Merit Medical Systems, Inc. (MMSI) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Merit Medical Systems Second Quarter 2017 Earnings Report. At this time, all participants are in a listen only-mode to prevent background noise. We will have a question-and-answer session later and the instructions will follow at that time. Now I would to welcome and turn the call to Mr. Fred Lampropoulos, Chairman and CEO, you may begin.

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 the listening to the slide but others will listen to it via recording. We appreciate your interest in the company and taking a few moments to here 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 be upside and a discussion about our 2018 and 2019 preliminary thoughts. So, what I'll do right now let's turn sometime over to Brian Lloyd, our General Counsel for our Safe Harbor provision. Brian?

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 purely 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 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 except as required by law or regulation, we do not assume any obligation to update any such statements whether as a result of new information, future events or otherwise. Please refer to the section of our presentation entitled Disclosure regarding forward-looking statements for important information regarding such statements. Our financial statements are prepared in accordance with accounting principles, which are generally accepted in the United States. However, we believe certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of our 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. Please refer to the sections of our presentation entitled Non-GAAP Financial Measures and Notes to non-GAAP Financial Measures for important information regarding non-GAAP financial measures discussed on this call. Readers should consider 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.

Thank you, Brian and again welcome ladies and gentlemen. Today delight to report what we believe is reaffirmation of our plan and as we continue to deliver our three-year plan both in terms of various sales growth, gross margin and earnings growth. So, I'm going now ask Bernard Birkett, our Chief Financial Officer, go over the number on the revenues gross margins and earnings side and I'll be back again in just a minute. Bernard.

Thank you, Fred. And we're pleased to report our Q2 results which continue to deliver on consistent growth and revenue; we see revenue grow over 24.9% on a constant currency basis to 188.7 million and by 23.5% on a recorded basis to 186.5 million. And organic growth was 10.4% on a constant currency basis in the quarter. And we see 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 ‘16. Margin improvement has been accomplished by delivering on our objectives, changes in our product mix and improvements and efficiency, cost management and utilization of our facilities. And fair 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.

Bernard, thank you and just a reminder that these earnings are based on higher number of shares almost a 10% increase because the offering we did in the late first quarter and they are still I think exceed essentially what we had talked about and that guided too. Even with that $0.02 adjustment I think we're still a bit on consensus earnings by about $0.05 and So, I think that that is an extraordinary effort. I am very pleased with 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, 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, I'd go to what Bernard talked about and that is the utilization, the mix, which means really that the business is really performing from our point of view and in a number of areas. So, I'm very excited and pleased with our efforts. Now what I would like to do is based on where we are it's clear to us that we need to do some adjustments and So, Bernard you are the star of the show today I'm going to let you talk about our guidance and some upticks alSo, for '18 and '19 on a preliminary basis. Bernard?

Thanks, Fred. So, update to guidance for 2017 based on the results that we have 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 increase our non-GAAP EPS guidance to a range of 123 to 128 up from 115 to 120. And GAAP guidance remains the same. And 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 what forecasting top line growth of approximately 8% for 2018 and 2019 and this will be supported by an introduction of new products for R&D, the integration of M&A completed in 2017 primarily on Argon and CCI and continued development to our international sales organization and change to sales force structure and compensation. And gross margin report has to expand by 100 basis points to 150 basis points each year. Again, this is supported by opportunities with mix, focus from our sales force restructuring compensation, new product launches with higher margin profile, improvements in utilization and efficiency in our manufacturing facilities, and focus and discipline in managing our cost base. And EPS growth is forecasted in the range of 13% to 15% in 2018 and the same in 2019. Again, this will come through the combination of sustained organic sales growth and margin improvements and again disciplined and focus management of OpEx.

And going back 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 three-year plan that we introduced 2.5 years ago 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 gaining the results that we all want. There are a lot of other things going on I think Bernard mentioned and I mentioned as well as the business and just about all of its areas is kind of hitting on all cylinders, in the business for all that doesn’t happen very often being whether it be our sensors business, our coatings, our OEMs, the international market. Things have been performing very nicely and we expect that will continue. There has been a couple of I think interesting developments you are all aware of them. PAE is a very interesting market for us but it's still very early and you're not seeing any results from PAE at this point and you likely won't till next year as there are a couple of initiatives that Merit is involved in that will help to organize and to grow that business. First of all, one of things that will be initiating next month, it’s a thing [ph] PEA. We been very successful with our HeRO product line which continues to grow, I think about 20% plus range give or take and our radio programs by bringing that skilled physicians in and they train other physicians. So, we just in the last week or So, opened up a training course for prostatic artery embolization. Those were held here in South Jordan and also, we do them in Europe and the response has been overwhelming. So, what we thought would be one course and may be one later on in the year has now turned into essentially four courses that are already planned and they are all fully subscribed. Which means that you're going to have somewhere by the end of this year about a 100 additional positions that have been trained and starting to do these procedures. It's not just the embolic, that 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 as 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 intentional Guide Wire but it alSo, helps us with all of our micro catheter products to combine this So, for instance the Maestro, we have been at a disadvantage and that 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 another product are going to help to appeal our growth. The pipeline is full with lots of new products like it's always is and So, again as we look out into the future, we are confident that with the controls that we put in to place with a focus on the objectives that we have I think fairly spelled out to you that we're confident of the business from this point on. So, do you want to make any other additional comments Bernard?

