Merit Medical Systems Inc (MMSI) 2016 Q4 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Merit Medical Systems, Incorporated fourth-quarter and year-end 2016 conference call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would like to introduce your first speaker for today, Chairman and CEO, Fred Lampropoulos. You have the floor, sir.

Good afternoon, ladies and gentlemen. And, thank you for taking the time to join us. We have a lot to talk about today, so we will start our meeting today by having Brent McDonald, one of our staff lawyers, read our Safe Harbor provision. Brent?

Thank you, Fred. During our discussion today, reference may be made to projections, anticipated events, or other information which is not purely historical. Statements made on this call which are not purely historical, including statements regarding our operating or financial results; prospective or completed transactions; governmental or regulatory matters, including investigations or proceedings, are forward-looking statements and are subject to risks and uncertainty, 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 obligations to update any such statements.

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 operation, and can be useful for period-over-period comparisons of such operations. The reconciling table included in our release, and discussed on this call, sets forth supplemental financial data and corresponding reconciliations of GAAP financial statements.

Readers 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 may affect net income. Furthermore, these calculations may not be comparable with similarly titled measures of other companies.

Okay, Brent. Thank you very much. That is a lot of stuff to read.

As I mentioned, we have a lot to cover today. I would like to do it in this order, I'm going to talk about the quarter, I'm going to talk about the year, I'm going to talk about the recent acquisitions, and then I'm going to talk about our guidance. So, let me start by talking about the quarter.

As you see from our press release, our revenues were $157.7 million. That would be about $159 million on a constant currency basis. We were a little bit short. Now, we're not normally short, and I want to just go right on the record from the very beginning saying this is not of concern to me, and we hope it is not to you. The reason is, is we were so busy in these acquisitions and a lot of work being done, and there were three specific areas that lowered that sales number.

We have an FX effect, and Bernard will talk about this in a moment. We had a bit of a decline in the Cook business, and the DFINE business, which we reorganized and restructured, and let a lot of people go, as you are all aware. Even though that is all complete, I think it affected some revenues in that particular area.

Again, without spending too much time on it, with the new products and the momentum of the business, I am still satisfied. But, what I would like Bernard to do, is just to take a second and go over more of the highlights including the core business, some of the other data, as it pertains to the quarter. Bernard?

On the revenue side, as Fred has just commented, we hit $157.7 million, $159 million on a constant currency basis, and the growth rate in the quarter, based on those numbers are14%, 14.9% on a constant currency basis, and organic growth is 7.9%.

So again, for us that is very strong growth in the quarter, and again a little bit shy of consensus, but we are confident that we can continue to grow through 2017. And again, that those growth rates are very strong.

Thank you for that commentary, and now let me move to the earnings side and the gross margins. You can see the gross margins improvement, which we're very pleased about, and that is five consecutive quarters of gross margin improvement.

In addition, you will see that the bottom line, the earnings per share on a non-GAAP basis were $0.31 and I believe that is ahead of -- we beat the numbers. Bernard, go ahead and comment on those.

On a GAAP -- sorry, on a non-GAAP basis, it was $0.31 compared to $0.24 in Q4 2015, an increase of 28% on the earnings line. Again, there's a number of factors driving that number. One is the strong revenue growth that we have seen. Strong margin improvement growth, driven by a number of factors. Again, by bringing on DFINE and HeRO which were higher-margin products, that helped our margin profile. The medical device tax was a component of that.

And we've also seen strong production efficiencies, and coming from our operations group which filters through in the fourth quarter to help support that gross margin number of 48.4%. Again, very strong on that area of the business, and we continue to lever the income statement, as we see our OpEx number come in at 34.1% for the quarter, the percentage of sales, versus 34.9% in the comparable quarter of 2015.

And, that is in line with what we would have forecast and we have held our R&D expense to where we had targeted for the year. Our SG&A expense was a little bit lower than where we had targeted for the quarter, and I think [200] basis points off on where we had forecast for the year. Again, a lot of control on that OpEx line, gross margin growth, and that has filtered down into our earnings number.

The bottom line in terms of the year in the quarter, if we combine those and discuss those, is we hit everyone of our parameters. We hit our sales number in our range, we had our gross margins in our range, and we also hit our earnings in the range that we had discussed for the year. I think we're pleased with that.

I think the exciting part, of course, is the momentum we see as we move forward, and I will move on to that in just a moment. That is the overview, and of course we will answer questions about that a little bit later on.

Let me move on to the acquisitions. It is interesting, and we appreciate your patience with us, because we wanted to talk about all of these things in one call so that we could talk about our forecast for next year. But, the Argon business is something that I've actually tried to buy five different times. And, it was too expensive, there were too many issues and those sorts of things. At this particular point, though, we own it. And, we were able to buy for $10 million.

This is a business that we're attributing about $35 million of revenue to -- $35 million, $36 million, and we're giving ourselves a little bit of room there to make sure, because they are unaudited at this point, that how that will all fit in and we'll talk about how it fits in for the year. We have some unique advantages, and a reminder that Merit is in the transducer business, in a big way.

We produce over 1 million pressure transducers a year. We also make all of our pressure sensors, all of which will be consolidated into the production of these products. Another thing is -- that is does, that I think is exciting for us as you start taking a look at operational leverage, is the ability that we have of adding 2 million additional blood pressure transducers, but it's also stopcocks, pressure tubing, and also includes drip chambers, all of the things that we either source or that we make.

I think maybe the most important issue here is, what it means in terms of the value proposition. More and more, as you all know, our companies need to have the ability to bundle, be able to go to that C Suite, and talk about what they bring to the party. And, we know our competitors, Boston Medtronics, Cardinal, and others use those techniques and tools to build their businesses. Well, Merit is broadening that base.

And, the other thing that I think is interesting about this is, the primary business is located in Japan and Europe. Now, why is Japan important? We're in the process, and have just recently come to an agreement, where over the next couple of years, we will be transitioning from a single distributor to a more of a Chinese model that we have used in our business, which has growing that business substantially. And as you all know, China and Southeast Asia is our fastest-growing.

But, Japan has been lingering, and part of that is because there was some conflict in the various channels. For instance, our distributor has a biopsy device, we have one. Our distributor has this, and we have that.

And so, we just believe that this will be the best situation for Merit, and we are in that process. It will take a little over year to transition all of that business, but essentially what it does, is it takes and it doubles the revenue, because we're going to take, essentially, the middleman out.

We will own all of the licenses, and we think we can grow Japan substantially with our new products. That was part of the strategy, as well as the business and the other half of it, which is in Europe. Very little in the United States.

