Merit Medical Systems' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.25.14 | About: Merit Medical (MMSI)

Merit Medical Systems, Inc. (NASDAQ:MMSI)

Q1 2014 Earnings Conference Call

April 24, 2014 05:00 pm ET

Executives

Fred Lampropoulos - Chairman of the Board, President, Chief Executive Officer

Rashelle Perry - Chief Legal Officer

Kent Stanger - Chief Financial Officer, Secretary, Treasurer, Director

Analysts

Tom Gunderson - Piper Jaffray

Jayson Bedford - Raymond James

Jim Sidoti - Sidoti & Company

Greg Macosko - Montrose

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Merit Medical Systems Incorporated First Quarter 2014 Earnings Conference Call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions)

I would now like to turn the call over to Fred Lampropoulos, Chairman and CEO. Please go ahead, sir.

Fred Lampropoulos

Good afternoon, ladies and gentlemen. This is Fred Lampropoulos broadcasting from Salt Lake City, with our staff assembled in our conference room. We would like to start the meeting today by having Rashelle Perry, our General Counsel, discuss our Safe Harbor policy.

Rashelle Perry

Thank you, Fred. During our discussion today, reference maybe 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 historical maybe considered forward-looking statements. We caution you that all forward-looking statements involve risks, unanticipated events and uncertainties that could cause our actual results to differ materially from those anticipated in such statements.

Many of these risks are discussed in our annual report on Form 10-K and other reports and filings with the SEC available on our website. Any forward-looking statements made in this call, are made only as of today's date and we do not assume obligation to update such statements.

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

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

Fred Lampropoulos

Rashelle, thank you very much and good afternoon, ladies and gentlemen thank you for joining us. We are delighted to discuss with you today the results of our first quarter.

Before I get started, I would like to just go over a couple of issues that we hope that you will keep in mind. As you look at our sales effort, I think would all agree that this is a great performance. We are very, very excited about the sales results. It's approximately $5 million ahead of our internal forecast.

If we take a look at our earnings, those earnings are ahead of our internal forecast and we reaffirm the numbers that we put forth in our guidance, in our call, in February, so we are actually ahead of where we thought we would be now I recognized that it was a little difficult as we were discussing some of these expenses that would come into play in the first quarter. Things like the 401(k), which we have got back into place and I think we shared those numbers or the issues of why we thought that it was necessary after a year or three quarters of being taken away.

Pretty substantially increasing healthcare cost, approximately $1.8 million of healthcare costs, some ongoing litigation that we discussed with and I will get into more detailed with that and then some building allocation costs and we really essentially have two facilities in Texas right now, one in Angleton, Texas, and the new facility in Pearland, Texas. For those of who you may not recall several years ago we were hit by Hurricane Ike. We have been in a facility that's more than 60 years old and we felt that we needed to make some changes. We moved a portion of that business to Salt Lake City, and we then built this new facility which will withstand winds up to the 150-mile an hour range in a new facility, closer to Houston and the medical center in which we conduct substantial business, so those are a number of the issues that go onto play.

I think I continue, I think, to be optimistic about our sales, the efforts. I would like to discuss for a moment before I get into few other numbers. One of the developments that we have kept [somewhat] under-wraps and that is that effective the 1st of January, we have divided our sales force. A little detail on that, we first of all spent almost a year in planning and evaluating how we would do that, legibly do that. We did that, because we had such a large bag that it was very difficult for our sales force to be able to be proficient in selling products that are very, very complex that range all away from embolic, therapy to the placement of pacemakers and coronary sinus guides and a various types of things associated and EP and CRM business, and so what the emphasis coming in late yields, emphasis coming in other very complex areas, we just simply could not and did not feel that our sales people that handle all those products and so we redirected now a sales force that has about 35 direct salespeople in our interventional business and the balance of about now 90 salespeople that are in on our cardiovascular division.

Since the end of the year, we added about five direct salespeople and one or two clinical site folks and that was done to try to balance out the various holes in various areas as we put this together. I think the thing that's so pleasing about the performance from our point of view is, both of these organizations in the very first quarter of operations were at or above the forecast that we have and I think our guys did a terrific job.

What will it mean in the future? Well, products like our snares, our Peritoneal Dialysis catheters, our coronary sinus guys and some of these products will get more attention, more training. Consequently, we will benefit more sales. For example of one today, an account that they ordered almost $20,000 of catheters that we get about 65% gross margin and those particular products, we think, will continue to grow rather dramatically throughout the year and this is kind of, I don't want to say a surprise, but I think we are pleased, very pleased to have the results we see from these efforts they display.

Why didn't we talk more about it? It's simple, we did not want our competitors to be aware of what we were doing, and we didn't think it would have a material effect on the business, but we felt that the long-term it was necessary. We actually did it a couple of years ago then made a transaction the BioSphere side and had to kind of bring it back together.

This time it stays this way, for good, and we think that our products, our salespeople will be better informed, they will be better trained and consequently they will be able to train and have better dialogue with physicians. If we think about our embolic business, I think we are off to a very good start. As you can see from the first quarter we are up 28%, and I think we are seeing a substantial interest and kind of a revert our Embosphere business, along with I think a very nice increase in our HepaSphere business and I can say that not only did we get the orders at the end of last year that would have been in that fourth quarter and there was a lot of it there, but we continue to see that demand increase or continue, maybe a better word, and recently just on the last year when we received another $1 million order from Japan that will be delivered in the second quarter for our HepaSphere product.