I think it pretty well covered and the guidance is clear and how we're going to achieve that is alSo, clear and supported by PAE, supported by robust R&D and nothing further to add.

I think it's, I'm going to cover the new Merit; the new Merit is like the old Merit with more discipline. And I think that’s the key to this is that the whole company is brought into this and we structured support to be able to support the line units and understanding there cost and their expense lines and making sure that they are kept in line. So, again, I am very, very pleased with our performance and I hope you are as well. Let me just move quickly over to M&A for just a few minutes, because I'm sure I’ll get asked the question but I will go ahead and see if I can address that now. We think that there are and continue to be numerous opportunities for Merit that are consistent with a couple of things that are important to us. And that’s the expansion of our existing business platforms. We're not looking for a for acquisition for revenues, what we're looking is it consistent does it fit, does it give us gross margin expansion, does it help us and does it have other products that we can develop beyond there. Now there could be a new strategic type of product line but at this point very candidly I just don’t see that. I see product line expansions enhancements in our existing four legs of the business that we have and I'm comfortable with that, but I alSo, want to be very clear that we are constantly looking and opportunities are being presented and again I would say at a pace that I've actually very candidly have not seen before. So, I think this consolidation is something that goes on and I think that plays very well with disruption for Merit and opportunity as well as opportunity to fit these products in under the kinds of requirements that are complementary to our and that we think will add more profits I mean it's kind of simple as that. So, I think with that said Bernard unless you have anything further, I think we spelled it out. We'll try to keep these comments short because of the day and how busy you all are. Thank you for joining and at this time will now turn it back over to our administrator and we're sitting here and we will alSo, be here after the call to maybe add some additional clarity if that's necessary. So, we will turn the time back over to administrator.

Thank you. [Operator Instructions] And our first question is from the line of Jim Sidoti. Your line is now open.

So, it seems like the acquisitions are as planned. Would you say you're to the bulk of the integration at this point or do you think you still have some more cost in the back half of the year related to integration?

There are some more things to do for instance in our single port plan Jim we were going live with Oracle staring next week, So, we have a team over there and there is still work to do it's always been a few months and there is a lot of training and a lot of things moving we have to become disconnected from the prior host and then integrate and train. So, there is still work to be done but I think maybe more importantly as we've been pleased that the revenues have maintained themselves and in fact growing more than we thought they would and I think we are just have been pleased very much for catheter connections, we just had a record month in revenues there our tooling is completed, our cost are going to be coming down, we are opening up new accounts everyday we've gone now and gone off the dealer thing into the direct So, all of those have been kind of all taking place. So, there is work to be done but I think the integration risk just the general business and that sort of thing all of those things have worked out I think much better than some of others in the past, that they worked very, very nicely. So, I think we are very pleased with it.

And you mentioned [Tim's] would you say that the thing's defined, is that revenue coming in where you thought it would when you did the deal. [Multiple Speakers]

You have to remember Jim what's defined that there are over a 100-people let go and we had to shut down distribution, So, I said we are okay with it. Let me go to another point that hits all three of these and that is one of the things that we always do is to start a research and development project and we have three research and development projects, revenue product for instance the catheter connections, Argon and defined all coming, sometimes probably in the first quarter, these things 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 defined products and a number of other things going on there. So, I think we’re fine with all of this Jim. There is still work to be done. But we're fine with them.

Okay and then on the R&D line with the approval for the PAE, will some of those cost start to come down for that project and I assume they will be offset by the projects you just mentioned, is that right?

The interesting thing about PAE is we really didn’t have any R&D expenses, what we have is approval of an existing embolic product an indication and since it has not been [indiscernible] device, the de novo route was the route that we had to take. But I think the important thing is Jim is that, we are the only company that has approval for embolic for that procedure in the United States and as I quite mentioned in my initial comments it’s the SwiftNINJA, it’s the vast access [ph], it's the radio pros, its closure, it's all those other things that go on that are all high margin products supporting PAE and really very tendering Merit's presence. We are having people call us physicians, we're the only game in the town right now and 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 is no R&D expense. We did that a long time ago.

