Merit Medical Systems Inc (MMSI) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Merit Medical Systems first-quarter 2016 conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to hand the conference over to Fred Lampropoulos, Chairman and Chief Executive Officer. Please go ahead.

Thank you, and good afternoon, ladies and gentlemen. This is Fred Lampropoulos, broadcasting from our facilities in South Jordan, Utah. And we would like to thank you for joining us, taking the time to visit with us on what I know is a very, very busy reporting day.

The first thing I would like to do is to have Brian Lloyd, our Chief Legal Officer, read our Safe Harbor provision. Brian?

During our discussion today, reference may be made to projections, anticipated events, and other information which is not purely historical. Statements made during this call which are not purely historical, including statements regarding our operating or financial results or our prospective transactions, are forward-looking statements and are subject to risks and uncertainties, such as those described in our annual report on Form 10-K and other filings with the Securities and Exchange Commission.

We caution you that our actual results will likely differ and may differ materially from our anticipated results. Forward-looking statements are subject to change and are not intended to be relied upon as predictions of future operating results. Any forward-looking statements made during this call are made only as of today's date and we do not assume any obligation to update any such statement.

Although our financial statements are prepared in accordance with accounting principles which are generally accepted in the United States, our management believes that certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of our ongoing operations and can be useful for period-over-period comparisons of such operations. The reconciling table included in our press release and discussed on this call sets forth supplemental financial data and corresponding reconciliations to GAAP financial statements.

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

Thanks, Brian.

Ladies and gentlemen, we are delighted that you have taken the time, and I would like to review with you some highlights of our first quarter.

A few reminders before we start. As all of you know, our first quarter is somewhat unique. That comes from the fact that we usually start out a little bit slower because of our shutdown in Christmas and the way we account for earned credits of production. This has been something that we have talked about many, many times before, but just as a reminder.

We also have a couple of other issues that are important for you to keep in mind, and that is because of the acquisition of the HeRO Graft, there are some expenses in the first quarter that have to do with the markup of inventory, as well as other expenses associated with the transaction. And in a few moments, Bernard Birkett will go over those particular issues in more detail.

Let's talk about revenues. Revenues for the first quarter were just over $138 million, and on a constant-currency basis, they were $140 million. Again, like all medical device companies, it always starts out a little bit slow as people get back -- physicians get back from vacations and procedures start. That being said, revenues grew at 6.6%, and 8% on a constant-currency basis.

There was a little bit of a takeaway. That would be because of the HeRO growth, and if we take that out, we would be at 5.6%, and 7% on a constant-currency basis, well in line with our estimates on how we view the business, with, of course, acceleration as we go through the year. We still believe that the Company will grow at a level of about 8% organically and then the benefits of our HeRO Graft of around 150 basis points, give or take.

Let me just weigh in a little bit on the HeRO Graft and give you some information there because I think it's important. We have now transferred a portion of the manufacturing to our facility in South Jordan. It is always amazing to me to see the great efforts of our engineers and our management team here and the efforts to get it here.

So we closed the first week of February, and here it is, about the third -- almost the end of April and we're actually producing product here on our campus. We had some people spend over a month away from home to be involved in that process. A few more words about the HeRO in just a moment.

Now on an earnings-per-share basis, on a non-GAAP basis, earnings were $0.19 a share, compared to $0.18 for the same period a year ago. And again, I will have Bernard go through this, the SG&A and expense, in just a moment.

Let me talk to you a little bit about what I think are some of the very exciting things that we are doing here at Merit. There are a lot of things going on and I would like to address some of those for you right now.

Now, we have talked about the HeRO Graft, and I should say that our sales are exceeding our forecasted projections, but then again it has only been for about 60 days or so that we have been selling the product. But I would say that our initial feelings about the transaction is that it has met every criteria that we had expected and more.

We are very excited about the future. We are excited about some of the global opportunities in other countries that we can be licensed in in the future, so all in all we expect and I'm happy to report that this transaction has started right out of the gates to be one that is very, very successful.

