Merit Medical Systems Inc (MMSI) 2015 Q3 法說會逐字稿

Good day and welcome to the Merit Medical Systems, Inc. 3Q 2015 conference call. At this time I would like to turn the conference over to Mr. Fred Lampropoulos. Please go ahead, sir.

Good afternoon, ladies and gentlemen. Thank you for joining us. We are gathered here, all 50 of us, in Salt Lake City. And we appreciate you taking the time.

We will start our meeting by having Rashelle Perry, our Chief Legal Officer, read our -- it is the --.

Legal disclaimer.

Legal disclaimer. Thank you.

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 these statements made in the call which are not historical may be considered forward-looking statements. We caution you that all forward-looking statements involve risks, unanticipated events, and uncertainties that could cause our actual results to differ materially from those anticipated.

Many of these risks are discussed in our Annual Report on Form 10-K and other reports and filings with the SEC available on our website. Any forward-looking statements made in this call are made only as of today's date, and we do not assume obligation to update 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. The tables included in our release and discussed in 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. I suppose that some would like to call this -- based on our last call, in which we talked about Twist and Shout -- some of this would like -- some would like to call this Summertime Blues. I would prefer to call it Here We Go Again.

So with that said, let me go ahead and get started on our call. And let me -- another little snippet, if I could. I just left our facility, our R&D and administrative facility, where we currently have a Think Radial program which just started about 15 minutes ago. We have 22 physicians there -- 11 interventional radiologists, and 11 interventional cardiologists. It's the first time we've had a mix of those individuals.

Now, why is this a big deal, and why would I start my call with it? Because recently, at the CIRSE meeting in Lisbon, we had a symposia in which we had 500 interventional radiologists there. I think it would be fair to say that we had the busiest booth in this entire tradeshow. So I will come back to this a little bit later on as we talk about things Merit is doing. And let's start out by talking about revenues.

Our revenues were up 6%. Adjusted for FX, I think it's about 200 basis points more than that. And I did read one headline that said that we missed the revenue number. I just did a calculation. It was 0.1%. So, I apologize for that miss. In baseball we call that just basically touching the outside corner. So I am going to call it a strike.

But you will all have your own opinions on that. It was summertime. And in the summer, as I explained, we would be sequentially lower. And it is not an unusual phenomenon for Merit.

We did have some interesting one-time events that -- if you take a look at the income statement, you will see that we had a situation where we took $1 million hit. This is on a GAAP basis. And that was because of a deal that we signed to have the exclusive right for a steerable snare. Not a steerable microcatheter, a steerable snare.

Incidentally, it is $250,000 a year for Merit to have the rights to that product. We can opt out, if we want to, after the first year. So even though we only put up $250,000 for what I think is a great technology, according to our good friends in our accounting offices, we had to take the entire hit even though we may not be obligated beyond this year to spend that money. Hopefully -- I hope that we do, because I think this is another in our snare portfolio.

We have some very exciting areas. Endotek continued, and sales were up 11%. They are still up 16% year to date. And I am sitting here with Darla Gill, who is the President of that division and one of the founders of Merit. And today alone, we opened a new Elation Balloon account. And you're going to continue to hear about the Elation Balloons and this division, which I think can grow in the 20s as this comes forward with new products.

At the first of next year, there are a bunch of OEM products that are sold, like bipolar products; probes; and other products -- and we are going to start to break this out as a separate division, because we think it is something you really need to keep your eye on. And we are going to pull all the products of the division in there, and that is going to start next year.

If we put that number in there, it is going to add about another 500 basis points to grow for this quarter, give or take. Anyway, that is something that we think is important.

A couple of other things that we want you to know about are the Centros catheter. I was looking at some of the numbers earlier today on the Centros catheter, and interestingly enough, that catheter is up somewhere around -- I'm sorry, I lost it. But I will find here shortly. Well, I will just give you the number. Something like 76% for the year. This is the Centros catheter.

You're right on, Fred.

Am I on? Okay. 76% for the year. This is a dialysis catheter. And for the quarter, it was up even higher than that. It was up 289 -- excuse me, 167%. So this is a product that is getting a lot of traction. And we've been waiting now almost two years to get all of the appropriate approvals in Europe, and we will launch that product very shortly in Europe.

So we are very excited about a lot of the products. I'm going to come back to that. But I am going to let Kent go ahead and give you a little bit of information on some of the numbers, and margins, and that sort of thing. So, Mr. Stanger, you have the floor.

