Merit Medical Systems Inc. F3Q08 (Qtr End 09/30/08) Earnings Call Transcript

Oct.23.08 | About: Merit Medical (MMSI)

Merit Medical Systems Inc. (NASDAQ:MMSI)

Q3 2008 Earnings Call

October 23, 2008 5:00 pm ET

Executives

Fred Lampropoulos - Chairman, President and Chief Executive Officer

Rashelle Perry - General Counsel

Kent Stanger - Chief Financial Officer and Secretary/Treasurer

Analysts

Shawn Fitz - Stephens Inc

Sean Bibic - SIG

Christopher Warren - Caris & Company

[Jason Jenford] - Raymond James

James Sidoti - Sidoti & Company

[Ken Grossman] - SG Capital

Operator

Good evening, ladies and gentlemen, thank you for standing by. Welcome to the Merit Medical’s Third Quarter Earnings Conference Call. During today’s presentation all participants will be in a listen-only mode. [Operator Instructions]. This conference is being recorded Thursday 23, October 2008.

I would like to turn the conference over to Mr. Fred Lampropoulos, CEO of Merit Medical. Please go ahead, sir.

Fred Lampropoulos - Chairman, President and Chief Executive Officer

Good afternoon, ladies and gentlemen. We are delighted to be with you, we are broadcasting from Salt Lake City.

With us today we have our Operating Officers and Members of our Staff and we appreciate your attendance. Before we get started we would like to turn just a moment over to our General Counsel, Rashelle Perry, Rashelle?

Rashelle Perry - General Counsel

Thank you, Fred. In the course of our discussion today, reference may be made to projections, anticipated events or other information which is not purely historical. Please be aware that statements made in this call, which are not purely historical, may be considered forward-looking statements.

We caution you that all forward-looking statements involve risks, unanticipated events, uncertainties and other factors that could cause our actual results to differ materially from those anticipated in such statements. Many of these risks, events, uncertainties and other factors are discussed in our Annual Report on Form 10-K and other reports and filings with the SEC which are available on our website.

To the extent any forward-looking statements are made in this call, such statements are made only as of today’s date, and we do not assume any obligation to update any such statements.

Fred Lampropoulos - Chairman, President and Chief Executive Officer

Thank you, Rashelle. Ladies and gentlemen, we’re delighted to report the results of our third quarter in this press release which is somewhat lengthy, we also offer an update about the outcome and status of our Angleton, Texas Facility.

Let’s start out with the performance of the company in the third quarter. As some of you will recall, historically we guide down both in terms of earnings and revenues in the third quarter. We were pleased and I don’t want to say surprised but very pleased and I guess surprises is a fair word, that our revenues hit a record $58.2 million in the third quarter up 15%.

You will recall in the first quarter of this year we were up 5%, second quarter 10% and in the third quarter 15%, bringing to us overall effective 10% for the year and we are pleased with that. We are also pleased that our net income was $5.2 million, up 18% and that was the $0.18 a share, which I believe was at the consensus level compared to 4.03 last year.

As we look at the year and I think these are the things that we as a business try to concentrate on although we are aware that many of you look at quarters and look at the progress of the business, I think it’s important to know that our earnings are up over 40% from last year. Now, in this period we also took a charge of approximately $0.02 after tax for expenses associated with hurricane hike and about a $300,000 for an impairment charge for the discontinuation of a product line. Had we not done yet of course on the earning for a been $0.20, But all in all, I think we are very, very pleased with the overall performance of the company in a time when we spent a lot of time worrying about and trying to get our facility up in Angleton where there was a lot of attention diverted to that.

Briefly on the Angleton issue we had, I’m going to say minor to moderate damage as we made the assessment, we had some glass, we had some wind damage in which part of the roof was pulled back. We had water damage and just in a matter of a few days in fact we were on the ground in just a few days after that Houston was mess it was difficult to get in there. But, I’m very pleased that within a few days we had 353 foot tractor trailers heading down there were supplies and supplies were not available in the general area. And the net of the whole thing is this, we are up and operating partially within a few days or a week or so and we are now back into full production with all the repairs made. I will give you a little of idea of the extent of the work, we had to pull up 18 inches above the wall board and cut it out replacing the entire facility because of water damage even though there was only inter two but because of mould and that sort of thing and had to recertify the facility. None of our employees was harmed, there was a lot of, of course, climate attention that they had to spend on their own circumstances, we had some people that without power for as long as three weeks.

But all in all I thought we handled it well, in fact, the insurance company came to us and said if everybody else did the way you guys did it our claims would be about half, in fact, at one point they said to us, I hope you guys have pictures because most people are still standing around looking at this stuff, we need to make sure that you have pictures to support the damage that took place. They didn’t get there until the third week. And, we are able to support that. There is some insurance coverage, there is some stuff that this will have to be gone through a process of being adjudicated and then we will look at how this all shakes out in terms of any loss of business or business continuation. We are insured to those effects. We do have a deductible but we thought it was appropriate that we take this charge based on the expenses that we had and then there could be some adjustments relative to insurance down the road.

So, Kent, do you want add something on that?

Kent Stanger - Chief Financial Officer and Secretary/Treasurer

Yeah, I think, one thing is very important, it’s the critical assets of our inventories, we are preserved both by our preparation as well as that one possibility was down. And the second part is all the critical equipment was protected and non-hurt and so that enabled us to get up on that. Finally I think that the insurance we accrued for everything that we believe would be paid by the company up to our deductible and so even though the exact amount is unknown, basically the expenses we believe were covered by insurance.