Let me just tease you a little bit. At one time, this particular business, before they got in the patent suit many years ago with Edwards, which is now -- those patents have expired, and they can come back in the states, and was doing over $100 million a year, just in the United States.

It's a business I grew up in. It's a business that I am very familiar with. And then, we also now are going to combine those businesses with other Merit products that we have, that fit very nicely as well as the Catheter Connections. So, let me go there and talk to you about that.

A majority of our purchase price for this transition was for Catheter Connections, a company based here in Salt Lake City. Catheter Connections is essentially a virtual company, in that they didn't do any manufacturing, they're molding was outsourced, the production was outsourced, and Merit, of course, has all of those capabilities to produce. And we're going to still use an outside vendor for part of that, but we're moving all of the molds in-house.

We believe that this business will improve almost 60% this year, and we think it has a very, very dynamic growth opportunity. Some of the accounts that we have in this antiseptic cap business, which really deals with hospital acquired infections, but before I go into the accounts, let me just add another little tidbit. Sometimes people say, well, this is just associated with the ACA, and the ACA is going away.

I do not know what is going to happen to the ACA, and neither does anybody on this call today. We all have ideas and thoughts and the administration has plans. But, to date, none of us really know what that is going to be.

But, whether there is the ACA or any other plan, there will still the issues of patient care and infections that cost hospitals and patients a lot. This is something that everybody has become more aware of, more and more all the time. We have places that we have recently opened, like the Mayo Clinic, which is now just coming on board.

We have facilities like the Yale University System. We have Tufts University, and the BayCare system down in Florida, including Tampa General. The Saint Jude Children's Hospital, and of course, the Intermountain Healthcare here in Salt Lake City, is, what, the largest account for these products.

But Catheter Connections did not have, essentially, a sales force. They used a master distributor. So this is going to go into Merit's sales bag, along with these other products in our Cardiac Division. And, this is going to see substantial growth and improvements in gross margin because we have the opportunity to produce this product, and produce it in greater volume.

We're very excited about this. There is some international business, but again, they simply did not have the footprint that Merit has. We think that these products are going to enhance our business, we think they're going to allow us to be more productive, and we believe that all of this adds to that value proposition of the business. Bernard, I'm going to let you, if you have any comments on these particular transactions, if you'd like to step in.

The transactions fit directly into our CI business, and we've already got the infrastructure in place to be able to capitalize on these investments, and to grow them in the way that we have forecasted out, particularly over the next one to five years. We see a lot of opportunity there to grow this business.

In year one, there will be some consolidation, some reorganization to be done, but again what we see, it is a great growth opportunity for us. And, it actually fits in with everything else. So, from a strategic point of view, it is a really good fit for us.

Okay, Bernard, thank you. Let's move on to the future. I think there will be other questions on the past, and will be able to answer those in a few moments. But, let's move on to the future.

As I said, the fourth quarter was more of an anomaly than anything else, and that we have, I think, a great expectation for growth as we go into next year. Let's talk about what is going to drive that growth. We now have a full line of Elation balloons. We have the gastric and the GI side, and then the pulmonary balloons.

I am very excited about what is going on on the pulmonary balloons. First of all, we get about a 30% premium over a GI balloon. And we have opened numerous accounts. They have reordered. This is a very excited area, particularly, in the Aero side of the business, because that is the biggest part of our GI business.

We are the leaders in pulmonary stents. And, these go right along with that. And then you take the others, and we now have this full basket, these full complement of products, and we are having a lot of success. And, that division, again, will see substantial growth.

The CorVocet biopsy device was just released, and I think you all know about my feelings about that device, and the opportunity for Merit. We start talking about some of the new radial products. A new EASE, PreludeEASE, is coming and it has in fact been released.

And one of the products you're going to be hearing a lot about. It was a little bit of a sleeper, we have not talked much before but the PreludeSYNC. It is a compression device used, but there's some really unique things about it, and in our slide deck if you will look at that, you will see something that is almost Apple-ish. And by that I mean, there's some great marketing and some great ideas in this, that our customers have responded to very, very -- very much so. And we're very excited about what that means.

We have at least two new guidewires, and these are advanced interventional guidewires. These are the Amplatz guidewires, and a new product called the True Form, which is an interventional guidewire. That is another product that is now in the process of being released.

We had an opportunity recently to acquire a distribution agreement on a product called the TWISTER. One of the major companies was distributing this product for nine years. They made an acquisition. They let this product go, and they had been selling it for nine years. We picked it up, and we're still get on our GI division. There's really know cost to Merit other than the inventory, and putting the Merit label on it. And we're very excited about what that means to that same division that sells the pulmonary balloons and the GI products.

The SwiftNINJA -- well, the SwiftNINJA is meeting all of our expectations in the United States. Our price point is about $2,400. I will say, that that's almost twice of what I originally thought our price point would be, and that is going to enhance our margins. As well as, you are very aware of the Super HeRO. And so, these are products that enhance the HeRO market, which we acquired last year.

And, there are other products that will be coming out through the year. And we hope, on a number of areas, whether it be PAE and others, and things that are developing, that we will be able to make some other announcements in the very near future. The bottom line is, we have a full complement of products, and a full pipeline right behind it. We see exciting days ahead.

And so, with that, and that introduction, I will go ahead and start with the numbers for 2017, and then I will have Bernard comment on them. Our guidance for 2017 is as follows. We believe our revenues will be in the range of $713 million to $723 million. We believe that our gross margins will be in the range of 48% to 48.5%. We believe that our earnings range will be $115 million to $120 million.

Now, let me just briefly comment, that on some of these issues, on both the revenue side and the earnings side, we have essentially not attributed much to these two acquisitions because of the integration issues and getting them ramped up. And I'll let Bernard maybe talk about that in a moment.

But, overall we see organic growth of at least 8%, and then overall, with the various acquisitions, some of which are dragging from the past. I'm talking about things like DFINE, and I think we get one month of the HeRO, but we're looking at about 18% to 20% growth overall in the Company. And that is extraordinary. Without all of this, and those acquisitions, we would still be -- and the recent ones, we'd still be in the 11% to 12% range.

These are numbers we know, and have a high belief that we will be able to be successful in. And, with that said, Bernard let me turn some of that time over to you.

Just a couple of comments on the revenue. We're confident in the guidance, $713 million to $723 million, and again, as Fred said, it is broken down into three areas. One is legacy growth, at approximately 8%, so tracking at the same, or close to the same growth rate that we have seen in 2016, and that we committed to in our three-year plan.

Obviously adding on the DFINE product for the first half of 2017, that will bump our numbers up to get us to, as we said, between 11% and 12%, and then the addition of the Argon and CCI products gets us to the, around 18% to 20% growth rate. And we have factored in the FX changes that have been taking place in the market, particularly in China and Asia-Pac. So we're conscious and aware of that and that, and that that is something that we monitor very closely.