Yes, I also want to talk about growth in some of our geographies. So we've got -- besides Endotek, we've had 18%, 19% growth for the Pacific Rim distributors other than Japan and China. China itself was 24% up. So those are some of the high spots of where our growth is coming from on the international scene.

When you talk about gross margins, gross margins were 45.5%. So we lag a little bit there. We've had some challenges, for example, in getting our Mexico facility up. It is on schedule; it is working fine; but it's carrying overheads for our limited-production quantities right now, as we have transferred over the six products that were with our contract manufacturer. We've now moved another group of products down there, and we have scheduled another set before the end of the year. So we are on our way into next year of being able to start absorbing the fixed overhead that it takes to operate a new facility of that size and capacity.

So we are excited about the future of that, how that is going to help us into 2016 and even more into 2017, as we are able to load the facility with products that we can then consolidate out of our other facilities, reduce the labor costs and eventually overheads as we can eliminate the positions. So another area of issues is just absorbing our overall capacity, the excess capacity as we are ramping up and transferring products into Texas and as we increase capacities in our Paris facility for our embolics. So those are some of the areas where we have had overheads that are excess of our standard costs.

Let me talk about China. As you all know, there was a lot of concern by Wall Street on many international companies with the devaluation. So we even had a hit in the quarter on that, which I think cost us about $200,000 to $300,000. There's about $500,000 overall that we were hit in the real; in the renminbi, which is also the yuan; and in the peso. Now, going forward, all of that has been hedged. So going forward now, those currencies our hedged. And we should not see that again.

Again, it's one of those things everybody got caught. We talked to a couple of banks, and they got caught. No one really expected that devaluation of the currency.

That being said, we just reviewed next year's forecast, and I will just tell you that the growth figures are in excess of 20%. I'm not going to go into the entire forecast for next year, but at least we are very excited and continue to be excited about the opportunities in China with Merit's products.

I want to make you aware -- I want to go into a little bit more color on Kent's comment with Mexico. So we did have those legacy products. We now have made the first transfer of other new products to the facility. Those were put in place two or three weeks ago, and now they will ramp up. And then either late this year or early next year, we will take the next tranche of products down there.

When those products are in place and up and running, based our best calculations today, sometime in that first quarter we are going to now absorb all those expenses of the new facility. That would have been somewhere around nine months or so from when we opened the facility till we have full absorption.

From that point on, it is going to give us a tremendous improvement in gross margins. In fact, today we had about 20 or so of our employees from Mexico that were here. I had an opportunity to visit who are the next tranche of recipients. They will receive these next products, and they are here being trained. So it's interesting that here it is, October 22, and we are training people for something that will take place in, I guess, December or early January.

November it starts into ramping.

November, okay. So, anyway, it's kind of a big deal. And it's one of the reasons we put our three-year plan together and presented that, because we wanted to make sure that as we went through this transition this year that you could see both sides of the equation.

So we continue to be very excited about Mexico. In fact, I will say that I believe all of us believe that it has exceeded our expectations. By that, I mean the transfers were done without a flaw, without missing a beat or creating any problems for our customers. The start-ups worked extraordinarily well. And they have, at least on the products there, met or exceeded the previous REs or reasonable expectancies from the other plant. And we think that productivity will continue. So when you look at these facilities and the opportunities here, they are really extraordinary.

One other point, again, I don't want to miss, because it is something that in the long-term of things is important, and that is we have opened a warehouse. We have hired people, and this expense of these employees is in this quarter, of our new Australian facility. We will be going direct. In fact, this very day, the initial inventory has arrived at that facility. And on or about January 1, Merit will go direct there, which will then take us from wholesale to retail.

And we think that there is a great opportunity in Australia. And again, there is still work to be done. But the facility is in place. Systems are in place. People have been hired. Salespeople have been hired, and inventory is on hand. So that will be something that will add both our growth and to the opportunities in terms of margins going forward.

I would like to talk a little bit if I could about the steerable microcatheter. Now, we made an announcement about this, and someone could say, oh, it's just another product. Merit has lots of products. What's the big deal?

Well, let me tell you what the big deal is. First of all, this is a product that came from Sumitomo Bakelite, which is a Company, a great Company in Japan. We were able to, without any expense to Merit, retain an exclusive worldwide tradition agreement. Why? Well, it is because of our performance in Japan. It is because of our performance of our other microcatheter that we now produce at our facility.

