Merit Medical Systems Inc (MMSI) 2015 Q4 法說會逐字稿

Good afternoon, and thank you for participating in today's conference call to discuss Merit Medical's financial results for the fourth-quarter and full-year 2015 and guidance for 2016.

(Operator Instructions)

Please note that this call is being recorded. I will now turn the call over to Fred Lampropoulos, Chairman and Chief Executive Officer of Merit Medical.

You may begin your conference.

Thank you.

Good afternoon, ladies and gentlemen. We appreciate you taking the time to join us. Along with our staff, we have with us today Bernard Birkett, our Chief Financial Officer, who will be making part of this presentation.

Before I turn the time over to our attorney to read our Safe Harbor Provision, I would like to remind you that we're doing this a little bit different than we've done in the past. We will be posting slides. And if you go to our website on our homepage, you can pull up this presentation which I think will be helpful to you now and in the future. To access the slides, as I mentioned just go to www.merit.com, and it will direct you to the appropriate location.

I think at this time, we will go ahead and we will ask David Lewis, one of our staff attorneys, if he would read our Safe Harbor Provision.

David?

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 the statements made in 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 in this call are made only as of today's date. And we do not assume 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, 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.

David, thank you very much; and I just know how much fun you have reading that. It's right up your alley, and thank you very much.

Ladies and gentlemen, as you know and have known in the past, there's always a lot going on at Merit. As we think about last year, we think about the Mexico Project. We think about the new products we've introduced, We think about an acquisition that we started on in early December and then completed. We think about the opportunities for the future.

But at the same time, as all of you are aware, there's a lot of turmoil in the world. We have currency. We have oil prices. We have problems between nations and the complexities of nations.

All of those facing us and yet despite all that, we were able to accomplish and meet the goals of our year one of our three-year plan. Not all of those goals were exact numbers, and by that I mean we didn't hit every number that we had anticipated. But we did hit the top line and the bottom line.

So I'm going to ask Bernard Birkett if he would to go through the highlights of the year on a financial basis. And then we will come back, and we will start talking about next year.

Bernard, here you go.

We'd like to report Q4 revenues of $138.4 million or $141 million in constant currency. That's an increase of 4.2% as reported and 6.2% on a comparable constant currency basis.

For the year 2015, revenues were $542.1 million. On a constant currency basis, we achieved $553.4 million. That's an increase of 6.4% as reported and 8.6% on a comparable constant currency basis, Therefore, hitting our first year of our three-year plan, which we had guided in the range of $535 million to $545 million.

Q4 non-GAAP earnings per share was $0.24. For the year 2015, non-GAAP earnings per share was $0.87, therefore hitting our three-year plan in the range of $0.85 to $0.89.

Q4 non-GAAP gross profit was 45.6% compared to 47.4% in Q4 2014. For the year 2015, gross profit was 45.6% of sales compared to 46.4% for the year 2014.

Q4 SG&A on a non-GAAP basis was $36.9 million, or 26.7% of sales, compared to $35.2 million for the same period for 26.5%. For the year 2015, SG&A on a non-GAAP basis was $146.6 million, or 27% of sales, compared to $143.1 million, or 28.1%, for the year 2014.

Q4 R&D was $11.4 million, or 8.3% of sales, compared to $9.5 million, or 7.2%, for the same period in 2014. Excluding regulatory costs and clinical trials, R&D was $8.2 million, or 5.9% of sales, compared to $6.8 million or 5.1% in Q4 2014. For the year, our R&D expense was $40.8 million on a non-GAAP basis, or 7.5%, compared to $36.6 million, or 7.2%, in the year 2014. Excluding regulatory costs and clinical trials, R&D was $29.5 million, or 5.4%, compared to $27.3 million, or 5.4%, in 2014, remaining flat as a percentage of sales year on year.

Q4 GAAP earnings per share was $0.14, and for the year 2015 GAAP earnings was $0.53. This was outside of our planned range for the first year of our three-year plan, which was $0.63 to $0.67. And the primary reasons for this were severance costs and acquisition costs that we incurred in Q3 and Q4 of 2015.

Bernard, thank you.

That's a lot of information. And again, a reminder that much of this is not only in the press release but is available on the slide deck.

Let's talk a little bit about what drove these numbers. As you all know, not only have there been the business issues that we've had to deal with -- issues like China, the euro, gas prices, and the issues that those have created in terms of currencies in Russia, the Arabian Peninsula, places like Brazil. But despite all of these issues, the Company, I think, performed very, very well. And in fact, what we've done is we've adjusted to these. I will talk about some of those adjustments in a moment.

As well, we are all aware that there have been some major management changes here. That of course is not something that's enjoyable. But all of the changes and the things that we've done, in our estimation and the estimation of the Board, were things that needed to be accomplished; and they have been.

So I'm happy to report to you today that the Company is stable. I think Bernard has stepped in and done a terrific job. And I think you will start to see some of his fingerprints on both our presentations and how we're doing things and certainly in the data going forward.

So along with those kinds of issues, let's talk about all the positive things.

As we look forward to next year, we first of all have the Mexico facility, as you are well aware, up and running. We have just in the last two or three weeks moved several new production lines to Mexico. And we expect to move another one in less than a month. At that point, all the things will be in place to cover all the overheads as those lines come and get up and running.

So as we look at that last move, I think which is scheduled for March 4, 2016, we'll then see at that particular point that we should have sufficient coverage for our overheads in that facility.

Let's talk about some things that have gone on in Australia.