On the gross margin side, on a non-GAAP basis, 48% to 48.5%, again, that is in line with what we have spoken about in the past, and our plan of increasing margins by 100 to 150 basis point year-on-year, over the next three to five years. And that is supported by growth and margin coming from the integration of DFINE, improving gross margin on the HeRO product, introduction of new products coming in that Fred has spoken about, and a continued focus on operational efficiencies for driving productivity within our operations group.

So each of our groups has very specific targets to deliver on, for us to achieve that 100 to 150 basis point improvement. That is supported by the 130 basis point improvement that we saw in 2016, and again, we've seen margin improve quarter-on-quarter for the last five quarters. And again, we expect to see that same cadence in 2017, where it will improve quarter-on-quarter.

OpEx, will generally be in line with the 2016 numbers. There will be some reorganization costs, particularly in the first quarter to the second quarter of 2017, with regards to these businesses that we have acquired. So people just need to be conscious of that.

And, on an earnings side, again, this going from $1.15 to $1.20, that, again, is based on our strategic plan to drive earnings, and we have done it in 2016. We know what is required, controlling our costs and improving gross margin, and I think that is reflected in the guidance that we have given.

Just on a GAAP basis -- so, we just want to cover those numbers. Gross margin would be between 45% and 45.5%, and the earnings between $0.54 and $0.60.

The important thing is, is that we made a commitment three years ago, and a three-year plan. We will hit those numbers. That we are not, at this particular point, going to add another year. However, we will monitor our progress as a Company, and when appropriate to do so, and when we have visibility, that would allow us to do so, we may. We will just have to see how it goes.

But the bottom line is, we have the acceleration of gross margins, I think a great revenue path. I think the operations, and the guys are doing a good job of being disciplined to keep those expenses in place. And we're going to have top line, gross margin, control the expenses, and grow the bottom line, integrate these businesses. And guys, we're just simply getting better. It is a good feeling around here, about the -- just our general demeanor, our thought process, and the things that we're doing.

We're excited about the future. We hope that you are. We hope you can see the vision of the future for Merit. And we are now, unless Bernard you have anything else to say? I can see that you don't. We will go ahead and turn the time back over to the operator, with a reminder that we will take as many calls, with as much time as you have.

Thank you for your patience. There was a lot to cover here today. I'm sure we will have a lot of questions. We will do our best, and then we will be available for up to an hour following the end of the call, and will be available for further clarification on things that are appropriate to discuss. That being said, let's turn the time back over to the operator, and we stand ready to answer your questions.

Thank you. Before we begin our question and answer session today, we do have a few additional comments from Bernard Birkett, Merit's Chief Financial Officer. You have the floor, sir.

Thank you. We would just like to quickly summarize the results for 2016. Worldwide revenue was $157.7 million, $159 million on a comparable constant currency basis for the quarter, up 14%, and up 14.9% on a comparable constant currency basis over Q4 2015.

FY16 worldwide revenue of $603.8 million, and $608.8 million on a comparable constant currency basis, up 11.4% as reported, and up 12.3% on a comparable constant currency basis. Q4 GAAP EPS was $0.17. Q4 non-GAAP EPS was $0.31. FY16 GAAP EPS was $0.45, FY16 non-GAAP EPS was $1.01.

Q4 2016 GAAP gross margin was 44.5%, compared to 43.6% in Q4 2015. Q4 2016 non-GAAP gross margin was 48.4%, compared to 45.6% for Q4 2015.

And, just to clarify, one area of comment, OpEx expenses were just over 20 basis points, not 200 basis points as I previously mentioned. With that, I'll hand back to the operator, and we will take Q&A.

(Operator Instructions)

Jason Mills, Canaccord Genuity.

Hi. Thank you for taking the question. Fred, can you hear me, okay?

I can, Jason. Thank you.

Congratulations on all the progress. Wanted to start with the line item that I ask you most about, and perhaps you get a lot of questions about from investors, the gross margin line was outstanding in the quarter. It ended up being well over 100 basis points better than what we were modeling in the quarter, and your guidance for next year is another 100 basis points over what we are modeling.

Could you give us a sense for the key drivers, you sort of went over them briefly, but maybe a little bit more color on what is driving that gross margin line even to levels beyond the expansion we were modeling, and what gives you the confidence in 2017 to be able to get the full year over 48%?

And then, I guess a separate question on the gross margin line for Bernard, sort of the cadence as we go quarterly through the year and how gross margins should track quarterly from Q1 to Q4. I will start there.

Thank you, very much for the compliment. Gross margins have always been the discussion, and where we're going to get the best bang for the buck. There's a number of unsung heroes, and unheard-of heroes in the Company, and two of the guys that really get credit here is our Chief Operating Officer, Ron Frost, and his partner, Mr. Peterson. I think Neil Peterson, who is our Director of Manufacturing.

We've worked hard in automation. We worked hard in efficiencies. I think Ron, since he's picked this ball up -- and he has been involved with the Company now for well over 20 years -- but I think there's a real focus when you take that, along with the additional analysts and people that Bernard has brought to it, and they work together to talk about the goals and hold people accountable. It takes a lot of the work off of me, so I can go do the things that I do better, and these operational guys. So, that is part of it.

I think it other part, Jason, is the mix. We talked about things like the HeRO, and although it is relatively small, we took that and we originally modeled it 55%, it is closer to 70%, 75% and that effort goes to Neil and his team. So, I think those are some of the issues.

I think one of the other things that we did mention, and I would like to just throw this in, because I think this is important, is that we haven't talked a lot about DFINE today, because we have been through and doing that work. But, we have new R&D programs and new products that we'll be rolling out with DFINE. We have new products that have already been assigned to both clinical -- or, excuse me, Catheter Connections as well as our Argon business. We're doing what Merit does well.

But, probably the best part of this, is, you have all of these new products that have either been eating up R&D expense, or haven't had the volumes because they're just getting started. But, the one that comes to mind -- I was going to tell this story, is a product, the PreludeSYNC. Again, radial procedures are a big deal.

This product, if you will go look at our slides, you will see why I said it was somewhat Apple-ish. You will see why people want to buy this product. Our distributor in South Africa bought, on the first day that we released the product, half of our inventory. We have doubled the forecast, doubled it again, and now we're talking about doubling it one more time. We're going to have -- and this going to produce about a 65% or 70% gross margin.

So it is mix. It is focus. It is the higher-margin products. It is all of those factors and the great work that is being done over in the operations side, both in terms of the assignment of bringing cost down, negotiating, there's a lot of factors but they are all running at the same time.