Fred Lampropoulos - Chairman, President and Chief Executive Officer

I will talk just briefly about gross margins for a second and I’ll turn sometime over to Kent for further clarification and then I’m going talk about revenues and our business. The gross margins for the third quarter were improved a year ago period but as you can all see they were down sequentially from the second quarter. Some other purposes of that was that we got, we had a lot of expenses that got cut off in terms of the commodity prices, oil, shipping both incoming and outgoing and all of these things hit in that period. Now of course, on the positive side of that we have already seen dramatic decreases in terms of surcharges on these very same expenses that we got hit for those quarters and those will be, we do think, assuming that we stay at the same levels. But, we are seeing that trend and will get the benefit of that. We have also gone back to many our of our vendors where almost everybody took advantage including Merit. We go out and try to pass on some cost Merit is doing that others -- we have actually gone to some and are meeting weekly to take a look at those and actually asking vendors to roll back those prices to make sure that we are not being taken advantage of.

In our case because we try to do things correctly, we have had increases in the labor which we have discussed about in the second quarter. We will have some insurance increases and some of those factors that are going on and so we are passing on up to 5% but I think when its all said and done it will be somewhere about 1% or 2 % of sales as we will end up in terms of our overall revenue increases, its’ probably where we will end up.

So, there will be some offsetting stock as we move forward and balance of this year into next year. So, we also had a number of products that we launched during the quarter and they were the cost associated with the startup of new products. We are not changing anything in terms our forecast, our gross margins at this point where we believe that we can see today and looking forward that Merit is going to see robust sales going forward, double digit sales as we look forward to 2009.

Let me give you the support for that. We launched several new products, our approved products and all are being very, very well received. In fact, I can tell you form several positions particularly on products like a MAK [NV], the doctors have told that when they compare our products against the competition that these are so far superior and in some cases they are not even waiting to use up their inventory. They are actually buying these products today. Each product itself are $90 and have 65% gross margin to 70%, but have features and benefits that are so far superior that we believe that they are some huge product opportunities and hits that we’re going to have, so you got the move beyond what I will call the singles and maybe into the double range and so we are going to extend some of these hits into extra basis.

Kent you want to add anything on the side of the gross margin discussion?

Kent Stanger - Chief Financial Officer and Secretary/Treasurer

Yeah, I appreciate that. One other thing that I think also affected this quarter is the product mix. We had an increase in sales and particularly in our kits and trays compared to the earlier quarters of this year and so when you look at it sequentially I believe they had 23% increase in kits and so that is in part because of I think growing business in a timely thought that someone might slow down it actually increased sequentially. And beyond that we have in a comparable standpoint, we had in all and we mentioned this in other calls in the past two quarters. But, large amount of sales that went to an OEM customer in the kits area earlier in the year that dropped off in ‘07, so now the comparable in the third quarter does not have that business and it will help make that different. (Multiple speakers) mix, change in the margins that percentage.

So, let me just make sure it perfect. In the second quarter of last year we had that OEM customer and the third which was in the kit area that’s our loss in the third quarter of last year and so this year the new businesses on top of that gives us a little bit of a -- we need to have this clarification so that it doesn’t look like we’re spending time on this little margin things but its more of the numbers moving.

And I think part of the weakness is some of our competitors have flown through, they are delayed somewhat and we’re seeing the response of the market and I think it’s a fair product and customer service level that we can provide.

Fred Lampropoulos - Chairman, President and Chief Executive Officer

And as you all know we have discussed this before, we have essentially three competitors on our kit line and all three of those competitors have situations were their businesses are being challenged, they are being sold or other circumstances going on. And, I will give an example one of those we had an account this morning with one of these competitors that’s 500 kits a month that was about $135,000 worth of business and the accounts just said they had it with them we matched their price, we didn’t have to go lower, we matched their price, we got the business. And one of the things that the kit business does do once they get in there you are able to draw thorough a lot of other businesses you add on as you develop that relationship. So, we are seeing a lot of that we are not focusing on kits and trays but we are seeing some of the fallout from this weaker competitors.

We do incentivise our sales force to sell these premium products in fact, in order to qualify for Merit’s presence club you have to hit, the focused product which were some of the newer products and the higher margin products. So, I think all in all we are happy with the business, we are glad that hurricane haikus has gone and passed and that we’ve come through that. I think again relatively on scale some costs and some delays for products but will be all cut off to staff down there has done an excellent job as well as the staff here in Salt Lake. We’ve had engineers on assignment down there and all in all I think we just did an incredible job and I want to commend the staff here, the staff in Angleton as well as an in Island, who have support all this. So, we I think have done well.

Merit continues to be debt free and I will tell you as you all know, in this environment that is a wonderful position to be in our cash balance at the end of the quarter was let’s say over $30 million and it continues to grow. And so, we are in a very good position with that cash and with a un-drawn revolver which is 2.5 below prime to allow us to take advantage of opportunities to which we are seeing more than we have ever seen. With the capital markets kind of shutdown, venture capital all of various issues that were all very well aware of, we are seeing more deals in fact, we are visiting two opportunities next week and we’ve talked about two or three this last week that we are working on. So, we hope that in the future we will be able announce some opportunities and products which we think will help Merit going forward as a new technologies, patent technologies has a number of great opportunities out there. And Merit is in a great position to take advantages of these.

So, all in all in our business, revenues are great, we have plans that continue for cost reduction, we will be looking in the future to take more products offshore, we have great new products coming forward, we have a full pipeline of products and the staff I want to extend my appreciation to all of you for your hard work. It’s a difficult time and lot of lives are being affected around us, we see it. Our unemployment rate and our ability to track labor and all sorts of things has improved dramatically as the economic times we seem to prosper, so to speak, in these difficult times in terms of more stable labor market and turnover. So, we are in a pretty good shape there.

