Merit Medical Systems Inc (MMSI) 2015 Q2 法說會逐字稿

Good day and welcome to the Merit Medical Systems, Inc. second-quarter 2015 conference call. At this time, I would like to turn the conference over to Mr. Fred Lampropoulos, Chairman and CEO. Please go ahead, sir.

Thank you very much and good afternoon, ladies and gentlemen. We are broadcasting from Salt Lake City on a wonderful and beautiful summer afternoon here. We will start by having Anne-Marie Wright, who will discuss our Safe Harbor policy. Anne-Marie.

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 on this call, which are not purely historical, may be considered forward-looking statements.

We caution you that all forward-looking statements involve risks, unanticipated events and uncertainties that could cause our actual results to differ materially from those anticipated in such statements. Many of these risks are discussed in our Annual Report on Form 10-K and other reports and filings with the Securities and Exchange Commission available on our website. Any forward-looking statements made on this call are made only as of today's date and we do not assume any obligation to update any such statements.

Although Merit's financial statements are prepared in accordance with accounting principles, which are 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 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.

Anne-Marie, thank you very much and again, ladies and gentlemen, thank you very much for joining us. We're delighted to have you and we are pleased to be able to report our second-quarter results. And overlying all of that, of course, is I think execution of a plan that we have been preparing and have executed for years and preparation and have shared with you last year. And I am pleased that we are on track on that plan and performing at or above the performance that we had expected.

Let's talk a little bit, first of all, about our net revenues. Revenues were up just slightly over 7%. When adjusted for constant currency over last year, it's about 10%. So we are pleased generally with the sales numbers. Strong performance once again from the international markets in China. The domestic market, I think, has firmed up for us and it is doing quite well. OEM did well and so just kind of across-the-board, we had a quarter that we are all very, very pleased with.

In terms of sequential improvement, I think you saw -- but, first of all, the revenues and then you take a look at our gross margins. Those have increased and we are pleased with that and we expect that we will have further improvement. I'm going to come to that in a minute as we discuss the balance of this year and very candidly taking a little bit of a peek into 2016.

When you take a look at GAAP earnings, even though we talk -- and we're going to talk mostly about non-GAAP -- one of the comments or subjects that we talked about here prior to coming on the call was essentially that our GAAP earnings doubled essentially from last year's second quarter and on a non-GAAP basis, they are up 70%. I think all of you would agree that that is just great performance.

The people responsible for this performance, all 40 or 50 of them, are sitting in this room and I have already expressed to them as I disclosed the numbers to them my appreciation for their efforts. I think in terms of expenses and the budgeting process, I think that we are disciplined. We are running to our budgets or in fact below those budgets and so I think that the process of the visibility and the accountability and responsibility that we have of bringing these numbers back to you as our shareholders and people of interest are -- we are happy to do so and I think we are doing a much better job internally.

I want to turn just for a few minutes and discuss our Tijuana facility. Just a week ago on this day, our Board was preparing to meet and we met last Friday in our new facility in Tijuana, Mexico. This facility, which was built under the guidance of [George Frijo], one of our employees, and many others, I think was executed masterfully.

We had a great advantage and that -- what we did is we had a contract manufacturer and we were able to negotiate a deal where all of the employees that we wanted to come to our new facility in fact came. In fact, out of almost 200 employees, there were only two that did not come and that was really for family reasons.

The reason that's significant is, in terms of quality and we had no interruption, but more importantly, we have a cadre of personnel there and you'll hear more and more about the quality people and our efforts to continue our consolidation plan that we presented to you where we will continue to move products and we can do all of that while not being at the expense of any of our existing employees. That will come out of the growth that we continue to see and then, in fact, I think that as we move into 2016, will, in fact, accelerate on bigger numbers.

Now that's a discussion for another day, but I think that this is a significant factor that will improve our gross margins substantially over time and I think it was just done and all of you -- I know you don't get to see these things, you are not there, but you will see it in the financial performance. You will see a lot of different things that will come out of it. I'm very proud of the execution.

Every single productline that was in our previous contract facility is up and operational in our facility with about 200 employees. And now we will start to move and adjust and take advantage of the opportunities that are there. So I'm making a big deal out of it because it's a big deal. It's going to probably be one of the largest contributors to gross margin improvement, at least one of those, significant as we go forward.

So I'm going to turn some time over in just a second to Kent Stanger. He wants to -- he's going to share with you some of the financial improvements and some of the factors that I think that you will find interesting. And with that said, Kent, let's send some time over and let's have you hit some of the things that you dream about at night.

