MMSI
#Thank you, and good afternoon, ladies and gentlemen.
Thank you for joining us on a very busy reporting day.
Some of you are listening to this live, others will listen to it via recording.
We appreciate your interest in the company and taking a few moments to hear the Merit story.
As you can see from our report, we reported record sales and record earnings.
We are also here today to talk about a guidance adjustment to the upside and a discussion about our 2018 and 2019 preliminary thoughts.
So what I'll do right now is turn some time over to <UNK> <UNK>, our General Counsel, for our safe harbor provision.
<UNK>.
Thank you, <UNK>.
And again, welcome, ladies and gentlemen.
Today's a delight to report what we believe is a reaffirmation of our plan, as we continue to deliver on our 3-year plan, both in terms of areas of sales growth, gross margin and earnings growth.
So I'm going to now ask <UNK> <UNK>, our Chief Financial Officer, to go over the numbers on the revenues, gross margins and earnings side.
And I'll be back again in just a minute.
<UNK>.
Thank you, <UNK>.
We're pleased to report our Q2 results, which continued to deliver on consistent growth and revenues, where we've seen revenues grow by 24.9% on a constant currency basis to $188.7 million and by 23.5% on a reported basis to $186.5 million.
Organic growth was 10.4% on a constant currency basis in the quarter.
And we've seen sales growth in all product portfolios and across all our markets in the second quarter.
Gross margin was 8.3% on a non-GAAP basis, up from 46.4% in Q2 2016.
Margin improvement has been accomplished by delivering on our objectives, changes in our product mix and improvements in efficiency, cost management and increased utilization of our facilities.
And earnings improvement continues on a non-GAAP basis.
For the quarter, earnings were $0.36 versus $0.26 in Q2 '16.
We just want to highlight that $0.02 of the earnings achieved in the second quarter of '17 relates to a tax credit adjustment for options exercised in the second quarter.
<UNK>, thank you.
And just a reminder that these earnings are based on a higher number of shares, almost a 10% increase, because of an offering we did in the late first quarter.
And they still, I think, exceed essentially what we had talked about and had guided to.
Even with that $0.02 adjustment, I think we are still beat on consensus earnings by about $0.05.
And so, I mean, I think that, that is an extraordinary effort.
I'm very pleased with it ---+ of the efforts.
The other thing that I think is important to note is the gross margin of 48.3%.
Now we had mentioned that, during the first quarter, that we thought we could see a slight adjustment because we would have a full quarter of the Argon acquisition as well as the Catheter Connections.
But as it all turned out, it was the same as the first quarter and I'm very pleased with that.
It goes to what <UNK> talked about and that is the utilization, the mix, which means really that the business is really performing, from our point of view, in a number of areas.
So I'm very excited and pleased with our efforts.
Now what I'd like to do is, based on where we are, it's clear to us that we need to do some adjustments.
And so, <UNK>, you're the star of the show today.
I'm going to let you talk about our guidance and some upticks also for '18, '19 on a preliminary basis.
<UNK>.
Thanks, <UNK>.
So update to guidance for 2017 based on the results that we've achieved through the first half of the year.
We're increasing our revenue guidance to a range of $722 million to $727 million, up from $713 million to $723 million.
Margin guidance remains the same between 48% and 48.5%.
And we increased our non-GAAP EPS guidance to a range of $1.23 to $1.28, up from $1.15 to $1.20.
And GAAP guidance remains the same.
For 2018 and 2019, we're giving preliminary guidance based on what we see,and the market trends and how we believe our business can perform.
And we're forecasting top line growth of approximately 8% for 2018 and 2019.
This will be supported by: an introduction of new products through R&D; the integration of M&A completed in 2017, primarily on Argon and CCI; continued development of our international sales organization; and changes to sales force structure and compensation.
Gross margin, we forecast to expand by 100 to 150 basis points each year.