We are now selling directly through our modified direct sales program, our HepaSphere in China, and we are receiving orders and by the way, the margins on that approach 90%. As we look at the business that the things that we have put in place, we look at the facilities, we look at the continued consolidation in Salt Lake City of our facilities here as an example. We moved into those facilities about one year ago. This is the new 285,000 square foot facilities in here in South Jordan. It takes time. We get those things up and running, get the flow correctly. We as you know shut down one facility and consolidated it here and I think we are starting to see the benefits of that.

We have two major automation projects that will come on this month. One is, we've automated our transducers. That's the project we've been working now for approximately 18 months. Our new chipping systems that literally come on order, comes into our system to what when it goes on the truck, it was really essentially free in hands and we think that that is going to be a great saver in cost and will help us to be much more efficient and proficient and accurate in moving products and increasing the velocity of product that move out of here and thereby decrease the need that we have for facilities in the future. We just simply moved things faster and I think that's good news.

If you go over to Europe and think about the results both, on the EMEA side as well as in the direct sales side, I think you can look at those numbers and they are up about up 31%. It's an extraordinary effort, 31% increase in sales. These are dealers and direct. It's substantial.

You can see the China results, and this does not include by the way very much on the embolic side. Very little of the increase that we are seeing in China is from the embolics, but we expect as we go forward that you will see a substantial contribution from our Chinese efforts in our embolics. This comes from a broader acceptance of products and registrations that we have put into place in which products like our infusion catheters, our guiding catheters, our sheets and other products are now starting to take hold in China.

Then finally, before I ask Kent to kind of weigh in on some of the financial issues, I think it's very important to know what's going on out in Melbourne. Many of you will remember that this is really the Thomas Medical now known as the Melbourne Division of Merit Medical, sales in that particular effort were up 49%.

You recall that first quarter, we had following the transaction last year, was I get somewhat of a disaster. We had lost a major customer and it put a lot of pressure on us and, but what did we do? We went to our sales force, we went directly with the product and we picked up a good portion and ramped up to a good portion of the recovery of what we lost.

In addition to that, I think one of the surprises out of Melbourne has been the acceptance and the enthusiasm worldwide for our coronary sinus guides and these are ways to cumulate the vessels necessary for electrophysiology and for CRM procedures, so we also have Meritized the business, and by that I mean we have a very active research and development program out there, we have several new products that I think will help us not only take back some of that business we may have lost, but will be substantial contributors to growth.

As my recollection serves me correctly Kent, and I am just kind of going off, some numbers I recall, we did almost $3 million in the month of March, which should put us on the $36 million ramp out there. That's pretty exciting. I think, when we bought it, it had a $26 million ramp or sales actual I think is [worth] I could be off by a little bit, but the point is that that business is growing and that we are excited about things that are going out there

I could talk to you about smaller pieces of business like our sensor business, which is up 117% and others, but I think all-in-all the sales efforts are things that I am pleased with, particularly when you start out that New Year and you are a little bit slightest for probably the first half of January, it was weather. I think that was an issue for a lot of people. You hear about it, I don't want to hang my hat on it, but we just couldn't get product places. It's hard to think about that as we are looking out the window now we see trees in bloom, but we can tell you that whether the shipments to Europe or shipments to the East Coast, there are a number of delays. Despite that, I think, we hit numbers that we are very pleased with.

Kent, I am going to spend some time over to you and let you talk about the things that you dream about at night, the numbers.

Kent Stanger

I would like to just recap some of the major points. First, we hit $119 million in the quarter, just short of last quarter's record of $120 million. We were up 15%. I think that's more significant that Fred has really been talking about. Our non-GAAP net income was $5.4 million or $0.12 a share that was up from last year's $4.3 million.

Our GAAP income was $2.8 million or $0.07. That was also up a lot from last year's $671,000 for the quarter. We can talk about ourselves going in, I want to recap a few of them. Malvern was up 49%. BioSphere, that group of products is up 28%. The standalone products were up 18% and those were some of the best. I wouldn't say it's with our inflation devices actually up 10%. They have been growing slower, so it's nice to see that in our OEM customer actually added to instead of taking on that one.

Non-GAAP gross margins were 46%, compared to last year's 44.4%, so again we had improvement year-to-year on that and the GAAP margins were up as considerably 43.6 compared to 41.4, We have seen some loss momentum in the gross margins but year-to-year, we are doing well and we expect it to accelerate through the year as we are able to produce and sell more products according to our sales forecast.

Income from operations then which is a key point, was $10.3 million or 8.7% of sales and we were up 40% on that metric over last year $7.4 million, so we are seeing really improvement year-over-year in almost all the areas of our business as far as the income statement goes.

Fred Lampropoulos

Kent, thank you. We want to I think speaking in candid with all you guys and one of the things we were talking about, I am going to say it so that you won't, but we were talking about, that last year we were talking about particularly of that first quarter was improving quarter-to-quarter and we were talking today about what we want to look at as the improvement from this quarter over the first quarter of last year, so Kent was teasing me a little bit and saying, quarter-to-quarter improvement, but now we are telling you something different. Again, we are focusing on the comparison and I don't feel bad about where we are sequentially.