Going forward and I think this is the big news, I think the important thing is that our growth continues to accelerate. And our goal is not just to be in double-digits as you know, earlier in the year we talked about 8% based our budgets on that things started moving, we are into that double-digit through the first nine months of the year. I think it will move into the low double-digits and we are in the process now of calling for forecast and budgets for next year, but the momentum that I am seeing the opportunities even with our weaker dollar and with other situations we are still seeing that there is a lot of momentum in our marketplace. So, I think that pretty well covers how we are doing, what we’ve been through. I think that brings us up-to-date in terms of Ike. Kent you want to add anything else before we turn the time over.

Kent Stanger - Chief Financial Officer and Secretary/Treasurer

Thank you. There is a few financial highlights I wanted to focus on. One is the classification of these expenses went into selling and general administrative so that if you loot at those expenses they appear to be high that 832,000 had to go there, so if you look at those unusual expense coming out and our percentage is there about 23% about for both the quarter and the year, which is inline with last year, and we got historical history and what I think many of the expectations were in that area. I mean other thing (inaudible) is that the -- our business is growing it spread over $31 million in cash our working capital has now grown to $77 million and it is a 4:1 ratio which I think is a strong thing -- and (inaudible). Another advantage I would like to point is our EBITDA has grown dramatically. We are now over $41 million in EBITDA when you look at it going to (inaudible) adequate increase in the past two of course.

Fred Lampropoulos - Chairman, President and Chief Executive Officer

So, the business came to the third quarter in summary at record levels even though we generally guide down because that is what we have seen over the years. We saw dramatic increase in sales. We have a lot of moment, a lot of great products, a lot of good opportunities and the company is as healthy and strong as it has ever been and so we are in great shape to take advantage of opportunities in markets. We have a great staff and I think I had probably enough of talking about how wonderful we are. So now we will turn the time over to you guys and we will let you go and poke at us a little bit.

Question-and-Answer Session

Operator

We will now begin the question and answer session. [Operator Instructions]. Our first question comes from Shawn Fitz with Stephens Inc. Please go ahead.

Shawn Fitz

Hi Fred and Kent good afternoon. Congratulations on a good quarter in a tough environment.

Fred Lampropoulos

Thanks Shawn.

Shawn Fitz

Hey just as we dig a little bit and teeth to the revenue segments. Fred and Kent, can provided us some details in terms of some of your kit business?

Fred Lampropoulos

I guess as I look at some of the other revenue segments, in particular catheter’s was very strong.

Shawn Fitz

Could you provide us with more insight into what was driving that in terms of dynamics in the marketplace, or specific with what you are doing there?

Fred Lampropoulos

Yes, go ahead Kent, I will let you in this.

Kent Stanger

Yes, I mean we have had a lot of growth in there. Some of those focus products Fred was referring to in that area, so you see growth in trailers and energies, you see it in the impress versus a radiology catheter, drainage catheters are really growing in high percentage right. Many of these are newer products so they caught out during the introductory phase of their life cycles but -- so you see both product introductions and focus of the sales force driving that as well as the opportunities for new markets that we are entering into and some more of the new products we introduced this quarter going there. Fred do you want to talk more on those

Fred Lampropoulos

Yes, Shawn let me just kind of go into this for the sheet business because this is an interesting one. One of the things that Merit has done over the last couple of quarters is introduced a radio lottery sheet and market sheet and a radio lottery sheet is a product that is used for a patients which makes them more ambulatory, lower time with smaller catheters and we get two to four times the price for that product that we do for a standard sheet. That is particularly being felt over in Europe where they do much more, in terms of procedures than we do here in the United States. But it is a growing trend that I think that we will see here in the U.S. So that is part of what’s driving it. The Marker tip, the MAK NV is in this group as well and all of the access products, the MAK products and all of these things, so this is an area that you are going to continue, see grow very dramatically in fact even though this one I think for the quarter was at 26.8% for the quarter and for the year. I think we are still above 19. It’s going to probably approach someplace even on a higher number, closer to 30% growth.

And remember we are taking this market share from existing products but these are improvements many of our large competitors have just ignored these markets for years and years so we are excited about the opportunity in those particular areas.

So I am talking too much, Shawn so I will let you go ahead. I hope that answered at least part of the question.

Shawn Fitz

Perfect. I guess so and then Fred, just maybe take a step back. I know we are in to some extent in kind of unchartered waters but you obviously had a long career in this industry. Could you maybe just provide some perspective on what we should be thinking in terms of overall PCI procedures in this environment and kind of what you are seeing and what you are hearing in terms of your Intel on the street right now?

Fred Lampropoulos

Our numbers would indicate that at least for Merit our business and the inflation device for the third quarter grew at about 4.3% so it actually slowed down over the second quarter which is what we would expect. You know in the summer quarter but the whole PCI area is still, I think suspect. I think it may very well have bottomed out as we have indicated and reported before. But we are not seeing huge upside to that. Where we are seeing Merit’s opportunities is really over in the peripheral business the interventional radiology side of the things, which is where we continue to invest a new product of those things. So, we see those procedures continuing to grow across the board. So, PCI still probably bottom at least slow down on the downside, our overall business is up remember we have some of that spine theory product in here that helps to in this business. I would suspect based on inflation device business when we back out that business that you are going to see the things that down from canters slight flat are -- okay, 2.3% up. So, that’s bottom it’s but I think you will see in these other companies, the bigger companies they are selling the stands if there is not a huge upturn in that area at all.

Shawn Fitz

Okay. Kent, just kind of the housekeeping item could you refresh my recollection on what you all said in the second quarter as it relates to guidance for the full year 2008?