Again, this is supported by: opportunities with mix; focus from our sales force restructure and compensation; new product launches with higher margin profile; improvements in utilization and efficiency in our manufacturing facilities; and focus on discipline in managing our cost base.
And EPS growth is ---+ we forecast to be in the range of 13% to 15% in 2018 and the same in 2019.
Again, this will come through, through a combination of a sustained organic sales growth and margin improvement and, again, disciplined and focused management of OpEx.
And on that particular issue, I think one of the things that you'll see, as you look into the second quarter, is really how we controlled our expenses.
And we think that this 3-year plan that we introduced 2.5 years ago, it has really been helpful to the management team.
And it helps us to focus in on everything that we do as to whether it meets those objectives.
And so it's our view that by adding these additional couple of years that it is helpful for the entire business to keep focused on getting the results that we all want.
There are a lot of other things going on.
I think, <UNK> mentioned, and I mentioned as well, the business, just about all of its areas is kind of hitting on all cylinders.
In the business world that doesn't happen very often.
Whether it be our sensors business, our coatings, our OEM, the International market, things have been performing very nicely.
And we expect that, that will continue.
There's been a couple of, I think, interesting developments.
You're all aware of them.
PAE is a very interesting market for us and ---+ but it's still very early.
And you're not seeing any results from PAE at this point and you likely won't until next year.
There's a couple of initiatives that Merit's involved in that will help to organize and to grow that business.
First of all, one of the things that we'll be initiating next month is the ThinkPAE.
We've been very successful with our HeRO product line, which continues to grow, I think, at about the 20%-plus range, give or take, in our radial programs by bringing skilled physicians in and they train other physicians.
So we've, just in the last week or so, opened up a training course for prostatic artery embolization.
Those are held here in South Jordan.
And also we do them in Europe and the response has been overwhelming.
So what we thought would be 1 course and then maybe 1 later on in the year has now turned into essentially 4 courses that are already planned and they're all fully subscribed.
Which means that you're going to have somewhere, by the end of this year, about 100 additional physicians that have been trained and starting to do these procedures.
And it's not just the embolics because that's actually a small part of it but it's all of the other parts that go on, the vascular access, products like the SwiftNinja.
And just this week, we received approval for our True Form guide wire.
And this is a very exciting product that sells for in excess of $200.
And this product allows us to have that interventional guide wire but it also helps us with all of our microcatheter products to combine this.
So with, for instance, the Maestro, we've been at a disadvantage and we haven't really had a wire that you could package and our competitors did.
So now we have that full package.
And so we think having that wire, along with the new Amplatz wire and other products, are going to help to fuel our growth.
The pipeline is full with lots of new products like it always is.
And so, again, as we look out into the future, we're confident that with the controls that we put into place, with the focus on the objectives that we have, I think, clearly spelled out to you, that we're confident in the growth of the business from this point on.
So you want to make any other additional comments, <UNK>.
I think it pretty well covers and the guidance is clear.
How we're going to achieve that is also clear: supported by PAE, supported by robust R&D.
Nothing further to add.
Now there are some more things to do.
For instance, in our Singapore plant, Jim, we are going live with Oracle starting next week so we have a team over there.
And there's still work to do.
It's only been a few months and there's a lot of training and a lot of just things where we have to become disconnected from the prior host and then integrate and train.
So there's still work to be done.
But I think, maybe more importantly is, we've been pleased that the revenues have maintained themselves and in fact grown more than we thought they would.
And I think we've just been pleased very much.
The Catheter Connections, we just had a record month in revenues there.
Our tooling is completed.
Our costs are going to be coming down.
We're opening up new accounts every day.
We've gone now and gone off the dealer thing into the direct.
So all of those things are like kind of all taking place.
There's work to be done.
But I mean, I think, the integration risk, I mean just the general business and that sort of thing, all of those things have worked out I think much better than some of our others in the past.
They've worked very, very nicely.
So I think we're very pleased with it.
You have to remember, Jim, with DFINE that there are over 100 people let go.