Even our sales were up slightly an extraordinary fourth quarter, but I think the thing that is important to remember are these other issues that came into play that we discussed with you in our guidance call that is the litigations so on, so forth. Let me tell you where we are on the litigation, we spent during the quarter just about $300,000. I don't like spending money on litigation, but there are times when you have to draw a line in the sand and that's what we have. We are to the point now, where we are coming down to the backstretch and we will be working on expert witnesses and by the time we get down to August or September, this thing should be resolved.

We are confident it's going to be resolved in Merit's favor. We would not have brought the case just to refresh of the memory, we are the plaintiffs, so we have got more work to do on this and we will keep you brief as this particular situation plays out. We have talked about the new facility, we have talked about the things in automation and the programs that are going on here.

Currently, we need to have more leverage, but I will you it's also a tough business. There is price pressures out there, we don't have a lot of elasticity in pricing as many of you know. One of the things about splitting out the sales force is that allows us to work in areas that will give us higher margin and these are specifically the embolics, so if we look at where we are with embolics today, if we look at a year ago, we lost in the domestic market almost $3.5 million dollars with the revenues on our embolics.

Now, if we take a look at the business today on a global basis, with the work that we put in the last couple of years in China and Japan, as well as the United States and Europe, we are starting to see because of this focus and effort, I think we are starting to see that this thing is turning in the direction we want and essentially the product that gives us the highest margins. We will be attending the guest meeting in about a week, which is the global embolization meeting in San Francisco and we are this week at the ECIO, and I just got a report before this meeting that our booth is very, very active and the guys they feel very positive about our efforts there.

Kent, you wanted to add?

Kent Stanger

Yes. I just wanted on the quarters (Inaudible) that's 70% year-to-year on that particular product line, so it's exciting to see that growth.

Fred Lampropoulos

Our inventory turns have improved and we are very pleased about that. The other thing is the integration of the Maquet, Datascope was really absolutely seamless. That is going to become a big player as we now introduce our new Sheath at the EuroPCR. This is a Hydrophilic Sheath, so one of the you will hear a lot about and that you will see a lot of results from is really the continuation of our radio business, so that product will be released next week in Europe. It is submitted to the FDA, so it is in the review process right now with the FDA, and our expectation is, our hope is that sometime in the late second, early third quarter that this will be approved in the United States.

When you add that along with our Safeguard closure devices, you add it with our boards, our wires and all the other products it's a very, very big deal, so we are very excited. The pipeline includes a lot of products that are coming out, whether it would be crossing catheters, whether they would be our steerable catheter, we could go onto gel foam, which we hope to introduce this year.

Asia, I was looking at the numbers today in our Aspiration business was just about $1 million in the first quarter, about $4 million business and something that I think that we are going to be very excited about and something we have been waiting for a very long time. You know sometimes this business it could be very frustrating. It's frustrating to you sometimes and also to us, but biliary catheter, which really fills out our drainage catheter, becomes a very, very big a deal. Incidentally, this particular product is going to be staying now shoulder-to-shoulder with the business that's up 54% in the first quarter.

When we add that biliary catheter that then means that a customer can buy all of their drainage catheters from us versus some of those, that's a big deal and I expect that - I am not going to say that's going to go 50%. You know what? I might say that. We might see this business of 50% this year. In the first quarter, we are talking about business then just on the locking side did $1 million, so this is another product.

We have number of areas in our portfolio that we are going to continue to grow very, very, very rapidly and I think our worldwide effort, so we have got a nice business. Can it be a better business? Of course it can and we work every day trying to prove the business here to give returns to our shareholders.

One other point I want to make and I won't stand it long, there were no bonuses paid anybody here last year on this general staff and so I won't say anything more than that. You can read our proxy statement for our shareholders statement, but there were no bonuses essentially paid for the general staff last year, but we want get some bonuses this year. In order to do that, we have to meet all our goals and exceed them, so we are going to work very hard to accomplish that.

I think that's pretty well says what I want to say, so I think what will do now, we will go back to Lorenzo, Lorenzo, let's open up the line and see who is in the queue or who is getting in the queue for us.

Question-and-Answer Session

Operator

Yes, sir. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions) The first question is from the line of Tom Gunderson with Piper Jaffray. Please go ahead.

Tom Gunderson - Piper Jaffray

Hi. Thank you and good afternoon guys.

Fred Lampropoulos

Good afternoon, Tom.

Tom Gunderson - Piper Jaffray

I guess a lot of upside surprises here, Fred. I guess, the biggest one for me was on the embolics. Can you give us a little bit more color on where you thought that growth came from? Was it may be a major U.S. OUS split. Then, do you think this is a new base level that we can look at for embolics or was there some first quarter kind of things going on in there?

Fred Lampropoulos

You recall, Tom, that we got approval from the Japanese government in the fourth quarter and that we had some initial shipments. Most of those I suppose you could say were on the pipeline, so we got a couple of reorders, substantial reorders and I mentioned that just yesterday we have received another $1 million order for delivery by the end of the second quarter for our HepaSphere product, so both Embosphere and HepaSphere both, in China and in Japan are in very, very big demand.

