

When you drop down below, we are seeing interest expenses drop. We were able to pay our loan down about $10 million and we also were able to reduce our interest costs by the rate which we are going to see another rate drop here in just another 30 days or so because we lowered our leverage ratio down to 324 which puts us in a new tier of our interest bracket coming up in the next few months.

So we saw that come through the operating percent you already mentioned, Fred, and to net income as it grew significantly.

Kent, let me ask you, could you please discuss just briefly about a small impairment charge we had this quarter and how it compares to one last year because there just a few little things there. And then I want to then address and remind folks of a product we acquired last year and some of the effects that you will see in terms of the sales for the next quarter. But could you go ahead and discuss that for a second?

Every year after the midyear numbers come out and during the third quarter, we do a review of our intellectual property, goodwill and other IP to value and do fair value analysis of it. It is required by GAAP. So in that process we had to make an adjustment to some intellectual property involved with a product that has underperformed and it also has a contingent liability so that also was reduced. They offset each other. Net of the two, so there was about a $1 million reduction in the asset and $700,000 in the liability, so you have $300,000 and the net of that is $200,000. So it is pretty small.

But last year?

Last year it was a similar adjustment on the very same product that was net of almost $4 million. So that was a big GAAP adjustment last year when you look at the two comparisons.

And I know you can't live on both sides of the blade so of speak but it is interesting to note for the three months that our GAAP earnings improved from 13 up to 18 and year to date from 23 to 33. Kent, do want to comment on that?

I want to just say that that was a record, that was a record quarter. It is the highest GAAP earnings that we have ever had and it is also the highest non-GAAP earnings for a quarter.

So it is nice to see that some of our efforts and the work is starting to come through. I would also like to say that in terms of our growth, we are there in those double digits during a summer quarter against a big quarter last year. That is pretty significant there and a reminder that as we moved into the fourth quarter in our comparisons we had last year an acquisition we made in early October and so as we compare the fourth quarter, that is just something that we hope that the analysts will keep in mind that there is that product that in terms of comparison or core, it now will now match up quarter to quarter because we will have had the benefit of the revenues of that product last year as well.

Prior to this we have been talking core and non-core so to speak on that earnings side or on that revenue side.

One other thing we would like to just briefly discuss with you and that is that in terms of what we can see here it is October 22, 23, okay. In terms of revenues, if we were to look at it, we are likely to be on the low end or just slightly below the upgraded forecast that we gave you for earnings and so we are going to look at a range of about $134 million for the quarter. Now this is our best guess-timate at this point or slightly lower but in that range, still double-digit growth. And the earnings on a non-GAAP basis between 22 to 25. We say that to you because we don't want you to get too far ahead of us and this is what we see today. It is very early and that is a guess but it is just what we are looking at. We want to make sure that you can see what we are thinking for the year and then of course we will be planning and we will announce our plan both for the year and a three-year plan in February.

I think all in all I need to let you know that we are actively engaged, you can see these international markets and the investments that we made. And let me remind you of those investments.

Beginning of the year, we split our salesforce and we have higher than I think normal expenses because of that. But it was interesting to note just in the last month and I am just talking about the last month and of course one month does not a quarter make, but SG&A expense for the month of September was about 26.4%. So I think it shows what we are capable to do. We also had by the way a record -- all time record sales month in September.

That being said, we do have a plan. We have the entire staff engaged in the plan. Our goal is to have our operating margins move above 10% but we've got a lot of work to do to get there. This is getting close but it is not close enough and it is clearly not satisfactory enough. It is not where we can be but there is still much to do here.

I think we are looking at products and we are aligning our salesforce and a whole bunch of folks, in fact, the entire company along with the company objectives.

So that being said, I think that the planning process and the things that we are going through will kind of give us the returns, both returns on equity, return on assets, it will give us the kinds of operational results that we want but we are heavily engaged in this and we know we need to do better and we know that we just can't kind of -- we've made those five-year investments that we talked about. We have made acquisitions, we bought technology that went along with that and facilities but we are done with that and now it is a new plan and it is to utilize and to optimize the assets and the investments that we have made.

I think that pretty well covers, Kent, what I want to say. Do you want to add anything else before we turn the time over?

No. Let's get to questions.