Let me talk to you about a recent approval that we had from the FDA, and that is for our Corvocet Biopsy System. We think that this is one of the great product opportunities that Merit has ever had. It is Merit's first entry into the biopsy business, but for those physicians who have looked at the product that we recently introduced at the SIR meeting in Vancouver, the response was overwhelming. And so in just a month or so, we will have a full rollout of the product.

We have also just introduced the One-Step product line. We have had this product for many years, but we have added some new safety features, some new sizes, a new pigtail, so we're excited about the opportunities there.

Now one of the big surprises for this year has been Australia. Now, Australia is a long ways away and it has a lot of challenges. But we were able to reach our first-quarter sales forecast by the 27th day of February, so we're very excited about both what this will mean in the future to margins. My understanding is that we are already profitable there, and so we think that there is going to be great opportunity in Australia.

And as I have always said in the past, we are always very excited about having the opportunity to be direct, to be close to the physicians, to the technicians and supervisors that use our products. Those are where ideas come from. Those are where we get opportunities to sell deep into the bag.

We have also just opened our Canadian office. I just returned this very day, as we're speaking, from our new facility in Toronto, and we have five sales reps in Toronto spread across Canada, and the same thing is going to happen here as happened in Australia. We're already ahead of forecast and we will continue to be that way. There are several reasons for that and I will discuss that with you in just a moment.

And then, another issue is our Mexico facility. Now as you all know, this was something that Merit needed to do, to both have a low-cost center, but maybe more importantly, as I have said, is to have the availability of labor. And in the United States -- or better yet in Utah, with a 3.4% unemployment rate, there is a challenge having this facility and now almost 500 employees.

And let me go back and refresh your memories that we took a building, built it from scratch, hired a management team. We now have those 500 employees that have all had to be trained and we had transferred almost 12 product lines. And we have now reached that point where each month, after this first quarter, will be incrementally more profitable and will add some gross margins and get us to that goal that we discussed in the past of 100 to 150 basis points of gross margin by the end of 2017.

Now another issue has come up that I think is important to talk about. I addressed it a little bit in the comments, but let me just shed a little light on it, and that is the difficulties that one of our competitors, a noble competitor, has had lately regarding a recall. This has created an unprecedented opportunity for Merit. In order to meet the demand, we are running both our molding and our extrusion and our assembly 60 hours a week and we expect that this is going to go on for several months.

Now it is -- again, I hate to have the opportunity to benefit from somebody's misfortune, but at the same time there are patients who have to be served, physicians who have to treat, and Merit is doing everything we can to help to step in and fill in this huge void. It also creates other opportunities for us to sell other products.

So, we will tell you the numbers after we have the second quarter, and realizing we have only been into this a couple of weeks. I mean, if I said it wasn't overwhelming, I wouldn't be saying the truth. It has been consuming. As you can imagine, when you go from 40 to 60 hours a week for all of our employees that are working on these product lines, and they include our diagnostic catheters, our nonvascular access kits like the MAK-NV, our vessel sizing catheters, and other products that are part of this, and we are ramping all of those up as we speak.

So in 90 days or so, we will then give you the results of this. We think this is again going to be something that is going to take a bit of time and certainly the Company will benefit from this.

So, I think I have given you the highlights of the opportunities here and I think I will turn some time over now to Bernard, and Bernard, why don't you give us some more of your insights to the financial performance?

Thank you, Fred.

On gross margin on a non-GAAP basis, we achieved 45.9% in Q1, compared to 44.9% for Q1 2015. Two main drivers behind the margin expansion are the changes in the medical device tax, and also on the sales of product and geographic mix that we have seen in the first quarter of this year.

From an SG&A perspective on a non-GAAP basis, we did 28.2% of revenues for Q1, compared to 27.5% for the same period in 2015. On an R&D, including clinical and regulatory costs, we achieved 7.7% of revenues for Q1, compared to 7.5% for the same period in 2015.

Bernard, I am going to ask you a question before the other folks get a chance, but we talked about our three-year plan almost a year ago, and we laid out and were successful in completing the first year. We have talked to our shareholders about our belief of our ability to complete both on the revenue side and the earnings side. Do you want to just comment on your thoughts on that, not just mine?