Yes, I'm real happy and pleased to report the progress we are making in our financial statements and I'm going to focus mostly on the non-GAAP numbers. We've given you both of them. But all the way down through our financial statements, we are seeing leverage on those sales growth that we've seen. Our gross margins improved significantly over last year. They are up 80 bps. They are also up sequentially another 60 bps, so -- or 160. So we are improving sequentially as we promised.

Our applications of overheads, the expenses in Europe due to the euro being weaker helping reduce our costs as they also reduce sales, but, in the total, it's actually helping our income statement. As we look, we even get more leverage when you talk about SG&A. When you compare it to last year, we've got 250 basis points of improvement in sales and marketing and general administrative expenses and another 50 or 60 bps in research and development efficiencies.

So our distribution and even our product pipelines as a percentage of sales are becoming more efficient. So when you look at all of these factors of improved gross margins and lower operating costs, you will see a dramatic improvement in our income from operations. We're also lowering our interest costs both by paying our debt down, as well as lowering our interest rate.

Our cash flow from operations was a record of over $20 million this quarter. That was the largest contributor to reducing our debt leverage ratio, our EBITDA to debt ratio of 242 now, well ahead of our commitments to the bank and it will again reduce our interest costs by another 25 bps in another month from now.

So the EBITDA has now achieved a level of $86.7 million and again, higher and it's exciting to see these developments. So we are again seeing leverage all the way through the statements and that's how you get a growth rate that's 70% over last year.

Okay, it's nice to have a report like this with just kind of things hitting on all cylinders. I think the part that I'm looking forward to, as Kent pointed out, is we have expenses in this quarter that were part of the startup expenses in Mexico and then it will take us some time to absorb, but our expectation is that, within 18 months or so or two years, we will have 500 employees in our facilities in Mexico and they we will absorb more and that will turn profitable. So it's a drag now and yet we still are getting this performance. It will become a big plus as we move forward, so we have that momentum.

I want to talk for a minute about the pipeline. I made the comment that I believe that our business will accelerate in the future and I believe that because we have had a couple products that have been delayed. There was a vendor issue here or this thing. They are not big deals, but we have this huge introduction of new products as we move into the late third quarter, probably fourth quarter and then start rolling them out in the first quarter of next year. And as those things gain momentum, and these are all very high-margin products, we're not going to talk a lot about them by name for competitive reasons, but there are a bunch of things coming that we are very engaged in and very excited about.

And beyond that, some of our vascular stents that we first talked about at our meeting out here in Salt Lake, those projects are progressing and even though those are long-term projects, I think that as we have further assessed markets and opportunities, we find that those markets are even larger than we anticipated. So we will start to talk more about those as we get into 2016. They are significant. They are significant both in terms of the market opportunity, the product we have and the breadth and the profit opportunities, but again those are for kind of later on.

Now, let me temper this all just a little bit with the same thing I do every year and that is we are sticking by our forecast. We are not increasing anything, even though we beat the numbers. We are kind of staying where we are because we are coming into the summer. It is summer and you never quite know what's going to happen and how things are shaking out. We live in a volatile world and although we are comfortable with our forecast, we don't see any reason why we should change anything, but I'm always a little bit cautious as we come into this third quarter, Sales seem to be fine; everything is coming on fine, but I always get nervous in the summer.

So again, we reaffirm our sales. We reaffirm our earnings. We believe business will accelerate even further in 2016, but more importantly is this plan, this execution. This quarter-by-quarter focus on delivering the results that all of you have waited for patiently for a long time. So I think that we are pleased with it. We've got a lot of work to do and that's I think another important thing. It's not like we've burnt all of our powder in the last four quarters. There's a lot more runway here for improvement. And I think that is the significant message of today is, with the facility now up and running, with those opportunities, with automation, with cost savings, cost-cutting, consolidation and new products, the future is bright and it will continue to get even brighter.

But it's a long haul, it's a lot of work and the people that make it all happen are sitting in the room and we are pleased. It's always nice to be rewarded for that and I think that we have been and we hope that we can continue to reward our shareholders with this performance. Kent.

I just want to add that we are seeing real leverage as our sales increase and our costs throughout our distribution and our manufacturing -- the fixed elements -- are being surpassed and now you can really see the leverage occur when we hit the higher sales numbers like we saw in June.

Okay, well, I think that pretty well does it. We could spend a lot of time -- I'd rather answer your questions. So what I think we will do at this time is turn the time over to our operator and we will let her go ahead and pick some names for us to chitchat with. So, operator, it's all yours.

(Operator Instructions). Thom Gunderson, Piper Jaffray.