But this is unique. It is the only catheter that I am aware of that you can steer. And when we have shown this to physicians here, and as we introduced it in Lisbon, the response was overwhelming. Now let me add just a little bit more flavor to this. We will list this product at about $1,500. That is about 5X of our existing product.

Now, why would somebody pay 5 times that amount? And the answer is: you can go places that you simply can't get to with a standard microcatheter. We took orders on the floor for over -- for $1,000 from one of our distributors in South Africa. Our cost is somewhere -- I think it is about $350, based on an order that we placed with Sumitomo today. So even on the distribution level, there is substantial profitability. We think that we will be closer probably to $1,250 to $1,300 ASP.

And the exciting part is that it has a lot of pull through. And it is a gee-whiz product. It is always fun when you have a product like this that nobody has ever seen before, and they want to use it.

Now, they won't use it in every case. I estimate about 25% of the cases that are used in the IR lab will use -- have a need for a product like this. It uses our various embolic materials. And so, again -- did I add this -- in looking at China, it is probably the fastest growing area of the world. And as we looked at our business in China, the embolic business, the Embosphere business is growing extraordinarily fast. Joe, can you give me a few of those numbers?

43% year-to-date.

Okay, this is Joe Wright, who is our Vice President of the International Group. And it is up 43% in China this year. So I guess the message I want to deliver is that, again, as I said, the summer is over. We have a full bucket of products. Our new centesis catheter, which we will release in just a month and a half; our new 40 atmosphere inflation device, our new PAL Planner. I can go into our new Corvocet.

And incidentally, I had a physician here yesterday who came in and was doing testing on this new product, sat with me and just said, Fred, I don't think you guys realize what you have here. And I said no, if you'll excuse me, sir, I do. We have worked three long years to be able to design this product, which has multiple patents. And we are close to release on that product. It is going to be late fourth/early first quarter of next year we will release this product.

So we have all of those products in the hopper and many others. And we are doing all the transfers, opening up the new directs. We are watching our expenses. I think that has been the big news this year, is that we've really, I think, done a pretty good job of controlling the expenses below the line. And I don't want to be -- and overlook the gross margins, but I think with the Mexico issue and these higher gross margin products going, we are going to see the kind of improvement that we all want on the gross margin side. Certainly on the revenue side, we are going to see a plan that will at least meet our three-year plan. Kent, do you want to add anything else?

No, I appreciate what you're saying. We have seen an increase, particularly in this quarter, in research and development expenses. We've accelerated some of our projects for the CVO spend, for some balloons, and iron, and some of these important products that we see for future. So that is right -- on the rise recently, and so operating expenses have come up. But we are investing in the future.

Yes, and we always have. We always have. So we believe that we'll continue to be a premier Company in terms of growth. We are extremely aware of the requirements for us to have operating performance. And I hope that as you consider the things that we have said, yes, I understand you have to report on the quarter.

It's in the rearview mirror. In fact, it looks like one of those cities out here in Utah. You drive past it in about 40 seconds. You cannot even see the lights.

So we are here today. And as soon as we are done with this call, we will answer other questions and give a little more clarity for those that have interest. But it's on down the road. And we will finish up our year and, I think, in good order and then press to the future. So, we want to thank you again for your interest.

We want to now open the lines up and we will let you guys fire away. Just be reminded that I have all of my gear on, and I'm protected for all the spears and any of the arrows that may come. And I do swing back.

So here we go. Operator?

(Operator Instructions) Thom Gunderson, Piper Jaffray.

Fred, maybe I will start a little bit on Q3 and then move, as you said, to Q4. But on Q3, the operating expenses -- you guys have done, as you said in your remarks, you have done a good job of watching your expenses this year. But I noticed a little bit of a shift in that, and I looked -- in the last three years, you have had your operating expenses go down sequentially Q2 to Q3, and this year they went up. Was there anything unusual about this year and your expenses on SG&A and R&D that would account for that increase in dollar expense?

Yes, Thom, as I mentioned, I will go to the R&D first. We have all of these products that are at the doorstep. And so to start to gear up for the production and get the production lines in place, we've had to hire a few more people. We are also -- we had some other projects, one of which I mentioned, that was an expense. So I think that is part of it. But we also had some other stuff, and that is on the studies.

So one of the things is that on the high-quality study and that sort of thing. Some of the monitoring and assessment so that program are -- you know, there was some expense from there that you would not have seen last year. So that's another part of that.

