MMSI

Merit Medical Systems, Inc. (MMSI)

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Merit Medical Systems, Inc. (MMSI)

Q2 2013 Earnings Call

July 31, 2013 05:00 PM ET

Executives

Fred Lampropoulos - President and CEO

Rashelle Perry - Chief Counsel

Kent Stanger - CFO

Analysts

Tom Gunderson - Piper Jaffray

Jim Sidoti - Sidoti & Company

Michael Rich - Raymond James

Chris Cooley - Stephens

Greg Macosko - Lord Abbett

Dale Detile - Boston Company

Presentation

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Merit Medical Systems Incorporated Second Quarter 2013 Earnings Call. During today's presentation all parties 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 conference over Chairman and CEO, Fred Lampropoulos. Please go ahead, sir.

Fred Lampropoulos

Good afternoon, ladies and gentlemen. This is Fred Lampropoulos. We are assembled in Salt Lake City with our general staff. We appreciate you taking the time to visit with us today. We have an exciting story to tell you but prior to that, we’re going to let our Chief Counsel read out the statement that you’re all excited to hear. Rashelle?

Rashelle Perry

Thank you, Fred. During our discussion today, reference may be made to projections, anticipated events or other information which is not purely historical. Please be aware that statements made in this call which are not historical may be 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 Securities and Exchange Commission 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 any obligation to update such statements.

Although Merit's financial statements are prepared in accordance with accounting principles which are 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. The table included in our release, which will be 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, 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 again, ladies and gentlemen, thanks for joining us. We are pleased to be able to report today what I believe to be significant improvements and a further explanation of our profitability plan going forward.

One other thing that I will refer to, most of my discussion and comments today will be in relationship with the results of the first quarter. And although we are required to compare quarter-to-quarter or year ago, I would remind all of you that there have been a lot of changes since that time. We’ve had the introduction of the Affordable Care Act and the tax, the 2.3% tax. Merit has made the largest acquisition in its history. We have shutdown a facility, and we started up a brand new facility. And so most of my comments will be made as to the first quarter, comparing those and then moving and talking about where we’re going to go from here.

First thing I of course would like to point out is the substantial improvement in gross margins. What we have discussed in the past is that we believe that Merit has an opportunity with the investments that we’ve made to be able to improve our gross margins approximately 60 basis points per quarter for the next six quarters or year and half. That’s a very, very aggressive prediction, so to speak. That’s 360 basis points that we should be operating at by the end of 2014.

Now, fortunately, this quarter we exceeded that. I would remind everybody that you shouldn’t assume that we’ll do 140 basis points but that our plan is in place and we believe that we should see those opportunities. It will have to do with increased market share, product mix and just an overall reduction of expenses and new product introductions. Then we’d like to move down to the SG&A expense line. Once again quarter-to-quarter from the first quarter down 220 basis points.

In just a moment, I’ll have Kent just briefly discuss some of the issues that were made in period oriented, like some of the expenses that were in SG&A that will now move to the gross margin side. But I’ll just make a couple more comments and then have Kent to discuss that.

R&D expense was down 90 basis points compared to the first quarter, and I think we’re able to do this, ladies and gentlemen, while reducing our inventory of $3 million. So let me talk about that just for a second.

While we were moving, shutting down a facility and making sure that we had no disruption to our customers, we still reduced inventory $3 million. We continue to believe that as we get leaner, as our automation goes into place, that there is even more opportunity to reduce these inventories as we grow our company. So it will be one of the things that in terms of cash management, obsolescence and other issues that we feel comfortable about.

The other reason I think it’s an important metric is that as we go back to last year and look that in the third and fourth quarter where Merit was building inventories actually for most of the year up until the third quarter, we disappointed shareholders when we have to slow production down because had much inventory. And we have those negative variances for the fourth quarter, some of which carried over into the first quarter. Those variances are essentially gone.

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