Kent Stanger

We’ve really changed those stock bearers were still on the 8 to 10% on the top line and obviously we are pushing up towards the top end of that range at this point particularly with this third quarters as it was. And we just adjust the bottom line for what we did in the second quarter so --

Shawn Fitz

Okay. And then I guess my math is right you are doing it quickly, just to stay within kind of that upper end of 10% growth the year over year in your product revenues the liquidity would have to be just up modestly over the third quarter is that kind of are we in the right range there?

Fred Lampropoulos

Yeah, that’s what the reset goal that’s where our internal projections were as far as that and we’re so, we have not changed in that at this point. We have some (inaudible).

Shawn Fitz

Okay. And then last question you know, sorry to talk a little bit about business development opportunities could you just maybe speak to some more specifics as it relates to strategic, what you are looking for kind of range of sizes and that type of information?

Fred Lampropoulos

Well. It’s a really good question. We have the capability in normal markets and with the reasonable companies I think borrow up to $200 million. In these markets times and in these conditions most of those opportunities have pretty well dried up that we all know that. If you talk any of the banks these things spread to us as well. What we are seeing however, our number of opportunities where we have inventors coming to us with good products that we think have good market opportunities that they haven’t gone to before. We become kind of the company choice for a couple of reasons. Number one, we meet with them right away and we can make a decision. It doesn’t have to go through several levels, I meet with them, R&D and stuff like that and we will in the very near future announce a couple of smaller dealer for product development which we’ll go out. It has to be developed but their products that we were very excited about and there will be in the ‘09 area and we will start talk about that as we talk about next year.

Now, on the larger side when I say larger that this is in the new environment we’re in. We are seeing a number of companies and opportunities that could be in the 15 to $50 million range that we think would be accretive that we think at technology and also that we think a complimentary to Merit’s existing products. And we are talking to no less than four different opportunities there. No less that actively engaged in dialogue and due diligence. Now, how many of will happen we talk about this all the time I think there is a higher probability that these will things will happen this environment than they might have been in past. Because that many qualified buyers, we can pay cash, we still have a very good currency that’s up for the year and so, we’re in very, very good shape and the best I ever seen in terms of these opportunities. I think what we have to do, make sure we keep our senses about us that we’re making the right choices and not trying to do it to impress anybody because I don’t think we need to, I think our company is going nicely it’s profitable, we don’t want to derail that. But at the same time there are some really good opportunities out there that we may not have seen a year ago.

Shawn Fitz

Great, Kent. Thanks with that.

Fred Lampropoulos

Thanks a lot.

Operator

Thank you. Our next question comes from Sean Bibic with SIG. Please go ahead.

Sean Bibic

Hi guys how are you?

Fred Lampropoulos

Doing great, thanks.

Sean Bibic

A few quick questions, what is the tax rate for the fourth quarter what is that going to be now with the -- I mean do you have an estimate for that being that you are going to get that R&D tax credit now?

Fred Lampropoulos

Yeah, I’m going to go and through net over to Greg Barnett to talk about effective tax rate. So, Greg you want to answer that. Greg is our Chief Accounting Officer.

Greg Barnett

Yeah, we are probably I would think we’ve got the R&D tax credit where you are going to get a benefit for in fourth quarter with the reinstatement of that there will be a couple of 100,000. So, we probably could be in the 35 to 35% range and so--

Sean Bibic

35 to 36 for the fourth quarter?

Fred Lampropoulos

And then the other thing that just as a point on the tax side is that Merit was instrumental with the efforts of Greg Freddy in terms of the research and development tax credit and state of Utah, this year, Greg that would be around $250,000 so its actually higher than the federal and going forward next year, we’ll expect that action increase. So, I think we are, we like those things, when we use and reinvest those fund to bring up the products and create jobs.

Sean Bibic

Okay. How much was the FX impact in the quarter?

Fred Lampropoulos

The revenues was about 0.9% wasn’t it got 4% on revenues, in Europe about 1.2%.

Greg Barnett

The margin it’s naturally has because we have a manufacturing operation in Ireland and so the cost of those operations make that gross margin effective about half of that.

Fred Lampropoulos

So, that’s really I think a very important thing is that we do have that benefit of having that natural hedge in place. Because if that goes we pay in euros, its translated into dollar and reduces our cost on the labor side. So, our labor cost has come down probably around 25%, when it translate from 160. On margins we don’t have a lot affects from FX because discussion to rise revenue, cost go up similar so the margin affected, I think actually few quarters are like 0.10 to 1%.

Greg Barnett

The good news is to answer to the question is Merit is in very good shape with the dollar strengthen it does really hurt us like, it might other companies that they don’t have those operations.

Sean Bibic

Okay. Do you guys provide gross margin guidance before, didn’t you?

Greg Barnett

Yeah, we did.

Sean Bibic

What was that for the year?

Fred Lampropoulos

We, you recall that, we set a program amount with goals of base year, last year 38.4 to grow our margins, a 150 basis points over the next three years. We clearly exceeded that this year and we are in front of that and we elevated our gross margins for our goal this year to be at 41.5%, which would bring that goal almost 310 basis points above last year.

Sean Bibic

Okay. And just two more quick ones. The assets that you got from Mend where are you guys classifying those revenues, or what are the kind of new acquisition revenues do you have?

Fred Lampropoulos

I am going to let Greg do the talk about the assets, it’s not fully contributed in this.

Greg Barnett

Yes, Micrus, that’s meant. It’s the Micrus, they just going to be in the, I think it’s in the catheter sales.

