Merit Medical Systems, Inc., Q4 2008 Earnings Call Transcript

|
 |  About: Merit Medical Systems, Inc. (MMSI)
by: SA Transcripts

Merit Medical Systems, Inc. (NASDAQ:MMSI)

Q4 2008 Earnings Call

February 5, 2009 5:00 pm ET

Executives

Fred P. Lampropoulos - Chairman, President, and Chief Executive Officer

Kent W. Stanger - Chief Financial Officer

Gregory L. Barnett - Chief Accounting Officer

Rashelle Perry - Chief Legal Officer

Analysts

Kevin Casey - Casey Capital

Christopher Warren - Caris & Company

James Sidoti - Sidoti & Company

Edward Han-Burgess - Raymond James & Associates

David Turkaly - Susquehanna Financial Group

Andrew O. Rem - FAF Advisors

Presentation

Operator

Welcome to the Merit Medical fourth quarter and year-end 2008 earnings conference call. (Operator Instructions). I would now like to turn the conference over to our host, Fred Lampropoulos.

Fred P. Lampropoulos

Good afternoon, ladies and gentlemen. This is Fred Lampropoulos. We’re assembled in Salt Lake City and other locations and are pleased to be reporting our year-end and fourth quarter results. We appreciate you being with us and look forward to your questions following our formal presentation. I’ve asked Rashelle Perry, our legal counsel, to read our Safe Harbor provision.

Rashelle Perry

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 and uncertainties are discussed in our Annual Report on Form 10-K and other reports and filings with the Securities and Exchange Commission which are also available on our website. To the extent all 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 P. Lampropoulos

Ladies and gentlemen, just about an hour ago Merit reported our year-end results and fourth quarter. The headline read that we had reported record sales earnings for the year ended December 31. As you’re all aware, Merit’s revenues for the year were $227 million compared to $208 million last year, our earnings were a record $20.1 million, up 33% from the year-before period, and gross margins improved to 41% from 38.4%.

I would like to bring to your attention that each of these benchmarks; revenues, earnings, gross margins were all ahead of schedule, all above what we had originally anticipated, and all in all we had a wonderful year. We did this despite tremendous increases in input costs, and everybody of course is well aware of the problems that all companies felt in the second, third, and fourth quarter as we had these huge input costs. We’re aware of an increasing of the dollar which had an effect in the fourth quarter, and I’ll talk to you about that. You’re all aware that we had to deal with Hurricane Ike, which cost about $1 million in charge, plus of course, the slowdown in response time; our facility was down almost 30 days in the fastest growing area of our sales, and then of course, one other issue that we’ll discuss in a few moments and that was the tax effect that hurt us in the fourth quarter regarding a securities issue in our top hat program, which required an expense against tax, which amounted to about $356,000. In just a few minutes I’ll have Greg Barnett just walk you through that. So, despite some of those issues, Merit had what I would consider to be a great year and I think has poised the company from a new product’s point of view, from a cash point of view, performance, facilities, and everything else to look forward to 2009.

Kent, I’m going to go ahead and ask you just for a minute to kind of step in here for a minute and just discuss a few of the points regarding some of the issues that I just discussed.

Kent W. Stanger

Well, for example, our sales, if you want to talk about that, in the fourth quarter our sales were up about 7%, but they were a little bit weaker because we had an OEM customer who for inventory management purposes deferred some of their shipments and it was a material amount. The euro in the fourth quarter declined in value as a relation to the dollar, which is the majority, the pound sterling as well, and so it had an effect of about $736,000 compared to the fourth quarter of a year ago of a reduction in our revenues. So those were top line influences that I think were significant that down turned a little bit the 7% number we had.

Fred P. Lampropoulos

And Greg, would you just briefly discuss the issue regarding the income tax expense that we discussed in the report that affected the fourth quarter?

Gregory L. Barnett

We have a deferred comp plan that’s an insurance plan that we had losses that the whole market saw and the deferred comp had as well, but those losses that are recognized in the deferred comp for tax purposes become a permanent item and affect our tax rate. And so in the quarter we had about a 2.4% effect to our taxes for that or about $356,000 that hit our bottom line because of the losses that were sustained in that deferred comp plan most of which occurred during the fourth quarter.

Fred P. Lampropoulos

So, we’ve talked about input costs, we’ve talked about the euro and pound sterling, we’ve talked about some of the market adjustments that we had to take and some of the other issues that affected the bottom line net. Despite all that, Merit, I think, performed admirably. We have a huge pipeline of new products. We received 510(NYSE:K) approval for our new microcatheter. In fact, I was just on the phone a few minutes ago, as we’re doing some market preference trials out in the Midwest, and the trials are going great, and we expect to launch this microcatheter some time in full market launch in just the next couple of weeks.

This is a product that sells for approximately $350. It’s used for procedures like UFEs, uterine fibroid embolization, it’s used in delivering various types of embolic materials, and we’re very excited about that product. Also, and it’s not likely that we’ll make any other press release to this effect, but I was notified yesterday that we received a 510(K) approval for our new inflation system, which we’ll introduce in the second quarter of this year or late first, probably early second, and we received that just yesterday.

So just in the last month or so we’ve received approval for our microcatheter, a new Miser contrast management system that is proprietary and we’re very excited about, and our new proprietary inflation system, and as a reminder to all of you, and as many of you know, Merit is the market leader, and we’re very excited about the Blue Diamond and the new inflation system which will be coming out in the next couple of months.

The MAK-NV, which is another product, which we introduced is doing very very well. Our new Short Sheaths, which are used for procedures in doing de-clots as the demand is outpacing currently our ability to produce them. So we’re gearing up for more production in that area. In fact I would say almost across the board that demand for our venous access products has been extraordinarily strong as we take and focus on vascular access going forward.