We had to shut down distribution, so I said we're okay with it.
But let me go to another point that hits all 3 of these and that is one of the things that we always do is to start a research and development project.
And we have 3 research and development products ---+ we have a new product, for instance, the Catheter Connections, Argon and DFINE, all coming some time probably in the first quarter, these things that have been developed.
And this is part of that integration where it teaches people the process that we go through to bring a product to market.
So I think all of them are moving just fine.
We're very excited about the DFINE product and a number of other things going on there.
So I think we're fine with all of these, Jim.
There's still work to be done, though, but we're fine with them.
Yes, the interesting thing about PAE is we really didn't have any R&D expenses.
What we had was approval of an existing embolic product and an indication.
And since it's not been here there was no product and device, the de novo route was the route that we had to take.
But I think the important thing is, Jim, is that we have ---+ we're the only company that has approval for embolic for that procedure in the United States.
And as I tried to mention in my initial comments, it's the SwiftNinja, it's the vascular access, it's the radial pro, it's closure, it's all those other things that go on that are all high-margin products supporting PAE and really, very candidly, Merit's presence, our ---+ we're having people call us, physicians, we're the only game in town right now in that area.
We expect to be for some time.
But the money to be made, from a shareholder's point of view, and building the business really comes from those other products where we have very high margins.
But there's no R&D expense.
We did that a long time ago.
Well, as you know, I can't comment other than to say that it goes on and on.
It's slow, the wheels of justice move slowly and they're expensive.
But I don't ---+ I can't comment on it, Jim, other than we're engaged in the process.
We're providing the information that was asked of us.
That's the essence of it.
That's all I can say about it.
We think it will decline.
A little bit of time here because that\
I think you pretty much hit it.
Okay.
So those are just some but I think between now and the end of the year with our new [Izod] syringe ---+ which one.
What, I'm sorry.
(inaudible)
Our new vascular access product, there's a whole bunch of it.
One of the things that's always interesting about Merit, and kind of difficult for analysts, is we have a lot of products.
I mean, I've always said this, if we were a baseball player, I mean, we would have the highest batting average in history because we hit a lot of singles and we hit ---+ a double from time-to-time.
So there's a full basket of that.
And then remember I'm going to say this to you now because it's not ---+ it's coming around the corner, Merit has a new CVO, this is a central venous obstruction stent, fully covered that's going to start showing up in Europe in about 18 months from now.
So that, overall down the road, could generate $100 million a year for Merit.
So the pipeline is full, vascular access.
And then you've got these just these initiatives that we talked about.
Radial, PAE, all of these sorts of things and all the accessory products that go with them.
So they're all ---+ I don't want to say singles.
Some of this might be long singles.
We might make it to second base on these but there are several of them.
It\
No, we're going to stay focused.
We're going to ---+ we're not looking for traditional spine and orthopedic guys.
That's not our market.
We would look for things that might fit into the IR.
We have to stay focused.
We have limited resources to do all of these sorts of things.
And to be very candid, we have a couple of other products on the embolic side that will be coming into the IOS and a couple of other products in that area.
So we're comfortable in that space.
We think we can grow that business nicely.
But we want to be ---+ we don't want to be distracted by having these more orthopedic types of issues.
And with traditional spine, that's not our cup of tea.
So we're going to stick to the knitting.
Well, <UNK>, <UNK>, <UNK>.
Those are our numbers.
Our goal is to meet those and those are essentially the minimums.
Our goal and our compensation is based on us beating those numbers.
But we\
I think, <UNK>, it goes back.
Our primary focus on where we get the greatest leverage right now is on expanding gross margin.
And I think the ---+ what we've outlined is fairly ---+ the positive outlook for the next 2 years.
There's still a lot of work to be done.
We've got some of the low-hanging fruit already and capitalized on that.
That is a big area that we're focusing on.
But we also commit to managing the OpEx line and making sure that, that stays under control.