The performance in Q1 has reflected our belief that we will achieve the three-year plan. We have had strong sales growth of 8% on a constant-currency basis, which obviously included HeRO, but that's close to where we would have expected it to be, and also on the earnings side, where we exceeded the earnings that we achieved in Q1 2015 has given us a strong start to the year and bodes well for the rest of the year.

Do you know -- as we were sitting here and talking about the products, another thought came to me that I think you will be very interested in. We introduced this new product called the SwiftNINJA. It is a steerable microcatheter, and to my knowledge, it is the only one of its type in the world and it is a deal that we did with Sumitomo.

We are continuing to see in Europe, where it is approved, extraordinary acceptance. I would say it is exceeding my expectations. We expect to file our FDA application in May and we hope at sometime in the late summer, early fall we will have that approval.

It is an exciting product. It helps you to go places that you just simply can't go with a standard catheter. I will talk more about that as our registration becomes closer to completion. But, again, it's a very, very exciting product for Merit, and as we went to the SIR Show, I have people today that are over at the Charing Cross meeting. We just went to the ECIO over in Europe, and this is all people can talk about.

So, again, we will look forward to having more discussion about this product in the future.

Ladies and gentlemen, I hope that you feel what we feel, and that is optimism, opportunity to grow the business and create shareholder value. That is our goal; that's our job. And I just want you to know that we are giving all of our efforts to that end.

With that being said, I think it is time to open up the line, so we will turn the time back over to our operator and we will go ahead and take calls, and in advance I will thank you for your time and participation. Ma'am?

(Operator Instructions). Jayson Bedford, Raymond James.

Just a couple quick ones. I thought it was pretty clean here. And I realize you don't want to go into detail around the disruption from the competitor, but is this something that is large enough that would cause you to alter your guidance at some point?

I think, Jayson, one of the reasons we decided to comment later on is that we want to be able to have at least three months under our belt.

But we are buying more equipment. I discussed the issue regarding the work hours. Let me tell you that this is global. In the 35 years I have been in the industry, I have never seen anything like this. It is so unfortunate for a great company. It is going to be, I think, a long time.

Once you start pulling product, you have to get, of course, requalified, and I don't want to speak on behalf of Cook, nor would it be appropriate, but it is going to be long and it is going to be deep and it is going to create a great opportunity for Merit.

Now, after this quarter, we will see where we are. We will see what we are able to deliver, and then we will take a look at it and we will comment when and if it's appropriate to do so. We just didn't think it was -- it is just too early at this point.

But, it is deep. It covers many products that Merit has. We mentioned the MAK-NV, so this is a device that you use to gain access to the liver. It is hydrophilic catheters. It is marker band catheters that are used by vascular surgeons and cardiologists, and then it is all of the various products used across the field of interventional radiology. So it is massive, is the best --

And one other thing, too. In terms of Merit, we are very well prepared to deal with this. Part of that is because we're fully vertically integrated. We do our own braiding. We do our own extrusion. We do the whole catheter. And so, that gives us a huge advantage.

Okay.

So, yes, it's a big deal.

Okay. On the quarter, Inflation Devices I think were down year over year. I think you mentioned an OEM reduction and a drawdown of large distributors. Are you expecting a replenishment at some point over the next couple quarters, and any way to quantify the year-over-year impact there?

I think there are a couple of issues. One of them, of course, is Kyphon. The sales were down there and that's something that always skews the business, as you know from the past.

I think a lot of the other part of it has been the international distributors over in the Middle East -- really, across the world. So I think wherever you have had the currency issues and the strength of the dollar and the difference there with the oil prices and those sorts of things, I think that is where we are seeing that.

Now that being said, we have a new device that we will be introducing in the very near future, the [floating] atmosphere device. And I think just being out there with a number of these issues in the peripheral side of the market, the basics touch hits that market, and so that's one of the things that happens when you get the benefit of being in front of these customers.