Okay and then the last one on the legal expense, it seems like it came down a little bit from the first quarter will that trend continue and then I noticed one of your competitors took a reserve it sounds like they are going to settle a situation they had with the DOJ, do you anticipate anything like that happening with you in the next 12 months.

As you know I can't comment other than say, it goes on and on it slow the wheels just as move slowly and there expenses. But 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 and that’s all I can say about it.

And do you think products will remain at about these level for the rest of the year?

We think it will decline.

Thank you. And our next question comes from the line of Jason Mills with Canaccord Genuity. Your line is open.

I want to start where you left off in your prepared remarks Fred, with respect to M&A and your take on the Met-tech [ph] sphere I guess more generally you mentioned the M&A activity I presume in some respects you are referring to a lot of the M&A we've seen in the public domain. Could you comment a little bit further with respect to how that M&A that we’re seeing publicly affects your ability find and the competition around the assets that you think may be attractive to add going forward.

Yes, the thing that’s So, interesting about that you see these consolidations and it means that they are So, busy doing that that it creates opportunity because some of those companies that have products that we compete against they know who they are buying from, they have all of the issues but they may not have the same sales person. So, just from that point of view one of the things that's always been kind of the hallmark of Merit's growth and opportunity is we're steady Eddy. We show up, we have new products they know who we are and that's help us from a consolidation point of view most of time people [Indiscernible] are you nervous about this and are you nervous about that are you worried about this. And the answer is no. They create opportunities, they are not distractions to us, they create opportunities. Now in terms of the situations out there as I mentioned in my comments you've got all of these things coming any of those back to 2008, 9 or 10 years ago when private equity dried-up and this and that and there are only So, many people that people can go to with products that fit, that have a global distribution, it's part of the reason why the SwiftNINJA came our way. Why other products come to Merit because we have that footprint globally. And then there is a lot of really good ideas out there where people have done work here in the U.S. they have approvals but they don’t have a salesforce, they don’t have the national accounts, they don’t have the ability to go to our trade show and have a presence. If all of those things play and I don’t think we could be better positioned nor I think better deals than I've seen now and that are presented to us almost on a daily basis.

That's very helpful color, Fred, that's what I was looking for. Thank you. So, as your gross margins continue to track-up I think this is six straight quarters something you've been focused on and something the street has been focused on you have delivered and now you've given guidance to deliver for the next 2.5 years. Talk about what are the key drivers to achieving that sort of goals post you set out for yourself. I guess generally and then specific to some of the assets you've acquired recently how is CCI and Argon contributing at this point in time and define and SwiftNINJA etcetera?

Yes, little bit of time here and that's a big question. Let me go to and I was hoping someone will ask this question. Three or four or five years ago someone wanted to ask some suggestion we change the name of the company to Merit Construction Company. We had projects going here in Salt Lake, we had the projects in Texas, we had the projects in Ireland and we had projects in Hong-Kong, we have projects in France. We brought on and in the Netherlands. Now I was in the Netherlands last week at our Distribution and Corporate Headquarters for Europe and the way warehouse that we built there two or three years ago and open in that and 30,000 or 40,000 square feet is now 85% utilized. Usually we look at these things for five years. We put in to place these facilities because of the growth that we anticipated. Had we not done that and let's also, for [Mexico] we built that. So, we built and put a lot of capacity in place. But if you look at 24% growth pick your number that means that the rule of 72 is you should double your business in three years. And I think what we did is we put those in place now you had that expanse that comes with that, the depreciation, you got to clean it, you got to heat it, you got to cool it. But as you bring product through and those cost now get absorbed, then all off a sudden you see the kinds of performance and opportunities for gross margin improvement to absorption. In terms of our business and I've said this on our last call, a lot of people in this room that are sitting with me and I got 30 of our staff sitting here now, but I think Ron for us and newer players in the guide said on this last call are probably right [ph]. The things that we are doing to lower cost negotiating with our vendors, the efficiencies, new automation, streamlining, all of those things are bringing millions of dollars a year into that gross profit line and it’s the primary reason I think this quarter, we have actually, if you go back to the transcript, you will talk, you will hear me say in the previous quarter as we are coming to this quarter in the last one month of the Argon deal. Well we were able to because of our efficiencies to be able to keep that at that 48.3% non-GAAP and I don’t want to say it was a surprise to me it was certainly a hope, it’s a reality. And I think that when all these things starting clicking and you get positive variances, you get all the businesses growing. Even if you look at the line items, you will see inflation devices are growing, those are pretty flat for a while but that’s growing. So, the business is growing, the folks on the operation side are working a lot on efficiency and then remember back to the Argon, because I know people look at these things and say well, why did you do this, why did you do that. Remember the fan connection. And that is we've now gone direct in Japan with our OEM sales and on the first of next year we will go direct on our products over there, other than administration. So, the part of the Argon deal was the strategy that they were to maintain the discipline in our SG&A and they will have enough coverage and enough volume to cover that expense of going directly to SG&A in Japan is going to be higher. And I think this proves that even though we haven’t started that higher product sales that that absorption is there and again the other thing that I mentioned in my previous comments is that we've seen, I don’t want to say surprising but certainly pleasingly that we've seen, we didn’t lose any business, we didn’t lose any business in this transition. In fact, if anything we’ve gained business. And you don’t get to see that very often in a transaction, you usually have something drop off so. Efficiency, absorptions, mix, higher gross margins on the new products that are coming to the market, you all add that up that gives us the confidence of being able to step up for the play and saying okay, we can continue this down the road for the next two and half years.