I think the biggest opportunity is really going to come out of China, and remember that with this you also have the micro catheters and all vascular access products that go along with it. Now, we've also had a substantially increase in our effort and our attention in Europe. One other thing I think that's important, we have a small other product, a product PVA polyvinyl alcohol and that is an also embolic material. Then we have another embolic material coming out and we have three or four more embolic projects that are very exciting projects in the next several years.

I mean, these are not things that are easily done and they take time, but we have an embolic program and we are getting reach in Central South America, in Asia, in Europe, the United States is kind of bumping up pretty dramatically and is one of the things that we are doing, working smarter.

Let me give you an example. In the embolics site for UFE's, we are doing a lot of things with social media, we are doing a lot of things in terms of advertising that we think reaches a lot more people and is a lot less expensive than some of the things that we have done at BioSphere and kind of things that we inherited. Now that some might be a criticism of them, but it is saying that I think we are becoming a little more [happening] in terms of understanding how to reach our customer base.

In particularly with physicians, we can get those referrals. What it means for our ability to bring customers to physicians and improve their business, so we are getting much better at this and some my expectation is, this is just the beginning of a global improvement in this business.

As I mentioned in the fourth quarter, now we are in the third month, we are at about, see I forget, so I am just going to just withdraw the comment, but we are busy, we are growing dramatically and that's a long answer to your question, but we are very excited and very excited about next week at the GUEST meeting.

By the way, it may get a little longer. We started that study and this study for PAE is a very, very hot and exciting subject amongst interventionalists around the world. We have also as part of this, and I was up in Vancouver last week, there is now other discussions of other areas of interest whether it would be gastric artery embolization or other types of areas where people are now starting to look, where else can I do this that would be helpful, so there's a lot of conversation and think what's happened and I will close with this is that Merit's standing and Merit's posture and investment in this particular market is appreciated by physicians who happen to buy most of our other products as well, so I think that's part of it. Long answer, but clearly we are more excited about the embolic business.

Tom Gunderson - Piper Jaffray

Got it. Thanks and thanks for the color, so my only other question for this round is China. You have mentioned it a few times in your comments here and it's a big part of what's going on in a number of product areas, but I am curious where you are in converting regulatory approvals of the entire catalog of Merit products into China products?

Fred Lampropoulos

Yes. Well, we have an active program in which we are actively having products all the time that go through the through that process. Right now, we are going to the process of getting some of our stents approved, so then I saw it won't forget our AEROSIZER, pulmonary stents have just been approved in Japan. We just attended to show there. That's another exciting opportunity in our endoscopic business.

If you would have looked at our embolic business or at least our China business four years ago, you would've seen that there were five products that were approved. Almost on any given day, I would say about a third of our entire product line, but probably representing better than half or so of the revenues that come from the company. By that I mean, the ones that generate largest revenue a good portion of those are now just starting to be sold, so we have active registrations, we get new registrations and one of the other things that's important in China is not just new registrations, but the renewals is something that you really have to be on top of, so you can run out.

One of the things that's different in the U.S. is you have to renew these things every three or four years and in the U.S., you get a 510 (k), unless there is some significant change that kind of last forever so to speak, so we probably 30, 40 products now approved versus that five and we continue to register those products as we see those demands or demand for the product and interest in the product, so it's an active, ongoing, never-ending process of new products Procine catheters, Hydrophilic sheaths, stents, embolics not just in bios that maybe in syringes, so it's a long process and one which we have dedicated probably three, or four people with our staff right there in China, so it's a busy, busy.

One other thing too is, not only this stuff coming from the north, but it's also coming from our Shanghai office, our Hong Kong office and our business in all of Southeast Asia is growing dramatically, so it's kind of across the board, Tom, something in which we invest a lot of money, we get started there and I think we are getting the results and our margins are by the way higher than a corporate average, so we get better prices in China than we do in the United States and Europe, so it's a great place to be.

I think we now have about 53 full-time employees in our Beijing office, so exciting business opportunity. I am glad we are there. I am glad we made the investment.

Tom Gunderson - Piper Jaffray

Got it. Thanks, Fred. That's it for me.

Fred Lampropoulos

Thanks, Tom.

Operator

Thank you. Our next question is from the line of Jayson Bedford with Raymond James. Please go ahead.

Jayson Bedford - Raymond James

Good afternoon and thanks for taking the questions. Just a few, I guess just a follow-up on Tom's question on the embolics, how does it roughly break out between UFE versus oncology and maybe U.S versus international

Fred Lampropoulos

Kent, you have got the numbers?

Kent Stanger

I have the product, so I'm not going to go by procedure utilization. Although quite as fair to say is mostly what you're talking about, so it was $2.4 million for the quarter on the QuadraSphere HepaSphere and it was $6.7 million on Embosphere. There is another $400,000 that's on the PVA and some miscellaneous catheters and wires for a totaled $9.5 million.

Rashelle Perry

So, it's going to be one-third right now.

Kent Stanger

So, I don't know the international.