Let's go to it. Operator, we are going to go ahead and turn the time over. We only took 17 minutes and we will take whatever amount of time that our listeners would like to have to answer questions. So let's turn the time back over to you.

(Operator Instructions). Thom Gunderson, Piper Jaffray.

Kent, US/o-US, what is the split in revenue and what is the overall growth rates for the two?

Yes, that is a great question, it is one that I wanted to talk about. The split is $77.9 million on domestic and [$50.9] million international which is a 60/40 split. The growth rate is 21% for international -- and these are quarter numbers -- and the domestic growth rate was 7%.

Thanks. And then the acquired product from last October, I could look at my notes, I don't recall it, what was that and what has it been running at at about a quarterly rate?

Yes, Thom, we acquired a product from Maquet Datascope Getinge, I think the parent company is Getinge. It is the Safeguard. It is a closure device for both femoral and radial approaches. I think at the time we were doing about $6.2 million was kind of the annual run rate for the product.

$5.5 million for nine months.

So we are going to be a someplace probably around -- I don't know on an annualized basis probably going to grow about 20% or something like that, Ken?

$7.5 million or $8 million on that product and then we have the related RadBoard and so the last quarter was $1.8 million to give you that number, a little over $1.8 million for that product and another -- it was a over $2 million for the three that we brought together.

Thom, I will say that that is a sister product with a hydrophilic sheath that we just got approval for and is now approved essentially globally. When I say that I mean in Europe and in the US and this is the closure device that goes right along with it so we expect that this particular area of the market is going to grow very nicely for us going forward. Does that answer your question?

It does, perfectly. Thanks. And then one last one maybe a broader one for you, Fred, and that is you talked early on in the conversation this afternoon on what you called the Ws, sort of up down up down where we don't get a sense of consistency across the board on the quarterly. How are you addressing that with your team and can you keep this SG&A line stable? And it looks like R&D has returned to a fairly stable level. Talk a little bit about that of what you are doing differently to get one in a row to be five in a row.

Let me go to the issue of some of the factors, some of them are these regional issues, some of them are issues like adjustments you make and the third quarter is always a very interesting quarter because you have FIN 48 and a number of just adjustments that you make. By the way while I am on that subject last year we also had I think a $1 million tax benefit last year that came out of the Irish facility. So I think when you look at that I think we look even better.

I think the key to all of this, Thom, is the management of inventory and expenses and I think what we've sat down with our staff to do is say okay, rather than kind of have this bottom-up approach, we have taken a top-down approach. These are the numbers that we have to have in order to meet our objectives. We are in the process of strengthening our accounting and our reporting staff so that we can spend more time in the analysis and the review of our business instead of flying more by the seat of our pants. So we are doing some things here to firm up areas that we haven't done in a long, long time and that are necessary in our view to be able to get information to manage the business and to have our managers, our leadership be able to do that.

So I think those are the big changes and I know that may sound maybe a little esoteric but it all comes down to understanding the numbers, managing the numbers and knowing what those expectations are. And then so rather than look at things quarterly, we are going to meet and we will have the staff in place to meet on a monthly basis and review it and you don't want to come to the principal's office. That is kind of -- we just need to do a better job. Kent, do you want to comment (multiple speakers)

(multiple speakers) anything about the bonus structure. The plan is for some of the executive sales group to have their bonuses tied to both sales growth, margins and managing operating expenses to help drive these operating expenses to a lower (multiple speakers).

I think we have talked a little bit about this in our last call but one of the things we will be doing going forward, you can't change a compensation plan in the middle of the year but our intention is going forward that we will align and this seems like common sense as you talk about it but a lot of companies and Merit is one of them, has been managing for growth. And that is one way to do it but I think a better way to do it is to align margins, to align expenses and it is just not about them getting theirs if the rest of the company and the shareholders don't get theirs as well.

I think what we are going to do is we are going to make sure that we align those numbers better so that we are all in and we are all rolling in the same direction.

Now again I don't want to in any way defame our salesforce. I think they have done a terrific job but I think this will be more effective.

One other thing that we are doing is we are looking at the business and we are analyzing products that aren't giving us the kinds of margins that we want. If they are things that are underwater or below our corporate objectives, we are either going to raise the price or we are going to do without the business. So I think we are in the process of doing that. That process has actually started.