Thank you. And our next question comes from the line of Larry Biegelsen with Wells Fargo. Your line is open.

Its Adman in for Larry congrats on the quarter. I wanted to start with the long-range plan and the 2018 and 2019 goals of 8% of your organic growth. You talked a little bit about the different drivers on the call including new product introductions, I was hoping you could just highlight a couple of those products that will help drive growth in the coming years.

Some of these are interesting, when we talked about new products, it's not just new introduction but products we may have actually introduced last year. Let me give you a prime example of one of those is our [indiscernible]. Our Endotech business and a product we just introduced just a few months ago with our elation pulmonary balloons, is driving that entire business, that business is rolling dramatically, it will grow even faster as we go forward. I just got a report from [indiscernible] who runs that division for us, one of the founders of Merit by the way. And that would be one, the true form Guide Wire, I mentioned that in my comments, does a couple of things, it is a re-shapeable Guide Wire and it also, goes along and as packaged we've been at disadvantage because our Maestro micro catheter which is a great product didn’t have that kind of a wire and our competitors had wire packers with theirs. So, that's online. You've got to think the radio procedures continue to grow. You’ve got the twister, you've got some new Amplatz Guide Wire, we didn’t really talk much about the Amplatz Guide Wire. And this is the Guide Wire that's sells in the $30 to $50 range versus a diagnostic wire at $6 or $7. So, you take those products. We also, have let's see I'm trying to think, what I am missing here, Justin, other new products coming out -- okay So, those are just some, ormal but I think between now and the end of the year with our [indiscernible] syringe, a new vascular access product, there is a whole bunch of it and one of the things that’s always interesting about Merit and kind of difficult for analyst 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 is a full basket of that and then remember I'm going to say this to you now because it's not coming around the corner Merit has a new CDO this is the central venous obstruction stent fully covered that's going to start showing up in about 18 months from now. So, that overall down the road could generate a $100 million the year for Merit. So, the pipeline is full vascular access and then you've got these just these initiatives we talked about radio PAE, all of the types of things and all the accessory products that go them. So, there are I don’t want say singles but some of these might be long singles, we might make a second base on this, but there are several of them.

Got it, that's helpful. Thanks. And then I guess just one I have to follow-up on PAE specifically. How do you think about the size of that opportunity I think you've previously said you anticipate doing roughly 30 million to 50 million call it a three to five-year window, is that still the way you are thinking about things and then obviously the long-term opportunity is quite large but requires a lot of market development activity? So, I wanted to asked you how you plan on building up the market, driving adoption and what the roll out will look like?

It's a very good point and something that we've discussed, we've talked about little bit in the previous comments about these PAE classes. Again, we went out even today I was told after I made that comment that we had more people sign-up today. Our interventional radiologists are singing-up for this program as fast as they can and very candidly faster than we can accommodate them all. We expect that if we take a look at what I'm seeing today then we will probably train 100 physicians between now and the end of the year in United States alone. It's actually enormous number and particularly with the excitement for interventional radiologist. So, you can talk to me and I'll tell you about why I think it's a great opportunity. But if you really want to get fired up [Indiscernible] and talk to him about his skillset, imaging, why they are the best to do on this job and what it means to their practice, So, that what's going to drive this. And another thing that we did as there were five or six men sitting in this room yesterday having a conversation and we were talking about this very same issue, and we started saying okay guys what you guys doing anybody here for TURP anybody here for laser, how many want to be in for an outpatient procedure with a Band-Aid on your wrist, if you did a ready approach [indiscernible]. I think as the awareness becomes available, as more and more people get the procedure done, as the press starts to pick it up as we presented at trade shows and as it gets picked up there, it's simply going to be and I said this for long time, it's going to be the procedure of choice and Merit is there not only with the only improved embolic. But with all the accessories and it's really the accessories that drive the value here SwiftNINJA, the vascular access, the catheters, the procedure pack, the closure devices, that’s where Merit is going to make the money, it's all those other products, the embolic is the small part of that, the procedure is the big part of that.