Rashelle Perry

We can give you the international, we can get that for you may be model up, but yes the other thing that's important to note is that, when we bought this business, revenues in that particular area I think were less than $1 million, so I mean, we have come a long ways with building this product essentially from almost the basement into a pretty good size franchise and I expect it will grow dramatically.

I would not be surprised, Jayson, if in five years this business wasn't $30 million just on HepaSphere's. This overall business has the potential to become $100 million. Now, that's a long ways for now, but that was kind of always our view. You will need other things to take place, a couple of other things but I am not adding some of, what I think are huge opportunities. I am talking about the base of products we have now, have that kind of opportunity as we talked.

Now, remember we are investing in things like the high-quality study. We have the best study, so we are doing things that we think are necessary as well as smaller studies that a number of physicians are doing to take a look at kind of local populations and smaller issues, so I think we are very active in the area and it drives a lot of other product sales. Remember, it has to be delivered and it has to be in excess, so it has a lot of pieces and those things are I think somewhat unique to Merit.

Jayson Bedford - Raymond James

That's helpful. On the expense side, I just wanted to tackle the, whether you want to look at it year-over-year, quarter-over-quarter bump up in G&A, so I guess a few questions here just trying to put some of the factors. You are running two facilities in Texas right now in Angleton and Pearland. When do the costs related to Angleton kind of falloff and are we working through a period of kind of elevated spend at Pearland that will again kind of shed some of these costs as the year goes on?

Fred Lampropoulos

Yes. It's a good question and I'm really glad you asked it. Right now, we have an operation running in Pearland. We opened the facility about a month ago and we are transferring it up. That transfer will be completed in September. In the meantime, the expenses show up in the SG&A line, but as it moves close to September and a higher percentage of the production that is done there, it will kind of ramp down in one area and ramp other and move from the SG&A into the cost of goods section.

Now, that's how it ramp out and by September it will all be completed. Incidentally, just as a point of interest, there are a number of economic incentives that to go along with this with the state of Texas and the local authorities there, so these deadlines of September will be hit and I think we will have a much better business.

I think, maybe of more importance of that kind of at one part, we have a new management team down in Pearland and Angleton right now, they kind of move between the two. One of the other things that we are doing Jayson is, we're moving a lot of products that were being done out of house to the new Pearland facility. I can think about two major projects that right now Merit makes a 65% gross margins on these products, but some of the shafts and some of the work being done in-house, so it seem silly to me that we can extrude, grade and finished catheters we have other people doing it for us.

In fact, I think it's nonsense, and I think our new management team and Chief Operating Officer and this is kind of this whole planned and our thinking is moving to bring all of those things in-house and those will help to offset the increased cost that we have down there, so really look at Angleton moving to Pearland and we look at this business may be two years from now, you are going to it substantially different business with a lot of that work being done and applying overheads to offset the cost of these new facilities.

Now, I May sound a little disrespectful to our previous management team and so on so forth. That's not the intent. They didn't have a facility to move into. They did a very nice job of dealing with what they had to in a very limited and very old facility, so I think I have answered the question on how expense is going to kind of kind - right, but in the first quarter we spent in the SG&A almost $900,000 that's in the SG&A line that eventually will be up in the other line.

Now, the good news is we are moving a number of products there. Even some of our stent packaging and delivery systems, I mean, we are moving several million dollars of expenses that are going out of house moving them all into house into this new facility over the next year to 18 months, so those are exciting things.

It means we are going to have higher gross margins almost product and they will offset these new expenses and have plenty of capacity. I think that's another thing that is something I want people to hear today and that is if you come to Merit facility and incidentally we will be announcing sometime in the very near future an Investor Day.

We think it's important to get people out here to see what we have. I had one of our largest investors here recently. They came out, they were looking at all of things, they had some concerns about our business and so on. They came here and they said you know, Fred, we listen to your talk and all the various (Inaudible) seeing what you are saying understanding it makes, there is a huge difference.

Jayson, you have been here. I am not going to ask you to give us a testimonial, but we believe it's time to have Investor Day out here, we are going to bring shareholders, old and new and bring them out or show them what we are doing and we are going to convince them that what we are doing is right, we are going to convince them there is great opportunity this business and I sound like I am trying to cheer up my football team for they hit the field, but I'll stop there.

Jayson Bedford - Raymond James

No. I appreciate the detail there. I guess, on Angleton, it sounds like you are still carrying cost there. When does that facility get shutdown plus that you won't carry those costs?

Fred Lampropoulos

By the end of September, there will be a little of maintenance, but it's also up for sale. We own the facility and I think 14 adjacent acres. I just a note this week, where there is some interest by the city, the county and it's a big area for Dow Chemical and a number of businesses, so by the end of September we will be out, we will be fully relocated and will either sell that facility. If we can't sell it, we are going to take a knockdown at old facility. It shouldn't have any effect really on the balance sheet or anything like that or income statement and then we will see what we can do to sell that.

I think probably almost 20 acres, down in Angleton, but we will be fully relocated at that particular time into the new facility up in the Houston.

Jayson Bedford - Raymond James

My last question on this questions and then I'll drop here, but again, just still trying to reconcile the jump in SG&A. The healthcare cost, the 401(k) true-ups that you mentioned are those heavier in the first quarter?