These things are all running in tandem, and we are doing -- you know, Jason, you and I had this conversation in your office. It is all about execution, and that is what these guys have been doing. The credit really goes to the operational team here, and the sales team.

You will also notice -- a long answer. You will also notice that there is less focus and activity on the kits, and some of these other areas, simply because they're the lower margins, and everybody's spending their time on these higher-margin products that are very exciting for us. There's a lot of factors going in there, but each and every one of them contribute one way or another.

And another thing -- I mean, I may be getting into too much detail, but some of these, both the Argon and the Catheter Connections, initially, will be a little bit lower. So, if those weren't in there, we would actually have even higher. But our intention is, is once we bring those into alignment with the moldings, the operations, and the things that we're doing, which won't take as long, they will start and be a further contributor to our sustainment of gross margin; and that will only get to 50%.

I mean, that is the near-term goal, and we have talked about it for years, it is to get the gross margin to 50%. So, I'm going to hand -- Bernard, you want to comment on those things, please?

Yes. To quickly summarize it, it's mix, DFINE has been a big part of that in Q4, and HeRO is -- we're actually starting to see improved profit margins there, new products, and then operational efficiencies. That has been the focus throughout 2016, and we have seen gradual improvement there throughout the year. And again, that is the focus for 2017, and it is to execute on that. And, once we do that we will continue to drive margin improvement.

So, one other thing, Jason, and that is, this will be the third year of our plan, and we thought about maybe even adding a year. I think we're going to wait and look till about mid-year, look at these new products, and then, I think at that particular point, we may very well come out with whatever adjustments, and what other forward-looking we can look at by adding another year. Because, I like people looking forward, and I think it is good for our company to have our staff look at those goals, and look at those commitments, so that we're always reaching and putting forth the effort that is necessary to be successful.

Thanks for all the color. Just, the last part of the question, maybe Bernard, if you can comment on how you would have us calibrate our expectations for gross margin by quarter through the year. And then I have a few follow-ups.

We typically don't give quarterly guidance. Obviously, we've just given annual guidance in the past, and that is what we're sticking to for 2017. But the trends, I think that the first quarter, we've just got to be careful on. That is usually little bit lower, as we start production back up, and then we're integrating two new businesses at the same time which we have already commented on as well. You've got to bear those costs in mind.

Okay. So, maybe a little bit below the bottom end of the range to start the year, and hopefully maybe a little bit above the top in the range as you exit the year. Is that a fair way to look at it?

Yes.

Okay, great. And then, Fred, question on the acquired businesses - the recently acquired businesses. You gave us some good color on how you are guiding to 2017, but as you think about the guidance range and the revenue that you bought in the mid-40 range, would you have us model that in that range? Or would you have us model, maybe, 10% lower than that as you prune some of the products out of there? Or would you have us model growth?

I'm just want to get a sense for what is implicit in that $713 million to $723 million. Is it about the mid-40s, lower, or higher? And then, you mentioned your plan to transition Japan, which is interesting in the fact that you are going to capture all of the revenue and not just half of it. I'm wondering, what level of revenue that contributes in 2017. What sort of level of business had you been doing in Japan? And that will give us a sense for how that is doubling.

Yes, let me go to the first part of the question. We look at the revenues in this group, of these acquired companies to be in the low 40s, is about where we expect the business to be for the year. Again, whenever you have these situations that are on contract, that are -- most of this business is on contract. And, so, there may be some potential for upside here as long as we can maintain that business.

Where we see, again, a lot of the growth potential is in the antiseptic cap business, and it's now -- I will tell you, that we've already started on Merit-developed new products in that area. And I actually have a couple of my competitors on the phone today from 3M. I do not want to go through and talk about my -- all of our structure. But, let me just say, we see that business growing from the $9 million, $10 million range to over $50 million or $60 million in the next three or four years. So we have a big plan.

And, let me also say this. These products, talking about the Argon acquired, and the Catheter Connections, as well as some other existing Merit products, are all very, very complementary. And I think that is the other thing, is that we're not walking in there with other types of bandages or things like that.

These are devices that complement each other, and go together, and we're adding some new ones. We are excited about how this grouping works out, and what it brings to the hospital in terms of a value proposition.

Incidentally a new hospital, we opened up one last week, it is $100,000. They can go up to $300,000. This is a big business and a big opportunity, with good competitors out there. We happen to believe that this is the best product on the market, and I think the customer list speaks to that. It goes to that particular issue, that we are very excited. I get so excited about this stuff, I forgot the last part of the question.

Japan.

Let me go back to Japan. What the deal is, is, it moves up the revenue side -- so, let me break it out. At mid-year, we pick up all of the OEM business, so that becomes all of Merit's. On January 1, 2018, all of the other business now becomes Merit branded.

So, the real improvement in revenues and gross margins, really happens in 2018, because we have to transfer it. But we will own all of the licenses, and then we will operate it through sub-distributors. But it is almost 100% markup where we are, so it goes from something like $19 million, $20 million, to $40 million, and you get that additional margin. It is a 50% improvement, and so it is a huge opportunity.

But, more importantly, is having that all product breadth and having the focus together. Again, our guys in Japan, for years and years have done a nice job. But markets change, products change, and there are too many channel conflicts. And, so we're looking forward to an opportunity to have that to be a big growth driver.

But it is not just because you are going from wholesale to retail. You are going to see growth in real terms. And some people say, well, the economy in Japan is this, and it is flat, and so on and so forth. I'm just telling you, that, if you look at our stents, they are growing dramatically, our aero stents and our GI stents. We have a number of those products that will be introduced in those marketplaces, and there's a lot of need for that.

It is one of the biggest market areas in the world, because of stomach cancers, esophageal cancers, that is kind of the national disease in Japan. A little bit will come online, I will say about 20% of that, mid-year. All of it is online by the first of next year. That doubles it.

But, in the meantime, we're also adding and combining the businesses together, and be working out of one office, one warehouse, with one set of leadership. It is something that we've hoped, and I think we needed these products to drive that opportunity.

By the way, there is little if no caps, or any caps being sold on our behalf in Japan, in China. There's a little bit in Saudi Arabia, but all of Europe, and a good portion of this huge gap -- there has never been any of our products sold in St Louis. So, for my friends on the phone, I'm coming to St Louis.

Thanks for that color. One more, and I'll get back in queue. I appreciate it, Fred. One more. On the OpEx side, maybe Bernard for you. You said OpEx sort of in line with 2016 levels. Were you implying the revenue as a percentage -- or the expenses as a percentage of your top-line guidance? It seems like perhaps OpEx is going up a little bit.