Hi, everyone. So last quarter, I think you also had a good quarter and I think a lot of the revenue growth was coming from some of the strength outside the United States. Kent, can you split out US and OUS revenue growth for Q2?

Absolutely. The international sales were just a little over $55 million, leaving $83.1 million domestic. That's a 40% rate and I will comment that if it had been in constant currency, it would have been 41.3%, so -- but that's where it is. A little over -- it brands to 40% of revenues.

Thom, let me add a little color to that. China, for the quarter, grew at about 27%, 28%. Our direct in Europe is flat due to the euro, but our distribution is up. Our US sales were up about 6%, up 7.3% for the year. One of the areas that's very exciting, and something that for me is personally gratifying, is the growth that we are seeing in our endoscopy business, Endotek. That business is accelerating. We were up 26% for the quarter. For the last month of the quarter, it was up even more. It was well over 30%.

Yes, 40%. 40% for the month, yes.

40% for the month and we are introducing a new line of esophageal balloons and pulmonary balloons, which will come a little later on in the year and we believe that that is going to continue to accelerate this business dramatically. This is a business that's generating about 70% gross profit. So this is one that a lot of people criticized early on and we kind of stuck with it and we believed in it and it's starting to really accelerate. It wouldn't be surprising to me, Thom, if we didn't see this business compound its growth for the next three or four years at better than 30%. So it's a pretty exciting opportunity for us.

Thanks. And just a follow-up, because China is so important to everybody's income statement. Up 27%, 28% in the quarter. What percentage of business is China right now of your revenues?

It represents $13.2 million and I would have to run a quick number to give you that percentage.

Joe, let me answer the question -- we ought to have that on command. Last year, we did about $50 million. Joe, what was the year last year?

We should do around $50 million.

We'll do about $50 million, so it's less than 10% of our business.

Got it.

But still significant.

Yes, but growing nicely.

Can I (multiple speakers) just short of 10%. I just want to add in that one of the other things -- I had a call a while back where someone, an analyst called and they were wondering about the receivable issue. Everything that we get done in China is COD. It's paid for at our facility when they pick the product up, so the receivable risk is nil. So that's another -- I think we've managed the business there very well. We are adding, I think, six more salespeople that are in our budget for this year, so we continue to believe that China -- and we continue to invest there. So we are excited about the opportunity and we are pretty well-established there as well.

9.6% is that number for the quarter.

Thank you. And then I'll ask an expense question and then get back in queue. But I'm curious about gross margin and the potential for continued improvement in gross margin. Part of it I understand is your manufacturing in Europe and the euro, I get that, but that's not really in your control. Can you delineate a little bit more on how the gross margin is improving and things that are in your control? Are we leveraging the Salt Lake facility from a year ago? Is that what's going on?

Yes, there's just leverage, in fact, in almost all our facilities. We are producing more product as we sell 10% or more units if you look at it that way. We are also doing lean manufacturing in automation processes and procedures where we are cutting costs out per unit on that basis. And the only contra to that is that we did start up a whole new capacity in Mexico and it's underutilized right now and there's a phasing in of that in front of us, but we are looking at product mix improvements, so many of the products that are growing the fastest are higher margin. We are getting more volume across fixed costs throughout -- and then we talked about the efficiency gains through automation and other lean manufacturing initiatives that we believe over time will all contribute to the growth. And then when you look into 2016 and even more in 2017, the Mexico thing will really start accelerating that gross margin improvement.

I think some of our input costs as well, Thom, we have a very active trade rep and the Company is very, I think, conscious of the opportunities in negotiating because of our increased volumes whether it be from sterilization, packaging, shipping, all of these things. We are very active in all of these areas. I think we were looking at a number the other day that it was something like over $8 million in savings in the last three years.

So whether it be these absorption levels -- and remember from the first quarter, you have that kind of that lag that we see every year coming in in the first year. Well, that absorption -- we are starting to see positive variances across the Board. That's another -- very important as compared to the other. So as we come down the road, you will continue to see, we believe, those positive variances despite the situation in Mexico.

The Mexico thing, which we guided and discussed and we are aware of, will absorb up, I think, in a very orderly fashion as we have a very committed program to be able to put products there, which will make us more competitive, which then will help with more volume. So I think that it's nice to see a plan come together, Thom. And there's a lot of runway here.

Good to hear. Thanks, you guys.

Jim Sidoti, Sidoti & Company.

So just so we are not surprised next quarter, can you be clear on what the impact of starting up the plant in Mexico is? Do you think that could cost you a couple pennies in the third quarter?

No. We believe that the -- how am I going to put this, Jim? There is an expense to it, but it's offset, but it's already baked into our numbers. We are getting the benefit, by the way, of lower cost already of the existing products. Remember, we have 10 productlines with 200 people and so fortunately it's not like we are starting up from day one. We have 200 people there already and that's helpful.