I think in terms of the sales force we will also look at, as we align those, to make sure that that alignment is done with higher-margin products and a focus. Part of this radial program I think is really helpful because now in the past many of our products have been sold kind of onesies and this and that. Merit is much more active in developing programs whether they be our embolic programs that have to do with vascular access and micro catheters and embolics or below the knee types of issues where you guide wires, vascular access, crossing catheters and balloons and that sort of thing. So I think we are looking more and more at those kinds of approaches of combining a bunch of high-margin products.

So there's a lot of initiatives and things -- and I've said a lot, I don't want to confuse anybody but I guess the basic way to answer it is more visibility, more discussion and more accountability. I think that goes for all of us. So not only these guys be more accountable but that means when we lay those numbers out there, we are all accountable for them too and I don't think we have ever laid out in the history, a three-year plan. I think that is very helpful to us.

Not a five-year plan, that is too far out and we can't see that but a three-year plan as we sit down and talk about it, we can see where we want to take the business over the next three years and we think that as we lay that plan out, it gives us all a little bit broader scope than just one year at a time to see where do we take this and we can spell that out to investors.

It is a long answer, Thom, but I think those are things that are different from the way we have done things in the past and we think we are already starting to see some of those results. You are seeing them this quarter but again as I point out, it is kind of just -- listen, we know that we can and we need to do better. You guys know it and I know it and everybody in this room knows it. So we have to provide and do things differently, not the same way we have conducted business in the past. Kent?

I just want to support that. I have seen changes in differences in the way that things are being managed as decisions being made and disciplined to many of these -- and individual decisions made throughout the Company so I am encouraged.

Something else, Thom, and I know this is again thank you for indulging us but it is just not me. It is the accounting staff, it is better information, better numbers, it is the operational staff. This year we have gone through a number of management changes that we think helped to put the team on the floor that we think will execute this plan.

We have traded, we have made some adjustments, we have strengthened and I think we have the people in place to take the business forward and to accomplish what we say that needs to be done.

Thanks, Fred and Kent. That was good color. I appreciate it. That is it for me.

Okay, Thom. Thanks so much and Thom, it was good to have you out here too and I think that having you here and see the business was helpful for us and I hope it was of some value to you as well.

I enjoyed it. I look back to -- I look forward to coming out there during ski season in March.

We didn't mention anything about early March and skiing on Friday, we didn't think anything about it I don't think but you will have to make your own choices.

I looked at the calendar right away.

We can give you the average depth of snow and temperature and that stuff but we will get that to you later. Part of the new metrics.

Jayson Bedford, Raymond James.

So just a couple of questions. So the cost structure, specifically OpEx, was down nearly $3 million sequentially. What was in the expense base in 2Q that wasn't in the expense base in 3Q?

Kent, I'm going to let you handle that.

There were several of those. We saw reduction in payroll taxes and bonuses and shows and conventions for nearly $0.5 million and some of our vacation accruals and in travel. We reduced some in our advertising and donations so it was pretty broad based but we were seeing real discipline again and focus on efficiencies in delivering our products to our customers and trying to save costs where we could.

Jayson, I think one of the things that not only Merit but many companies are having to do is you take a look and you and I discussed this I think out at the TCT. But we have to look with the expenses you have, with the regulatory burdens, the Affordable Care Act taxes and all of this sort of stuff, I think we are all taking a look at the kinds of returns that we get on these investments that we make.

I think we continue to conclude -- and one of the things we are doing is like next year we have already -- we have eliminated two or three shows that won't be on there next year. We are cutting back on some of these areas that are very nice to have but we think we can spend our money elsewhere and some of that money, a good portion of those savings go to shareholders.

So I think we are just evaluating everything that we do and saying is it just business as usual or can we do something differently? The fact of a matter is almost everything we are doing is something that is being looked at.

So we will be at TCT maybe next year but if it is it will be a 10 x 10 booth and not this big thing with a lot of people and a lot of time with people out in the field and those sorts of things. So we're looking at -- all of those shows and discretionary spending and as you went through these things with Kent just a moment ago, almost all of them are discretionary expenses, things that we have control over and things that we can make decisions on. So that is one of the areas.