We spent some money last year. We had really no benefit, other than we've set up and now have a direct sales effort in Australia. Let me tell you why that's important. In some cases, we are getting 50% to 75% more for our product there. It costs us more to get there, I'll grant you that; but we are going to have the benefit to be closer to our customers.

We think that in the future, Australia is going to have very, very dramatic double-digit types of growth as that direct sales force grills down. I think we have four people there now, a warehouse, customer service. And we are very excited about Australia. As of January 1, that direct sales force in those facilities are effective.

We've also recently made the decision because of the breadth of our product line and again, with the desire to want to be able to be closer the customer in the point-of-sale, to go direct in Canada. So on April 1 of this year, we will have our entire sales force, which will consist of about four or five people; our warehouse; customer service. Our management is already in place, and we will be going direct in Canada. And we will get the benefits of the closeness to the point-of-sale, as well as the difference between wholesale and retail.

Now last year, we also were able to introduce a number of new products. If we take a look at our business and take a look at Endotek. That business not only is the fastest growing in our portfolio, but it is our expectation that as we move forward with our new Elation balloons, the mini-stent that we have introduced and some new sizes there, as well as our pulmonary balloons and our wireguided balloons, that we're going to continue to see dramatic growth in the endoscopy business.

Some of the other things that we did during the year is we spent a lot of time looking at things that we thought would fit very nicely in the business. There are some expenses in the fourth quarter. So as you go through that, you will see that there are some acquisition expenses. And there were other expenses that were associated with acquisition opportunities that we walked away from. Nevertheless, those expenses were there, and they're reported on a non-GAAP basis.

However, we did conclude a transaction that we're very, very excited about. And in fact, it is a company that we tried to buy three years ago; and it was sold to CryoLife. CryoLife has moved in a different direction with a new CEO and a recent acquisition. And so the product line that we wanted three years ago became available. And in a very short period of time, in about 45 days because of our prior knowledge of the product and our prior due diligence, we were able to close a deal.

Why is this significant? Well, it allows us to have better interface with vascular surgeons, who also will work on this product with nephrologists and interventional radiologists. It's a business that in my view, and this is not meant to be a criticism of others, but did not have the breadth of coverage and investment. So about 90% of the revenues are in the US; 10% are in Europe. And we think we can do dramatically better because of our footprint.

And we also have other associated products, like our peritoneal dialysis catheters, our chronic catheters. And be reminded, when we talked about this in the announcement a few weeks ago, of the pull through. Vascular surgeons use many of our products already. Now we have products that give us more breadth in the opportunity.

I'm happy to report to you -- making an announcement about an acquisition is one thing, but actually getting the job done is quite another. We had a seamless transaction. All of our customers have received all of their products. Everything is online. All the deliveries have been made, and it was seamless.

And I want to thank the guys on our staff. But it's a significant opportunity. In our model for next year, we have discussed the fact that the growth is about 11%. In 2016's forecast, 11% increase in that product line.

We believe they would have a lot higher opportunity for growth beyond that. But we are starting training, in fact, next week of our sales force. And we've already had all the contacts and done all the things we need to do with our existing customers. But it's going to be a big opportunity going forward.

Now, one of the things that we want you to understand is the number of new products that were just launched in the latter half of last year that are just getting traction. And then we're going to talk to you about the newer products because we're going to talk about some very exciting opportunities with the business. And in a few minutes, I will turn some time over to Bernard to go over the numbers, the ranges, margins, and so on and so forth.

Before we do that, let me just set the stage here. Let's talk about the products that we launched last year that will be part of the momentum and the opportunity going forward.

Last year, we launched our ONE Snare microsnare, which complements our EN Snare. One of the big surprises last year was our AEROmini Tracheobronchial Stent. I think we were going to do about $1 million. We ended up doing substantially more than that. And we have great hope for this product, particularly with the other products in the Endotek Division.

We also added what they call the BAL Convenience Kit, which calls on that same customer. Of course, you are all aware of the Prelude SNAP; it was our improvement of that product over the classic sheath. And we continue to get rave reviews on that product, both on our direct sales force and from some of our OEM customers.

Another one, of course, that is -- and it's so much fun to have these products come out and have them well-received by our customers -- were Elation esophageal balloons. We worked long and hard. And when you combined that along with our BIG60 Inflation Device, you get the kind of growth that we talked about. We are talking about 25% to 30% growth rates. And we think we can do that for the next several years in that Endotek Division.

We also were able to make a deal with Sumitomo Bakelite in Japan for a steerable microcatheter. As I'm speaking to you today -- we received an order today -- and it's just been launched for 10 units. They are selling from almost $1,100 apiece. This is the tool that in very, very difficult cases is absolutely necessary to have to be able to get to these points. It's hard sometimes to get to these small vessels.

That product is launched in Europe and, as I mentioned, to great acclaim. And what's even more fun is when you get a physician that sends you a personal note. And that physician says, "I couldn't do it with this; I used this, and there are two issues for me. One, it's great because I was able to get the case done. And then one bad issue is that I don't have any more stock and I need to order right away."

When you get a comment like that, it's very encouraging. Now, we have not had that product approved yet in the US. It is in the process of registration. We think it's going to be about mid-year, maybe early third quarter. But it's going to have a substantial impact on our business and our opportunities. By that time, we will have had almost six to eight months of selling in Europe; and so we're very excited, with great margins about 65%.

I mentioned about Australia. I mentioned about Mexico. I mentioned Canada.

Let me go to the new products that we talked about, the HeRO. Again, a product that I believe has been underserved with huge opportunities, particularly international. But in the United States, it is kind of a last resort product.