So, yes, there is a negative variance in that facility and that negative variance will be going down every month, not going up every month. So it's baked in. It will burn off and in the meantime, we are getting positive variances and more volume coming through the business, new products and so on, so forth. So it's not an issue that we are concerned about, that we don't have I think perfect control of. We can control the speed at which we introduce products there and so on and so forth. So it's there, but we -- it's a small ripple and we have a lot more tide moving in our direction.

Okay, understood. In regards to China, have you seen business start to slow down a little in the last month or so or has that not impacted your business yet?

We have not seen it slow down. In fact, if anything, we've seen it increase. I think our embolic business there is growing. Our micro catheter business there is growing, vascular access. So just about across-the-board all of the products and we continue to file for new registrations. And so, no, we have not seen a slowdown, nor do we anticipate one.

Actually, our June numbers, for example, were stellar. They were really high growth.

All right. At the Investor Day, you were pretty excited about the Prelude SNAP and the new biopsy device and the embolics. Can you just give us some color on how those products are doing?

We've released the SNAP and it is a terrific product. We are taking business away from our competitors every single day and that's a product that we will continue to accelerate. We also have some potential -- not potential -- but actually OEM customers. So some of the business that we lost in this area when we first bought Thomas Medical, we believe some of those customers are coming back. That should accelerate that business as well and then we have another R&D project underway in another area that's kind of a complementary product that's probably 9 to 12 months out. So that whole business of vascular access across-the-board.

I'd like to add one other thing, Jim. I want to continue to talk about radial procedures. I had a physician call me today, well-known, high-profile guy. He's been a guy that I have know for a long time and he indicated that he sees now the radial procedures in the United States at about 25%. Our belief as a company is that that will continue to grow and it will exceed in the next several years over 50%.

But the thing that's really neat about that is you are starting to see some of the radial stuff slip over to interventional radiology. And you are seeing some of the vascular access products that are in the IR market slip over to the cardiology market. So we hope that you'll maybe come to see us at TCT where we have some new ideas, new things that we will be presenting there and some combinations of products that we don't see in the market, the things that we are currently building.

So one of the things that -- I was talking to someone today, and I hope you're not offended -- no one is offended by this -- but in 1964, there was this group called The Beatles and they introduced this song that was an old song by the Isaac Brothers called Twist and Shout and of course, it was a hit. A number of years later, almost 20 years later, there's a movie called Ferris Bueller's Day Off, or something like that and that same song went to number one again. Well, we have products that are best-in-class that, as you combine them, we are going to reintroduce some of these things packaged to meet some of these needs that are currently not being addressed and that our competitors don't have.

And we think that this radial revolution continues. We just finished our first training [think] radial program in Germany. We have one coming up in Ireland and I think this whole vascular access thing is something that Merit has a strong suit in. And so although we have new products, we have the SNAP, we have the EASE, we have lots of different things coming. We have a lot of things in our bag that sometimes you just have to put a different ribbon on. And so we are looking at a number of those things, I think, in our marketing department.

So we are excited about -- I will give you another example, Jim, and I'm sorry to -- you kind of hit my button. Think about the amount of money that it takes to go and do a procedure, to go in and put a closure device in and do all of those kinds of things and think about a smaller hole, think about less bleeding, less hematoma, less pseudo-aneurysm, all of those sorts of things in a closure device at maybe a third or half the cost with results that are equal.

(inaudible)

In fact, we had an employee just in the last couple days had chest pains, went off to the hospital, had a radial procedure, came back and said, you know, I went in, they did the procedure and I walked out of the hospital. And I had the (inaudible) the last time. So what I'm trying to say is that this revolution is going to continue in the United States and there is no company better positioned with existing and new products to take advantage of it.

So we are excited about the entire portfolio of products. The Elation balloons, as I mentioned in the Endotek business, a new drainage catheter system coming out in September. We are loaded. And I don't want to talk anymore about it because my competitors are all on the phone trying to figure out how we do what we do, but there is more to come.

All right. And then the last question. If you look back over the last 24 months, Merit's really turned around. You've gotten the Endotek and the Thomas acquisition's integrated and back to growth. You've reorganized your salesforce. You've expanded capacity. So what's next?

More of the same.

What's keeping you busy now, Fred?