And I should say one more thing, too, and this again relates to the Cook situation. We are getting to hospitals. We are on all the national accounts, all of the IDNs. We have access, but there are some places that are solely this company or they're that company. This kind of breaks down those walls.

And I think the thing that has been so interesting about this is how much people appreciate what we are doing. We are working weekends. We're working nights. We are doing all of these things to meet these customer needs, and customers appreciate it. And that's nice that someone appreciates the effort. It is not just get a catheter out there. It is the work that we are doing to help the physicians do their job.

Think about taking all of these products off globally. It is a huge disruption.

So, back to the question, I think that we will see -- particularly as you introduce these other interventional radiology products. The Corvocet is right in there. You have got some new guide wire products, you have got these -- so my expectation is that we will see that recover. Mostly, though, we will see the increase coming from the direct hospital sales.

What's tough on the dealers is it is tough times. It is tough to get dollars. It is tough to do this, so I think that's going to continue to be soft, but I think on the direct side -- and that's why Canada and why these -- and Australia and I should mention we have started in Japan. That's going to be a much slower process over several years, but we are now planning to go direct in Japan in the next three or four years. But we are just laying the foundation to do that.

That's a long answer, but I hope that answers your question.

No, it does. I guess just lastly for me, I apologize, it may be in the PowerPoint, Bernard. But the US-OUS mix in the quarter, and I think it looked like it was -- the growth was double digit for both, I believe, if you back out the OEM.

In the US, the total growth was about 8.5% year on year. That's including OEM. Excluding OEM, yes, it would have been double-digit growth.

OUS, we fell 3.2% on a reported basis and 7% on a constant-currency basis. So all of the markets essentially -- in total, it's growing. Obviously, there is a slight drop in OEM, and in OEM, that relates specifically to the customer on the Inflation Device sales. So those two are linked.

All right, thanks. I will jump back in queue.

Jim Sidoti, Sidoti & Company.

Just a couple more on the recall. Is this something that you think is just a one- or two-quarter thing or how long do you think it will last?

It's a really good question and it's difficult to answer it, though, Jim. I think it could be one or two years; it could be a couple of quarters.

I think maybe another part of the question or an answer might be, how much of the stuff that we are selling right now will stick? And is this just a passing? I think we're going to be able to keep a good portion. Unfortunately, some people have been having troubles, but it is not just now. They have been having them for the last year or two, and I think these are great opportunities, particularly when we start talking about the biopsy. We start talking about the SwiftNINJA steerable microcatheter. These are the very same customers.

And so, I think you get a shot at other products. If we do the job and deliver it, that's why we are -- we are bringing the oil out here. If you're in the area, folks, come on by. We are here. The whole staff is sitting here and they will be back out there. And I don't want to be flip about it, but I'm just saying I think it is going to be a lot longer. Is it five years? No. Is it a year? It most likely will be at least that, in my opinion. That is just my own personal opinion.

And is it primarily in the United States or is this an international phenomenon as well?

It is international, Jim. Again, one of the issues that Merit benefits is if you look at Australia and Canada, where we have just started these direct operations in Australia on January 1 and in Canada on April 1, the ability to go in there with 10 or 12 new salespeople and have them to be able to solve the problem for somebody and then to transfer the existing business from wholesale to retail, in many cases these improvements are somewhere around 30% to 50% improvement in pricing, which is going to help us in our gross margins.

But we are seeing -- listen, I had a string of emails out of Japan last night. We're getting calls from countries, not just from distributors or hospitals, but it's that big of a deal. So we are seeing it across the planet.

Right, and so it sounds like you are buying equipment. You are working all the time. What other things do you need to do to respond to this?

I think -- we are not -- on the equipment, we are buying some additional braiders and some additional equipment, but we already had a lot of capacity in place because of our new facilities and that sort of thing.

I think what we have to do -- the real issue comes down to how do you allocate this fairly. How do you do those sorts of things? Because everybody wants the product, and so it is the business side of being fair.

And it is also not working your people to death. 60 hours a week is a lot; it is a lot of hours, Jim.