It has good margins. But one of the things I want to remind you of -- and Bernard will talk a little bit to this -- is there are a couple of things that affect this. One, is we have the inventory markup that affects margins. Two, we have a deal that that product will be made by CryoLife in their facilities for no more than six months, and we're paying cost plus 25. That will affect margins.

That being said, we will set up our first line here in South Jordan, where we will produce those catheters in April. So it will be a drag initially, both for the reasons I mentioned. But going forward, we believe it's going to have substantial opportunities.

The Corvocet biopsy device, we are about less than 60 days away from the release of that product. We believe, and I believe personally, that this is one of the great products that Merit has produced. And we believe that we are going tow become a primary market shareholder in a relatively short period of time. It's a great product. Every physician that's held it, has trialed it, has had high regard for it.

If we take a look at some of the micro puncture and below-the-knee products, we have both guidewires and a new pedal access kit that's available in several configurations that's a new product that goes along with our micro puncture business. We have a new centesis catheter. This is a catheter we've been asked for, for a long time. It comes both as a standalone and in a couple of different trays and configurations.

We have a new inflation device, a new 40 atmosphere inflation device. This is for some of the procedures that when we go in and we have these grafts, we have these fistulas that require high pressure. And this is a product that fits that market need.

A new product, in fact we just trialed this product last night. It has the CE mark, and it has FDA approval. It's a new Hydrophilic Prelude SNAP.

The doctor that used it last night commented that it was so smooth, and it was his belief that he could not have accomplished the procedure, or at least the access, with any other product other than this one. This is a product that will have almost a 100% premium over the existing product that we sell, which is also a premium product. So we are excited about that opportunity.

Then of course three new balloon products coming in the Endotek Division, the wireguided esophageal balloons. And then the pulmonary balloons, both wireguided and fixed wire, coming over the next few months, just a couple of months. In fact, the wireguided, we are out doing trials; and we expect to release that in two weeks.

So there are a lot of drivers here. Wholesale to retail, market expansion. I haven't even touched on the OEM opportunities in some of our other divisions. But we are loaded with all of these products, all relatively new in the last six months or so, and then new ones coming in the first part of this year.

So I think as we look at the opportunity, we look at the marketplace out there, I think Merit is well-positioned to take advantage of the marketplace with these great products.

That being said, now that I've told you all that good stuff, I will have Bernard tell you some even better stuff.

For 2016, we were guiding revenues in the range of $587 million to $597 million. Gross margin on a GAAP basis at 44.5% to 45.5%. Gross margin on a non-GAAP basis between 46.5% and 47.5%.

Earnings per share on a GAAP basis, $0.74 to $0.80, and on a non-GAAP basis, $0.97 to $1.03. Just to note that our 2016 guidance includes revenues and earnings for the HeRO acquisition that we completed earlier this year.

Essentially what we're saying is that we believe that in terms of top line and bottom line, we accomplished our first year. What we're saying is that we are reaffirming our initial forecast on our three-year plan for our second year of the three-year plan.

A lot of work to be done. A lot of acceleration of the business, but these products are here to do it. The business has the capacity to do it because of the capital investments we've made in the past.

There it is, ladies and gentlemen. It's what we've done, where we are, and where we're going. We, I think, are excited about the opportunities and look forward to being able to report to you in the future.

With that being said, I will now turn the time over to the operator. And Bernard and I will be available for your questions now. As a reminder, when the call is over if there is more clarification or things that you didn't ask or didn't get asked on the line, Bernard and I will be here for about an hour or so until we are able to meet with you and answer your questions.

With that said, Operator, I will turn it over to you.

(Operator Instructions)

Tom Gunderson, Piper Jaffray.

Hi. Good afternoon, everybody.

Hello, Tom, how are you?

I'm good, thanks. I've two basic areas, one is on revenues, one is on earnings or gross margin actually. On the revenue side, Fred, it's still new for us, this HeRO Graft and it has an impact to your numbers and to guidance for 2016. So as we try to model this, if they did $7.5 million in sales last year without having that extra euro bump that you will get by having broader distribution and I think you said 11% growth, but it's not for a full year. How should we proportion that? When do we start to see a quarter-over-quarter kind of growth that would reflect that 11%?

Tom, just a reminder and I'm glad you brought this subject up first. Just a reminder to everybody that as you model our numbers everybody is aware from our -- from what we do in the past that our first quarter because of the way we shut down at the end of the year and then we ramp up and we don't take any credit for production, it goes to the sterilizer, we always have that little lag but we then catch up in the second quarter.

And again, a reminder on this particular transaction that we're going to have about $85,000 a month in inventory mark-up and that's going to take four to six months to work that off. Then you have that cost, that plus 25% and that is so that we can get a smooth transaction.

I got a report from our Vice President of Engineering. We have teams down there. We have people who will be there for a month, so we're there and the comment we got earlier today was is that we think we can probably move up the date maybe by 30 days or so but eventually all of that will be produced here.

As you pointed out, there's about 11 months worth of revenue because of when we closed and so we're going to only have the benefit of 11 months of that. But despite that, we think that we'll still grow off that base by about 11% on an annualized basis above what they did minus that first month. I'm confusing myself, Tom, not you.

But so we're going to get 11/12 so the $7.5 million and then we're going to take that and that's go at 11%. We have actually here today 60 to 70 of our sales people that are in our peripheral interventional group, everybody being trained by the physicians and all of this, and when they leave here they will be trained and they will be capable of monitoring these cases and sitting in and explaining.