Merit continues to have no long-term debt. Merit continues to, I think, do a very good job in terms of our financial management. We ended the year with $34.3 million in cash, and I think that was compared to approximately $17 million or so the year before. And while we were doing all of this, we completed our new headquarters in Europe. We built and spent cash on some new automated equipment. Despite all that, we more than doubled our cash on hand. Income from operations was $31 million and inventory turns were approximately 3.7 times.

So, again, as we look at our business, we take a look, despite the headwinds that we see, and let me explain to you what I think the biggest risk going forward is in our business, and it’s really one that’s relatively unique, and it’s not really Merit. One of the risks that we’re seeing in this economic environment that we’re facing is with vendors, and we’re keeping a very close eye and monitoring the various inputs that we have from vendors across the board, and as the economy weakens, we’re seeing people that are shutting down plants; Panasonic, as you guys all know, announced that they were shutting down 27 plants, we buy a battery from them, and so these are the kinds of things that we have to look at. Now, I’m not saying it’s being affected. I’m just saying these are the kinds of things that this economic downturn, and in all the years I’ve been in this business, it’s the first time where I’ve had to really concentrate and focus, and Merit is making sure that we have backup vendors, and we’ve been doing this for some time. This isn’t something which started today, but something we started a few years ago. We were making sure that we had backup and alternate vendors for all of our critical parts.

That’s one of the biggest risks that I see going forward in our business, is making sure that we’re on top of these kinds of situations as the economic environment deteriorates. All in all, even though we’re seeing a lower euro and a lower pound sterling, we’re seeing a lot more interest in Europe. Many of our new products are being well received over there. We continue to look at expansion opportunities, and I think, for instance, in Germany we’ve added three or four new reps and a new country manager in Germany, which of course as you’re all aware is the largest market in Europe.

So all in all, if we look at our business, it’s healthy. We are well invested in research and development of new products, we’re relatively lean, and we have a good cash position and a great balance sheet. So I’m pleased and want to compliment my staff on their efforts, the hard work and the preparation they’ve done for 2009 and well into the future, and we believe that we’ll be able to continue to bring good results to our shareholders and as the company moves forward.

Kent, is there anything you’d like to add before we go to questions?

Kent W. Stanger

Yes, I would. I’d really like to emphasize the amount of leverage we got this year out of gross margin that was 270 basis points, and is in large part the reason why we had 33% increase on the bottom line, and so the operations group have done a good job of both leveraging the fixed cost that we have in place with the increasing volumes of production through our different facilities as well as the ability to automate and improve $5 million or more actually of cost savings programs and some of that was taking products down to a lower cost environment. So we had a lot of initiatives that I think were really helpful in making that almost 3% move this year in margins, and therefore of course the bottom line was greatly improved.

Fred P. Lampropoulos

Let me add a little bit more onto Kent’s comments regarding offshore. We continue to produce through a contract manufacturer a substantial amount of what I’ll call labor-intensive products in Mexico. We are in the process of site selection for a Merit facility; we’ve not selected that facility, but we’ve made it very clear that Merit is looking at Costa Rica, Mexico, and currently the Dominican Republic, and looking to have a Merit facility in the intermediate term, and we hope that that site selection will take place some time this year, and although it won’t affect 2009 we will look forward to the benefits of that as we look forward.

In Europe, and particularly in Ireland, one of the advantages of having a stronger dollar is the lower cost of production that we’ll have in Ireland, and particularly when we’re ramping up for some new products that are coming out of Ireland, that’s going to be to our benefit.

Another thing that we’re doing that is saving us a substantial amount of money and I think is a change in paradigm in the company is that we’re doing a lot of container shipments, and most of the products now that are going to Europe and coming back from Europe and from several locations like our Angleton facility and our Salt Lake facility are now going by ocean container and returning filled up with product coming back from Ireland, and I can just tell you that the cost savings are enormous, and that is well on its way, and essentially I think I can use the term that the pipeline is full, and by that I mean there are products going and coming and we’re beyond the initial test phases, and that’s going to literally save hundreds of thousands of dollars, and we’re preparing for the time in the future when you might see higher energy costs again, and we want to make sure that we’re in a position to do that. It’s the first time Merit has done that even though we’re 20 years old, and it’s something that I think is going to have a very positive effect on us going forward.

So, all in all, as we look at the business, in terms of new products and innovation, there are a lot of opportunities. There still continues to be a lot of potential add-ons. This year, as you know, we added a new product that helps to be used for the extraction of cuff catheters, and as I look at the sales that is in the sales channel now; it’s a product with probably 80% gross margins, it’s patented, and that product is starting to sell, and we’re seeing sales results of that every day.

So, as you can see, I think we have identified the cost issues, the cost opportunities for reduction, and the full pipeline. At the same time, our competitors, again, we haven't seen anything that would come in and challenge the various franchises that we have. We continue, I think, in the areas that we’re involved in, to be the leader in innovation for new product.

So I think that pretty well wraps up what I want to say. Again, I want to thank my staff, and I want to thank our shareholders for their continued support, and we look forward to 2009. I think at this point I’ll go ahead and turn the time over to our operator and we’ll start answering questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Kevin Casey with Casey Capital.

Kevin Casey - Casey Capital

Can you expand on the vendor and the issue with them? I assume the current vendors you’re using are probably the best quality and also the best price; so when you have to go to somebody else, are you losing quality or does it take time to ramp that up, and does it cause any interruptions? And also pricing, too, I assume when you’re going to somebody new they probably know somebody else?

