Q4 2005 Merit Medical Systems Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good afternoon, ladies and gentlemen and welcome to the Merit Medical Systems fourth quarter and year-end earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Mr. Fred Lampropoulos, Chief Executive Officer of Merit Medical. Please go ahead sir.

FRED LAMPROPOULOS, CHAIRMAN, CEO AND PRESIDENT, MERIT MEDICAL SYSTEMS, INC: Thank you and good afternoon, ladies and gentlemen. Fred Lampropoulos here. As you can see from our release, our fourth quarter revenues were 42.7 million, a 9% increase over the previous year. And earnings for the fourth quarter were $3.7 million. Now that was down from 4.3 million a year ago. A couple of things that you need to be aware of. I have discussed this, we're talking about this, of course, publicly. We talk about in the text of this, the start up of new facilities.

One of the cost items is approximately $200,000 a month or about $2.4 million per year for increased depreciation and amortization because of our new facilities, new injection molding equipment and the associated equipment that goes with all of this. We also talked about the increased cost of direct labor. Like most labor markets, we have to be competitive and Salt Lake has one of the lowest or highest cost and lowest unemployment levels in the country, so we, of course, have to deal with that.

We're launching new products and I'm going to spend a few minutes about that in just a minute and talk about that. We also had a 1.3% reduction in gross margins because of the trade business in Richmond. And we had a choice of taking the expense which is for SFAS No. 151, its inventory cost. And we decided we would take it and put it into last year -- that was about a 1.1% reduction as well. Now what it will affect going forward is we'll actually have an increase in gross profits, but we felt it would be appropriate to take it. We had to take it either in the previous year or take it in the first quarter. So we decided we would just get it over with -- again, a requirement under accounting law.

We also, as you all know, have hired the new sales people and we've increased our research and development. Now, all of that sounds like, I don't want to say bad news, but it sounds like we spent money and as you all know, we have been investing in the future, in facilities, in new products, in capability and this is just a part of that. We will continue to see these expenses as we have discussed previously, as we move into next year until we start to absorb these expenses. One of the things that I'll discuss in a minute is -- that you'll see some of the reductions in some of - I'm going to call them the old line products for lack of a better word, legacy products, because of some of the maturation of that market and I think an increased interest in our sales force in new products, and I'll discuss that in a minute.

As we've previously discussed, we came in at the low end of our range. We came in at 166.6 and it was a 10% increase. And to be very candid with you, I'm not happy, I'm glad that the year is over. But I think it also spells out that the actions that we've taken to develop new products, to put the sales force in place and do all the things that we've done, were things that were timely and needed to be done clearly, and we're going to continue to do that and introduce a whole slew of new products, which I'll review in just a moment.

For the year, we had net income of $15.8 million or $0.57 a share. And all of you can, of course, follow that. I do want to point out again a 1.4% decline in gross margins because of the Richmond facility. Now, on the Richmond facility, good news, and that is, it is now producing, going into this year, positive gross margins, and - a little quicker than we actually thought it would. So as we go forward, it's not going to be as big a drag. It still has a long ways to go before it's performing at the level we'd like to but it is -- business is turning up. They're hitting record sales almost every month. And yet we're actually trying to - we're not encouraging those sales, it was a strategic issue, because we have these other sales and new products that we want to have that have higher gross margins for them.

Now, as I mentioned, all the products in the year increased in 2005. Catheters rose 17% and we will continue to see an increase in catheter sales as we introduce a slew of new products. In the fourth quarter, catheter sales rose 27%. For the year, it was up around 17%. With the introduction of the new stiffen dilator micropuncture kit which has just been released this last week and it is a product, a continuation, a broadening of that particular product line. That will add to the product group, which was the fastest growing last year in our catheter sales.

This week, after a long and painful experience we are going to -- excuse me -- next week put the resolved drainage catheter in human beings and go out and do what we call our market preference. We'll look at that for probably two or three weeks and then we'll ready to roll. And that's a significant factor, it's one that we have been waiting for a long time and we're very excited about the opportunities that that will meet.

The stand-alone devices increased 10%. Custom kits were six for the year and inflation devices were five. And as we point out the sales of procedure trays were only 2.4% of total sales. Now you'll notice that the areas historically that we have worked on, custom kits, has slowed and inflation devices, a part of that has to do with the decrease of restenosis and inflation devices would participate because that on the downside in terms of lower growth.

I do believe, however, that as we introduce these new products and have a broader that we'll probably see these products in a more mature -- actually probably click up a little bit because there'll be an across the board, I think, more interest in Merit's products. But what you will see is in the standalone and the catheter sales and some of these areas, those of the areas where you're going to see.

Now, one of the other things that we are going to do and Kent and I are going to be working on this for analyst purposes. And that is that we're going to probably at some point in time take a look and re-categorize these products so that some of the newer products can be better analyzed and we can point them out. So we're probably going to do some reconfiguration of the four or five categories, so that it better spells out some products that get stuck into some of these areas that we think are going to be quite exciting. So we're going to do that.

Now we put a plan together. We put a plan together, 18 months or two years ago, we looked at our business, we had a capacity problem, our sales were stagnant, our research and development was not producing products at the pace that was necessary to compete and there were some opportunities on the acquisition side. We had put a plan in place, we've discussed that plan. We've asked that you continue to be patient with us as we now roll these out and start a new era.

And I think that's a significant thing for all of us to understand, that we really are at a new era in our company. We are putting out new products at just record paces. We have so many ideas and so many opportunities that - and the guys in the R&D labs and in operations, and they're all in the room, of course, and I don't want - they're not always living up to my expectations, but I can tell you that we're doing much, much better than we were doing two years ago, or even a year ago, but there's still more improvement that we can make.

Now for the year, again, you saw that gross margins were down. This is not anything new. I do want to point out that in the fourth quarter, we had 38.8% and we had 1.1%, which is attributed to the accounting adjustment, so that we moved it up to just about 40%. Sales and administrative expenses, I think they speak for themselves. You can see that research and development expenses were up around 4.5% in the quarter and in the year, and that's about a 35% increase over the previous year.

So we've added the headcount in R&D, I think they're doing as good a job as I've seen them do for years. The sales force is now trained. We told you that it would take six to nine months. We started hiring people last summer, about mid-year, and those nine months are about up. And we're excited about the future of the company.

So right now it may appear to be dark and I'm apologizing for a company that makes money that is a great company, but at the same time, we all believe and I believe and you believe that we can perform better. And now what we have to do is to absorb this overhead, continue to introduce these new products, and as we do that, we're going to see, I think, a …