Again, on the SG&A side, you're going to see a little higher expense because of these Radial programs. The one that I am talking about that we are doing here; the one that we did recently in Miami; another one that we did here a few months ago. So those programs, when we have done the metrics on it, lead to 80% of the people that come here end up buying Merit products.

So we have found this to be very, very successful. We are investing that money because of the product sales that will come out of that. So that would be another one. Kent, you want to add to that?

Well, we have seen a variety. We've had headcount increases in various areas of SG&A, and particularly in R&D. So we are -- we have staffed up for growth and for infrastructure there.

But Thom -- yes, and I agree with you that it is something that we have to make sure that doesn't get out of control. I will give you an example of one of the things we put in place yesterday, and it wasn't -- other than I think we get really unproductive with new hires. And so I have put not a hiring freeze on for the Company, but I will not entertain any more hiring until we get into next quarter in these areas, because we have invested the money. I don't want to hire anybody else in these areas from now till the end of the year.

So it's -- but we do this, and I think as far as I'm concerned, it's a good management tool, because you don't want to bring people in this time of the year. Everybody has -- in just another 10 days, everybody starts thinking about a whole bunch of other things. So that's the best way that we can answer that question for you.

Thanks. And then a quick one on Q3, and then I will go to Q4 -- and that is tax rate. Tax rate looked a little below the 31% that you've been running at. Is that what we should look at going forward? Or was there something going on in Q3 that made it that way?

The third quarter traditionally -- and you can see it last year, too -- is lower, because we have discrete items like the Fin 48 reserve for an audit that expires because the statute of limitations runs on a reserve for that. So we are able to flush that out. And so third quarter always has a bump downward, but we are not changing the total for the year, no.

Okay. And then speaking of not changing the total for the year, Fred, do you want to give your thoughts about how the year looks, which I guess is Q4, and your confidence in the guidance that you gave us earlier in the year?

Yes, we'll reaffirm our top line and our bottom line. I will say, and I think based on the first three quarters, you may see a little mix, a difference in the gross margins, as you have seen this quarter and others; and then a maintenance and below expectations on the SG&A side; and probably a little moderation in the fourth quarter on the downside in terms of R&D. But we will finish of the year at or above what we said. And then we will start looking to next year.

And again, I don't want to get too far ahead, Thom, but I think you can see -- I will say this: that without reservation, that 2016 will be the best year in Merit's history, without any doubt. No doubt about where we are going with the products, the excitement, the microcatheters, the new drainage products, the new biopsy products. I mean, we have never had that type of portfolio.

But you have to invest in them, and we have invested in them. But it's going to be a very exciting time for the Company going forward. It is exciting as I sit here today. It's not like somehow it's going to pop up out of the ground. It's there. It's very exciting where we are.

Got it. I will let some others ask questions. Thank you guys.

Jayson Bedford, Raymond James.

So a few questions: first, on gross margin, you listed a few things in the release to explain the year-over-year decline in gross margin. I am guessing that the startup in Mexico had the biggest impact. One, is that correct? And then, two, is there any way to quantify the impact of Mexico on gross margin?

Yes, it is one of the issues. Another one that hit us -- and I think, Greg, you might want to address this, because I think this is where it goes on that devaluation. Wasn't that in gross margins as well? No? Okay, do you want to go ahead and comment on this?

We also had some production in our in embolics in France that was down, as well, that affected our gross margins.

Let me just -- I am sorry to interrupt you, Greg. By the way, this is Greg Barnett, our Chief Accounting Officer. So we've expanded the facility in France for the production of new microspheres which we'll introduce next year. That's about all we are going to say today. And also for our gel foam that we talked about before, so that is one of the issues. Remember, last year in this quarter we were making our initial deliveries to Nippon Kayaku, and it was over $1 million difference in the quarter at those higher margins. So that is another factor both on the revenue side and the gross margins. Please, Greg.

And then we did for the quarter have almost 1% favorable pickup for the effect of the euro. So we had the manufacturing variances that we have talked about, both in our embolics in France as well as our operation in Mexico. And then we also have the sales discounts that we talked about in Russia as the ruble continues to devalue.

Yes, let me address that one. I think almost everybody that you talk to, Jayson, will tell you that whether it be the real, whether it be the yuan and the devaluation, or whether it be the ruble, those things clearly have affected and had some effect on these things in terms of discounting to make sure that we work with our business partners there. We don't expect them to take all of the burden.