And I think if you look over the last 3 to 4 quarters, you can see that our OpEx is growing slower than revenues, and that's being ---+ hasn't always been the case in the past.
And that's where we're focusing on that as well.
So I think the guidance is ---+ it's aggressive.
In some ways 13% to 15% growth on earnings is aggressive.
But we're confident we can deliver on that.
That's ---+ as I said the focus is on managing costs and improving gross margin.
And let me add just a little bit on that.
I mean, I mentioned earlier in a question about market development and the cost, I said that we originally thought we might do maybe 2 of these PAE courses this year.
And then it looks like it's going to be 4 or 5, just in the U.S. alone.
That costs money to do that.
So the reason we've kind of stuck with these numbers is because it would give us that top line and those higher margins which give us, as <UNK> pointed out, as we all know, the biggest bank.
What we don't want to do is say, oh yes, we can get you to 20% to 30% and then we stick with this and we miss it.
So that's just not what we feel comfortable with.
And we want to have a little bit of room particularly when we see the demand and the opportunities to spend the money that will give is the best returns, <UNK>.
So <UNK>, can you comment.
It's just as well on R&D.
To grow at the rates that we forecast, we've got to continue to invest in R&D.
And that's a big part of our business, making sure that we have that pipeline of new products coming out.
So we want to control the expenditure in those areas but we still need to invest for growth.
This has been the same story we've been telling and the same story that we've been performing on and the same story that, I think, has garnered attention to our company and our stock.
So we're going to stick with the story and we're going to stick with those efforts.
<UNK>, I think, they've served the company well.
Like as <UNK> pointed out, in this quarter we've got a little bit better on that OpEx side.
Good for us, isn't that nice.
But if I miss it, you guys are going to kill me.
And I'm not going to miss it.
So our plan is as advertised.
And something else that <UNK> just mentioned to me is one of the other things we\
Okay.
I'll accept that.
We've got 10 more years as a company, so.
One of the areas is more salespeople.
And now we don't ever want to do a bolus but what we want to do is we want to stay within the parameters that we've guided to, but yet you're growing and you have to have people.
Our products are more complex.
So where in the past Merit has been essentially an accessory company, that started changing 5 or 6 years ago as we've moved into more therapeutics.
So it requires more clinical support.
It requires ---+ on the R&D side, our products ---+ in order to get a product that's going to be that double, triple or home run.
These are now 5-year projects.
They're not 18 months, they take more time and more money.
And so we just believe ---+ and by the way, this is not a change in what we've been saying for 2 years.
I find these questions very interesting.
We've said we're going to keep that SG&A line and that R&D because those were the investments have to be made, whether it be in going direct in Canada, Australia, building out those infrastructures now in Japan, and with those kinds of things that allow us then to get the higher margins of growth, they have to be made.
And so to ---+ I am not going to ---+ and please don't take this personally, I am steadfast and sturdy that we will grow it at those numbers we said.
We'll get those gross margins and then we will go ahead and manage those expenses but it's really difficult to do all of these things and make everybody happy and make more and more money and then you find out that you're Shallow Hal.
You just don't have enough legs to hold up the building.
So we've got to invest in these sales forces, clinical training, national accounts and in these countries that require us, in order to go direct, you've got to put infrastructure in place.
They all fall in those categories, Matt.
And so again, I'm not offended by the questions but I'm surprised that what we've been telling everybody we're going to do and we've done is now being questioned, why don't you do it differently.
We're sticking with our model of success.
We're extending out what we think we can do in the expansion of gross margins.
And if we're lucky, maybe we'll get a break and we'll be able to reduce those expenses and get more of the bottom line.
But as <UNK> points out and as we all know, it's upstairs that you make your money, in mix and gross margins.
And that's where you're going to get the big bang.
And that's where we've been concentrating and that's where we've been getting the results while maintaining ---+ in this particular quarter by the way, it was lower.
So I mean I thought we did a pretty good job on the expense line for the second quarter.