There is no doubt that when you start talking about $1 billion and some might say, well, gee that's $0.5 billion from here. It took us 29 years to get to $0.5 billion. It will take us five years to get to $1 billion. And I think what I spend my time on is looking to say, okay, now I can already see that. I can see it in facilities. I can see it in products. I see that. How do we go from that to the next $1 billion beyond that? So I think strategically the thinking has to be how do we build the business for the future. It has to do with geography and again, some of these things I can't go into detail because I'm putting out information that I shouldn't.

But if you talk about geographic areas. Where do we go direct? What are the products? Where are the patients? What are the trends? I spend my time on looking at those things and looking at where we direct the business in the years to come. And I also look at succession. I think about, okay, we are trying to build a business of lasting value, how do we make sure that there's no interruption and the business continue to grow.

So I think about all of those things and I have a Board that I think taxes me. I think we have a very strong Board. We just added a new director, Ann Millner, but I think the Board that's engaged at Merit today is not only the best we ever had, but they have very high and lofty requirements and we are working hard to meet those, which meet the needs of our shareholders.

So that's what I spend my time on. I'm off to a trade show this weekend. I'm off to China and Japan again in early August, then TCT. There's a lot of stuff, Jim. So that's the best way for me to answer it is my job is to think out 3, 5 and 10 years and that's what I'm doing. But at the same time, I made a commitment to deliver the results and I think we are doing that and it is very gratifying, I will say that.

But so much for gratification. Okay. So we hit a new -- as Kent likes to say -- a new 52-year high, but we've only been in business for 29 years. But it's making sure that we are hitting on all cylinders and what's nice is everybody on the staff that's making this happen, they are all sitting in the room here, Jim. It's not just me and Kent and Anne-Marie and a few; they are all sitting here. They all know and they know the results from performance. I think we've performed, but, like I said, there's a lot of runway left. This is just kind of like the opening act.

Okay, Fred. Thank you.

(Operator Instructions). Jayson Bedford, Raymond James.

(technical difficulty) congrats on the progress. A few questions. Is there any way to quantify the impact of a stronger US dollar, or a weaker euro on gross margin? Meaning of the, what, 80 basis points of gross margin improvement year-over-year, how much of that is related to FX?

I'm going to let Kent answer that in just a second, but to get back to the 30,000 foot -- remember, it's reducing our revenues and Kent will discuss that. It's also reducing the costs, input costs in our European operations and so we get the advantage. And as you had pointed out in your writings, we are one of those companies at least that has this thing hedged in such a point that the stronger dollar, lower euro actually helps us somewhat. So Kent, why don't you give them more specific details?

So as we've already indicated, 2.5% or $3.4 million was a reduction in revenues, but at the same time we had almost $3.2 million in the cost of sales section of our financials that was lower cost due to FX. So the ratio change there is actually 88 bps. It's why we named it in the release as one of the major factors to the improvement in our gross margins. There are other factors too that were up and improved and offsetting coming along like the variances and stuff, but those are the numbers I think you're asking for.

And when we look at the gross margin level in the second quarter, is that a level you expect to build upon over the next couple quarters?

Yes, I believe there's still forward momentum in most of those factors. I think that our gross margins really saw improvement sequentially during the quarter as they have during the year. So each month, we are seeing improvements due to all the factors I was naming earlier and a lot of that is volumes of production in our different manufacturing facilities, as well as the input costs and other things that Fred was mentioning and therefore our variances are improving as we go through. And that's basically a function of those volumes versus our standard cost applications of overheads.

So yes, I believe we have a trend here that's going to continue. We could see a little bit of a slowdown in the summer if we have leveling off sales or even -- sometimes we have lower sales from third quarter to second-quarter comparison, not significantly but somewhat. But, again, the trends are I believe that we will see improvement sequentially and maybe even more in the fourth quarter on gross margins.

Jayson, let me just add in a little point that we opened up a new facility a little over -- about a year ago in Texas. That has been operating with negative variances because it was -- I think it was $300,000 a month in additional expense, if I recall. And that's being chipped away and products have been transferred. All of our stents are now being built there. They were being done by a third party. They are all now in-house. Catheters have been sent there and that facility is filling up.

And so those negative -- so we are doing all of this even though there's a little bit of a breeze in our face and I'll say that you have the negative variance there and you have the negative variance that you will see in Mexico. But we have enough momentum that it absorbs that and once we get beyond that, as we move down this three-year plan, again, with the products and everything we see, you are going to see I think substantial acceleration and opportunity in the gross margin areas both because of the mix and Kent alluded to that a little bit. We are discouraging those low margin products and we are incentivizing our salesforce in those in which we think there's opportunity and profitability.

So all of these things are kind of happening and even though you never always have the wind to your back, you sometimes have a crosswind. Those winds are going to shift around to the nose and that's all going to play to our advantage as the business goes forward.