And so what we do is we evaluate this and we have various -- what is the word I want to use -- kind of kickers that, at a certain point, prices will increase. And we have taken some haircuts there to make sure that they can stay competitive, stay in business. So that's another part of it. And I think everybody will kind of -- in the industry that has an international presence will kind of affirm that that is what everybody faced this year in those international markets.

Okay. Just getting back to the question, though, let's just assume Mexico did not exist in the quarter. And you were still manufacturing or still getting product from that third-party group. Was there not -- what would gross margin have been? I am just still trying to figure out the --.

Okay, there was about $500,000 worth of expense that was not absorbed in the quarter. Okay?

Okay, that's helpful. And then I don't want to be critical with the question here, but one of the concerns for investors, I think, getting to Thom's earlier question, will be the bump in operating expenses. You guys have done a pretty good job over the last four quarters of keeping the expenses in check. They were not as in check, let's call it, for the third quarter. And I realize that you want to spend. But there is an appropriate balance there. So what do you say to those investors who are thinking, oh, geez, they are kind of back to their old ways on spending?

Oh, oh. Well, if I am going to go out and launch products, I've got to train people. I've got to have samples. I've got to develop the support and all of the products in terms of literature, and videos, and all of that sort of thing, or I am not going to get the other side of it. And those are on the doorstep, so I can't spend that after, or I don't get the revenues.

So I've got to have the horse to pull the cart. So that hurts me when you say you are back to your old ways. But that's fine.

No --.

No, no, it's okay. That's -- you can say it. And you can preface if you want to. That is your prerogative.

I answered the question. We have to prepare for those types of things and get ready to launch products. And when you have a launch -- you know, six, seven, eight, 10 products, that costs money to get ready to do that. So that's what we've been doing.

And then what we will do is, in a very short order, we will see the returns. It is not three years or five years or the following year. But you have to -- what's the old saying? You have to spend money to make money? Now, if you spend it irresponsibly, that's a different story. But I think on the SG&A side, I don't think we are doing that.

But, listen, it is what it is. And you can call it what you want. I have a little different take on it, but you are the analyst. I'm not.

Well, okay. Is there -- I guess another way of asking it is: is the commitment to improving margins and improving the profitability still there? And does a quarter at like this cause you to waver at all on your long-term goals that you laid out back in February?

So I have reaffirmed this year. I will reaffirm our three-year plan. I will reaffirm all of our commitments. We will stand by that. We look at things, as you know, year-by-year.

And I don't see any reason why we won't meet or exceed everything that we said we would do. And we have done that. And we will continue to do that. So I will answer that as straightforward to you as I -- I think that's a straightforward answer.

That is. That is. Kent, can you just break out US growth versus international growth, if you could? Then I'll drop.

Yes. So US growth in the quarter was 6.4%. It totaled $82.9 million. International was $53.2 million, up 4.4%.

So that's interesting, Jayson, that domestic sales on a real basis -- or a cash basis, I guess I will call it, unadjusted -- are actually exceeding international. Now, it's summer; that is what you would expect to see, I think, in the third quarter anyway. It is not a surprise to us. And remember, that is adjusted for about an 18% to 20%. So I think on direct sales, adjusted for FX, we are up 21% in Europe. So -- but you take a pretty big haircut.

The other side of it, as Kent mentioned, though, is we get the input costs on the FX side that help on the other side of it. So we take a haircut here, but we get some contribution on the gross margin side.

And on the SG&A side. That's bigger than -- it's pretty large. It helps.

Okay, thanks, guys.

(Operator Instructions) Jim Sidoti, Sidoti and Company.

Can you explain to me -- why is the BioSphere business so lumpy? It was up double digits last quarter; up, I think, 1% this quarter. And you mentioned some production variations in that facility, which I assume is out in France.

Yes, yes, I think the real issue on the revenue side is that -- remember, we had that -- I will call it pipeline filling. But we had the big orders, the initial stocking orders from Nippon Kayaku, who is our distributor in Japan last year. And we didn't -- it was over $1 million for the quarter. And then, as I mentioned on the other side, we have and continue to have substantial interest and development going on the embolic area.

One thing to consider, too, Jim, is that if you look at the whole BioSphere business, I think we've been into that business now five years or so. The facility up to this point was exactly the old facility. And building things for the PBA, and building things for gel foam, and working on other embolic materials, we have literally had to put mezzanines into the facility. We don't have any more room for those mezz -- the building, literally from the floor to the ceiling, it was filled.