The other side too aside from just that question is I think operationally we are spending a lot of time asking ourselves a lot of questions on how we can better operate the business whether it be automation or consolidation and I think when we come up and share our plan with you, we don't want to let the cat out of the bag but I think it will be a very interesting phone call to listen to this three-year plan in terms of the things that we are doing that have to do with consolidation of facilities and a whole bunch of things that we think will bring cost savings and efficiency to the business.

Helpful. Appreciate the color for the fourth quarter but wanted to ask about gross margin. Kent, I think you mentioned production levels and mix. When you look at the number in the third quarter, is this something that you build on or is there going to be a bit of a step back here understanding that you will layer on some costs with Pearland.

I think what we have planned and what we are looking at in this plan because it is still early. You do start to build a production mix and you have delivery schedules but I think what we are doing is we are talking about maybe 20 or 30 basis points in the fourth quarter, improvement in gross margin. So right now based on what we see, that is kind of where we are guess-timating we will come in in terms of what we talked about in terms of non-GAAP earnings and then of course gross margins and revenues.

So we don't see a stepping back, we see slight improvement and then we will have different programs that we will discuss that we think will help gross margins and we will lay those plans out for you in February.

And that includes costs related to Pearland, right? The 20 to 30 basis point improvement?

That is correct. That is correct. (multiple speakers) It is in the model that I just gave you, yes.

Okay.

Remember if I could, Jayson, let me just say this. Remember now we are there and one of the things that we are doing in Pearland is we are moving a lot of stuff that was being built by other people and our goal in Pearland is to fill that plant up over the next 18 months to two years. So we have got a lot of work to do to be able to offset the expenses of that new facility.

At the same time, we have a plan to do that. We know what those products are, there is literally millions of dollars to be saved and to be absorbed by taking and moving those facilities. Some of them have to do with building products out of -- that are being built in other locations by other companies and moving those in and having those costs help us to offset those expenses. So those plans some of which are already in place and some continued things that will be moving in there as well.

So we are happy to be there by the way. It is a beautiful facility and there is a lot of opportunity there. So anyway, I think that is going to be a great opportunity for the Company.

And just last one for me. When you look at your business, the last two years it has become very seasonal in that you have seen quite a bit of earnings in the back half of the year and it seems to be the case here in 2014 as it was in 2013. Never used to be that way and I realize that healthcare utilization is getting a little bit more back-end loaded toward the end of the year. But when you look forward to future years, is this the way the earnings profile is going to be kind of soft first half, very heavy second half or can the expense base be spread out more evenly throughout the year?

It is a really good question. I will let you answer.

I am going to say one thing. There has been a long time consistent difficulty in the first quarter with a step up of expenses that come in the first of the year and we tend to have a little bit of a production swing too after Christmas and stuff. So I've seen in the first quarter, there's usually pressure on gross margins and there is sometimes increases in costs like wages and stuff that will happen then.

But it has been, that is longer than two years, it has been a long time that has happened have seasonality and I don't know that is going to go away entirely. But I think there is a new consistency I believe we can see in some of the other expense controls that we will see like we are not going to be splitting the sales force again this January like we did last year. And so some of those things I think are going to see less of that.

Okay, thanks. I will get back in queue.

(Operator Instructions). Jim Sidoti, Sidoti & Company.

I guess the big question that is on everybody's mind is what is Merit going to look like going forward? Is it going to look like Merit from the third quarter this year or Merit from the second quarter this year?

More like the third.

You know, if you could (multiple speakers)

Jim, let me answer the question. It has to look like this third quarter or better. We cannot operate this business at 4% and 5% operating profits. We can't run a business like that. It is not sustainable, it doesn't take us where we need to go, it doesn't do anything for anybody. So we have to operate the business in double-digit operating profits. That is what we have to do so we can make some money for our shareholders. And in fact so the people in this room can be compensated as well and align those interests. It has to be that way. There is no choice. There is no time so it is not optional any longer.

I agree, Fred. If you can run the business even if you can maintain an 8%, 9% -- 6%, topline growth with a 10% operating margin, you are going to see a lot of leverage on the bottom line.