Fred Lampropoulos

So, that would the revenue will go as in the Catheter sales, and we’ve transferred the technology their facility to our facility, they are three different projects there and one of those is delayed because of the hurricane by about 30 to 45 days, I would think in terms of the transfer but affectively our goals was just to have it done by the end of the year, I actually think we may still hit that. So, the revenues around catheters and its classified on the balance sheet both in goodwill and intangible assets, and intellectual property, which is a tangible asset. It’s not very mature yet to our total, I am unable to give you feel for that, so -- we’re just starting that product, its actually ahead of what we expected to be and we are running into capacity constrains at the moment but will be able to resolve those ourselves when we give that production that going up on their own. But anyway it’s a pretty small percentage for ‘08.

Sean Bibic

Okay. And than last one, on the commodity cost. Do you guys see any lags on that or when the prices are higher in particularly quarter, that’s were we’re going to cost set, or we can see --

Fred Lampropoulos

You’re going to see I mean for incentives, I’ll give you the one platinum, as you know all on platinum Merit sales a lot of marker band catheters that have platinum tips, on the more platinum bands. And those prices were going up, we buy those we produce those, they go into inventory and they have to be sold. So, you’ll see it as its going up in there, and you still have some other expensive inventory that’s on the show most of that will be gone and then we’ll replace with lower cost. So, yeah there are some lags there, Kent?

Kent Stanger

Yeah, in fact, our resin (inaudible) 38% and a lot of those recent increases just hit in September, some of them were behind that. So, it does lag as you said. And I expect that one the pressure for increases is going to be often, and we are pushing that they actually go back down, when we can roll that inventory through there system and then through ours.

Sean Bibic

So, we could see maybe another quarter or two of higher cost from this even though oil prices have dropped over 50%?

Fred Lampropoulos

Yeah, you’re going to see some lag, I mean its just, it comes in and actually bills goes on to the shop and has to be sold before you recognize what your cost in that.

Sean Bibic

Okay, thanks guys.

Fred Lampropoulos

Thank you, Bibic.

Operator

Our next question comes from Christopher Warren with Caris & Company. Please go ahead.

Christopher Warren

I wanted to ask a question about what exactly was discontinued and what kind of revenue that lawn generated?

Fred Lampropoulos

Chris, you always hurt me. It was a viceroy which was an inflation device, it was an analog device that we developed for use in peripheral urology and what we did is we were generating a lot of revenues off of it minimal amounts of revenue. But the product has only been on the market for a year, less the year, maybe year and a half. But our guys are pretty aggressive. We call them the impairment brothers out here. And if its not generating revenues, we don’t keep it on there, it’s a dead asset. So, the assets are here but it wasn’t generating the revenue that was necessary to defend and so we took the charge. Probably in the prior years about 25,000 in sales. It wasn’t much and now we are still on the tooling, we might be able to sell it off to somebody that -- the bottom line is it wasn’t giving the focus that we also expected. But there is already dozen new products. So, as you know, Merit inflation devices. I made the decision to develop the product, I take the responsibility for it. You got me. Not a big deal. I think the important thing is, as we know in this environment lot of people take assets and they keep among those books and they do lots of things and wait a long, long time before people fight. We don’t do that out here. It’s not generating revenues and we can’t defend it, we take it and we write it off.

Christopher Warren

Got you. Just turning to some of the new products and good stuff there, could you give us an update on -- I mean is it in the market, how is it doing if it is?

Fred Lampropoulos

The slip (inaudible) has just been launched, in fact, Chris one of the things I will do is I am going to send you an email that I got today from the physician that used it on a patient today where they use three of them on one case. It’s the doctors comments, it works great, the staff loves it, the nurse love it, thank you for developing the product. We think that it, again, its just starting we have done the training but we also think that it is in, what we really help this is Merit just announced as you saw earlier in the week that we have received FDA approval for our short sheet. This short sheet is the very same product that’s used in this very same procedure and we have a tremendous amount of demand in fact, I think as we are looking forward to next year because this is also in the catheter area. We have an existing product line in that area that we are replacing with this product that has new and improved features and I think that product line in terms of its revenues is probably going to double or triple next year and it goes right along with the slip knot. So, that product will release on the 1 November and beyond. Its on the shelves, it will come out and be distributed on the 1 November. I also pointed out in my press release that in the past we had an outside vendor that made it for us but we can only sell it in the United States and Canada because we didn’t have the CE mark. In this case it is CE marked its available for worldwide sale and our margins almost double, the new product which is improved. So, we are very excited about that, you will be hearing a lot about that in all the calls going forward.

Christopher Warren

Got you, thanks for that. And just touching on the kit and tray business as we look forward should we expect another couple of almost distortions in the large magnitude beyond your growth stemming from that year ago?

Fred Lampropoulos

I don’t know (multiple speakers) I don’t know its above what we forecasted and its not focused their a bit. And the focus of our sales force. So, the answer is that other product is out as compared to last year and it wasn’t until sometime around June when we started the product that replace that which by the way has done tremendously well and that’s our transfer set, which has done very, very well like 60% gross margin. So that’s what we replaced it with. But, I think the comparable quarters you will probably get maybe one more quarter of the comparison and on the other side of the coin that product started slipping up, not slipping up it started moving up very dramatically and then you will probably say may be a quarter, I don’t think much, maybe two but not much more than that. The call I got this morning, our competitors continue to get weaker, weaker and weaker. And so what happens our sales guys are out there and they want to use Merit product. So, we have to manage this demand. Our sales guy is out there, they want to buy your product and you can convert it on the spot and that’s what happened this morning. The guy just said we can’t do this any more, we don’t like the quality. We like to do this with you guys, we looked at the pricing it wasn’t tremendously high margins on the whole thing, but there is a strategically, whenever Merit’s will allow, you know, the other advantage we have of our competitors, we have all of these products once we get something in there and get our or so called (inaudible). Once we get our calls into them, they buy a lot of stuff, and so that’s w get the standalone stuff, that we get catheters, that we get inflation devices. So, its out there and helps to build the business strategically and positions Merit and strengthens us and we are going to go ahead and look at that business and continue to take advantage of the opportunity.