As I run through the P&L, just given where you are guiding to any gross margin line, if I held them at 2016 levels for the year, it actually looks like your earnings could be more in the $130 million range. It almost looks like your OpEx spending assumptions, vis-a-vis, your bottom-line guidance is for OpEx to be a little higher as a percentage of revenue in 2017. I'm just wondering if that is conservatism or what that is?

OpEx may be a little bit higher, as we integrate these two new businesses. They're both international businesses, so there will have to be some investment made there. Again, there is a level of conservatism there, to make sure that we're not over-promising and under-delivering.

Okay, I'll get back in queue. Congrats, guys.

I thought you said that rather nicely.

Thank you.

And nervously. (laughter)

Brooks West, Piper Jaffray.

Hi thanks. Can you hear me?

We can, Brooks. Good to hear your voice.

Good to hear your voice as well, Fred. I'm trying to build up my revenue number for 2017, so, bear with me here but I want to make sure I have got everything. Did you say that the Argon business that you are acquiring, was about $35 million, $36 million in revenue in 2016? And, so that would imply the Catheter Connections business was about $10 million, am I right on that?

Catheter Connections was a little lower than that, and about $1 million of it was royalties that we received. And, the reason we're being a little bit conservative, is that whenever you have these kinds of transactions there's always the risk that something could fall off, or this and that. We just want to make sure that -- and then you have the FX impact from the year.

We just want to be conservativists, and not disappoint everybody. So, we're taking it, I think -- what was the word use, moderately conservative. Is that what you used? Or something like that. So, the answer is, we're just trying to be careful so that we don't disappoint anybody. I think we are under-promising here.

If you look at the rest of the business and take that $40 million out, and you look from $703 million and go to the bottom ends of $730 million, that means there's about $60 million or $70 million on the $603 million, I think, if that math is correct.

I think that speaks to our core business, and the other thing that just, Brooks, is a point of interest. You saw that even though the revenues were off a little bit in the fourth quarter, the core business was not. In fact, that accelerated in the fourth quarter, so I hope that answers your question.

Yes. No, that does. And, then, you had mentioned in FX impact, Bernard, do you have an estimate of what you are FX headwind will be next year?

We've actually built it into our forecast already, so we're seeing it primarily from China/Asia-Pac, and that is possibly $3 million to $4 million that we know is going to be -- potentially going to be an impact there, given the way the rates are going and how volatile it is at the moment. So we factored that into our number already.

So, we've already reduced our number by that much.

Okay, got it. And then, I guess, last from me, I was searching around try to find a little bit more information on Catheter Connections, and I could not find a lot. I understand in general what it is, but would love to hear little bit more just what those products are. And then, would also like to get an update on the DFINE business, if you could. Some of the changes you have made and growth expectations there. That is it for me.

Let me go to the Catheter Connections. Merit has known this company for a long time, because it is here in Salt Lake City. And their products are used like -- there are a few other competitors in the marketplace, IT Medical is a competitor, and so is 3M. And, a number of years ago they came out with these needleless connectors, I think they were called the Clave, and some of these products.

The problem with those products was, at the clinical level, you would swab them off, but there's ample clinical evidence that it did not do a very good job by just having them swapped with an alcohol wipe. And so, these antiseptic caps go in and, I believe that they, once they are on there -- I believe this is correct, somebody jump in here for me -- that once they go on there, they are now sterile there for up to eight days, I think is the amount of time.

And when you are in there with a very critically ill patient, when these patients are coming to the Cath Lab or going back to the ICU, any types of these hospital acquired infections, and these issues cost the hospital and, of course, maybe more importantly than the cost, is what it does to the health of the patient. This -- it is not just the product itself. We have both the male and the female, but it is how they are delivered, and these are on a strip.

And, by the way, this company has over 20 issued United States patents. So this is not just -- and they're actually very complex products. And then, of course, as I mentioned previously, without going into detail, we also received royalties also from some other companies, from some licensing agreements.

Now, the other thing, I'm probably more excited about, again, I have got to be careful here. There are a lot of other areas in which this technology can be applied in particularly when we start talking about our transducer and critical care business. So, I will leave it at that, and tell you that we already have new products, as we're speaking, being developed that I think have as much potential as what you would do on these IV lines, for these patients. That is the color.

Now, from a distribution point, they use a master distributor. They have done a reasonable job, but again, as we all know in distribution situations, they are not as good as having your own warriors out on the street. And when you start talking about the kind of revenues that can be generated, it gets the interest of a salesperson.

Now, as I mentioned in my previous comments, there's a whole bunch of holes that we're going to fill in. And there's, again China, there's Japan, there's all of Europe, there's so much opportunity here, and Merit has all of that in place. As well as, bringing in the manufacturing. So, we're going to produce a portion, and then, we have an outside vendor that is going to produce it. We're going to mold all of the parts.

One of the biggest problems to this has been their ability to, very candidly, keep up with the demand. They have not been able to keep up with the demand, and they didn't have the capital.

So, what Merit has done, is we have commissioned new tools, we're commissioning new automation, and by the time we get to mid-year, we're going to be fully capable of producing substantial volumes. We can meet that demand, now, but it is hand them out. That being said, for my competitors out there I'm coming to get you.

Next question.

Jim Sidoti, Sidoti & Company.

Good afternoon. Can you hear me?

I can.

Okay, great. Just, back to the quarter, I just want to make sure I've got everything correct. You said, organic growth was about 7.9%, so that leaves about $8 million in revenue that came from DFINE, and the HeRO, does that sound about right?

Bernard, do you want to confirm that?

Yes, that is correct.

And, Jim -- Jimmy, can I just add a little color, because I think I was asked previously about DFINE, and I do not think I answered it, so let me come back to it.

What we have done with DFINE, is that we have done the training, we've reduced substantially the expenses, we kept about half of the sales force in the United States, but the other half we trained existing Merit when we formed that IOS Division that we have talked about previously. We have started new R&D. So, we kept the R&D team in place, and we are now developing some new products and new capabilities to go into that group. We're also doing some redesign work, and we are improving products, as well.

So, we haven't talked a lot about DFINE on the call, but by the time we get to about mid-year, there is going to be an awful lot of talking about it, because there is going be a lot of new exciting things that will then be presented. It is kind of in a -- it is not resting, but it is in that transition. So, we have done all of the work on the distribution, we've done all of the work in consolidating customer service, and took all of those expenses out of the deal.

That is what we have done over the last six months. And by the way, Greg Fredde and team that worked on this transition I think also did a very good job to go through this transition. That is to that particular issue, and now I will answer any other questions you have.

So, just to be specific, the breakout on the $8 million of acquired revenue, was at roughly $6 million for DFINE and $2 million from the HeRO?