Fred P. Lampropoulos

Kevin, let me go to an issue of resins, and I’ll talk about polycarbonate as an example. It is, I think, the largest plastic that we use for our syringes and inflation devices, manifolds, stopcocks, and so on and so forth. There are several companies. Again, I’m not going to go out and give names right now; I would do that privately, but I don’t want to talk about it. But let’s say the backup vendor has the same reputation, the same quality, the same service generally. What happens is you end up using a lot of these things for a long period of time, but what we’ve been doing for well over a year is qualifying other vendors.

Now, other vendors are so excited about getting our business that in order to get that business one of the things that’s understood upfront and negotiated is they have to be able to match the price and be able to do it on smaller volumes if they’re going to get their foot in the door. I mean, just like in my business, I can’t go out and say, “I have this new catheter, and, oh, by the way, would you like to pay $5 more for it,” when they have an acceptable catheter. And I would say that very same thing happens here, whether it be batteries, whether it be boxing, whether it be in corrugate, or whether it be resins. We have enough buying power across the board as a company because of the size to be able to negotiate and make sure that the parties both get a fair price.

So, I don’t see those as being issues of desperation or we have to accept the prices. I see them more of issues of negotiation, and I can tell you that our vendors are very, very hungry, because of, let’s say, the drop-off in the automotive industry or other areas, they’re very, very hungry for companies that are continuing to grow and have good prospects. So it’s not really that risk.

The risk is, and this is a long answer, I apologize, but the time that it takes to qualify. We’ve been working on the plastic side of this for some time around a couple of years, and going through and making sure that each mold, each part, can be qualified with another material, and it may have a little slight difference in, let’s say, a molding parameter; release time, injection time or pressure, and those sorts of things. So, it does take time, those costs are already being reflected in our costs, but it’s nothing that’s going to be significant over Merit as being held hostage to a price of a particular component.

Operator

Our next question comes from the line of Christopher Warren with Caris & Company.

Christopher Warren - Caris & Company

I wondered if you might offer some guidance on the top and bottom line for 2009.

Fred P. Lampropoulos

That’s a great question and you can see that we have avoided that. The best way for me to answer that is that we hope that sometime in the next week or two we’ll have another conference call that will be encompassing and talk about all of Merit’s prospects and opportunities going forward into 2009. I can give you some general parameters that go back to what we said a few years ago, and this is the kind of thing without giving guidance that I think will be the general parameters and that is that we believe that we can continue to improve our gross margins, we believe that we can continue to improve our profitability, and I see revenues are going to be in the range of somewhere around 8% or 10%. Now, that gives you a lot of information. I don’t see that there’s much change to that, but there’s a little bit of fine-tuning that we want to do, and with year-end and with sales conferences and the various things, we just didn’t feel comfortable with throwing all of that stuff out in this particular call, but in the next week or 10 days, two weeks, we’ll have another call and we’ll go through and give all that stuff so that we can separate these two out. We felt that this was significant enough that we wanted to make sure that we finished before we started.

Christopher Warren - Caris & Company

Certainly understood. If I could just follow up and say, was there something in the fourth quarter results that made you feel a little bit more hesitant to endorse, let’s say, a double-digit top line growth expectation for ’09?

Fred P. Lampropoulos

No.

Christopher Warren - Caris & Company

And you mentioned in the fourth quarter a little bit of inventory de-stocking from one customer; do you anticipate that to come back near term or do you think that’ll be sort of a year long thing?

Fred P. Lampropoulos

Yes, we’ve already seen that, but I think it raises another good question and that is one of the things that we are seeing is with that general customer, which is one of our largest customers, kind of a topping and slowing down in that business. Their growth was substantially; Kent, you have the exact numbers, but I think it was flat to slightly up this last year?

Kent W. Stanger

It was 2.3% growth, but what they bought from us.

Fred P. Lampropoulos

Yes, so that is slowing and kind of topping it out, and that’s being reflected, and you know the company that we’re talking about; you can see it on their calls, but here’s what we’ve done. On the OEM side of the business we have staffed the OEM, we have it fully staffed in the United States for the first time, and in Europe, and our overall OEM sales minus the one customer we talked about last year grew at 23%. So, we would expect that as we move forward, there are a lot of our customers; and I can tell you that although they’re not material and we would make press releases on this, in our OEM business we’ve landed several $0.5 million accounts, $0.75 million accounts, over the last several weeks that will help again to propel that particular part of our business forward as we go into ’09.

One of the great things and one of the great opportunities, Chris, is this. Some of these issues that I talked about with companies and the economic environment, Merit, being strong, having no debt, and being reliable, becomes an opportunity for us to go to other medical device companies in our OEM division, and they appreciate that stability in the fact that Merit has a strong product line. I’ll give you an example of one. We had a situation not long ago where someone had come to us, another vendor had a safety scalpel and they announced they were going out of business. Well, they worked it out, and then they decided they were staying in business. So the vendor, which is one of the largest; I’ll just say one of the big four in the country, came back to us and said, “Well, you know we’re thinking about doing this,” and we said, “Look, why would you want to go back when you’ve had to go through all of this hassle and you don’t have the reliability?” So they called us back the next day and said, “You’re right, why would we want to do that? Here’s our order.” And that order was worth somewhere around $0.25 million on just one part going to this next year.

So, I think Merit’s financial strength and reliability and breadth of product line is going to play very well into our OEM business, which is going to continue to be one of our stars going forward.

Christopher Warren - Caris & Company

And just one last question, I know towards the end of the year you talked about taking several sales territories in the US and maybe specializing the call points a little bit; are you continuing with that, and, if so, how’s it going?