Christopher Warren

Sure, it is fair to say that the growth in the quarter is really more reflective of that just sort of comparative strength than specific contribution from either certainly slip not but also MAK NV?

Fred Lampropoulos

Yeah, yeah, remember these MAK NVs and short sheets and those things are going to do before fourth quarter so things were not driving growth at this point. Those are just getting launched and being shown in samples and training and that’s up. So, any of the things that you saw on the growth are really like legacy product and the strength of Merit in the marketplace not the newer products. But-- there is a few that have helped us but --

Christopher Warren

Yes in ‘07 and early ‘08 there are strategic…?

Fred Lampropoulos

I mean that the market band and the radio kit are having probably the biggest effect and what I would I guess we call legacy products, because we have to (inaudible) after three years. But, these products have only been introduced in the last six or nine months, but they are really getting traction and the MAK kits and those kinds access. So, its kind of the product that we’ve introduced over the last couple of years that are giving us the strength. But I think what you will see going forward, here there is other one who will start kick in and they are all of those same point of sale and that’s why as I said both in conferences and other places it is apparent to me across the board that Merits grow on higher numbers is going to accelerate. That’s what we believe and we see them in clearly, there is some data to support that.

Christopher Warren

Understood just I promise two questions. Any update on the sort of secret weapon technology that you acquired from Japan and on R&D should we thinking close to $3 million a quarter or $2 million a quarter for the next three to six months?

Fred Lampropoulos

You are not going to see anything for the next six months, because we have not filed 5, 10-K you know, its one of those things with the project I will say this, I believe it’s a $30 million annual opportunity five years out. I think that in ‘09 we will introduce the product we will also introduce several others that we haven’t talked a lot about, but you are not going to see a whole lot -- any contributions in the first half of ‘09 as we get out there and sample and do the things when it do. So, we are not including that in this accelerated growth at all.

Kent Stanger

On the R&D question it will be sort of 2 million its not going to grow significantly or it might slightly decline as a percentage of sales but it stands, we got a pipeline of products and resources and we will bring them those through. So, we are not talking about adding lot of R&D to get these products out with existing resources.

Christopher Warren

Okay, perfect. Nicely done guys. Thanks for taking the questions.

Kent Stanger

Thanks Chris.

Operator

Our next question comes from the [Jason Jenford] with Raymond James. Please go ahead.

Jason Jenford

Thank you, and good afternoon guys.

Fred Lampropoulos

Hi, Jason.

Jason Jenford

Couple of quick questions for you just Fred you mentioned a couple of time growth continues to accelerate and I am just wondering you know, are you suggesting that growth will be north of 15%?

Fred Lampropoulos

No.

Jason Jenford

In the fourth quarter?

Fred Lampropoulos

No, no, no.

Jason Jenford

Okay.

Fred Lampropoulos

Now, what I am talking -- I am really talking about the nine months, if you recall last year we did 8% or 10% this year, you know, we haven’t done the forecast yet but if I would have given that thing today I would say that our growth will be in the mid teens, mid lower teens. So, 12, 13 that’s what I think will do but I will confirm that you could push up the 15% I suppose on the very high side but that’s not what I am saying you know, that would be we wouldn’t guide there, we will guide probably at 10 to 12, 11 to 13 and then we will see how things work out but if you want to ask the question of -- let me phrase the question is Merit capable of doing 15% next year and the answer is, absolutely.

Jason Jenford

And kind of the big drivers of that growth is it largely kind of the share gains and then modest contribution from new products, the secret weapon?

Fred Lampropoulos

That’s correct.

Jason Jenford

Okay.

Fred Lampropoulos

Yes, we have more than one secret weapon out here too.

Jason Jenford

All right.

Kent Stanger

And we need a nice market as far as procedure growth rate, we would have to not wane on it, it has to do strong.

Fred Lampropoulos

And I think Jason as you know in our business and in these times, I am not going to say we are recessionary proof because that implies a lot of things, but we are not seeing more into manufacture the contrary for our products. And our strategy, also we have invested heavily in staffing our OEM sales. We are hiring a guy in Europe. We have United States fully staffed. We’ve never had that in the past. That’s driving a lot of stuff so -- and I just think across the board, there is just a lot of opportunity, both in legacy and new products, but we are in a great business at a great time. I mean if you take a look at the financial condition, you can see it. Where else you are going to find a business that in a prolonged that I believe that this isn’t just a one or two quarter thing that some people say. This is, I believe, going to be an extraordinary time. I am sounding like an economist now but none of us have been on our lifetimes. What better business could you be than this one. We are in the right business at the right time and now we are going to get a lot of attention because in the past as you know, there are a lot of these things that get hot, they come and go and we are just kind of steady eddy, but steady eddy is kind of picking up some steam.

Jason Jenford

Sure. Well, sounds good. In terms of the gross margin, I understand the mixed impact with the custom kits, but higher material cost, freight labor, new products startup, which one of those factors impacted you guys the most and I guess just in terms of the new products startup, is there any kind of one-time cost associated with that?

Kent Stanger

I think the labor cost when we were going through the mix of those was probably the highest of those components you just named. The statements we gave in April that really affected this quarter more than of course even the second quarter by the time it rolls to your inventory.

Jason Jenford

Okay.

Kent Stanger

From your standard cost exchanges.