So I think we have to be wise. We will be making a trip down to Texas next week, the management team will. It is just managing a crisis like this and an opportunity like this using good judgment. And we have been through these things -- we have had these opportunities before, but I have never in 35 years, as I mentioned, ever seen anything quite like this.

So, we have the facilities that we've built. Remember, we spent a lot of money to put capacity in place, so this involves molding in Salt Lake City. This involves a lot in Pearland, Texas, and when this started out, we had all those rains and those flooding down in Houston last week, and despite that, people still came to work and I think it speaks something to -- probably you guys don't want to hear about the quality of the building, but we had no problems with the facilities or with water and we just kept right on going.

So, we will -- again, we will give you a full report and we will be able to see better where this thing is going after we get a full quarter behind our belts. But it is going to be -- and then, we still have to do everything else. And I think one of the things that we have talked to our sales force about is to make sure that we meet customer needs, but that we sell all of our other bags as well.

And so, our sales force is -- they are out there, and not only that, but our management team. So, I have got people like Monroe May and I have got people like Joe Wright and I have got all these guys. We're out in the field. We are out there as a management team along with the troops and our country managers. We have got the troops out there, and like I said, I don't revel in anybody's misfortune, but it is actually kind of fun.

All right. There was another recall during the quarter. Boston Sci had a recall of the Fetch catheter. Is that material to your business?

I wouldn't say it's material, but have we opened accounts and, on our Aspiration catheters, did we get some of that business? The answer is yes. There was another one by another company. Did we get business from that? Yes.

One of the other things, Jim, I have tried to sit down and look at the staff, and another thing we have done, we have deployed engineering teams and had a lot of conversation about looking at the problems that others are having and make sure that we are not strutting around, that we are looking at our own processes, our own limitations, and that sort of thing.

So I think we're trying to be insightful and humble at the same time in looking at the issues, because every company goes through this at one time or another and in one form or another. So we're trying to keep just good senses about us and stay humble and make sure that our processes are in line.

Right. And then, if you were just looking at your results for the quarter, if you don't consider these recalls for the time being, would you say you are on track to hit the guidance that you put out in February?

Yes, yes. We just discussed that earlier, Jim, but the answer is we want to reaffirm we have -- we have a little bit higher on the SG&A kind of stuff, little things in the first quarter, but we always have that. It has to do with a lot of things like FICA and all these issues.

But we believe that the numbers that we have published in terms of our growth and our earnings capability are things that we are all committed to doing here at Merit, controlling those expenses and, again, we may have, again, because of this and our new products, other opportunities that we will talk to you about as they develop.

All right, thank you.

Mike Petusky, Barrington Research.

Thanks for taking the questions. Do you guys have by month in the first quarter the sales comparisons? I guess what I'm trying to get to is, did the quarter get stronger in terms of sales comparisons as you went from January to March, because it seems like you are alluding to the year got off to a very slow start? Do you guys have that data, by any chance?

We have it. We don't discuss it generally, but I think your statement is fair.

And let me give a little background on it. You come off the holiday. There is a couple of things that affect us on the margin side because of, as I mentioned, how we account for production and how that affects margins and that sort of thing. But it is always a little bit slower.

Everybody doesn't come back to work and not everybody rushes into the hospital. Usually people -- and I have seen this in my own family, by the way. You get the holidays over, you want to take a week or 10 days. If you have to have something done, short of something that is acute, you go get it done at that point, and so that's been the history of what we have always seen as it starts out. It starts to warm up. You get to March, it heats up. And I think this is fair. I think, though, we had a higher first-quarter revenues than fourth. Yes, that's unprecedented, actually. We have always -- we have never had that before, I don't believe. Is that a fair statement?

We did back before 2012, but since in the last number of years, the fourth quarter would have been higher than the first quarter of the following year. But this year, we were on par.

And we are where we need to be, based on what we would have forecasted. We are still committed to the guidance that we gave at the beginning of year. We are on track, so I don't think we need to adjust any of those numbers or really comment any further on it.

Yes, but again the bottom line, Mike, is it did accelerate during the quarter and we expect it is going to continue to accelerate.