Okay. The facility in Houston there, in terms of capacity utilization, what are you looking at right now at that facility?

Well, one of the things that you have -- when you have that facility up is it takes a while to I'll call balance it and some of those products, by the way, some of the products that are in there are going to be -- are also moving to Mexico. These are some of our catheters that have low margins and some of that will go to where we can produce them more economically and that will create more capacity.

I would say right now, kind of Kentucky windage, that we're probably at about 60% capacity, maybe 50% capacity on two shifts. So we've got runway there, but it's going to be kind of a dynamic where we are moving stuff there and then filling it back in with products that are higher margins and have a little more complexity.

Part of those, by the way, is if you take a look at this Endotek line, those stents and those products are some of those that are being produced there and we think we can produce some of those products for about 25% to 30% less than what we were doing, or more, than what we were producing at a contract manufacturer. And things like the AEROmini, our EndoMAXX stents, all of these are accelerating and they are going to accelerate even more.

Maestro too.

And Maestro. So that's another thing we are doing is we are producing our extrusions and our own microcatheters will be produced in this facility, so --.

They haven't come online yet, so those things are soon to be adding to the production level.

So I think as we look at this plan that has all of these factors in it, we have a cause to be, I think, very optimistic for the future, but again you've got to take it kind of quarter by quarter, year by year. But the point is, and I think you see this, we are executing and it's one of the reasons we have this three-year plan because we wanted people to understand that you're going to start up this Mexico facility in the middle of the year and we wanted to make sure that people could see the progress that we were making and the opportunities that it presented.

And I think we talked about it one time, the Mexico facility itself, when it's up and fully operational, capacity wise, in 18 months or so, should generate up to 250 basis points of additional gross margin just for that. That's pretty significant. That didn't talk to the issue of mix and new products and absorption and everything else. So it's a fun time at Merit, but still a lot of work to do.

And we're also going to consolidate one of our facilities at the end of September and eliminate some overhead, so we are here about a mile and a half in Utah.

So anyway, a lot of opportunities still left here. We are coming down the runway. It is just kind of like we let the brakes go and we just applied the throttle. So we're just starting down this runway.

Okay. Just a couple quick ones here. Kent, did you say that cash flow from operations was north of $20 million in the quarter?

That's correct.

What was the (technical difficulty) capital expenditures?

$39.4 million year to date and it was a little over $20 million -- this is a year-to-date statement -- I just know they were 19 point something last quarter. So it's a little over $20 million -- (multiple speakers).

And trailing 12-month EBITDA is about $86.5 million.

$86.7 million, yes.

What was the CapEx in the quarter?

CapEx was [$28.4] million year to date. Again, I'll say it for the quarter, it was roughly $10 million last time, so it's about $15 million for the quarter.

A lot of that CapEx, of course, going into our new facilities.

Yes, some of it's in buildings, some of it's equipment.

And that will (technical difficulty) now that Mexico is in place, right?

Yes, it will slow down. We still have some lagging payments to make because we just finished the building and all the invoices aren't in and paid for yet. And we've just really finished up the Maastricht facility payments too just recently. So there were some of those in the quarter, but those are going to fade off too. So yes, it will slow down a little bit. The leasehold improvements that are running nearly $10 million this year are mostly behind us.

Okay. And then last question from me. I know there's been a lot on China, but how much of your core portfolio are you selling in China right now and then is there visibility to expanding that portfolio? Meaning I'm guessing the 27%, 28% growth you are putting up in China is due to new products coming online?

Actually, it's very little of the new products and I would estimate that we have probably 50% of our portfolio that are being sold there, and an active registration process under Merit's registration. So again, there is a long, long ways to go in China, a long ways. So we are just -- we will hit $100 million in revenues there in the next couple, two, three years. So it's going to continue. If you take 30% growth, you can do the numbers.

So we are not selling everything there. It's a complex market, but we have a great guy that's running it and we have great leadership here in the corporate office. So a lot of opportunity still for many, many years to come in China.

We are really getting just started in the radiology area, which is a lot of the stuff that we've come out with over the last few years that still need registrations and it sometimes varies in the distribution and so forth, but there's a lot of runway there.

Thank you.

Dan Trang, Stonegate Capital Partners.

Fred, you mentioned the summertime is a cautious time for you. I'm kind of wondering what makes it challenging for you all compared to the other quarters and is this something that's unique to Merit, or is it also shared by your competitors, as well?

Historically, Dan, what we've seen is that Germany and many, many parts of Europe shut down for the entire month of August. They start getting ready in July and then they still kind of linger on into September. It's just been the reality of that situation for many, many, many years.