Now, that being said, where we think the big opportunity is, is recruiting and bringing on physicians that a number of key teaching centers, two of the largest in-planters in the country are in the top five facilities in the United States. Because I don't have waivers signed by them, I won't mention their names so hopefully in the future we can go ahead and disclosed that.

But one of the things we'll be doing is we've been doing a little bit different than CryoLife did. They would have been at summits. They would bring people to their facility. We are going to -- I think in talking with physicians that put these things in and would teach at those, we're actually going to go and take about 10 physicians at a time, take them to these teaching centers, and they will be involved, actually scrubbed in with these physicians with maybe the other eight or so that will be in the theater part of it.

And we think we're going to get much more uptake. We're going to get better communication with the physician and have that dialogue. The 11% that we are looking at here is 11% on top of 11/12, but we think that's going to accelerate for several reasons. Now only do we think that the training is an important issue, but we think there's that international footprint but we are not going to be a lot from that until next year because we're going to do this part first.

But the other part is that CryoLife didn't have -- is that they didn't have the access part so they didn't have the micropuncture. They didn't have the kits. They didn't have the wires. They didn't have a lot of the products that are used to put in there and we have all of that.

That's going to be picked up by our existing customers and our new customers. Ultimately, this is almost a $4,000 device, and so we are excited what it means for the sales force because all of these other products go along with it. I hope that answers your question.

We should see acceleration quarter to quarter starting, I'm going to say in the -- somewhat in the second and then accelerate during the end of the year. So you'll see maybe 3% or 4% in the second quarter, then you will probably see 8% or 10%, and then as we get into the fourth quarter you will probably see 15% type of growth, which will average out to this 11% for the year. That's how we see it.

But I can tell you this, having started that meeting up today with all those salespeople, many of them were out with the clinical force; that's another thing that we have. Remember, we've got about 15 or so clinical specialists out on the field who are trained and of course already essentially have the training down, and so we have that and that's a much bigger effort than CryoLife. And CryoLife was a great company but they're a tissue company. Merit is a device Company.

And another thing, we just got back from the ASDIN this weekend down in Phoenix. We had no less than -- there were 30 people at our booth for every minute that we were there. We had the busiest booth at ASDIN. If you had any analysts that were there that might be on the phone, they will confirm that.

And I asked them, I asked ourselves, the marketing people, well what was it. A lot of it was interesting. It was curiosity. It was a lot of -- remember, these are nephrologists so these are the guys that are referring and they wanted to know how they could work better with Merit to refer their patients out and how they knew that they could get these patients treated.

As an example, this is a long answer, but if you go to New York, if you go look at New York State, we have one implanter in Albany. Think about the opportunity that we have in vascular surgery and all the people that live in just, in New York. There's so much opportunity here.

Then on top of that, we have all of these other products, both on the cardiac side, the endoscopy side, and on the peripheral intervention side. I hope I answered your question. I through a lot of stuff out there, Tom but there's a lot of opportunity here.

You did through a lot of stuff out there but you also answered the question, so thanks. I got exactly what I wanted and a little bit more, so thank you.

The other question is on gross margin. It was just a tad, hardly worth mentioning but you are trying to grow gross margin, and it was a tad lower than what we had estimated. In the Q3 10-Q, you attributed lower gross margin than you wanted to Mexico, which you just talked about and embolization product production being lower and messing up overhead a little bit. And then international discounting to account for the strong dollar with your distributors. Is that about the same in Q4? Is it getting better and how do you see those parameters in 2016?

There were a number of issues as you pointed out. Nippon Kayaku, which is a distributor for our embolic materials, there was about $1.5 million less revenue in the fourth quarter because what they do is they make large orders, but with that being said I would also say that we're a little bit disappointed in the performance there. We had the issue of the devaluation of the yuan; that affected us both on the revenue side and the gross margin side. We had the Russian issue, and that's just simply because we are doing -- we have to do heavy discounting. We don't change the prices but we rebate to our distributors. And again, I think it's the same issues and then on top of that, you had the Mexico issue which we are still in that start-up phase.

So I think comparatively speaking, and Bernard, maybe you can weigh in here, I think those on a comparable basis, I think we are showing about 160 basis points of gross margin improvement going forward. And that takes into account mix. It takes into account these things essentially on a comparative basis being stable quarter over quarter. It takes into account Mexico coming online, and then even though you do have some start-up expenses with some of the new products, we're not going to get as much gross margin for the first nine months on any new product just because you are ramping up. That will start to accelerate.

We do have the benefit of having a number of these products on the -- that we launched last year. And I've got to talk about a couple of these because they are so exciting. If you take the microcatheter, the SwiftNINJA. Oh, my goodness. Here we are selling this thing for $1,200 a pop, gross margin is about 65%, 70%, and then we will be launching that in the US.

It's one of those products, Tom, I'm not seeing too many of these. You put it in the hands of a physician. In fact I had a cardiologist tell me this weekend that we need this in cardiology. We haven't even thought about that because of its peripheral application.

Then we also talked on the call here today in our introduction about the Wireguided Elation Balloons. Let me tell you what's significant about that, is that you have the fixed wire, but many hospitals will be 60/40 or 50/50, and we haven't had that and yet we've been selling them as fast as we can make them.

We've ordered four new production lines that will be up by mid-year to meet the demand. Now that we have the other one that is approved and signed off, we've signed it off today. I just noticed in my notes as we were getting ready from when I did the presentation until right now, that we already sold like 20 of those things today. We just launched it a few hours ago, and we get a $50 premium.