Okay. So can I ask, then, it seems like you guys do have some work to do on gross margin to get where you guys want it to be for the full year, given the start. I guess I would have expected gross margin, given the suspension of the device tax, to have actually sequentially improved on a reported basis, and it doesn't appear to have done that. Can you guys comment on that?

Yes, let me explain to you a little bit. So in the -- Merit accounts for production when the product goes to the sterilizer.

So you bring people back from the holidays, and as you'll recall, we shut down between Christmas and New Year's. And then you crank everything back up and you start building product and you get product that starts to go probably in the second week of January, and it ramps from that point. We don't take credit for product until it goes to the sterilizer and comes back and put it into inventory.

So, it is something that we, again, talk about quite often, but listen, I want to go back to what Bernard said, and that is we expect to hit our revenues, our gross margins, and our bottom line. That's our expectation and that's what we are reaffirming today.

And when we gave guidance, we said that the margin improvement would happen throughout the year, so it wasn't all going to come in the first quarter. And it has improved by 1% on a non-GAAP basis Q1 2015 to Q1 2016 and that is in line with our expectations, and we expect that margin expansion to continue throughout the year.

And let me put a little more color on it, too. As we mentioned earlier in our comments, the facility in Mexico has now reached that breakeven point. Since the end -- we have transferred additional products down there and Mexico is a recipient of some of the opportunity because of this disruption in the marketplace.

So, we're going to be able to apply overheads, and those are going to cover and create opportunities in terms of gross margins and that sort of thing. So, again, we are not -- we are not dismayed at all, in any way. In fact, I would say we would be quite to the contrary.

Okay, let me just ask one question around the money being spent, and I didn't get a sense of how much is being spent to respond and position yourselves on this Cook recall. Is that likely to impact in any way in the second-quarter margins, the money you are spending, given that probably the revenue doesn't flow -- maybe you don't get the full impact of the revenue associated with what you're spending. I don't know what you are spending, though. Can you just comment on that?

The only thing that we are spending is we have just purchased some additional braiders and some things like -- talking about maybe $0.25 million worth of expense for braiders or something like that. The rest of it is stuff that is already in place, so we already have extruders and braiders and equipment and fusers and all these things.

That is capital expenditure, so obviously it gets depreciated over time, so you're not going to get that hit straight to your cost of goods sold. So it is not going to affect margin straight away.

Yes, yes. So we are not paying for shipping. We are doing some overtime, but the additional volume applied to that overhead will more than cover the cost and create, we think, opportunities that we will talk about on this call in about 90 days.

But we are not having to go out and spend huge sums of money or bring trucks in or do all this net. This is what we spent this money on, Mike, over the last three or four years, putting capacity in place. And I think we are uniquely positioned. There are some of our competitors that will also benefit from this, but they are not vertically integrated like Merit is good. So I think we have a huge advantage in terms of our ability to respond to customers. Clearly, we have that advantage. So, I think that -- I hope that answers your question.

It does. You have a tough comp in the second quarter. Do you guys have any hope that you guys can actually show a positive comparison in terms of adjusted EPS? You had a very good second quarter last year.

Yes, that's -- do you want to comment on that? I guess --

No, we are not (multiple speakers)

I got my lawyer -- we don't give guidance, but again, Mike, I know that -- and I wish I could do that, but we just don't do that. Again, I guess the best thing for me to say, we have said it over and over, we will meet our year. We'll meet everything. All those expectations that we put out there, we will meet, period.

Okay. All right, thanks, Fred. I appreciate it. Thank you.

Thank you and that concludes our question-and-answer session for today. I would like to turn the conference back over to Merit management for any additional comments.

Ladies and gentlemen, thank you very much for taking the time. Again, a busy day. Now we spent a lot of time today talking about disruption. Please keep in mind things like the SwiftNINJA, keep in mind the other new products that Merit has, and the geographic expansion that helps us to get higher sales prices and higher gross margins.

There are a lot of very, very positive things going on in the Company. There is going to be a lot to talk about in the next quarter and we are looking forward to that, so stay tuned. Thank you for your attendance and good night from Salt Lake City.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.