Fred Lampropoulos

Yes. The 401(k) was in the first quarter last year, but it is incrementally higher. In the second, third and fourth quarters last year, remember we held back on that, we discontinued it and so this expenses we get into these other areas will be higher, but those are in our estimate. That's on that SG&A side.

On the insurance side that's starting right from month one and that's up dramatically just simply, because of the increase we received. However, we have a number of plans and other things that I won't go into a lot of detail, but we have got a lot of things here that's helped lower and to manage our healthcare costs and sometime in the future I will talk to you about this.

They are not material to our discussion today, but there's a lot of exciting things that we are doing here to convert it. We can't take it into our own hands and then I'll kind of leave at that for right now. Kent, you want to comment?

Kent Stanger

I just wanted to reaffirm that most of these costs are that are step up sequentially, because they are either additions or new costs that we didn't have last year maybe, but as far as moving forward they are pretty well constantly. I mean, they help coverage the 401(k) in place expected for the year, the building costs are going to be one place or another in the statements, principally right now they are in SG&A numbers out of that into cost of sales. Does that answer your question?

Jayson Bedford - Raymond James

It does to some extent.

Fred Lampropoulos

Kent you got to clarify.

Kent Stanger

The other big thing is that you got increased headcount is probably largest increases far as comparing year-to-year the number of people in different positions in salaries and wages are the biggest line item increase in there. Then some of the other things we been talking about.

Jayson Bedford - Raymond James

Okay. Thanks guys. I will get back in queue.

Fred Lampropoulos

Jayson, just one other reminder before you leave, you noticed that when they heard we were coming with a huge scenario, because we were kind of right there that they changed Houston from national league to the American league, so now we got Tampa, Boston and now the next place is coming to Salt Lake City, so just I thought that could be in your report.

Jayson Bedford - Raymond James

Here we go. Thanks.

Fred Lampropoulos

Thank you.

Operator

Thank you. Our next question is from the line of Jim Sidoti with Sidoti & Company. Please go ahead.

Jim Sidoti - Sidoti & Company

Good afternoon. Can you hear me?

Kent Stanger

Yes.

Fred Lampropoulos

Yes. Jimmy, how are you?

Jim Sidoti - Sidoti & Company

Good how are you?

Fred Lampropoulos

Good, I am coming to San Francisco to meet with some of your investors.

Jim Sidoti - Sidoti & Company

Yes. We got that, we are setting that up. That you very much.

Fred Lampropoulos

You're welcome.

Jim Sidoti - Sidoti & Company

I assume that once you can see if I won a [foot race].

Fred Lampropoulos

Up, up. Just keep me dry, Jimmy. Keep me dry.

Jim Sidoti - Sidoti & Company

Kent had cast and everything then I thought maybe you finally had an advantage.

Fred Lampropoulos

…finally have advantage. There we go again. There you go. I work all this and he gets all the credit. I don't understand, but what can I do you for you, Jimmy?

Jim Sidoti - Sidoti & Company

There was an FDA warning. I think warning last week against Power Morcellation of uterine fibroids. How is that going to affect your business for being balanced?

Fred Lampropoulos

We are well aware of that. It was a subject that was actually brought up several months ago and then I kind of hit the journal. I think it's probably better. I'm not a medical doctor, so I will just kind of stay away from other than saying that that business is moving up. Women have choices and I think that they need to consider UFE. Over any of the other treatment modems, I think if it were my family, my wife, whoever, those are the things we are going to look at and I think it's a great opportunity for Merit, and particularly you have that kind of choice.

If you think about the morbidity and the mortality associated with hysterectomy. Think about all those things and I think this is a great alternative and clearly 30,000 women a year having a UFE procedure, so and I think some of the things we are doing, Jim and maybe I can share this with you sometime soon as, is really some of the things we are doing to increase this awareness, but given the choice it's been my - it's going to be first choice. You have to consider it.

You are talking about essentially an outpatient procedure versus a lot of changes and major surgery, so that that argument has always been there. I think the more people know about it, the more opportunity Merit is going to have of patients in to treat them.

Jim Sidoti - Sidoti & Company

Do you expect to increase your direct to consumer advertising?

Fred Lampropoulos

Yes, but it's interesting how you asked the question. What you, if I could, if I can have a little fun with, do you expect to increase your direct consumer advertising and reach a lot more people at lower cost? The answer is yes.

By the way, if you get a chance, go to ask or UFE website and go take a look at this new website that we just launched and take a look at it. You are going to love it, but more importantly, Jim, I would love to explain to you, we are getting over 30,000 hits a month on this website. 30,000 hits a month and those hits are turning it the patients going to physicians and being treated and they end up using a Merit product, so you go take a look at that. I think, that it's for everybody in the line, ask the UFE.com and I think you would be very pleased and sometime maybe on Investors Day out here or whatever, I'll sit and kind of go through all of the stuff that supports all of this and how we think it will generate substantial interest and opportunities and get choices to women.

Jim Sidoti - Sidoti & Company

I guess, we are only asking if you can leverage this FDA warning to help get the information out to more people.

Fred Lampropoulos

I think women have choices and I don't want to comment on somebody else's misfortune.

Jim Sidoti - Sidoti & Company

Then overall, it definitely seems like the top line was ahead of where I expected it. Bottom line, it sounds like overall is if anything a little, it's a little above where you thought you would be at this point?