On the gross margin side, we will have comparative periods, we'll have Mexico that will be at that point we are going to start to add. Remember, when we are all said and done, by the time we get through 2017, we'll have about 100 to 150 basis points of gross margin improvement just coming from Mexico. So that's going to give us a huge advantage.

And then these new products are all high margins and as we get into the HeRO, we have got to go through this markup, and we've got go through this transition costs, but once we get through that in the first four months or so and use up that inventory, then again that's going to affect our gross margins on the other side. Do you want to add anything to that, Bernard? This is a long answer but I'm long-winded today.

That's correct, Fred. Primarily, we've identified two areas specifically for margin improvement where we've targeted sales mix and geographic expansion, so we set targets for our sales force on that and also from an operational efficiency point of view. And that includes the Mexico facility that we know from each of our facilities what they need to contribute as far as gross margin improvement.

So we're very focused on it. It's what drives a lot of our numbers. We've set really clear goals for our people, so we've got a good plan in place and we believe it's achievable.

One more thought here, Tom. I just got to throw this one last thing in, is in terms of staff compensation and bonuses and those sorts of things, it's about 40% on the revenue side and about 40% on the bottom-line side with a couple of other little tickers in the middle. Gross margin is, of course, important but we get paid by hitting these numbers. So it certainly has our attention in terms of how to accomplish these things.

Got it. Thanks, Fred. Thanks Bernard. I'm done.

Thanks, Tom.

Jayson Bedford, Raymond James.

Hi, good afternoon. Can you hear me okay?

Just fine, Jayson. How are you?

Well, thanks. So I guess maybe just a few financial questions to start. I would love to get Bernard's view of the business here. He's been in the CFO role here for three or four months. Maybe you can speak to some of the newer initiatives and processes that you are putting in place on the finance side. And you kind of alluded to it in answering the last question, but outside the gross margin line, do you see opportunities for the business to become more efficient on the operating line?

Yes, we have targeted at certain levels of operational expense to drive the profitability that we are looking for. We've done it on three different areas. On the revenue perspective, we really got focused on growing the revenue in a number of different markets. We've identified new markets and we've also identified new products and products that will be introduced.

Then on the margin side, again, we are focused on delivering higher margins so focusing on those higher-margin products while maintaining our existing legacy business. So a lot of the sales force that they are actually being compensated now on one revenue growth and margin on ASP growth. So we've got the sales force aligned with where we want the business to go.

From the operational side, we've also been very specific with our operational group to identify the cost savings that we expect to deliver on the margin and forecast that we have, so it's like a two-pronged approach and again, these guys are incentivized on delivering on the operational cost saving initiatives that we have in place.

And can I add one more thing, Jayson, to that if I could, and that is we had our Board of Directors meeting this week. This weekend we had our audit committee and we also had a presentation by our independent auditors. Whenever you go through some of the changes that we went through, they did more -- I don't want to call it inspecting but testing, they did more of this, they did more of that, and here was the glowing report.

The glowing report was there were no adjustments. There were no deficiencies at all. And in fact, they were very, very complimentary in terms of -- and I think that speaks volumes to not only the business as it was, but the effectiveness that the accounting staff had to get through these things and get them done efficiently and effectively, particularly now that we are reporting as a larger Company and the audit time was reduced by three weeks.

I want to let you know that all the concern that a lot of people had, which I understand is a fair thing when have these kinds of issues, that the compliment was is we did it better than we've ever done it before and that they feel very comfortable. And they delivered that report to the audit committee. That was -- that's satisfying to me and I'm sure to all of you guys and our shareholders. We'll take your next question.

I want to finish up on that, so it doesn't just stop at the margin line. There's a lot of focus as well on SG&A and R&D expense and to make sure that they are in line with what we have forecasted and budgeted. So there's a lot more accountability being pushed back to the various function of heads to manage their budgets and to be essentially within that budget throughout the year, and we'll be working very closely with these guys to make sure that happens and to drive the profitability out of the business that we know it can deliver.

Let me tell you with more detail how we're going to do that. In the past, Jayson, you know this as well as anybody, we had two really great guys. We had Greg and Kent who did a great job for many years. But in terms of delegation and some of those issues, they grew up with the business. That's the way they've always done it.

I think what Bernard has done is when he talks about responsibility, part of what we've done is that we've hired these analysts that work for Bernard and work with the department head so it's not just making a statement. There are people who are signed in the accounting department. These are new heads we've added in the last year in which they have specific departments that they have responsible work to work with those department heads and to take a look to make sure their plans all kind of add up.

It's not just a statement being made from 30 feet. We've got the ground troops on the ground working with the departments and making sure that they are in alignment. I think that's a huge improvement so that we get not just what we say, but that we get the performance because it's being reviewed and they're responsible for it so it doesn't go three or six months. They're looking at every month and those analyst are working with them to make sure that they are on plan. Wherever there's a deficiency where they can go through and make sure they have answers to make sure that they stay on plan. That's different than we've done it in the past when we can get down and actually help the departments and that's a big change.

Okay, thanks for that. I guess just another one for Bernard on the financial side. R&D was higher than we had modeled and higher frankly than it had been in the past at near 8.5% of sales. I know you gave us some additional color, but just can you comment on why it seemed elevated in the fourth quarter and then what does this ratio, R&D as a percent of sales, look like in 2016?

In 2016, we forecasted R&D at the same level as a percentage of sales as what we would have achieved in 2015, so if you look at R&D itself and just look at it for 2015 over 2014, we were 5.4% of sales in each year so year on year, and that's what we will be targeting for 2016 so at least maintain that ratio.