Fred P. Lampropoulos

Yes, and the fact is we have done that. We probably have now I think it’s five or six territories where what we’ve done is we’ve split up what we call our procedure management business and our interventional business. All of those are functioning and growing at rates would allow us to invest in those as going forward. So, as the company moves forward, we’ll continue if we have a split territory or we have a vacancy, we will go ahead and hire and split the bag up because as you’ll recall in our conversation, we believe there are a lot of quality Merit products that aren’t getting the attention they need just simply because one of the problems we have is we have so many products it’s hard for a salesperson to sell them all. What a wonderful problem to have, but management’s choice is then to divide that bag up, and we’ve done it, and it has been successful, and we’re going to continue to do that, but still keep it within the range of our model of SG&A cost so that we can manage this going forward, but if you look at us five years from now as we progress through this, you’ll see that we’ll have a separate sales force for procedure management and a separate sales force for interventional. So, it’s progressing very nicely.

Operator

Our next question comes from the line of James Sidoti with Sidoti & Company.

James Sidoti - Sidoti & Company

A couple of questions; first on gross margin. Kent pointed out that you did a nice job this year extending that to 270 basis points. Going forward, should we assume you maintain this kind of trajectory or has most of the low-hanging fruit already been picked here and do you think it’ll slow down a little bit?

Fred P. Lampropoulos

It’s a good question, Jim. Originally, what we had put forth was a three-year plan to grow the gross margins at 150 basis points per year. This particular year, of course, as you can see, we did much better than that. I think what our goal would be is not to grow it at 270 or that sort of thing, but I think there’s a 100; Kent will probably say 80, but there’s somewhere between 80 and 125 basis points that we think are available this year with what we see today. Now, if we see lowering prices in commodities or at least stable prices in commodity prices, we might be able to do a little bit better. So I think we still think that there’s room there. We still want to stick with our three-year plan of 150 basis points a year, which would be 450 basis points off the 38.4% base that we talked about. So, I mean, the straight answer is there is more room. We did get a lot of the low-hanging fruit, but as each sales dollar comes in with the fixed cost that we have I think we're going to be able to do better. What offsets some of this is increases that we have, for instance, in let’s say healthcare, we have those kinds of cost input.

The other side is that because of the economic slowdown we’ve seen the turnover on our business, which is always a huge factor. When I say huge factor, I’ve seen it sometimes when it’s 30% or 40% on the production line, it has dropped dramatically. And, of course, what that means is you’re going to have more stability there; people are holding onto their jobs, we have less training costs, and better quality.

So, I think there’s a lot of opportunity going forward into 2009. The other thing is that we have these higher margin products and we have these newer products with higher dollar volume; for instance, our microcatheter, our extractor, a number of these products are higher margin and higher dollars, which over time is going to affect positively our gross margins.

James Sidoti - Sidoti & Company

So, you think you can grow at 80 to 100 basis points this year despite the stronger dollar?

Fred P. Lampropoulos

That’s correct. Remember, on the stronger dollar. Remember, that helps us in a place like Ireland where our production and our input on our vascular access is a lot higher. So that’s gone from, let’s say, $1.60, or the euro ranging of $1 to $1.60, down here to $1.28 or $1.29; that’s almost 30 basis points, and 30 basis points of labor cost is pretty dramatic, so it actually lowers our cost of our products coming into an area that we’re focusing on. So it actually helps us in that sense.

James Sidoti - Sidoti & Company

Can you talk about the acquisition pipeline, and is that a reason why you’re holding off on giving us a guidance?

Fred P. Lampropoulos

Jim, I can’t comment on acquisitions.

James Sidoti - Sidoti & Company

Okay. So, you said you plan to have another call though in the next few weeks?

Fred P. Lampropoulos

We do.

Operator

Our next question comes from the line of Edward Han-Burgess with Raymond James & Associates.

Edward Han-Burgess - Raymond James & Associates

Can you walk us through your operating expense in the quarter? It seems like SG&A was a little bit light and your gross margin was a little bit light as well. And then if you could touch on the tax rate, it jumps around a little bit, if you just exclude the tax item of 3.6 you get about 32.6% tax rate, and you got a tax benefit last quarter. I’m not really sure what is the going…

Fred P. Lampropoulos

Let me go ahead and ask Greg Barnett to jump in on the tax rate for the fourth quarter and discuss that with you, and then we’ll go to gross margin and SG&A cost and I’ll have Kent do those.

Gregory L. Barnett

We talked about that deferred comp tax effect. It was about 2.4% for the quarter, so it would have been about 34.5% for the quarter, and the year would have been about 33.6%. In the third quarter you recall that the FIN 48 lapse of statue on tax returns, we get a benefit in there for that quarter, and so every year in the third quarter we’ll see that blip where we get a lower effective tax rate than any other quarter in the year.

Fred P. Lampropoulos

Okay, is that clear, Edward? Do we need to talk any further about that?

Edward Han-Burgess - Raymond James & Associates

I’m sorry. Let me just get the numbers. It’s 34.5% for the quarter excluding deferred comps.

Gregory L. Barnett

Right, and then 33.6% about for the year had that not affected us. So year over year there wouldn’t have been much difference in the effective tax rate.

Edward Han-Burgess - Raymond James & Associates

And the renewed R&D tax credit impacted by how much?

Gregory L. Barnett

The R&D tax credit for the year was about 1% of favorable effect on our effective rate.

Edward Han-Burgess - Raymond James & Associates

And was there any update on state of Utah tax credit? You mentioned that may go up in 2009.

Fred P. Lampropoulos

Edward, I’m going to jump in on that particular issue. The legislature is in session, and I think we want to just defer any discussion about tax credits other than to say that they are in place. We think that they benefit the local economy and help us to hire people, but Merit is not going to comment any further. We’ll talk about the rates kind of offline with you, but we’d prefer not to discuss it publicly.