Great thanks and if I can squeeze in one more on M&A, you mentioned in the past you had an interest in building out the interventional oncology and spine business particularly within spine, So, I wanted to ask is that still the case and then are you still considering -- would you consider more traditional spine assets with call it an orthopedic surgeon call point or assets that would go through your interventional radiology call point? Thanks for taking the question.

We're not looking for traditional spine and orthopedic guide that’s not our market, we would look for things that might fit into the IR, we have to stay focused and we have limited resources to do all of this sort of things and to be very candid, we have a couple of other products on the embolic side that will be coming into the ILS 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 don’t want to be distracted by having these more orthopedic types of issues and what traditional spine that’s not our cup of tea. So, we're going to stick to the netting.

Thank you. And our next question is from the line of Jason Bedford with Raymond James. Your line is open.

I don’t want to be ungrateful with this question, I appreciate the '18 and '19 goals but the EPS guide of 13% and 15% implies a thing that OpEx kind of stays at similar level and a percent of sale. I'm just wondering if you see opportunities over the next few years to create a bit more leverage below the gross margin.

Well Jason, Jason, Jason 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 those are the numbers, we're comfortable as I mentioned, if we do that the business will do just fine and then we will do everything we can to exceed that. Bernard, you just are itching to take that, I can see it over go, let me have him, let me have him. Go ahead.

I think Jason it goes back, our primary focus on where we get the greatest leverage right now is on expanding gross margin and I think you know the move outlined is fairly, it’s a positive outlook for the next two years, there is still a lot of work to be done, we've got some of the low hanging fruit, already uncapitalized on that but that is a big area that we’re focusing on. What we also, commit to managing the OpEx line and making sure that stays under control and then I think if you look over the last three to four quarters you can see that our OpEx is growing slower than revenues and that thing haven’t always been the case in the past and we were focusing on that as well. So, I think the guidance is, its aggressive it's only a 13% to 15% growth on earnings. It is aggressive but we are confident that we can deliver on that and as I said the focus is on managing cost 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 the cost, I said that we originally thought we might do maybe two of these PAE courses this year. And then it looks like it's going to need four or five just on the U.S. alone. That cost money to do that. So, the reason we've kind of stuck with these numbers is because it will give us that top line and those higher margins which gave us as Bernard pointed out as we all know the biggest bang. What we don’t want to do it's said oh yes, we can get to 20 to 30 and then we stick with this then we miss it. So, that's just not what we feel comfortable within 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 us the best return station so. Bernard do you have any comments.?

It's just as well on R&D to grow with the rates that we forecast we got to continuously invest in R&D and that's a big part of our business in 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 are going to stick with the story and we are going to stick with those efforts. Jason, I think they serve the company well like as Bernard pointed out in this quarter we got a little bit better on that OpEx side, good for us, isn’t that nice. God if I missed it you guys are going to kill me and I'm not going to miss it. So, our plan is as advertised.

Okay, that's fair. I appreciate that answer. In terms of the organic revenue growth which again looks solid, can you maybe just talk about some of the cuts recent from some of the newer products launched earlier in this year and then just geographically I know you are breaking out in the slide deck but sometimes it's a little tough to tell from an organic and inorganic standpoint. So, if you can just comment where you are seeing the organic strength geographically? Thanks.

Yes, I think geographically I think Joel Wright and his team in Southeast Asia have done a really good job over there we are seeing it there. We are seeing good growth over Europe, one of the other things that's been very exciting is our growth in the OEM area, which tells me by the way was I think it’s a barometer. I think what we are seeing is other medical device companies are growing and growing well and consequently on the OEM side we're seeing double-digit growth which we haven’t seen and we see that trend continuing. And we're also, seeing our sensor, our coatings, So, I know [ph] a little bit, there are lot of these fits and pieces and as you know Jason probably it as is well as anybody it's a complicated and multi-faceted business. So, as I mentioned it's not very often that you get to see everything in same color, everything is kind of growing and that you get all of these bits and pieces Europe, Asia, Australia, Canada where we went to direct you are going to see more in Japan in the future. So, it's coming from everywhere but Bernard if you want to maybe expand on that a little bit.

All U.S. markets is it is obviously going faster and that’s what we've indicated will happen as that market develops, So, the split right now is U.S. 58 or U.S. about 42% of the business and we're seeing strong growth in our endoscopy business up till 23% in the quarter. And again, it's coming from like products like inflation devices up 11%, So, it's not just a new business, at the very end, the strong growth in all areas, as I've said across all markets and across all product portfolios.