The other costs that have been included in there are regulatory costs and clinical trials. So obviously as you're launching a lot of new products which we have at the end of 2015 and through the early part of 2016, there is a lot of regulatory cost that goes along with that for the filings and the registrations.

And also we've got to be conscious of that with the regulatory department that we are actually expanding into new markets as we are opening up Australia, Canada, and areas like that. We will have costs there but again, what we want -- what we've done is we've broken it down into each of the specific areas so we really understand what is driving that number.

So we are confident with the way we forecasted it. In broad terms, we are not seeing an increase as a percentage of sales on our SG&A and R&D expenses.

Jayson, just a little bit on that issue. As you know that some of these studies as you get larger enrollments both in the PAE and in the high-quality study and others, the more that you go in that direction, you have more expense. We hope, and I'm going to just throw a little teaser out here, but there are some very, very exciting potentials on that area that would be very, very helpful to the Company in terms of finishing up some of those studies.

I'm not talking about discontinuing. I'm talking about -- I've got to be careful here. Let me just say there are going to be opportunities which are going to allow us to sell sooner and be able to have less expense and then hopefully we can talk to you about that in the next 60 days should all those things develop.

Then another reminder that we have as part of our R&D, we have these other long-term projects like the CVO. And those -- as time goes along, those get more expensive but so that we have the discipline, we are cutting back in other areas or utilizing the expense that we have. This will be as you know as we have discussed in the past, these are very exciting game changers for Merit but this is going to end up being a seven-year project when it's all said and done. Just to give you a little color on that.

Right. Okay. And maybe just lastly, what was US growth in the quarter? Similarly, what was international growth?

5.9 in the US and let me just check the international one. Sorry.

Maybe just give me US, what was your US revenue?

The US, 7.9 on an international basis was the growth

That's fine.

Domestic was 5.4.

Okay. Thank you. I'll jump back in queue.

Okay, thanks.

Jim Sidoti, Sidoti & Company.

Good afternoon, can you hear me?

We can, Jim. Thank you.

Just a quick question on the quarter that ended. Malvern, I expected that number to be a little higher because of the new sheath that you had approved. Did that one not start the Prelude SNAP, has that not started to ship yet?

No. I don't think -- I don't know where you're coming up with that. Malvern, now that we have launched the Prelude SNAP, we had pretty dramatic growth on SNAP taking -- replacing the classic. We had a major OEM company that has come forward and we're delivering products there, but I think it shows it was down 0.8%. So I just think it's one of those things where I think last year something like that, we were shipping to Boston Scientific and some of those things, so it's more of a timing issue than it is a business issue.

Okay, so would you expect that business to rebound early in 2016?

Listen, if you take a look on Malvern, what's interesting, it's probably the most efficient facility that we have. We grew our Worley business last year. Bernard, why don't you look up the Worley business. But these are the coronary sinus guides last year grew, I'm going to say 25% to 30% but we'll get the exact number here.

Then we have another new product coming up this year. This is the non-valve Prelude SNAP, and the one that I think that -- let me come back. On the Worley business, we grew it at 80% year over year. We added about $1.5 million so about 1-7 to 3-2 so that came out of there.

What happened is that we lost some business on the classic side, on the OEM side. We made it up with direct sales on the Worley side and the SNAP. We have other additional products and one of the things that we are doing, Jim, on the SNAP, we have FDA approval and CE mark on the PreludeEASE Hydrophilic. And that's a product we're not going to make available to OEM customers, and that's going to be all of our -- I'm thinking about the SNAP, I said the EASE. The SNAP. I think maybe in the quarter, it was just really a timing issue more than anything else.

All right, and then I just wanted -- you talked about a lot of different devices before. The product that you are moving production early this year that you think will hurt earnings a little bit, that was the hemodialysis graft?

That's the HeRO. Yes, that's the one we just purchased. That's the HeRO. That's the stent graft, and what we're doing there is, of course we have the first quarter in which you have the markup of inventory, which is a requirement, and then we are paying them as a vendor at their cost plus 25%.

Then we will be producing it there for three or four months and then in the meantime, all of it is being transferred so we have other production lines and those things are being up and running and all the people are being trained. I think -- how many people did we have down there this week or next? We have seven people that are there, engineering, quality, operators, and that sort of thing, and they will be there now for the next three or four weeks in that facility while they're building products.

There will be additional expenses that you are required to make that will affect gross margins but it's a relatively short-term situation and something of course that's required on all acquisitions when you have inventory, as you know. And that amount is about $85,000 a month until we use up that inventory.

Then we will have the inventory they make. It will affect gross margins not a lot but it's there. Then as soon as that's out of the way then you'll see those gross margins accelerate in the second half. Incidentally, we can also from our point of view produce the product substantially less expensive than them. Let me tell you why.

They had their facilities on the campus in the Innovation Center at Georgia Tech, so they had that expense. This fits right in downstairs. Some of the things that we moved to Mexico, we can bring this here in an open space that helps to absorb overhead here.

Secondly, they send one pallet a week or two pallets a week to the sterilizer. We send I think since 70, every two days. We are going to get the benefit of the usage there, those costs.

Packaging. That goes down. And even some of the parts that are in the accessory kit are parts that Merit makes and we will be replacing those like the sheaths, the guidewires, the needles, the hemostatic valves. All of those things are things that Merit already makes, they were buying those out of house.

Once we get through this initial requirement of manufacturing and accounting rules, we have substantial opportunity for gross margin improvement but more importantly, we think that the growth and the opportunity is there are extraordinary. We think this is a big deal.