Yes, that is correct.

No. Hold on. Hold on. No, that $8 million was just --

He's asking fourth quarter.

In the fourth quarter. How much of it was DFINE?

Just over $6 million.

Okay. I stand corrected. Okay. Just over $6 million.

Alright, great. And now, looking ahead, I just want to make sure I'm clear on some of the comments you made. With the Argon acquisition and Japan, did you indicate you are going to go towards more of a direct sales channel in Japan now that you have got that under your belt?

We kind of refer to it as a modified direct, Jim. It's what we've been doing in China for many years, and that is, rather than having a master distributor that then -- so, you have the manufacturer, a master distributor, and sub-distributors. In this case we're cutting out the master distributor, Merit becomes the master distributor.

It doubles our revenue, it increases substantially our gross margin, but more importantly, what it does is, it puts us close to our call point and to our customer. So, it is the same type of model that we have used in China, and we're convinced -- you know, we speak the language, we have people on the ground; we have for a long time. We have our own logistics, our own customer service, so we're quite excited about the opportunities in Japan going outward.

It has been kind of a lagger, to be very honest with you. Japan has been the lagger.

And, do you think now that this deal is complete, you will be able to get some of your other products through those channels?

Yes. That is the other thing we have done, things like the [CorVocet]. But all of those of the products that we have been selling, have come over to Merit, and we own all of those licenses or will own the licenses as this plays out. We'll have control of the business and control of the future.

And, as you know, whether it be in Europe, or in Russia, or in China, that's always been the key in the long-term, for any of the bigger businesses, and certainly for Merit. We get closer to the customer, we get better prices, and more importantly, than all that, that goes along with that, is, we get to sell all of our products. We actually have products that we built, that are not being sold there because there is a channel conflict. And that is what we will eliminate as well.

Bernard, if I'm looking at the table in the back, it looks at amortization expense was about $0.27 for 2016. Where do you think that will go in 2017 now that you have these two new deals in the mix?

Amortization, it'll be, I believe it is going to be closer to $0.30. These new deals coming in.

And, how about R&D spend? Do you anticipate any new trials or any new big investments in R&D in 2017?

No. Going back to what Bernard said, and what we have committed to, we're committed to the discipline of, there will be new R&D projects, but they will be replacing old R&D projects that are now commercial. So, our goal is to have the discipline on the SG&A and on the R&D line, while improving the gross margin line.

And, because of these new deals, you won't see a lot of leverage on those lines because of the projects we are starting up -- as a percentage of sales. But the gross margins are the key and those are accelerating.

How about with the tax rate? Do these deals have any material impact on your tax rate going forward?

At this point we haven't forecasted in any material impact until we see what transpires over the next number of months, what's going to happen with tax rates particularly here in the US.

A couple more, Fred, you talked a little bit about Catheter Connections, and the impact from the ACA. Did I hear, you indicated you think even if the ACA goes away, you don't think that will impact sales growth at Catheter Connections?

Not a bit. At the end of the day, if you're a patient you don't want to get an infection, and hospitals don't want to have to have the cost of it. You cannot be efficient if you have people sitting in hospitals being treated for things they got there. It does not make any sense.

The ACA came out -- but whether it is Medicare -- it's not just ACA, it is Medicare and Medicaid, and all of these things have come out with plans saying, you have got to pay attention to these issues in your hospitals. And, everybody gets a score card every year, and that determines -- and a lot of people look at those and they say where do I want to be treated. This isn't going away by any means.

Just if you think about it Jimmy, would you like to do away the expense so you can get an infection in the hospital? Nobody wants that. It is not going anywhere. In fact if anything, we have got more and more, if you think about superbugs, and all the things that can happen, it becomes more and more safety and making sure that hospital-acquired infections -- that you do everything you can to minimize or eliminate them.

Those are the key issues. You don't need government programs to tell you what to do to come to that common sense conclusion.

Alright, and then, kind of a more of a bigger picture question, now you are above a $700 million revenue company, you got a lot of opportunity with these deals to improve the cost structure, the operating margins. Do you think you're going to take a little bit of a pause in acquisitions now, for the next three or four quarters, and integrate which you have? Or do you think you will continue to be active, an active acquirer?

Jim, I would say -- excuse me. I'm choking as I am saying this. No, I'm joking. (laughter)

Listen, we have worked hard, this group has worked -- I don't want to say we are tired, that's not the right word. But, we have to digest these things, and get them so that they perform. We did the HeRO, DFINE is still working, we have got to work these through. And more importantly, we have all of these new products. It is time for us to take a breath.

That being said, I have new stuff coming every day, but I think we have to be able to afford it, we have to see the long-term impact, and we have to be able to keep in line, and we can't go out -- this is a, I do not want to say does a stretch, but we've been playing a game, and we played five quarters last year. It was a lot of work. I think we all need a little bit of rest.

I am not usually much into rest, but we're going to take a little bit of rest. You know what? We don't need to do anything, plus, we never needed to do anything on these things, anyway. If you take all of this stuff away, you would still obtain a -- you get some, of course, contributions from these deals, and that is nice. But that is not what is driving the business.

What is driving the business are really these -- and maybe in this first quarter, it will be kind of fun for us to breakout that core business, and how that is driving. Because, that is where the real action is. I mean, think about it. If you take the HeRO, and you take the DFINE, you are talking about a $40 million revenue out of $600 million, it is 6% or 7%. Is that going to drive a business?

The answer is, it can a little, but not -- it does not really give you it. All of the other things we're doing, that I think are driving -- the stuff I mentioned that with Ron Frost and his group. There's my best answer.

Alright. And then, last one for me, on the acquisition note, there was a big deal that closed on, I think it was Monday, or Friday of last week, the Vascular Solutions deal. Does that open up any distribution in terms of direct salespeople or independent distributors to Merit?

I think I mentioned on one of the other calls, but if I didn't, the day that that was announced there were, in my view, this is my personal opinion, there were 125 salespeople sitting in Starbucks wondering what the hell they were going to do and what the future meant. I think that played to our advantage. I think it will continue to play to our advantage, because now it's closed. Now, they have to go through all of that transition. And so, the answer is, we actually have hired some of those salespeople, and I think it does open up opportunities for us, as disruption always creates opportunity.

Alright. Thank you.

Okay, Jim. Thank you.

(Operator Instructions)

Jayson Bedford, Raymond James.

Hi. Good evening, guys. Just for the sake of time, I'll just throw in a couple questions. You alluded to it earlier, but gross margin on the acquired Argon and Catheter Connections business, where does that gross margin flush out?