In our situation where we are very active and have a good portion of our revenues come from these international markets. These are things that we always kind of keep a very close eye on and yet, that being said, we have orders from places like Kuwait and Saudi Arabia, large orders of business that we will be delivering in this next quarter. But it's just always something that I just keep an eye on -- and listen, if docs are out, if technicians are out, if people are kind of kicking back a bit, there's going to be less procedures done.

So it's just been something that's always been part of our business and something that we always -- I think every year we always kind of warn, okay, third quarter is coming, it's summertime. That being said, go back and take a look at the last couple of years, they've been pretty strong quarters. I just don't want to get overly optimistic and then all of a sudden say, well, it did exactly what we thought it would do.

So we just always in this third quarter -- and ours is a little unique because of the I don't want to call it concentration, but because we do have a wide global business and people go on vacation and you see the same thing in the US, by the way.

The US slows down to.

Doctors go on vacation. Patients think, well, I will get this done when I get back in the fall and that kind of thing. So it's just kind of a little cautious. We've always been that way.

We've had histories that back it up.

Okay. Thank you.

Mike Petusky, Barrington Research.

A few questions. Fred, I want to make sure I heard -- did you say 50%, 5-0, of your product portfolio is being sold in China?

Yes. I think it's maybe half, maybe a little bit more. It's kind of off-the-cuff, but there are a lot of products. For instance, our Thomas products, our electrophysiology products, our Endotek products. Most of those products are not being sold there yet. So Joe Wright, who oversees that -- is that pretty close, Joe?

Yes, I mean our legacy products are growing at about the procedure growth rate. We are getting a lot of acceleration in the interventional radiology productline, the embolics, microcatheters and such. We still haven't penetrated the EP productlines.

Yes, so there's a lot of things, Mike, that just are in the process or getting started up. So it's probably about half of our productline now. At one time, the impetus for us to go direct so to speak in terms of the licenses is we had like five or six of our productlines being sold out of 50, it was 10%. So by having our own -- we just expanded our warehouse, by the way, in Beijing.

I'll tell you another area that's accelerating there while we are on this. All of Southeast Asia -- and we are looking at Taiwan, Vietnam, Malaysia, Indonesia -- all of these places are kind of -- and even Japan, which has been a laggard for the last couple of years -- is starting to show some life. I think they are up about 12%, Joe, for the year? So all of Southeast Asia -- and we are fortunate that we are in all these places.

We've gone direct now in Australia, so as we move into the fourth quarter into next year, we will start seeing a little different picture down in Australia. So I'm kind of expanding the question, but -- and there are a lot of other places in which models that we have used that have been successful are being expanded into. So again, because of competitive reasons and other reasons, I will just kind of hold the comments to that.

But plenty of runway. I've said that I think about 10 times today and I don't mean to offend anybody by doing it, but again I think everybody in this room believes we are just getting started. We've got a long ways to go for this business.

Great. I guess the CapEx number surprised me a little bit. Kent, I was thinking maybe $32 million for the year, but now it sounds like you guys are going to be closer to $40 million. Is that a better guess for CapEx for the year?

No, I would say $35 million. It should slow down because we've got a lot of building costs that won't be in the second half of the year as high a level.

Mike, one of the things that we touched on, but we just finished -- over the last couple of years, we had two expansion projects in Maastricht. One was for our warehouse, which we finished up a little over a year ago, year and a half ago, and then we just finished in the last 90 days the new corporate offices, sales and marketing and training center. That's just finished and we just had our grand opening I think in May and we just had a couple of sales meetings there.

So there's money spent on that, but those things, as Kent pointed out, short of things that will flow through, that's essentially taken care of now and will slow down substantially in Mexico. Although it's not all through the statements yet, pretty much -- and I don't know that other than small projects, everything is -- I'm out of the construction business. I've been in that business for the last 10 years. Now I'm out of it. And hopefully we will get back into it because we will have the need and the demand. But anyway, we are out of it now and that means that we will start to accumulate a lot of cash and much more than we've invested in the past and it's paying off.

Great. I guess I wanted to ask you a question also on the -- you guys did a big meaningful change in your sales alignment. And then I know you've done even some tweaking since that change. And I guess I am just wondering if you could characterize how that -- the numbers would indicate it's gone pretty well, but I guess what I'm wondering is has there been much turnover in sales or your sense of morale and all the rest of it related to those changes?

Mike, it's a really good question. At the end of the day, everything that we are talking about right now starts by selling something and so we've seen very little turnover. I think that, as we did this split of the bags last year into the interventional and to the cardiovascular, one of the things that we learned from that is that some of the territories that we had were very large and it was very difficult and a lot of time spent from people traveling. And I think what we've looked at as we are tweaking this going forward is to say, well, we need to kind of reevaluate that.