But that being said, that's my best answer.
<UNK>, do you want to add any salt and pepper to that.
No, I think you covered it pretty well.
You thought I did okay.
On the cash flow, it will be more steady improvements.
We have a lot of focus on working capital management.
And again, I think it'll be steady.
Let me go to your question.
So I answered that question initially based on what do we see for the future and our confidence in our growth and so on and so forth.
On the CVO stent, we think we're about 18 months, I think, maybe it might be 16 months now before we introduce this product in Europe.
And it's going to be a couple of years, maybe as many as 3 after that before it hits the U.S. market.
That's just the regulatory requirement.
But I'm not going to talk really anymore about that until we get ---+ when we're prepared to launch it because I don't want to tip off my competitors there to our features and benefits and advantages.
But I will say that we have a full capability in-house of making the stent doing the PTFE, the delivery system that Merit is fully self-contained in this particular area and we're excited about it, phenomenally this product, but several others that are in the queue behind it.
So that's the best ---+ again, not to offend you, Matt, but I don't want to be talking too much about things because I've got competitors on the phone here listening in.
And I can give you your names, if you want me to.
I could call them out but I called one out and they sent me a note.
And I decided I won't call them out anymore.
But I can see their names on my call sheet.
So we're not going to talk about it until we get a little bit closer to launch in Europe.
And then we'll go ahead and we'll start talking about why we think that there's $100 million market out there available to Merit alone.
So that's the best I can do today.
Reimbursement is established.
It's a good question.
I'm going to let <UNK> <UNK> answer that question.
<UNK>.
So we're seeing strong performance on the inflation device plan in the United States where we have a pretty significant market share predominantly because of the strategic and national account work that we've done over the last couple of years.
And that's just starting to come to fruition.
We had some key contracts kick in, in I think, the early first quarter.
And those are just starting to materialize now.
So I would expect continued performance of that base business on the inflation products to continue.
So no onetime transaction.
But I will point one thing out, Matt, just for you to write down.
It's a codename.
It's called basics Tau, T-A-U.
The 19th letter in the Greek alphabet.
Write it down.
The CapEx was $6 million in the quarter and operating cash flow, $17.8 million.
I think I'm going to take the word material out because that's a big ---+ and it has a lot of legal implications.
Let me just say that the SwiftNinja is contributing and is accelerating.
And so ---+ and we're excited about that because of its margin contribution and the uniqueness of the product.
So it's doing well and we're pleased with it.
Let me go to the Cook issue.
When that deal took place on April 5, I think when we first became aware of it, 2016, early in that second quarter of last year, there was an awful lot of pipeline filling.
I mean everybody would do anything they could to get a catheter.
Remember people walking in, taking everything off the shelf and walking out the door.
And so everybody would order and everything we had was going out the door.
We were working weekends, holidays to meet that need because our customers needed it.
So we are seeing a drop-off in that catheter area.
But remember there's a couple of other things, too, that it costs us 30 basis points to be in that business because our approach was not to gouge but to match their prices and meet their needs in a time of need.
We did exactly that.
I think that it built huge amounts of goodwill.
And I also said that I thought we'd do $10 million to $12 million.
We did that, I think, in that full 12-month period.
We had some you'd seen ---+ some of that fall off but it's not because we're losing customers as much as it is that bolus that went through.
So if you look at our MAK-NV, if you look at our marker band catheters, if you look at our diagnostic catheters, our Impress catheters, all of those have done very, very well.
But they're ---+ you're not getting that bolus again, so on a percentage basis, starting to fall off a little bit.
But we kept a lot of that business.
The catheter business is still growing.
It was 10.8% growth in the quarter.
So overall, our catheter business is still growing.
So Cook is only a small part of it.
Yes, Cook is a very, very small part.
But again, I think, we gained more by the goodwill that we created by helping customers, so.
But the Ninja is, and will continue to be, a big deal.