Fred Lampropoulos

And Jason, just go back, you would recall that as we moved in the second quarter in this country, we saw these record oil prices and commodity prices that were hurting our employees and we were still operating out here in Utah with most of our manufacturing is done at somewhere around a two-and-a-half or two and three-quarter unemployment rate. And so we felt compelled to make sure that we secured our work force. It was the right thing to do for our employees and for the business because of the slowdown and turnover that we see now. On the other side of that coin, we are seeing more and more layoffs. We are seeing more and more of the kinds of issues here in Utah. We have seen the rest of the country although it’s slower. We never really go up on the high side or down the low side, but we have seen a tremendous amount of easing of labor pressure. So what it means going forward is that we are not going to have the pressures of higher labor cost going forward that you might normally see. So we are not -- I don’t intend nor do I see in the cards that we would see any major increases in labor cost as we go forward next year other than some of the cost that you might see for healthcare and we are looking at how we will do that up as those costs come in, but we should not see any increases in labor cost. In fact, we will see lower turnover cost and that’s always maybe the higher cost is the turnover and we are not seeing that at all. We will see lower labor cost overseas where we also have a lot of products being produced in Iowa because of the strength of the dollar.

Jason Jenford

Okay. And just looking at your gross margin guidance that I think you mentioned and you kind of reiterated that seems to imply about 42% in the fourth quarter in terms of gross margin. Is that fair?

Fred Lampropoulos

It were to get to the 41.5 Jason but again, we can’t be jumping around quarter to quarter and jumping, is this now, is this the next week, is this the following week. We give guidance for the year and we try to stick to that. It would take 42% to get that. Is that going to be difficult to achieve? Yes. I think it’s fair to say it is going to be difficult to achieve. Are we unable to achieve it? I would say, no. It’s possible that we can. That’s our goal. But I think more important is this. We said 38.4 and 150. We are well ahead of that. There may be some adjustments but the other part that will offset, I think the real issue in a business. You may differ from how you view it. It is our earning power and our return on equity, and those are the things in driving that top line and building our franchise. Those things are all in place. I don’t see a retraction to where we were in the past. I see it still moving forward and as these prices come through, we work through it, the company is going to be on track to be able to improve over time our gross margins as our plan is and to increase our profitability. That’s why I think this is important. I think we all think that.

Jason Jenford

Okay. Fair enough and then just for me last question. The impact from Hurricane Ike, did it impact either revenue or gross margin in the third quarter?

Fred Lampropoulos

You’d recall that what we did is we took that as is required under accounting rules to take that, apply that as an SG&A cost. So it is in there. So the answer is it did not affect gross margins in the period. In terms of revenues, we were pretty unable to fulfill all other requirements that we have, I mean that shows off in the capital and this sort of thing. It is where the risk is. The risk is that when you are down for three weeks that means that you are going to have some -- that quarter so to speak going forward because you got to catch that up, pass it to your additional stuff. Now our production guys are telling us that we will be all caught up and we will have the standard inventories on the shelf including new products as we go through the balance of the year. So we are going to have some spot shortages, yes, but how? This is what’s really interesting as we work through this and now it’s been about three week since we’ve been up and running full time our that quarter has not increased. In fact we watch it every day appreciably. So I think we are managing and we are building the things that we need to do to make sure we get into customers on time. So there is a risk that you could see that if we drop the ball and we do the wrong things, but I think it’s a manageable and to be very candidly I think it’s a negligible risk.

Jason Jenford

Okay.

Kent Stanger

Anyways that revenues would be in the fourth quarter

Fred Lampropoulos

Yeah, we have commented…

Kent Stanger

Not before that insurance thing is going to kick in we were talking about that we don’t know what it is yet, but it should be covered by insurance.

Fred Lampropoulos

Yeah, we do have business continuation, a loss of those sales are covered by our insurance, which is kind of mix.

Jason Jenford

Okay. And there is going to be no spillover into the fourth quarter in terms of Hurricane Ike related cost?

Kent Stanger

We don’t think so. We think we pretty well have it wrapped up and I think we are pretty conservative in our approach to it in terms of material labor and our deductible and those sorts of things and I think that’s pretty well. I mean even though we are really down for short period of time and I think we can classify this as minor damage. We didn’t have anything catastrophic or anything like that. It was still a pain and a lot of work and took a lot of time to get this stuff done. I mean we had to get that besides. It’s the fastest growing part of your business. We brought in resources and again I want to commend our guys. We did a great job, a great job of getting this thing assessed and action – Jason, you would have been amazed if you would have seen all this happening.

Jason Jenford

It was amazing.

Kent Stanger

And just know the things. I am going to say this. None of our employees cost a nickel or wages. Everybody got paid; that’s in the numbers. We took care of our employees. We didn’t lose employees. We did what was right and that gives you strength.

Fred Lampropoulos

We paid a lot of bonuses for people to come in (inaudible) the ones who couldn’t come.

Kent Stanger

We moved our inventory at harms way. We had people on the ground. We got teams in. We had staff. I was on the ground, all were on the ground. I mean we there day after. And to get animals on the street is tree, buildings and the place got – it looked like a bomb hit the place. I mean there was a – we saw that in Galveston. We are 45 miles of west of Galveston, 50 miles south of Houston, it was a mess. We did it better than anybody in that area. It was extraordinary.

Fred Lampropoulos

All of those costs were already in our estimate.

Jason Jenford

Well, nice job guys. And that’s it for me. Thank you.

Kent Stanger

Thanks Jason.

Operator

Thank you. Our next question comes from James Sidoti with Sidoti & Company. Please go ahead.

James Sidoti

Good afternoon Fred.

Fred Lampropoulos

Hey Jim, how are you?

James Sidoti

Good. I just want to be clear. I think what you are saying is you saw growth somewhere between 8 to 10% in the fourth quarter based on your annual guidance. Does that seem reasonable?