Edward Han-Burgess - Raymond James & Associates

Sure. Great.

Fred P. Lampropoulos

Kent, I’m going to have you go to the SG&A costs and go to the other issue that Edward brought up regarding gross margins.

Kent W. Stanger

Well, the quarter was stronger. In other words, we were starting to see some leverage in SG&A. We didn’t have any unusual costs in the quarter. It was kind of normal operating expenses only this quarter, so that kind of helped. We’ve had a couple of quarters where we had some adjustments from Ike and some impairments we made. And if you take those out, we’re actually down for the year as well a little bit. So we got a little leverage there where we’ve had a relatively fixed cost particularly in the G&A area, which stayed pretty constant, and had some incremental or variable cost in the sales group, but obvious for more revenues, for one reason, and then a few extra salespeople, but we’re generally running a model that I would say is that we intend to get a little leverage out of G&A and spend some of that probably in additional salespeople this year, and I think Fred has already mentioned that plan, so that helps you on some guidance. And R&D will stay pretty close to around 4% for our objective. We have a nice pipeline, we have a good group, and we’re getting the flow-through we want there, so it’ll be relatively fixed in percentage of sales.

Operator

Our next question comes from the line of Dave Turkaly with SIG.

David Turkaly - Susquehanna Financial Group

Really quickly, the FX impact of the quarter was how much?

Gregory L. Barnett

It was 1.3% on the sales, was about $700,000 negatively for the quarter, and the margins pretty much offset themselves because of the favorable effect we get in Ireland for the manufacturing that’s done there. So we don’t get much margin impact with the different exchange rates.

Kent W. Stanger

Revenues did get impacted, but the cost cut down…

Gregory L. Barnett

Costs cut down as well. They kind of offset themselves.

Fred P. Lampropoulos

Yes, in many ways, Dave, we have kind of almost a natural hedge in place because we do sell them and then they’re transferred from euros of course into dollars, and we’re still getting above that base rate, but, then again, our production costs go down too. So, we do have some exposure and in that quarter it was $700,000, but it’s not anything; if we didn’t have that operation over there, it would be dramatically more.

David Turkaly - Susquehanna Financial Group

And then, the OEM customer on the inflation side, I don’t know when the last time how big they were, but is there a ballpark figure in terms of…

Fred P. Lampropoulos

We’ve talked about it substantially in the past. It’s a big company that was acquired. I’ll just say that it was a company that was acquired by Medtronic, so it’s Medtronic, in their spine therapy, and that business has slowed down dramatically. So it was only up 2.3%, and they’re our largest OEM customer, but as I pointed out, that business still grew. When you take that particular customer out, that particular business, which is a $36 million to $40 million business, it still grew at 21% last year. And we, over the last year, have staffed the US for the first time in the company’s history; so we have a West Coast, a Midwest, an Eastern and we have, for the first time in the company’s history, a European OEM sales guy. So we believe that there are a lot of opportunities on the OEM side of the business going forward.

David Turkaly - Susquehanna Financial Group

And, just so I’m clear, really quickly, the 36 to 40, that's that one OEM?

Fred P. Lampropoulos

No, that’s the whole size. We have 925 active customers in our OEM business. That’s the overall business size of that business segment. And it shows up in catheters, it shows up in standalone, it shows up on a lot of those other segments, as we look at our business. You’d see the four different segments, but those are very, very big buckets with lots of products in them.

Operator

Our next question is a follow-up from the line of Kevin Casey with Casey Capital.

Kevin Casey - Casey Capital

I will just follow up on the sales force; how many people are you planning to add, and then how long does it take for them to get productive?

Fred P. Lampropoulos

We’re going to probably add this year that we have in our budget somewhere around six or seven salespeople for the year. Usually we find that for all intents and purposes it takes six to nine months for them to really get up to snuff, maybe we’ll use a year, because that’ll make it a little more conservative. There are a lot of products and a lot of things that they have to learn, but we’ve been doing this for a lot of years, and we have good training programs. They go through a very intense training program both in the field and in the home office, and then if they’re replacing somebody, one of the advantages we have, if I could just kind of maybe expand this, I think last year Merit lost a total of two salespeople in the whole year, out of a sales force in the United States approaching 70. And in Europe, we lost one, I think, in Germany, or something like that. We just don’t lose very many people. Why would you want to go to work for somebody else when you have a company like Merit? In fact, one of the people we hired last year was someone who left and went to another company and was there for two years and came back. So we rehired him. We had an open territory and we brought him back. So we don’t lose very many, but we will add this next year six, or maybe on the topside, eight.

Kevin Casey - Casey Capital

Okay. And then, going back to, I guess somebody asked about the margins, and you had a phenomenal year. I guess you almost got two years of improvement in one year, and then this goal of 450, is that like the end result, or is this like an ongoing thing and just maybe the big numbers, the big improvement is kind of over? You talked about three years getting 450 basis points.

Fred P. Lampropoulos

Yes, remember, we talked about this. I think going back 18 months ago. That’s when we put this plan into effect and said, “We think that we can do this over the next couple of years,” and it was a goal, and we were willing to put it out there. I think one of the advantages and things that would allow us to continue to grow our gross margins is what’s happening in our research and development, in the acquisition side, and in other areas that’ll allow us to have higher gross margins.

So, I don’t think that the gross margin story is over, but I think that the thing to do as we come to this commodity issue and some other issues that Merit is working on, that it wouldn’t be appropriate for me, at least right today, to sit and say, “to throw another 450 basis points on the table and say it’s a new 450-point program at this point.” I’ll say this. I believe that Merit’s gross margins will continue to improve. I believe there are opportunities in the marketplace that will allow us to bring in profits and to bring in products that have higher than our corporate average of gross margins, and over time that’s going to have an effect as that blends.