Jim, let me say one other thing too and again I don't want to kind of hash the old but just for a second, look, we build tubing connectors and stopcocks and manifolds and kits and trays and that sort of thing and that has been Merit's legacy business. Five years ago, we looked at the business and said look, we are not going to be able to compete in the long-term with that kind of product mix. We started making investments in research and development that went from 2.3 up to about 7.5.

We looked at acquisitions that we thought were strategic whether it be embolic or whether it be nitinol base devices or chemistry and looked at what we thought were emerging opportunities such as radial, embolics, PAE, UFE and so on and so forth.

We also felt and we invested heavily in places like China, in Asia, Southeast Asia. We invested in Europe and in Russia and in Saudi Arabia and all of these areas we put this infrastructure in place to do and to build the business. It is all there now.

We don't really need anything. We have maintenance and we will have R&D projects and we haven't talked about that today other than just making a statement that our R&D pipeline is robust. We have lots of stuff, lots of opportunities and more of this program selling that you will see in the future where it is not just a product but it is a systems approach.

And again I mentioned it with embolics and delivering vascular access, the same things and some of the things people are hearing today that we have not talked about before is below the knee and there is numbers of products that go together there and we have those products and we are focusing on those products.

I want to remind folks that whether we articulated that, I obviously did not articulate that plan well enough and that is one of the reasons why we will lay out the three-year plan, we will let you have your best shot at it and then we have to be accountable for it. We will lay it out. It is not year-to-year because we can't operate the business that way, we just can't.

We don't want to operate the business -- we have made the investments and done the things but now we to perform. So this is a good quarter and by the way, it is a summer quarter so I think we certainly have the ability to do a lot better than this. But there is not a choice.

Okay. Can you just help me out with one thing? You look at this quarter compared to the June quarter where your revenue was basically flat, maybe down a little but your earnings have doubled. Your gross margin up 140 basis points. Is it a function of mix or just help me reconcile this.

I think it is a function of mix. Some of it, our deliveries of embolic materials. (multiple speakers) Let's go to the kit business. Kits were down by $1.4 million sequentially or some number like that -- $1.2 million sequentially. We don't make very much money on those things. We think strategically it has been important but that is not where our emphasis has been.

I think when we were talking about aligning of the sales force, it is not just about getting a sales number. So we may in fact going forward, see a little bit slower growth but we will be making a lot more money.

Now I dislike immensely by the way -- I dislike immensely slow to grow. I think it is crap just so you know. But I think focus on the products and doing away with the things that don't make us money and focusing on the things that do is a plan that I can subscribe to. That is what mix is all about. So you will see the mix and the product that we have developed in R&D and the things that we are doing will help to add to this and we will lay that out in our plan. But we are already working on it and we are already doing it and we will see more of that and we are all involved in that.

So I think that is the main focus and the sales guys, I have been very pleased. I will say this to them, when we started talking about this early in the year and say we need to do this and move this around and change this, we couldn't kind of jump right in front of them right after we asked them to administrate and manage this switch in the sales force. But as the years moved on, we have kind of now conditioned them to where they word looking star gazed, now they are starting to nod their heads and it is going up and down, not left and right.

So we have got them I think somewhat conditioned but until we actually lay out their compensation plan over the next two weeks, we will see if their heads are still going up and down. But they have to be part of this. We have done a great job across the board in growing the revenues. Now we just have to grow the right revenues to get the right mix. And I think they will make more money, we will make more money, it will be the right thing for everybody to do, that is what we are working on.

All right. Last question. The 25% growth with (inaudible) was that mostly in China or -- and what drove that?

Yes, if you are talking about the quarter, it was 25 for the whole group. China is a big contributor to that. So is Japan. That has opened up this year and has really boomed for us and it is a big part of the growth. By the way all of our business in China is turning more and more profitable. We are getting leverage there and it is one of the things that is helping gross margins by the way.

We do get some leverage. About $1 million in the quarter from the second to the third quarter $1 million in revenue and the China margins are well above the corporate margins.

We are actually starting to see quite a bit of improvement in Europe where that has been (technical difficulty) over there where we are getting some headway and on the embolics side there is in Europe so we focused on that. And candidly in North Africa and other areas. Russia has been a very, very big area for embolics this year. So anyway I think --

The biggest market is still the US and that is growing.