While he's calculating that, let me go through a few things to give him a little bit of time.
I'll stall for him.
First of all, as I mentioned, the OEM started in July.
Starting in September, just, what, 30 days away, a little longer than that, but we will be in a consolidated warehouse.
We would have consolidated all of the Argon business and all of the Merit business and that will be ready so that when those products come over at the end of the year, the space, the customer service, all of those things are in place a full 90 to 120 days before it's required.
It will all be in place and all exercised.
So that's what's going on structurally.
We have the question about what about SG&A.
Well, we've got to go ---+ we've put that warehouse in place.
We've done that but we still have to maintain that SG&A line.
So that would generally be an extra expense but because of the absorption, the products that we can ship there from Argon, OEM and the Merit products that will be in place to meet those orders, that costs a little extra money.
But you won't see it.
Because we already had planned that it will be within those SG&A parameters that we've set forth.
Are you ready, Bernie.
And I want to come back and make one last comment about Japan.
We have a great reputation in Japan.
A lot of these products that you know, like the SwiftNinja, are things that we distribute on a long-term, global basis.
But I think as a market, aside from essentially going from wholesale to retail, I think what this opportunity is in restructuring of that marketplace is it gives us a great opportunity for growth going forward in Japan.
There are products that Merit's been making for many years that we haven't been able to compete with because we had a distributor who had ---+ and who is a great distributor and we have a long-term relationship with, who were essentially locked out of those markets.
There are many, many, many products that Merit hasn't been selling in Japan and many new products that we will be able to sell in Japan.
So I would like to think, and I know I'm looking at Joe Wright at the end of the table here, (foreign language) that I would like to see those growth rates approximate what we've been doing over in China and Southeast Asia.
So that's 20%.
That's ---+ I'm asking Joe, he's looking at me, he hasn't responded yet.
But my point is, it gives us a lot more opportunity for growth in that marketplace with products that have been well accepted all over the world but was not consistent with the distribution system we have in place.
So we're, I think, very excited about the opportunity there.
Yes, there's a number of them.
From our operations point of view, we're not solely reliant on Tijuana to deliver on that gross margin improvement.
So I will be looking probably for 10 to 20 basis points from Mexico.
And ---+ but we're seeing improvements across all our facilities.
And so our focus just isn't in one area.
It's kind of spread across ---+ it's spread across all of our facilities but we're looking at improvements.
So Mexico is a part of this.
But I ---+ it's not ---+ we're not fully reliant on that.
Yes, yes.
I don't think we gave $1 million for the first quarter because we just launched it.
But I can just simply say without revealing ---+ because I mean ---+ some of those things I don't want to talk about.
It is accelerating.
This PAE approval will continue to do that.
But it's not just in the U.S. We're seeing it in Europe.
We're seeing it in Australia.
I'm seeing stuff in Hong Kong, I'm seeing it in China.
So we have it approved in a number of places and it's growing in all of those areas.
I think that's the best way for me to answer that question.
No, they were actually fairly close to what we achieved in the first quarter.
And as we progressed through the second quarter, we actually saw those revenues improve.
Yes.
Well, ladies and gentlemen, thank you for the questions.
Thank you for ---+ I know it's a busy day, a lot of other companies out there reporting today, and I thank you for taking the time.
We're excited.
We like laying these plans out.
We have found, as I mentioned, that they've helped us.
They've helped us to stay focused.
And there's a marker out there that everybody can measure us against and we're committed to making this work and doing our best to exceed.
So let me just again thank you for your support.
I know that we have a number of conferences coming up.
I will tell you that those conferences are filled.
Every slot from 7 in the morning till 6 at night is filled.
So we're looking forward to meeting with the investors that are on the phone.
And we thank those who have invited us.
And at this time, there's still work to be done here this evening.
Bernie and I will be here for the next hour or 2.
Thank you again for your interest in the company.
And signing off from Salt Lake City and wishing you all a very pleasant evening.
Good night.