And something else that Justine just mentioned to me is, one of the other things we're seeing and as the business gets larger, we spend a lot of time developing Jason our national account. So, our inflation device in the United States is up 5% to 6% and that’s coming from some additions of some national account contract that we brought online. So, these are existing products but Merit seems to be a topic of discussion, where people wanted to do more business with Merit and some of the other players consolidate and fall out. So, it's coming from legacy products as well. And when we talk about the new products they take time. They roll out, you got to get to the back committee, you got to get them on national accounts, you are going to have sales meeting, you got a launch, you got to build out it, I mean it’s a long arduous process on these things. But that’s been kind of Merit's history, the biggest advantage we have is that we're a 30-year-old -- it’s a prime of our life as a company and getting stronger. We don’t just look at something for a year or two, we will look five to 10 and here we are, and by the way Jason, just So, I can tell this one is because you're going to like this one. We have a new inflation device coming out at the end of the year, [boarding] inflation device they been doing this, I believe this new inflation device that we're coming out which was competitively priced, is going to add 10 percentage points to our market. We’re 50% player and I say we're going to be a 60% player within two and half years after we launched this. But I always say those things because I believe in the products and a lot of things. It's coming from everywhere its coming geographically, its coming from legacy, its coming because of national accounts, its coming from the new products and particularly we're just talking about Endotek, it’s a small part of our business but it's becoming a bigger part of our business every day because its growing faster overall than our business in general. So, very excited about endoscopy.

Thank you. And our next question comes from the line of Matthew O’Brien with Piper Jaffray. Your line is open. Matthew O’Brien: So, I have to take to follow up a little bit on Jason's question, because the SG&A or OpEx kind of staying flat, implies some pretty meaningful investments. In SG&A and R&D you talked a little bit about that, the pipeline on the product side seems great, I'm just curious as far as where some of those investments might be coming from an SG&A line are they domestic, are they international, will we see some leverage even beyond the 2019 timeframe from some of those investments?

Well one of the areas is more sales people. Now we don’t ever want to do a full list, but what we want to do is we want to stay within the parameters that we've guided to but 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 five or six years ago as we moved into more therapeutics or required more clinical support, it requires on the R&D side, in order to get our products it's got to be that double triple or whole month, these are now five year projects, they are not 18 months, they take more time and more money. And by the way this is not a change in what we've been saying for two years. I find these questions very interesting. We've said we are going to keep that SG&A line and that R&D but if those were the investments have to be made whether being going direct in Canada, Australia building up those infrastructures now in Japan and with those kinds of things that allow us to then get the higher margins than growth they have to be made. And So, too I'm not going to and please don’t take this personally, I'm steadfast and steady that we will grow at those numbers we said we will 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 are shallow hell, you just don’t have enough legs to hold up the building. So, we've got to invest in these sales force as clinical training national accounts and then these countries that require us in order to book direct you've got to put infrastructure in place they all fall in those categories and again I'm not offended by the questions but I'm surprised that what we've been telling everybody we are going to do what we've done is now being questioned why didn’t you do it differently. We're sticking but our model of success, we're extending out what we think we can do in expansion of gross margins and if we are lucky maybe we will get a break and we'll be able to reduce those expenses and get more in the bottom line. But as Bernard points out and as we all know it's upstairs that you make your money and make some gross margins and that's where you get to get the big bang and that's where we've been concentrating and that's where we have been getting the results while maintaining in this particular quarter by the way it was over. So, I thought we did a pretty good job on the expense line for the second quarter. With that being said that's my best answer Bernard did you want add any salt and pepper to that?

No, thank you. You've covered it pretty well. If we are developing markets, we're developing products to feed into that revenue growth and gross margin expansion and then to let that gross margin expansion fall through to the bottom line and that's what we've been focused on and that’s where our focus continues to make sure that earnings are growing faster than revenue. And we are starting to leverage the P&L. Matthew O’Brien: Got it, and then another -- well, two questions about package and be really quick one for Fred and one for Bernard. But Fred on the central venous obstruction product, that sounds quite interesting, can you talk a little bit more about the differentiation of that versus other technologies in the market and how that roll out should look as they are going to be PAE like. And then for Bernard, I didn’t see anything in the press release on cash flow outlook for the business. I know that's an area that you've been focusing on more and more, should we expect any kind of inflection point in cash flow or just more steady improvements?