Fred Lampropoulos

It is above where we thought we would be at this point, but to make our numbers we have a very steep climb and we haves a lot of work to do here. Everybody that's sitting in this room knows that there is a lot of things that need to be done, but I would say that with these embolics and these higher margin products in the product releases, these programs like Think Radial, which is a broad program of doing kind of the same things that we are talking about in UFE, but talk about Radial. If we start talking about PAE, the prostatic artery embolization, we have a lot of, I think, neat drivers that are going to continue to build the business, so we are enthused, but we have a lot of work to do.

Jim Sidoti - Sidoti & Company

Now, the sales in commerce, you know it seems like the level we've got almost back to where you thought it would be, when you did the acquisition, is the mix the same? Has the mixed changed to where you thought you would going to be a year ago.

Fred Lampropoulos

The mix has changed a little bit. I think the biggest surprise there had been the coronary sinus guides. These are catheters and delivery systems used to deliver leads and assist physician proper placement of leads for pacemakers and defibrillators. That's kind of a big surprise and it was one kind of I am pleased as the way that we were able to get access.

When we did the acquisition, we did not have access to those products, but subsequent to the acquisition, we got a deal and we are the exclusive manufactured by the way of these products, which is very important and we have a dual distribution, so there's another player out there, but I think the thing that we are doing, getting involved with many of the CRM players to go out there.

There is a list of them who they are. This is not the field, but we put together these programs, they get trained, they may buy somebody else's hardware, but they are buying their software. Again, one example today, right here in Salt Lake City, on account purchased $20,000 of these On my son of the company another hospital in Florida earlier this week that bought $20,000 of these catheters.

I saw another hospital, in Florida earlier this week that bought $20,000 worth of catheters. It's a very pleasant surprise with product that gives us about 65% gross margin, so it's going to be something we will be talking about, but maybe more importantly that, Jim, is the new stuff we have in the pipeline.

We are going to be showing some of the Heart Rhythm Show. I think, that's over in Denver. I think it's, - where is that Heart Rhythm Show, guys? Anyway, it's coming up. It's in San Francisco, but it's coming up, we will be showing some of our new products there and rather than at this point we will [chip] our hands, but keep our hands out.

Thank you. Our next question is from have some new products there that we think increase business. You know what? We have got a lot of people out in Malvern, who worked hard and stuck with us. We stuck with it eyeing up the technology. I mean, transaction. You can criticize and it's a fair discussion, Jim, on pricing and all this and that, but if we look at the vascular access and take a look at what Merit does on radio, in general access and then micro puncture and then you take a look at these things. Merit probably has the broadest portfolio of vascular access products in the world and the best ones, so I think that that platform works in UFE, it works in TAE, it works in HCC, all of these various therapies, all you have to get there and Merit will you bring there and then deliver the product that's necessary to be successful.

Jim Sidoti - Sidoti & Company

Well, I can say there is lot of difference in you and me. We'll talk to you in a couple of weeks.

Fred Lampropoulos

All right. Thanks, Jim.

Operator

Thank you. Our next question is from the line of Greg Macosko from Montrose. Please go ahead.

Greg Macosko - Montrose

Hi, Fred.

Fred Lampropoulos

Hi, Greg. How are you?

Greg Macosko - Montrose

Very good. Just one question perhaps I had missed it. I was a little surprise to hear more discussion of the change in the sales force, so that was, I guess, not preannounced from the way you said it, but it sounds like a decent idea. Talk to me about is the 125 that you now have is the right number to have and can you say that? I mean, you had a good sales growth quarter. Did you feel any of that from the way this was changed or is it really - maybe it was a drag on the sales growth in the first quarter. Would this change and might we see more upside in coming quarters?

Fred Lampropoulos

It's a good question. Thank you, Greg. I actually think it was a drag and I will tell you why. We had to go through the exercise and all of the administration of splitting out the sales force, working it all out and I will tell you that Marty Stephens and Kevin Sterba and Monroe May, the three architects, but primary Marty, did what I think was an extraordinary and difficult job. It took him one year and they brought in a programs and we look at them, but if you take a look at the weather, you take a look at new people going out into the accounts and taking over areas that they hadn't been before and all of that. Our expectation is that it was going to be a drag.

In fact, our general thinking was it could be a drag for maybe the first six months of the year. Now, that being said, that drag was just a [few] are replaced on the wing, because we had a lot of momentum in China, a lot of momentum in Europe, so as we looked at the business, we didn't think it would have a big effect and very candidly the U.S. is kind of one of the slower areas.

My expectation is though and we are seeing this play out in embolics, because this is one of the areas that we separated out, because it requires a lot more attention and lot more work in the coronary sinus guides that we talked about in the Thomas Medical Products. When we talked about snares and some of these other areas, these are the areas that, including peritoneal dialysis, so think about how complex these procedures are and you have got someone selling a maniple kit or a pack and then you are in there and you are talking about how you are going to deliver a therapeutic dose of a doxorubicin loaded HepaSphere or QuadraSphere into a tumor. There is a lot of work, so we worked hard to go through and look at it.