They start out around 35% for the Argon and about 40%. The biggest upside, is on the Catheter Connections because of our ability to mold, and we think that is going to approach 50%. And we think there is about 40% or so available to us. So there is upside on the Argon. Again, so one might say then why would you do something like that? And the answer is, is this value proposition and this pull-through.

Those are the parts of the things, and we think, in looking at the business for the long term, it is the ability to go in at the C level in the C-Suite, and be able to drive that value proposition. Now, the other thing we get to do, Jason, is again, you'll see other parts of our business, for instance, we make 1 million blood pressure chips per year. That's now going to go to 3 million chips per year. Now, that will take us a year to get there. But there's those kinds of things that start to integrate and create opportunity for the Company, and some of our other business units.

There's some other little sleepers in there. I will give you an example of one. In talking to our people over in Europe this morning, one of the things that was acquired was a reusable transducer.

Now, there is a situation in which the fully amortized cost of the reusable and the disposable is about $1. When you take a standard blood pressure transducer that costs you $5 and change, and mark it up, you're about $8. That is a $7 price differential in cost, that allows us to go out and compete and pull-through all kinds of business, and in fact, in talking to our guys in Europe, there were tenders and things we could not get on because we didn't have one of those.

Again, I think as we look, were not just looking for this year and next year but we're looking down the road five years and saying, as Merit approaches and goes past $1 billion in revenue, how do we make sure that we have that offering of products, that value proposition I talk about. That is part of that.

I also think, that much like the British, and lots of other people, Singapore is actually very strategic and the fastest growing area in our business. You look at places like Malaysia, Vietnam, you take a look at Indonesia, all of these places are places having a presence in that location makes a big difference. That was another part of our thinking, is the strategic locations, our ability to get product to Australia faster. Things like that.

There was a lot of thought that went into the pros and cons of that location, and when it came out -- and the value. I mean, we paid $10 million for this business, and someone might say, oh, well, there must be something wrong. We're going to show you how wrong it was, by showing you what it does.

And, I mentioned, I tried to buy it five times. I know this business, and I know the opportunities for it. And so does a number of other people. I can look at four or five people in this room, and they all are experts in this, because they all grew up in it, sitting in here.

If look at the products, some of the -- I will give you another example of an opportunity. They make a product, that was a patented product one time, and one of our sales guys saw that and said, I didn't know we could ever do this. And now we take a product that cost us about $4, and now we can sell it for GDP25 in the neural suite in London. You go from a GDP4 cost to a $25 product, by taking some of these products that Merit didn't have and combining with products that we do have.

There's a lot of opportunities, and you'll just see the results as we move forward. There will be a lot of pull-through, and again a lot of strategic and tactical opportunities here.

Two, including in Japan. Remember one of the things I said was, they have a relatively good business in Japan at higher profits, and we're going to take and almost double our revenues there. We actually have not calculated into our numbers taking out that middle person, so there is a lot of upside in this business, but initially the numbers I give you stand in terms of the growth in the markets.

Okay, that's helpful. Just on the operating margin assumed in the guidance, it implies something in the range of 12% to 12.5%. I'm guessing, what could drive that higher? Is it largely dependent on upside to revenue? Or do you feel like you have some flexibility, or some cushion on the OpEx line to drive some better Op margin?

Just as you said that, Bernard looked at me with a twinkle in his eye. Bernard, go ahead and hit it. Tackle it. There is opportunity on the OpEx line for us to continue to lever that. Again, as I mentioned earlier, we're just conscious that were integrating two new businesses. We want to make sure that we invest in them correctly to make sure that we can drive growth both on a margin perspective and a revenue perspective. There is some opportunity there.

I think the mix has a lot to do with it, too. I mentioned the SYNC, the radial thing continues to grow. The HeRO -- Merit's going to start putting on -- think HeRO, and continue to think radial.

Another product that we have not discussed, there's a product called the Surfacer. Merit, now, is the exclusive distributor in Europe for a procedure called Inside-Out. This is a product that we have the distribution rights for.

And, you look at the TWISTER. One of the things that I would encourage you guys to do, because I think it will pretty well answer pictorial, the questions. Your answer is, in our slide deck I think they are pages 9 and 10, but it shows the growth drivers. Go take a look there. You will see the NINJA. You'll see the SYNC. You'll see the HeartSpan. You will see the TWISTER. You will see all of this stuff, I think, we're pulling up the slide right here. It is 9 and 10. If you take look you see the Amplatz, you see the SuperHeRO. You see the True Form.

Jayson, look at all of this. It has all been R&D expense. Now that is going to turn into revenues and improve gross margins. I've never seen anything like this in our history.

I've never seen anybody with something like this. Take look at that slide -- those slides, because I think they are telling about the opportunity.

Okay. That's helpful, Fred. I appreciate it, and I'll jump out.

Okay. Great. Thank you.

Gregory Macosko, Montrose Advisors.

Yes, thank you.

Hey, Greg.

Hi. Hi there, Fred. Most of the questions have been answered, here. A lot of good answers, but one I wondered about, taking a step back. With respect to the Cath Lab and Cath Lab selling, it appears to me that, we look at the bigger picture there has been an increasing percentage of total sales being sold through the Cath Lab.

And, my sense is maybe some of these hires from Starbucks that you have taken on are helping that. Talk a little bit about that, and should we expect more and more products to be sold through Cath Lab?

Let me clarify a little bit. First of all, I think the guys that we hired are just coming on, so I don't think they have had any effect there. I think what you are seeing when you're talking about the Cath Lab, is Merit clearly has about almost half of its business, but the real growth is coming from our electrophysiology area. These are areas like the HeartSpan and the SNAP.

We have another new product that is a non-valve snap that is coming about midyear. When I mentioned earlier that is a non-valve SNAP that's coming about mid-year. So, when I mentioned earlier that we have, not only the products you are seeing, but more right behind this.

I think it is the Worley system, all of those particular things that came out of the Thomas transaction a few years ago, are really what is driving that part of the business. The other thing, of course, is if I were to look at the slides and I'm just going to ask Brady to slip back here and look at these one more time. Go to slide number 9.

The thing that is kind of cool about this, as you look at these slides you see the endoscopy business with the Snare; you see the balloons, which is endoscopy; you see the IOS with the SwiftNINJA and the CorVocet; and you see the cardiology. And, I do think you'll see a big move in cardiology.

And, then if you go over to page 10, you look at the additional products there, you see the HeRO; you see these other products. So the thing that is nice about where we are heading, is these things are kind of divided out with two or three products in each of the divisions. And, I think that is another really important thing to get the kind of attention to these products that we would like to have. They are spread out.

It is a nice mix. Again, I've never seen anything like this in all of our years.