Kent W. Stanger

And just to add to that, that I think the major incentives that are going to be long term in their development over a decade or longer will be, just as Fred said, a mix issue, where we’re upping the technology, we’re moving to higher-margin product in the mix, product breadth. Third will be a lower cost manufacturing environment that we alluded to that we’re going to site select, and then we can continue on increasing the percentage of products that we get to reduce cost out of. Those two things I hope will continue that process towards our corporate objective of up to 50% in the future.

Fred P. Lampropoulos

He hit the nail on the head. Our objective is 50% and that’s where we’re heading. Now, it’s not going to happen next year or the year after, but it is going to happen.

Kevin Casey - Casey Capital

And then one question about mix; typically when you have these higher technology and higher-gross margin products, they’re a little harder to sell. So does that mean SG&A as a percent is going to stay up at high levels or increase a little?

Fred P. Lampropoulos

Well, I think your point is well taken, and that is, they are harder to sell, and just from just basic economics it’s going to attract more power and more players into that marketplace. I think the unique thing about Merit though is that we’re not somebody new showing up with a new product. Merit is in these labs every day and our salespeople have been there for a long time. So I don’t think we have to have a more expensive sales force or other factors. For example, on the microcatheter, we were in an account last week and we were trialing the account and showing it to one of the largest accounts in this country, and the initial comment, Kevin, when they were coming in, and says, “You know, I’ve looked at 100 of these things… blah-blah-blah… I’m not all that interested,” until we walked in and until they actually looked at the device and tried to kink it and tried to do this and tried to do that and said, “Oh, my goodness. I haven’t seen anything like this.” And, remember, our microcatheter comes from a deal that we cut with a company in Japan, who is the number two market shareholder over there, but had no distribution in the United States or in Europe. So this is a tried and proven microcatheter from the number two player, and when we bring that into the US at well above our corporate average, those things are very positive, calling on the very same point of sale. So I’m confident that our SG&A costs are not going to be higher and that we are going to be successful with these higher and more profitable products.

Kevin Casey - Casey Capital

Sounds great. Thanks.

Fred P. Lampropoulos

I appreciate it. Thank you, sir.

Operator

Our next question comes from the line of Andrew Rem with FAF Advisors.

Andrew O. Rem - FAF Advisors

Can you guys maybe just talk about on that OEM order delay; what kind of order of magnitude are we talking about, and then, is there any timing in terms of when that might come?

Fred P. Lampropoulos

They’ve already reordered. This was more of a year-end inventory issue, and this by the way is not uncommon for a lot of folks that aren’t performing very well, and I’m not talking about Merit and I’m certainly not trying, but it’s not unusual for companies to want to keep their inventory down and deferred, to have the order come to their back dock on the second of January. That was in fact the case in this situation where there wasn’t anything wrong. The company is doing fine. They’d slowed down a little bit, but we’ve already made several deliveries to them from that time. We’re talking about a couple of million dollars though that would have been in the quarter had they gone by what they told us they were going to do, and then they just deferred it and took it in January. So it’s already ongoing, but you know, a couple of million dollars would have added more profits. Despite that, we still exceeded year-end, and I think did a wonderful job as a company. So I don’t want to overstate that, and maybe we spent too much time on it, but they’re already taking orders, there’s no deferral; it’s just they didn’t take it in the last week of December and moved it out into January.

Andrew O. Rem - FAF Advisors

So we shouldn’t necessarily think of it as incremental to first quarter sales?

Fred P. Lampropoulos

I don’t think so. No, it’s not material enough or anything like that. No, it just moved a little bit over here, and then they’ll move it out. Yes. Although, I will say that that particular segment is slowing down a little bit from their historical growth rates, but on the other side of that coin, as I indicated, Merit has been staffing and working and believe that the OEM part of our business is substantial, and to be very candid with you, I’d rather have an order for $0.5 million, $0.75 million on an annual basis and have 20 of those than I would have one big customer. Merit doesn’t normally go out and seek large customers. We don’t want someone to have that kind of control or have that type of impact on us. So, Merit has always worked very carefully to make sure, and as I pointed out earlier, we have 925 active OEM customers.

Andrew O. Rem - FAF Advisors

Okay. And then, going back to Kent, your prior comments regarding SG&A; I know in the third quarter you guys had talked about the negative impact that you had as a result of Ike and that was part of the reason why we saw an SG&A spike-up; is the 22% to 23%, is that a normalized level that we should be thinking about or…

Kent W. Stanger

Yes, I think it is. I think 22% is on the low end of what we’ve spent in the last year. If you look back, it’s a pretty consistent number, around 22%. A few blips once in a while for something that’s out of the ordinary from an operational standpoint, such as the example you gave, but yes, generally without those kinds of unusual things, extraordinary expenses that we can’t really call that in the financials, it’s generally in the 23% range.

Andrew O. Rem - FAF Advisors

And then, can you guys, for the couple of new products that are launching, is this the wrong time to talk about what’s the market size and what can we look for from those products in the first 12 months?

Fred P. Lampropoulos

The ramp size for products or delays or this and that sometimes really affect the ability to do that and we prefer not to do that. I can talk about market size though in terms of microcatheters. We’re talking about $100 million plus for microcatheters, and we think that there’s an opportunity and we have the exclusive right to sell these products in the United States and Europe, and so we think there’s a great opportunity for them. I would be disappointed if it weren’t several million. In fact, I’ve heard several of our salespeople say this week that they thought this was a real sleeper and a real opportunity just based on the responses they’ve had from customers.