By the way, I would also point out, we didn't lose any salespeople. I think that's the fruit that's kind of in the pudding is that the salespeople are enthused about it. They are here enthused about the educational process and you know question that was asked previously, what about these SG&A expenses. Well, there's a little bit of cost that go into kind of balancing, someone going from a product line, which is relatively small from a fullback, so we had to balance out those costs that are in there. As time goes on, there is no doubt in my military mind that we will see that this was what needed to be done.

Greg Macosko - Montrose

When was the implementing…

Fred Lampropoulos

It needed to be done.

Greg Macosko - Montrose

When do you think it will be implemented and complete?

Fred Lampropoulos

It is implemented and complete today. It's done.

Greg Macosko - Montrose

But the ramping in that, the comfort level of the sales force.

Fred Lampropoulos

I would say that that six-month period of which we were three months, so another two or three months I think we have had to train people, but we have less to train and we can be more focused on that training, so another two or three months. I think, our estimate would take them six months to get them to settle, but we are already seeing the effects, the positive effects of this, right now. There is work to be done.

Greg Macosko - Montrose

You don't see they will add to the sales, you'll need to add people as a result of it?

Fred Lampropoulos

We did. We added four, five, and we added a couple of clinical people to kind of balance out the portfolio, the geographical locations. That's already in the expense. We don't think we are going to have to add anymore, but we kind of did this as - again, it's a balancing issue, we had a territory and yet this amount of procedures, so we had to balance it up and that was part of this exercise that we went through and challenged and modeled and challenged again for that first year then executed the plan. Again, we didn't say much about it, because we didn't think it would have a material effect on the numbers.

It had a little bit of an effect, but we also didn't want our competitors to know that there might be any disruption if a competitor knows it, but the fact of the matter is it looks like with the business growing it didn't have any effect at all if it did is negligible.

Kent, you want to comment?

Kent Stanger

Well, I am just going to add one other thing that we didn't really talk a lot about kind of failed a little bit. There was a extra travel expenses in the first quarter due to this training and due to these meetings and communicating all of this, so we had nearly $0.5 million over last year in travel cost that were higher in SG&A, so that was part of this whole story.

Fred Lampropoulos

That's not bad.

Greg Macosko - Montrose

Okay. Then finally just along the same line. Does that mean that the sales are not going to be - I mean, a fair number of double calls on the hospital. In other words you can say, one call on the hospital. You have two people calling. How much of that is overlap with your figure.

Kent Stanger

Yes. There is going to be - they will cover the product, so there are two people now in each hospital extra.

Fred Lampropoulos

By the way we thought that out Greg. Think about this for a second. Someone goes down, someone is sick someone is on vacation, there is somebody to service that account and we think that was an important factor in here to have kind of a backup plan.

I'll give an example of a situation today. In a hospital out here in the western part of the U.S.A. an account was upset with the competitor. They called one of the guys in one of the divisions who used to handle the account and he and the new guy that's covering the account are going to go in there and we are taking probably $100,000 worth of business away, so that network worked. If that guy hadn't have been there, if he would have been there. If he would have been out someplace out, he was working on another in-service, he couldn't have done that, so we see a lot of benefits to this and we just simply could not get deep into the bag.

We have made a lot of investments and we just weren't getting the kind of returns that we felt were necessary and contrary to what other people think that's going on the industry, procedures are slow, things are, but for us we think there is a lot of opportunity here and we think we can deliver it. We are showing that now.

At the end of the day, it's all about leveraging those numbers. That's the part we have to do, but I think from a business point of view. We have plenty of capacity here. We can build the business, we don't have to build new buildings. We have everything in place and that tells me that we are going to have opportunity to reduce unit cost, increase our gross margins and build this business pretty dramatically over the next five years.

Greg Macosko - Montrose

Well, it sound like those bags that they are carrying around has got empty space in them now, so Fred I guess you are going to have to get going on that new product development, maybe make a few more acquisitions. Thanks.

Fred Lampropoulos

We don't have any money to make acquisition, so other than little teeny things, you know, little, little, teeny things, but we do have a very active R&D program here with lots of new products that we are developing balloons, new embolics, new catheters and new stents. We have got plenty of stuff to fill that pipeline and to keeping those saddlebags full, so good to hear your voice Greg.

Greg Macosko - Montrose

Thanks.

Fred Lampropoulos

Thank you, sir.

Operator

Thank you. At this time, there are no further questions. I would like to pass the call backs to management for closing remarks.

Fred Lampropoulos

Well, ladies and gentlemen, thank you again for your time. Kent and I will be available for the next, let's see here, it's about 4:00 O'clock. I have a baseball game to watch with my son. It's about 6 O'clock, so we will be another hour-and-a-half then I am leaving to go to the ball game. Yes. My boy doesn't use flying car, so I just had to put that in there.

That's all. We appreciate your efforts. We appreciate your interest, we will be keeping you informed on our Investor Day. We want to get shareholders, new shareholders, prospective shareholders out here to see what we are doing, we think that will give you a better understanding of the opportunity here at Merit Medical.

Thanks again for joining us. We are signing off now from Salt Lake City, wishing you a very good evening. Good night.

Operator

Ladies and gentlemen, that does conclude Merit Medical Systems Incorporated's first quarter 2014 earnings conference call. We would like to thank you for your participation. You may now disconnect.

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