And so what we did is -- a unit became available next door. And so, because we see this area still expanding -- and I think, by the way, since we bought it at around $24 million or something like that, it's like $40 million business or plus that. So it has grown by 50% since we bought it. And we ran out of facility.

So we put this -- and again, it is a leased facility, but we put some leaseholder improvements into it. We have to start to amortize that. So we don't have any other building projects ongoing. I think we ought to talk about that. If you'll just indulge me for a minute.

Last year, we were using a lot of capital. Our CapEx will continue to drop, even though we build and replace the equipment, we don't have those huge expenditures for cash that we had in the past. And we don't have any construction projects, other than remodeling with this and that -- and expansion of the facility, let's say, in France. But we have a lot of capacity.

We have a lot of capacity in Mexico. We have a lot of capacity in France. We have capacity in our warehouse in Maastricht. We have a lot of these kinds of capabilities where we don't have to use capital. We don't have those expenses. And that is kind of a big deal.

So, I mean, one of the callers said, are we back to our old ways? I would say, maybe we have some new ways on capital spending. But no one wants to ask that question, so I will answer it, and there it is. Higher cash flows; no more expenditures, at least for five years or that we've seen on facilities. But no one ever asks the positive questions about the things we've accomplished. So there you go.

You may want to talk about the FDA.

Oh yes, and one more; and no one cares about this, except everybody that cares about their job here. We just finished -- listen to this. This will get no notes whatsoever, so please don't write about it.

We just finished a five-day general inspection for the Food and Drug Administration with no, none, zero nonconformances. Not one. Five days, full inspection, nothing. We also just had our facility in Salt Lake and in Mexico, and I believe in Texas -- will be certified in full compliance with BSI.

Now, that is, I guess, a cost of doing business. And maybe nobody cares about it. But it is just a really big deal, and I want to really talk to my staff and thank them for what I think is an extraordinary effort and, I think, a reduction of risk to shareholders. We are complying with the law, and we are doing things that should be done.

So I think that is a great thing for us to talk about. We don't have to go spend money on running around fixing things. We continue to improve and watch things carefully. But it is a big deal; but again, nobody really cares about it, except for the people in this room. Okay, there you go. I am done pontificating.

All right. And then, can you just remind me: once you get Mexico up to speed, where do you expect gross margins to be late 2016, early 2017?

We think that we can add between 100 and 150 gross margin points just based on the input in Mexico. That has been our belief from the beginning. That is what we believe will continue to play out in our three-year plan. And I think, as I mentioned, Jim, Mexico is not missing the mark. It is actually exceeding the mark. They are receiving the products. Their productivity is better than it was in the previous facilities. Our transfer teams have transferred the product.

The second -- I will call them the new products, because everything else was legacy that was transferring from Mexico. And then another tranche of products will start moving over there in another 30 days or so. So those are significant, and it is going to be significant for the business.

Now, that being said, we are at 20% capacity today. And even when we get all of this done, we might be at 30% or 35% capacity. And yet we will have absorbed all of the overhead expenses. And it will start to contribute in the first quarter of next year going forward. It gives us a significant upside and a significant opportunity to be more competitive.

It is not just about the margins. That's nice. If we make more money, that's great. But it improves our competitive profile while not lengthening our supply chain.

You know, like I said, we can be there. When I hang up, I can call you from Tijuana in about an hour and a half from right where I am sitting right now. So it has a significant opportunity to help the Company. But again, don't overlook -- it's not just the gross margin, but the opportunity to compete is a big deal.

Thank you, Fred.

Okay. Thank you.

It appears we have no further questions at this time.

Well, I am disappointed. I am just getting going. But I guess we will have our own party here. Listen, we are available. Kent and I will be here for the next two or three hours.

Again, before we leave, though, again, summer is over. And we are all back to work. I think I took three days. Was it three days that we took this summer? But we are all back to work. Everybody has been working. You don't have to come back to work here.

But the docs are back at work. That is the critical issue. Procedures will be improving, particularly in Europe. The new products are there. And I hope -- I want you to test me. I cannot wait until our first-quarter call of next year. We will have our fourth quarter, but I am really looking forward to that first-quarter call next year, so that we can talk to you about our success and the other things that we are seeing, things I am talking about today.

But listen, we appreciate your interest. We will be available for your calls. And we will go ahead and sign off from Salt Lake City, wishing you a good evening. Thank you and good night.

This does conclude today's teleconference. You may now disconnect. Thank you and have a great day.