If we take a look at, for instance, the Miser, where we have a new product in that area, that product will release out in the middle of the year. It could have an impact of several million dollars. It’s a huge improvement, it’s a patented product, and we’re very excited about that.

If we look at our Short Sheath, that has been more than pleasing. It is a product that Merit sells into the fistula market, and I don’t want to say we’re having a tough time keeping up, but we’re just barely keeping up with the demand right now, and we’re trying to expand our capacity as we’ve launched it. We don’t want to go out and build a bunch of inventory and have the wrong mix. So we would rather have the demand from the marketplace pull it, but I think that one is going to be another sleeper, not a sleeper, but another star performer this year, along with the MAK-NV. I think the one that, personally, and I get excited about a lot of products, as you can tell, but the MAK-NV, which is a vascular access product, I personally believe is going to more than double what our internal forecasts are, and so that one, that’s an $80 to $90 product, and we’re very excited about it, but it looks like based on the performance we’ve seen, and that’s been out there three months or so, it’s just starting to ramp, but we’re seeing that that’s probably going to be more than double what we had originally anticipated in the first year. So I’m very excited about the MAK-NV which is again a vascular access product. Again, those types of products all have gross margins that are well ahead of our corporate average. So, again, as these things all blend in, it will help us in terms of gross margins going forward.

Kent W. Stanger

There are a couple of other things. We need to bring up that in our top 10, but here is the new micros products that are going to continue to grow that we bought a year ago and we’re getting transferred over into our production, so I think they have opportunity to contribute to this.

Fred P. Lampropoulos

Yes. We don’t talk much about that one though Kent. So, I’d prefer not to have any more dialogue on that one.

Kent W. Stanger

And then there was the new swappable transfer set.

Fred P. Lampropoulos

Now, that’s one I would like to talk about, and that is that this was a product last year that grew at, what 183% percent last year, Kent? It’s approaching a couple of million dollars and could very well double this year.

Kent W. Stanger

Yes, it’s up almost four times what it was last year.

Fred P. Lampropoulos

Okay, four times. So I guess to answer your question, we have a lot of products that we’re excited about with a well-motivated sales force, and I talk to these sales guys every day. They’re grateful to work for a company that has managed itself, I think, in the manner that we have with no debt and with plenty of cash and takes care of their employees. We do those things and I think that’s just, they’re confident, and I don’t mean that in a cocky way, but in a way that they’re confident and they can get up and go to work every day and know that they’re going to have a job that night, and I think that’s really important for them, and I’ve just seen it in talking to them, that they’re humble and strong, and I like that.

Andrew O. Rem - FAF Advisors

Can you guys maybe talk about, again, if you can be specific that would be great, or just order of magnitude for these new products that you’re coming out, and maybe even the ones that you’ve got in the pipeline or from an acquisition standpoint? What is their gross margin profile relative to your current corporate average just north of 41%?

Fred P. Lampropoulos

Well, if you look at 41% and then you look at all these new products, almost all of them have in excess of 60% gross margins, some of them higher, some of them a little bit lower, but I would say on an average they’re up in that range, and again, in terms of the overall dollars, we don’t go out and talk about those markets and how much we’re going to do. I think we believe that in this market with all the competitive factors that Merit can still be in the 8% to 10%, maybe higher, in terms of growth, and I think we just want to kind of stick with that. If there are some specific issues, maybe we can talk offline about that, but generally we don’t go out and talk about it and try to take one thing until we have the results. If we have the results and they’re empirical, then we’ll yell them from the highest mountain, but we prefer not to overstate it and then have it come in underneath it. That’s a tough one to play.

Andrew O. Rem - FAF Advisors

Okay, and then just the last question, is it fair to assume that you guys are not seeing any procedure impact?

Fred P. Lampropoulos

It’s a really good question. We have had numerous phone calls from people asking about statements being made by AHA and other players about the lower procedure rates. I’m not seeing, we’ve seen some slowdown I suppose if you take a look at our inflation business, which is mostly impacted by an OEM customer, but still I still think that the interventional procedures across the board in cardiology have been slowing down for some time and we have not seen the turn that many people have said would be there. It’s flat to slightly up and that’s about it. Some people have, I’ve even heard, say it’s down. We’re seeing the growth, and where we continue to see it is that Merit has spread out, and in the emerging countries Merit continues to do very well. In Europe we’re doing fine and in the US. Most of our procedures and the patients that use our products don’t have much of a choice. They need to have the procedure as opposed to some other situations where they may be affected by somebody’s health insurance or they may be elective surgeries. We’re not seeing, and Merit’s business is not generally affected by those types of procedures. I think we’re in a relatively unique position in that we’re well diversified across the board in interventional radiology, in cardiology, the OEM business, where people are looking for value and stability, and not in these elective areas that some other companies are being affected by.

Kent W. Stanger

Or capital equipment.

Fred P. Lampropoulos

Or capital equipment, yes. That’s a good point, Kent.

Operator

Our next question is a follow-up from the line of Christopher Warren with Caris & Company.

Christopher Warren - Caris & Company

Just wanted to touch on maybe raw materials, cost reductions, and some of the statements I think Kent had about potential lower costs going forward. How many quarters is it until the inventories sort of work through to the point where some of those benefits might accrue to the bottom line? And orders of magnitude, what kind of savings do you think you’d get on say a monthly basis there?