On the cash flow, it would it would be more steady improvements, we have a lot of focus on the working capital management and again I think it will 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 So, forth. On the CDO stent, we think we are about 18 months So, I think it might be 16 months now before we introduce this product in Europe and it's going to be a couple of years, may be as many as three after that before it hits the U.S. market that’s just a regulatory requirement, but I'm not going to talk really anymore about that until we get what we're prepared to launch it because I don’t want to chip off my competitors to our features and benefits and advantages. But I will say that we have a full capability in house of making the stent during the EPTFE, the delivery system that Merit is fully self-contained in this particular area and we're excited about it for not only this product but several others that are in the queue behind it. So, that’s the best, again not to offend your math but I don’t want to be talking too much about things because I've got competitors on the phone here listing in and I can give you names if you want me to I could call them out but I called one out, they sent me a note and I decided I won’t call them 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 closure to launch in Europe and then we will go ahead and we will start talking about why we think that there is a $100 million market out there, available to Merit alone. That’s the best I can do today.

Thank you. And our next question is from the line of Mat [indiscernible] with Sun Trust. Your line is open.

I had just one first on the 2018, 2019 commentary, I know those are organic target but is your expectation you will be able to grow EPS in that 13 to 15 even with M&A in other words, should we expect the deals are not dilutive to EPS.

Yes, the answer is yes. I think when we look at deals and look at these opportunities, they have to be accretive, and to be accretive to gross margins and our earnings per share. On a non-GAAP, you have deal expenses we have some of those startups but that’s kind of, what our general thinking is. And we look at these things careful to make sure that we don’t blow up our plans. So, we're very, very mindful. Listen, this plan that we put together, two and half year ago has worked and I think we've executed well and our goal is to continue that, and that’s why we're willing to take add these another year, but we will be able to do that and those things will be accretive over and above and I think that if you look back in our history the last couple years that’s what we’ve done. So, I'm comfortable with that 18 and 19 and hopefully there will be some deals there as well. I mean we're working on deals as we speak. We’re always working on something. So, I hope that answers your question.

Thanks, and if I could just two more quickly PAE, is any reimbursement hurdles that you need to clear before the adoption takes place or is reimbursement already established?

Reimbursement is established.

And then just lastly on the quarter you gave some color around inflation devices and the reason why that growth picked up because some kits were alSo, better than we expected, I mean was there anything in those lines that seemed one timeish in nature, do you think that uptick in growth is sustainable going forward.

It’s a good question, I'm going to let Justin Lampropoulos answer that question.

So, we're seeing strong performance on the inflation device finally 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 and that will be early first quarter and those are just starting to materialize now and So, I would expect continued performance of that base business on the inflation products to continue.

But I will throw one thing out Mat just for you to write down, it's a code name, it's called Basics Tau, it's the 19th letter in the Greek alphabet, write it down.

Thank you. And our next question is from the line of Charles Haff with Craig-Hallum. Your line is open.

I had a couple of questions here on the cash flow statement, do you have the operating cash flow and the CapEx in the quarter?

So, CapEx was 6 million in the quarter and operating cash flow at 17.8.

And then third on the catheter line, that was very strong and I wondered if there was a material contribution from SwiftNINJA and a continued benefit from Cook's recall of their angiographic catheter that benefited that, or if that's kind of an ongoing rate we should be thinking about?

I think I'm going to take the word material out because that's a big and 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 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 the 5th, I think when we first became aware of 2016 early in that second quarter of last year, there was an awful lot of pipeline filling and everybody would do anything they could to get a catheter, remember people are 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're seeing a drop off in that catheter area, but remember there's a couple of other things too, that it cost 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 builds huge amount of goodwill and I alSo, said that I thought we'd do $10 million to $12 million and we did that and I think in that full 12-month period we were suddenly seeing 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 market ramp catheters, if you look at our diagnostic catheters, our impress catheters, all of those have done very-very well but you're not getting that bolus again, So, on a percentage basis it's starting to fall up a little bit but we kept a lot of that business.

The catheter business is growing at 10.8% in the quarter, So, overall our catheter business is still growing, So, Cook is only a small part...

Yes, Cook is a very-very small part, but again I think we gained more by the goodwill that we created by helping customers, but the NINJA is and will continue to be a big deal.

Okay, great. And then one more question for me on the long-term guidance. We are not used to hearing such long-term guidance this early but I understand it's part of your culture and that makes a lot of sense to me. One of the factors that we haven’t heard from you about is competitive responses to your new products and if we think that the market growth rates or the markets that you are currently in today maybe five to six and you are growing well in excess of that right now. I'm just wondering are you anticipating further lack of competitive response or do you feel like you just have So, many internal programs going I've heard you talk a lot about the internal programs but it's just I don’t want to say disbelief but it's giving us long-term guidance I'm just trying to understand what kind of competitive response that you are baking into giving those numbers?