Last question is with regard to Tijuana. Where do you stand there? Are you fully up and running? Is there much more to come through in that operation? Obviously, you'll put in new products and things down there. But, talk about that and where we stand in terms of it being at full blast.

We are at about 50% capacity, and thank God for Tijuana, and I will tell you why. Because, if I didn't have it, I couldn't have this growth. I have a 3.25% unemployment rate in Utah. Hiring people here is very, very difficult.

We were able to move and now have 650 employees there, give or take, and that we did all without losing a single job in Utah. Essentially, these new products that are coming through, absorbed and we were able to get into a cost climate and the availability of labor.

And, one other point, Greg, I would like to talk about, too, about Tijuana. A lot of people talk about this border tax that's coming up. What is also interesting to know, is only about 10% of the cost of our product out of Tijuana is labor and overhead. The rest of it is value-added molding and capabilities that come from Salt Lake City to go there. A lot of people got freaked out about this border tax. First of all, I do not think it's ever happen, but if it does, it affects 10% of the revenues that come out of there, so it is really quite minimal for Merit. I wanted to be able to sneak that question -- or that answer, or comment in, as well.

Alright. Very good, Fred. Thanks.

Okay. Thanks Greg. I look forward to seeing you in New York on Thursday.

Jason Mills, Canaccord Genuity.

Thanks, Fred for taking the follow up. Bernard, I wanted to go back to the cadence through the year. And I understand you do not give quarterly guidance, but obviously the street holds your feet to the fire every quarter, and Fred knows that very well. I am sensitive to wanting to make sure we think about the quarters properly, and you've got a couple of new businesses coming online, that are, on a $700 million top line, $40 million/$45 million is not everything, but it is a significant piece of it.

So, how should we think about the top line as you weave these businesses in? And you're just now launching SwiftNINJA, which will presumably escalate as the year goes on, similar to SuperHeRO, and some the other products Fred mentioned. I want to make sure that we are all calibrating the quarters properly. I understand you do not give guidance quarterly, maybe you could help us, just give us color with respect to how things play out.

So, if we take out all of the transactions, I think we can go back and look historically for a moment. We usually see, in the first quarter, and I think Bernard's comments were reasonable, in that usually in the first quarter, you are starting up, you have some lag of, as I mentioned we don't give credit to product until it's produced and sterilized. And then, you also have the higher expenses because of FICA, and that sort of thing.

If you look at our business historically, it is a little lower in the first quarter. Starts to accelerate in the second quarter. And the third quarter generally the summer quarter, and it's about flat. And then, as you get into the fourth quarter, it starts to accelerate. I think that, that's the same type of thing you will see, even with these transactions. I'm going to sneak one other little comment in here, too.

In addition to the purchase price, we also -- and I'm not going to get into a lot of detail here. We also believe that during the six months, as we're integrating this business, that we're going to be able to have some offsets that will help to, not defer, but to actually cover the cost of some of the transition into these deals. We're going to get some help there as well, by the ability to reduce what some of those transition expenses are.

That is all I can really say about that, other than -- what I'm trying to say, there are other parts of the deal that allow us to reduce the expenses of the transition. We paid $10 million, but there are other considerations that come in place that help us to reduce that. Not the cost, but the expense. So that is going to help us as well.

Just on the revenue, Q1 usually is, if you just look at our trends, that is usually our lightest, for the reasons that we just mentioned. You will have, DFINE will be added in for the first quarter, full quarter of HeRO, and you're going to have two months revenue from the two acquisitions that we did. Given that, I will put it this way, the riskiest time for us will bring our businesses is in the first probably, two to three quarters of bringing that business on from a revenue perspective.

Okay. That's helpful. So, two months worth of Argon and Catheter Connections in the first quarter, and then, beyond that we can run rate it on an annual revenue base of somewhere in the $40 million to $45 million range.

Yes. The first quarter is probably going to be our most challenging from Argon and Catheter Connections.

I think that is fair to say.

When you are considering that number.

I think you said this. It is with any deal, you'd see the same situation. I don't want to sound like a downer, but those are the -- as you are bringing that on. And then, very candidly one of the other things, I'm going to have, actually, a little optimism, we also took into consideration some of this and made sure we had a lower number, too. And by that I mean that lower number, we gave some room and allowance that you could have some stuff fall off. I don't want to make this sound like somehow --

That is why the allowance is there. And the allowance primarily affects the parity -- or part of the year, because once we get traction, we get our own people in place, we will start to grow that business. But it is just Q1 and Q2, is where we have made the allowances.

Okay, that's helpful. And then, one final housekeeping item, Bernard, in 2017. The net other expense line has been running in that $3 million range, a little under $3 million range. How should that track through 2017, considering some of these new transactions and just what you have in terms of your debt load?

Yes. That expense will increase for 2017 as we [pawn] that debt.

So you're looking in the $3 million range or a little higher than that per quarter?

A little higher.

Okay. Thank you again.

(Operator Instructions)

I'm seeing no other questioners in the queue at this time.

Okay, so let me go ahead and summarize. First of all, thank you for joining us. I hope we've explained these transactions, and why we think, both tactically and strategically, why we think they are important to us.

Again, I would call your attention to the slides and look at the overall business. I think we have been conservative. I think there's opportunity, and our job is to give you the numbers that we know we can make, and then do everything we can to outdo those. That has always been the goal.

I think the new products are exciting, but again, the proof is in the pudding. We have got to go out and deliver.

One other point in that first quarter too, is that, that is usually when we have had all of the sales training. So, we have had all of the divisions, have had their meetings, have done their training, and we are out there -- and we are not in Starbucks. We drive past Starbucks. We might stop in Starbucks in the hospital, but, our guys are out there pounding the pavement with a lot of these new products and these new opportunities, and we're hearing success stories every day.

That is going to be the fun part is going through, and watching the business as it moves through the year, and meeting or exceeding our goals and completing the three-year plan. And, as we watch the business, if we think it is appropriate to do so, we will make whatever adjustments as we finish the first and second quarter.

We're excited. I hope you don't go away from this thinking that somehow there is a downer or we are concerned, because we are not. What we are is engaged. Excited about the businesses. Things are accelerating. Gross margins, I'm going to say it again, are accelerating.

That is the key to this, while having the discipline to maintain the expense levels. We know what that does, and what they can do for our stock. Our thanks to all of you for your interest. Bernard and I will be here for the next hour, or so. We're happy to add whatever we can from a clarification point, and again we will go ahead and sign off. I'm going to give thanks to my staff for a great year, and for all of your efforts. And we will sign off wishing you a good evening from Salt Lake City. Good night.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program, and you may now disconnect at this time. Everyone have a great day.