So at least on the West Coast or the Western part of the US, a few months ago, we started kind of a tweaking and kind of a retooling of that area. That's been completed. We didn't lose anybody that I'm aware of. Don, is that fair? Monroe. So we didn't lose anybody. In fact, if anything, I think people were -- our salesforce was very receptive to the fact that we kind of listened and we watched and we made the changes and we will continue as new products come on or as things gain more favor, you have to adjust this.

So you don't just throw a salesforce out there. You see what's hot and what's not and you adjust to it. And I think Merit over the years has a long record of that salesforce. So it's continuing to be tweaked. We looked -- I mentioned earlier that, with the growth and the opportunities in our budget this year, we had another six salespeople in China that have been authorized and budgeted and we are in the process of hiring those folks. So it's just kind of an ongoing never-ending -- but I think we have tweaked and then we'll start taking a look at some other areas in the country that we can again solve some of the issues of kind of expanded territories and we will start to reduce those to make it more convenient.

But we really haven't lost anybody other than those that we've invited to leave. And they've accepted the invitations. A few. One or two. That's it. Why in the world would you ever want to leave this Company? You have to be out of your mind to leave this place. Why would you do that?

Especially if you own stock. All right, so let me ask you one last question. Around the guidance, I guess the reaffirming of guidance, when I look at the last couple of years, you guys have done about 35% of your adjusted EPS -- and this goes for both 2013 and 2014 -- about 35% of your adjusted EPS was in the first half and then 65% in the back half with basically improving revenue, higher gross margin and lower SG&A percentages driving those bottom-line results.

And I guess based around your commentary on gross margin, it seems like that, at the very least, mostly hold together. I'm assuming then you must be assuming kind of a meaningful ramp in both SG&A and R&D in the back half. Is that fair? I don't know how else to get there other than that.

I don't see a meaningful or substantial rampup in SG&A and R&D expenses in the third and fourth quarter. In fact, I think that we will continue to have the discipline. We are operating in some of these areas under budget, which is what we'd like to be able to do and still be able to deliver the numbers. So I think the numbers speak and your analysis is, I think, correct in terms of where you see this because we have kind of a lag in the first quarter and we've discussed that.

I don't know if you are asking me if we are being conservative. I really don't know where you are going with it. But again I think we feel comfortable, particularly in this third quarter, of just saying let's just stay pat. Listen, we are a little bit ahead. You can see the numbers. We are a little bit ahead and hopefully we will be a little bit ahead or maybe even a lot, who knows. But we are just going to stick with where we have right now and we've got these facilities up and running and then we will let this thing play out. I've never thought it wise to ever go out and do any adjustments as you enter the summer quarter for the various reasons that I discussed previously.

Okay. Just part B real quick on that. If you guys were to come out ahead of your guidance for this year, you would still, in terms of the three-year plan, I am assuming you would still be looking for kind of double-digit earnings growth off of whatever number you might deliver this year. You wouldn't take half of that back just because you maybe came out ahead this year. Is that a fair way to think about it?

We would not do that. I think if we have it, that becomes the base and we take it from there forward. Yes, we are not going to pull anything back down. We are going to -- no.

Okay. Fantastic. All right, great. Great job then, guys. Thank you.

There are no further questions from the phone lines. At this time, I will turn the conference back to Mr. Lampropoulos for any additional or closing remarks.

First of all, again, thank you very much for joining us today and for your questions. I'm pleased, but we have a plan and we are going to continue to execute. I think there's a lot of opportunity for the Company, a lot of runway. We don't want to sound overly optimistic or pessimistic, but I think you can see the numbers. I think you can hear what the opportunities are. We just have to continue to execute and that's our plan and we hope to and look forward to reporting back to you.

It's an exciting time and it will be for not just a quarter or two or a year or two. It's just we've made a lot of investments in facilities, in products, in infrastructure and sales and marketing, in geography. We paid the price and there's a lot of runway. So we've got a lot of work to do and so we're going to go ahead and thank you and we are going to go back to work. And we wish you the very best. And just a reminder, tomorrow in Utah, it's Pioneer Day and a great pioneer heritage here in Utah. Have a good weekend and we'll look forward to talking to you in the near future.

Kent and I will be around for the next hour or so and -- or two -- and we'll be happy to take and to clarify any of the questions or thoughts you might have. Thank you very much we are signing off from Salt Lake City. Good night.

This does conclude today's conference. We thank you for your participation and you may now disconnect.