And incidentally, remember this is the same group of people who go along with these vascular surgeons with the other products that I mentioned and also the same group that's going to be very much involved in the CVO stent going forward. This is a long-term strategy in which this product fits in perfectly as well as the pull through issue that we discussed.

All right, and then my last question. If you look at the midpoint of your guidance, it looks like your guided to about 15% bottom-line growth for 2016 on a pro forma basis. Bernard, this is the first year you've given guidance. I just want to get a feel for how comfortable you are with that projection and if you think that is something that you can sustain for the next several years?

We are comfortable with this. Obviously, there's a lot of volatility in the markets and we've taken that into account. But we're still comparable with the numbers.

A lot of it is going to be down to driving that gross margin number in which we've already spoken about and the discipline and controlling our cost base which we are committed to. We've shown this year, in 2015, that we have the ability to grow profits at that kind of range. So we believe it's there in the business. Looking at 2017, again, I would think it's achievable.

Jim, let me add that on the sales forecast because one of the questions that we thought we would hear and I think we have to some extent is, okay, wait a second, you're going from this 4-9 adjusted for constant currency of about 6%, and now you guys are talking about 8% plus another 150 basis points. That's pretty aggressive growth.

But what we did is these aren't my numbers. These are numbers that we've gone to our staff, that we've sat down with OEM, sensors, the direct sales force, both European, Asian, and US and central South America, these are their numbers.

And in fact, to be very fair, their numbers were actually a little higher and we tempered those back, which I think is always wise to do, but these are pretty impressive numbers. And again, there they are. You guys can decide what you think of them but this is what our staff and what our sales organizations have committed to.

If you look, we have proven in the past that we can grow that legacy business and with the products that are coming out of R&D and with the recent acquisition that we have, I think that gives us a lot of comfort with these numbers and believe that we will deliver on them.

Okay, thank you.

Mike Petusky, Barrington Research.

Hello, Mike, how are you?

Great. So I just want to drill down again a little bit on the guidance. What's the tax rate that's assumed for 2016 in this guidance?

In the guidance, we are looking at a range of between 27% and 29% and that's really affected by the mix of earnings. And that's what has driven our tax rate in 2015. That mix can vary slightly year from year and that obviously has a big impact on the rate but we are comfortable at 27% to 29%.

So what I'm hearing you say is really no leverage on R&D and not -- is it no leverage on SG&A as well or do you get a little leverage there?

We will get a little leverage there.

Okay. So maybe --.

Mike, what I was going to say is as I talked about later, we've got these expenses and the start-up expenses with these new products that are coming online, even this transfer is -- I don't know if we are accounting that for R&D or not, but you've got some clinical support and these kinds of things that need to have to be successful to drive that top line. But as Bernard pointed out, the biggest drivers here are really the gross margin side, the facilities, Mexico, product mix, and so on and so forth. That's where you get the biggest bang for your buck.

Okay. So on the gross margin, how much of that gross margin improvement is coming from the device tax being suspended? Is that like 70, 80 basis points, something like that?

Yes, that's correct.

Okay. Then so as we look at some of these issues in the first half of the year, the HeRO and Mexico, getting to a place where it can cover its overhead, is it fair to say that this year in terms of adjusted EPS is pretty back-end loaded? Maybe it's like 40% in the first half, 60% in the second half or is it even swung more towards the second-half than that?

It will be obviously weighted towards the back end of the year. As Fred already alluded to, we've got started costs in January and that affects our Q1 numbers so we would expect margin to improve throughout the year. That's coming from not just Mexico but as we gain operational efficiencies as we leverage the new markets that we are entering, that will obviously improve throughout the year. So you should see consistent improvement.

I'm just trying to get a sense of magnitude. For instance, do you expect you expect Q1 to be a negative comp in terms of adjusted EPS versus the year prior quarter?

I would not expect it to be a negative.

Okay. All right. What about CapEx for the year? Do you have any general guidance around CapEx for the year?

In a range of $35 million to $40 million.

All right. (multiple speakers)

Just on the CapEx, our CapEx spend has been reducing from Q2 and you can see it reduced through Q3 and Q4 of 2015. So it should level off in 2016. We don't have a lot of a large building expense that we would've had in the first half of 2015.

Okay. Then in terms of your assumptions around currency, is it just an assumption that it stays consistent with current levels or what are you assuming around currency?

We've actually flexed it so we've looked at number of different alternatives and a number of currencies, and the ones that affect us the most are the euro and the yuan so we're fairly active in looking at that. We've brought on a Director of Treasury who just joined us in the last couple of weeks, so there's a lot of focus from us on that in managing that situation but again, as you know, the markets are very volatile. But we have tried to build it into our forecast as much as we can.

Let me ask a question, Bernard. What is the standard you're using, the rate in your modeling of the euro?

110.

110. Okay.

What we've done there is we've got forecasts from a number of different banks. We've looked at the consensus numbers and you've got some who are coming in lower than that but some are coming in much higher. We've taken the middle ground.

Mike, let me come back your question on the SG&A. As I mentioned earlier in the call, we've hired probably four or five analysts that are working and working with the department so that we can make sure that there's more accountability and more visibility. We have hired this treasurer who was formally with Stryker and -- Zimmer, excuse me, but anyway, I think we met with the Board as I mentioned early in the call this weekend and we started going through the functions and the help, and I think the big changes here are that we have I think this is Bernard's model. He's been able to go out and build this.