Fred P. Lampropoulos

Those are really good questions. Kent and I just had this conversation a couple of days ago as we were looking at the inventory and I think Kent and I had the discussion that it was about 12 months from when a producer produces a product until it comes to us and works through the system. I think most of the higher costs that we saw that came on in the second and third quarter are in our system and a good portion of them are through. There may be some that are not, but in terms of plastics and corrugate, we’ve gone to numerous people where we’ve seen surcharges, fuel surcharges; I was talking to our shipping people the other day where some surcharges just have gone away. Some of it though you have to stay after, Chris. We actually have to call people and say, “Hey, what’s this all about? We’re not paying this.” And they say, “Oh, it was an oversight.” It’s amazing to me about how much of this stuff tries to hold on, but I think you might get a little bit in the first quarter, but I think most of it will be out by then. Kent, you want to comment on it?

Kent W. Stanger

Yes, I think it varies. I think plastics are the slowest because of oil to produce the dowel or whatever, and then it goes into our molded parts and it’s raw materials, and then it moves into finished goods and finally off the shelf. It has a longer lead. I think some of our platinum goes through quicker. It’s the last thing added on and it goes out the door faster. It’s just got three or four months. So, it depends on the thing. I think the freight costs, and that you’ve already mentioned are a little quicker, too, if you can imperatively bid back down the numbers and ask for it as we’ve talked about.

Fred P. Lampropoulos

Chris, many of the incentives that we have for our purchasing department and for other areas though are to really focus in on these areas and make sure they’re coming down. And I think Kent’s point is also well taken. We buy platinum at spot prices, and we’ve seen one catheter have its cost reduced by $50 a catheter just in the cost of platinum. So this is a catheter that sells for $100, and it’s reduced by $50. So those are significant reductions and those have already come through the system already.

Christopher Warren - Caris & Company

So it sounds like then, along with the slowing economy, you’re saying the majority of the cost benefits of lower raw materials are already hitting the income statement or will it take six months?

Fred P. Lampropoulos

No, I think the point is this. I do not think that they are in fact. There are some and it varies. There are a few like platinum in those things. I think the majority will not, you have not seen the benefit of that at this point, but you will start to see that, because we’ve worked through that inventory in the second, third, and fourth quarter. Maybe a little hangover, but most of it’s going to be gone, and we’ll start to see the benefits. We have not seen it yet, but we should see it, and that’ll be one of the factors that’ll help us with our margins going forward.

Christopher Warren - Caris & Company

And is that implicit in your sort of general thoughts on 80 to 100 basis points?

Fred P. Lampropoulos

Yes, I think I’ve taken all those things. I’ve taken a look at the mix of the products. I’ve taken a look at the applications of overhead. I’ve thrown some increases that we’ve seen, as I’ve mentioned, with healthcare and those sorts of things. And, again, I would also like to point out that our goal is to under-promise and over-perform. We certainly hope that we can do better than that, but we want to be conservative, and we want to make sure these things play through and that we haven’t missed something. I’ll stick by what I said, and then I think again, Merit’s goal is to exceed, not to meet if we can. That’s our goal.

Operator

Our next question comes from the line of Edward Han-Burgess with Raymond James & Associates.

Edward Han-Burgess - Raymond James & Associates

Three quick questions. Why did goodwill jump by a $1 million in the quarter and sequentially?

Kent W. Stanger

Well, it was just from an acquisition. It was the (Trampack) acquisition. So we bought that new product that Fred referred to that’s for removing the dialysis catheters, and so there was a portion of the cost that we spent was attributed to goodwill.

Edward Han-Burgess - Raymond James & Associates

Okay. And any comments on cash flow in the quarter, we appreciate it. And lastly, Fred you already said you didn’t want to talk about M&A. If you could prioritize what you would like to do with the $34 million cash; that would be great.

Fred P. Lampropoulos

Yes, I’ll let Kent go ahead and answer the second question, and then I’ll comment on the last.

Kent W. Stanger

The cash flow continues to be strong as far as the cash flow from operations was over $28 million this year. Our income was up $5 million attributing that to the baseline. We did spend more on inventory this year, but I’m not sure what else you want to know about it.

Edward Han-Burgess - Raymond James & Associates

I’m sorry, you said $28 million in the quarter?

Kent W. Stanger

No. That was for the year. I can’t remember what it was for the quarter. I’d have to get the third quarter out real quick and get back to you on it.

Edward Han-Burgess - Raymond James & Associates

$28 million for the year is fine. Great.

Fred P. Lampropoulos

Okay, and let me address the last one. There are lots of opportunities out there, tons of them, more than we’ve ever seen, and certainly we believe that a portion of the cash that we have could be used for acquisitions and other opportunities, like we did with the (Trampack) device and others. So we have lots of things we’re working on, and I’ll just have to leave my comments at that point.

Operator

We show no questions at this time. Please continue.

Fred P. Lampropoulos

Let me go ahead and close. Just review for a moment Merit’s improvement in earnings for the year and in revenues for the year, in gross margins, our cash position, our new product pipeline; Merit is healthy, Merit is strong, Merit still has the energy that’s necessary to be successful going forward. We’re excited about the prospects of the business, particularly in these times when a business like Merit is, I don’t want to say unusual, but certainly we’re in a position where I think maybe we might be more appreciated for the things that we’ve accomplished all the years. We’re conservative, we manage our business, I think, the way it ought to be managed, we can still improve it, and that’s our goal, is to continually improve and bring more results.

I think in this economic environment, Merit has a little bit more bluster, and people will look at us. We expect to be at several trade shows and investment medical conferences in the next several weeks. We hope to talk to you in the next couple of weeks about the prospects for ’09, and we look forward to reporting those results and the results of the quarters as they go on through this year.

We appreciate your interest in the company. We look forward to building this company. We believe that we have the foundation and the energy to do so. So, with that being said, we’ll sign off now. Again, thanking all of you and wishing you Godspeed and good night.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using ACT Teleconference. You may now disconnect.

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!