Fred Lampropoulos

Yeah, it’s reasonable. I think there is quite a bit of upside to that Jim.

James Sidoti

Okay. And on the bottom line, I think your guidance was $0.70 to $0.72, do you have an update on that?

Fred Lampropoulos

We have no reason to change anything that’s out there in terms of what’s on the street, even with some of these extraordinary expenses, I think we are fine.

James Sidoti

Okay. So that 70, 72 is around right that view.

Fred Lampropoulos

Yeah.

James Sidoti

And then looking ahead, if the dollar does continue to get stronger over the next couple of months, is your natural hedge enough to kind of mitigate that impact on the bottom line or do you have any financial hedges in place?

Fred Lampropoulos

Yeah, we both hedge our receivables, we do that every month and then we have…

Kent Stanger

Our cash balances that we have.

Fred Lampropoulos

Our cash balances that we have as well as remember we have the manufacturing facilities. So, it’s not a big deal to us, it is really negligible.

James Sidoit

So, basically the strengthening dollar although it may slowdown some of the top line growth a little bit, it shouldn’t have any impact on the bottom line?

Fred Lampropoulos

That’s correct, very little.

Kent Stanger

Very little. Our manufacturing cost and offset that because it will be lower.

James Sidoti

Okay, alright.

Fred Lampropoulos

And then one other thing I’ll add to that is it adds profits in a lower tax environment, so the tax benefit helps to hedge that a little bit for us.

Kent Stanger

Yeah, that’s another good point, that’s right.

Fred Lampropoulos

So as labor costs come down, you make more – or tax 12.5%, that’s a very good catch Kent.

James Sidoti

Of the 30% or so revenue that do sell overseas, how much of that is denominated in your local currency and how much is in dollars?

Fred Lampropoulos

Jim, I’m going to have to get you back to that, do you know that number?

Kent Stanger

Our foreign currency, it’s about 11% of our sales.

James Sidoti

Right. Okay, so, 11% of sales is denominated foreign currencies?

Fred Lampropoulos

Again, it’s not a big deal.

James Sidoti

It shouldn’t be a big deal. Okay, alright, thank you.

Fred Lampropoulos

Hey, good Jim, thank you.

Operator

Thank you. Our next question comes from [Ken Grossman] with SG Capital. Please go ahead.

Unidentified Analyst

Yes, hi guys, congratulations on the quarter. I’m speaking for Ken Grossman from SG Capital and I am sorry if you guys already addressed this but can you provide a general sense on ’09 given the uncertainty of the environment?

Fred Lampropoulos

In terms of guidance and sales?

Unidentified Analyst

Yes.

Fred Lampropoulos

Okay. We have not provided guidance yet. We are in the process now of forecasting and budgeting for ’09. However, based on what we see and what we see as the acceleration of our growth, we expect to be in double digits growth for the entire year of ’09.

Unidentified Analyst

Okay.

Fred Lampropoulos

So this year as you know we were at 5, we were at 10, we were at 15, but we would expect to be somewhere in the low double digits is where I would expect to be. And then hopefully, we can do even better than that for the entire year. So, I am going to say 12%. I think we’re capable of doing that possibly better.

Unidentified Analyst

Okay. And do you think gross margins will be better too?

Fred Lampropoulos

We believe that as we add more volume, as we are disciplined in our approach to our business, as we have higher margin products come on board that we in fact will see higher gross margins. That’s our goal.

Unidentified Analyst

Okay, all right. That’s all I had to say. So thank you and good luck on the next future quarters.

Fred Lampropoulos

Great, thanks. Give my regards to Ken.

Unidentified Analyst

Thanks. Bye

Operator

[Operator Instructions]. We have no further questions, please continue.

Fred Lampropoulos

Well, let’s go ahead and close and summarize, again we appreciate your interest again as we all know there are difficult times not just in United States but across the world in a slowing economic environment. We believe that the company is well positioned with new products with a strong and a franchise that is getting stronger. We believe that we have a plan in place to take advantages of the opportunities.

The staff has worked very hard. We believe that many of the new products that we have are more than singles. We have some products that when we file our five 10-Ks will discussed we have a number of acquisition opportunities, in fact as I said earlier several other product and vendor issues that Merit is in the process of finishing up that we will be discussing at a future time. It’s actually a very good time for Merit, a very good time, no debt, plenty of cash flow, record EBIDTAs. We couldn’t be in better position. We simply to need to keep our senses about us. We need to keep our heads down, eyes open, and keep doing the job that we have done. This is a great staff and a great opportunity in any difficult market environment.

We believe that our shareholders are well positioned and our stock -- I know our stock price has been very volatile and candidly somewhat irritating but we are all irritated with all of this. But we believe that the critical issues of the day, are grow, quality grow, sound financial, and accounting principles and just being straight up and that’s what we try to do. We believe that we have done that and we will continue to do that and bring what we think are superior returns, comfort and security to our shareholders. The market will have its volatility but Merit will deliver. We have said it in the past. We have done it. We will continue to do it. I want to express my thanks to you, to my staff, and we are looking forward to several years of tremendous growth and opportunity in this company, which as these markets come to appreciate that and stabilize and candidly they don’t, we are still we think a place where investors should be looking very hard at Merit.

We will be attending several trade shows. We will be traveling at Europe to make presentations, so we are going to make sure that we are very active, make sure people know our story and why they should be investors in Merit and take advantage of what we think a very low prices at this point. We thank you again for your interest, your attendance in this meeting and we look forward to reporting results to you in the future. So we will be signing off now from Salt Lake City, wishing you a very nice evening and good bye.

Operator

Ladies and gentlemen, this concludes the Merit Medical third quarter earnings conference call. You may now disconnect. Thank you for using AT&T Conferencing.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!