We will have better accounting, we will better visibility, more help for the staff, more and an ability -- this is a complex business. You take a look at the currencies in Australia. One of the interesting parts, if you take a look at these margins and I talked about some of our products we are getting as much is 50% or 75% more, this is when you've seen the Australian dollar decrease by 30%. And we're still getting those. If we get back to some level in the future, so I think we have a lot of --most of the downside coverage has been already -- is already built into that, and there's opportunities in the future as we see oil prices improve and other commodity issues over time.

I'm not looking for any big bounce but I think that the numbers we are giving you are numbers on the currency side that are kind of -- where I think where they're pretty well going to be leveled out. I could be wrong on that. We've modeled it 110, and then everything else we converted.

But now we've got a treasurer here to help and take on this responsibility that knows how to hedge, By the way, I want to make sure everybody understands. This is not speculation. We are not speculating on markets. It's what we are doing is we're hedging essentially the revenues that we have in the receivables and that sort of thing.

It's just that hedging strategy so it will be risk management more than actively hedging on currency.

We are not in the currency business. The point is, the question was on the leverage on SG&A, and I think as the business is more complicated, what we are trying to do is to make sure that we do a better job of understanding and managing the risk of the business. We've hired people in this department to do so, and we haven't hired anybody by the way in accounting. These guys tried to do it all. They did a good job but we think there is more that can be done, particularly down at the division and down at the department level.

Last quick one, free cash flow generation. I'm assuming mostly used for debt paydown over the next 12 months, is that the likely --?

Yes, that's correct.

Thanks. I really appreciate it.

Thanks, Mike. I think we generated -- no one asked about this, but they used to ask about it before. Now that we're going, nobody asked any questions. Maybe if we generated almost $70 million in operating cash flow last year. That's pretty significant improvement.

Again, a lot of good questions and we appreciate them. Operator, we'll come back to you and see if there's anybody else with any further questions.

Marco Rodriguez, Stonegate capital.

Good afternoon, guys. I finally got in there.

We're delighted to have you. Thank you.

Most of my questions have actually been asked and well answered. Just one real quick follow-up. Do you guys have a handle on where D&A is going to be coming out in 2016 with the Cryo acquisition?

Did you say G&A?

No, depreciation and amortization.

We are still working through that. We have some valuations to do and that will be completed before the end of the quarter.

But the aggregate is built into our numbers. On the depreciation and amortization.

We've got estimates in there but we need to --.

We have to go to a third-party to get those. It has to do with goodwill. It has to do with intellectual property. It has to do with developed technology, and all that sort of stuff. So I don't think it is confidential information and if we can share that with you once the valuation comes out, we'll be more than happy to do that, Marco.

Got you. Appreciate that. Maybe I missed this then, did you guys update the EBITDA guidance for 2016?

We haven't issued that.

Okay. All right, very good. Appreciate it, guys

Thanks Marco.

There are no further questions at this time.

Ladies and gentlemen, we summarized, as I mentioned in my earlier comments, we hit our top line and our bottom line for last year. We missed some things in the middle and it's not a science, it's an art but I think we accomplished and made a lot of progress. I think we've restructured the business in terms of our accounting department and the accountability part of our business.

We've restructured our compensation so that our sales force, management, everybody is compensated on the first and aligns all those into revenues, gross margins, and ASPs. We have plenty of products to sell, and we've already seen with the microcatheter, we're seeing it with our balloons, and so it's not just anecdotal or hope. We're seeing that already.

Then on top of that you add what we think is a great tuck-in acquisition, but something that has a lot more implications for the long run. When we bought our snare business several years ago, it was a really nice business, a very profitable business, but it wasn't a business segment per se.

I think with this, along with our other vascular products, it's kind of a -- is a very, very big deal and that we expect a lot out of it and we're looking forward, and it's manageable. We've proven for years and years that these tuck-ins are very digestible for us, and I think it's been probably one of the things we've done best.

So top line, we expect a good year. The gross margin part is again the area that we think that we can get the most leverage on. And then but the business is changing and so yes, we're not going to get a lot of leverage on the SG&A side because of clinical specialists and launching these products and training them.

So that being said, it all comes down to top line and bottom line and sustainability, and we have that. Now, I hope you will give us credit for that. I hope we may have some of you that might think, well I don't know if they can do this or do that. If you go back and look at our top line, we've been very, very consistent and almost always correct. Very seldom have we missed the top line for the year in our history.

The issue has always been the management of the expenses and the gross margins. And I think we've structured the business and the visibility and the incentives to make sure that we get that.

The staff is sitting here. Each one of them is accountable. Each one is accountable monthly to their P&L and how it fits into the overall plan, and we have the horses to be able to help them to assist, to review, and to get the results that we expect to get the kinds of returns that we expect, and that you expect.

We got beat up a little bit today. I don't know quite where that came from. I don't know what you guys will think about this, but I will tell you we are optimistic about our business. We are optimistic about this acquisition. We are very excited about the new products and the margins.

All of these new products subject to not the acquisitions because we have those additional expenses, but we believe over the intermediate term, when I say intermediate, this year, on the second half in the next year, that our profits or gross margins on the HeRO business will improve. We expect in our margins on our microcatheters, our centesis catheters, our Elation balloons, our Touch 40, a lot of these products their rolling out have above average corporate gross margins.

So, there you go. That's where we've been, and that's where we're going. We hope you come along with us. We look forward to it.

We thank you for your interest, and Bernard and I will be here for the next hour or two to answer any of the questions that we can. Thank you again, and we'll go ahead and sign off from Salt Lake City, snowy Salt Lake City with almost 400 inches at Snowbird and hoping you come to see us soon. Good evening.

Ladies and gentlemen, thank you participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.