Yes, because last year we went backwards in the US. This year the split has helped. This is one of those areas where the split has helped because there is more focus on this stuff in the US so that market is growing better in the US this year after a down year last year. I think some of our plans have actually worked.

All right. Thank you.

James Terwilliger, Newport Coast Securities.

Real quick, I am going to switch gears here a little bit and maybe look forward and not so much backwards. A lot of my questions have been answered. But Fred, I wanted -- and Kent you can jump in too but Fred, maybe it is better for you in terms of this question.

I wanted to ask you a little bit about I think in October you put out a press release regarding the ThinkRadial initiative and I wanted you to talk a little bit in terms of how Merit is positioned, I think this is significant, how Merit is positioned for the move from femoral to radial access and closure. I know it is big in the international markets, not as big in the United States. I wonder if you could just educate me a little bit on your view on this and how Merit is positioned to capture this?

Thanks, James. Let me first of all talk about this product mix because I think that is an important part that goes back to some acquisitions we made last year and some internal development.

We talked about a stick to stitch approach. So you have to have the vascular access which Merit has. Merit has had a radial sheath that has been very well accepted and we have done well with it but now we have just got approval for this hydrophilic sheath so it allows us to have a product that we haven't had and it is a very, very big deal. In fact, I would estimate this is kind of just off the cuff but almost 75% to 80% of radial sticks are done with hydrophilic products. So even though that business has grown very well for us, it was this product that we worked on and developed over the last two to three years.

We then also have the arm boards, we have the armrests, we have the catheters. We then also have the closure devices, the guidewires, so we have a full line of products to cover this area.

Now there is another little thing going on out here, James, that some people are missing and that is everybody has assumed that for whatever reason that this is all a cardiology issue. Well, we have been in several conferences and we have several initiatives going on and several collaborations going on in which we are starting to talk about a lot of IR doctors who starting to do transradial approach for embolics, for UFE, for all types of procedures. And so in our last training class that we had here, we had a number of interventional radiologists as well.

So some people think that 20% is all that we are going to get in the US and I just don't believe that. I believe that we will see a 50% utilization rate in the next five years in the United States.

Why? It is lower cost. You have the same safety issues, you have better ambulation, you have a smaller hole, you have a whole bunch of reasons and maybe more importantly if it were you or me, do we want to take an 18 gauge needle and stick it in our leg and have the risk and the cost associated with closure devices and hematoma, pseudo-aneurysm and all of this stuff or do we want to do it in our wrist? And do we want to be able to get up literally within hours and in some cases walk out of that hospital? Well, I think you know the answer to that. I know what I would have done if I needed to. I would prefer the radial artery.

So I think the revolution in the United States is just starting but equally important, maybe even more important is the fact that Merit can compete in the international markets with this broad array of products and this hydrophilic and we are not done. There's other parts to this too. There are long sheaths, there are all other kinds of products that go along with this so I think radial is here to stay and we see it because if we just take a look at the people that are trying to get into our courses. If we could accommodate them, we would put 100 in there but it is just not, we bring in cadavers, we bring in testing, we bring in models and we bring in all of these things and we have physicians, trained physicians and it is kind of off the board. People are just doing all they can to get into these classes that we are sponsoring.

It is new for Merit, that is part of some of the expense that we have had but it turns into revenues very, very quickly. So that is the best way I think I can comment on it. We are very excited about it.

Thanks. That was a lot of detail, a lot of good information there. The comment about the IR doctors jumping in there is very, very interesting. I am doing some work in this area and maybe we will talk a little off-line but thanks very much for the detail.

You are welcome, James. Good to hear your voice. Thank you, sir.

(Operator Instructions). At this time there are no further questions.

Listen, we will go ahead and close it up. We have got worked to do in planning and all these sorts of things. We want to thank you for your time. Kent and I will be here for the next couple of hours. If you have questions we would be happy to discuss them to the best of the ability and whatever we can talk about that would be helpful to kind of define the things and the numbers that have been issued today.

I'm not going to say anything more. I have got work to do. This staff has work to do. Thank you for the call and best wishes to you. We will look forward to talking to you soon. Thank you and good night.

Thank you for your participation. This does conclude today's call.