Yes, I love it when you ask me these kinds of questions. I'm an army officer. You should never underestimate the enemy. You never underestimate anything that's a fool's game. Now we take into account we look at what they are doing but one of the advantages Charlie we have, when you’ve been here, you've seen this. Our ability to respond, our ability to bring up product to market, our regulatory, our national accounts, we do think faster than other people in my opinion. And but I've never underestimate, the fact if anything I overestimate their capabilities. But bigger as a competitor isn’t all we’ve better, So, I mean I get questions all the time about what about this acquisition, what about this roll out, what about this and that. As I said earlier I don’t see that at all as a disadvantage I see it as an advantage and I think history has proven that. It's proven in So, many ways and in So, any markets where we were stopping in investment banking and commercial banks we see all these things that roll up that they become more efficient, that they become more effective, that they make customer needs, I would argue that in fact in many cases they don’t. So, all of this stuff is going on is not something that frightens me or concerns me what it does is tell me that there is continued opportunity for Merit and the things that we do and I think we do as well as better than anybody. So, I hope that answers your question. I like it though, I like it when you start talking about. Mike, I see that sitting in this room everybody here and I am speaking metaphorically, has a gold bag and I mean these guys are the best of the best, they are rangers in this room. We don’t underestimate the enemy. And I don’t mean to call my competitors the enemies, but metaphorically speaking.

Thank you. And one last one Japan So, I heard you answer somebody else's question January 1st for 2018 for going direct outside of the kit business. I'm wondering Bernard if you could kind of quantify for us what percentage of your revenues is in Japan right now and when you go direct what type of impact you think that may have in your 2018 forecast?

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, 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 would 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 to full 90 to 120 days before if required, they will all be in place and all exercise. So, that what’s going on structurally, we have the question about what about SG&A, well we got to go we 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 cost a little extra money. But you won't see it, because we already have planned that it will be within those SG&A parameters that we set forth. Are you ready Bernard?

Yes, right now it's about 4% potentially it can move to 5. So, the overall effect on our growth, you are probably looking at 50 to 100 basis points for Japan. And then just on the CapEx and the OpEx and CapEx is 7.6 and the operating cash flow is 19.4. Just want to correct those numbers I gave you a second ago.

And I want to come back make with 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 has been restricting of that marketplace is give 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 long-term relationship with but we are 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 that I'm looking at July at the end of the table here, [indiscernible] that I would like to see those growth rates approximate what we been doing over in China and South East Asia, So, that’s 20% I'm asking Joe, he is looking at me, he isn’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 had in place. So, we're I think very excited about the opportunity there.

Thank you. And our last question is from the line of Mike Petusky with Barrington Research. Your line is open.

So, I guess and I may have missed this early on but any update on the Tijuana facility capacity, kind of near-term intermediate plan as far as that facility is concerned.

Mike thank you, it’s a great question. I don’t know how we've run our business very candidly without our Tijuana plant. Unemployment rate in Utah is slightly above 3%. With the growth that we been showing, we have been chasing products and moving, we're moving products, more products this week to Mexico and there'll be more rolling about 50% capacity down there. So, we still have plenty of room for growth, the business is operating and creating positive variances even with that much capacity. And by the way another really interesting thing and I said this many times but if you haven't heard this, Mexico for us isn't about the cost of labor, it's about the availability of labor and we have less than 1% turnover in Mexico and like any business that -- whenever you have turnover, it costs you money, you got to train people, you got to recruit people and you're going to lose those, even in Utah, because of this tight labor market and I would say we're seeing this in Houston, we've seen it in Melbourne [ph], wherever you go these markets are tight and they're expensive but in this we've got capacity, we've got a great staff down there, it'll be one of the big contributors to gross margins and we've been able to move what I call legacy products or products that are being built here in Salt Lake City, we've been able to move those into that facility is an ongoing and constant plan to do So, while we're bringing these new R&D projects, these 10 new products that we'll bring online over the next 12 month period and we're able to produce these here and go through a [indiscernible] why we moved the legacy products there and they pick them up and they execute them perfectly. And one more thing we have people that come here from Mexico, they come here to be trained, they'll come here for sometimes as much as three or four weeks, their behavior, we never had a single problem with one. They comply with the law, they're hard working and viva la Mexico, I love Mexico, there you go.

So, I guess and maybe this is a question for Bernard I'm not sure but the assumptions around the growth margin expansion which really I'd say I think are pretty impressive how much of that includes -- I guess how much greater utilization of the Tijuana facility is included in that or is there a way to essentially say hey of the 300 basis points -- 200 to 300 basis points we expect an improvement there, 50 basis points is associated with greater utilization of Tijuana is there way to kind of breakout how much you're assuming in terms of the gross margin from Tijuana?

Yes, there's a number then, 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 but we're seeing them 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.

So, out of the 100 to 150, 10 to 20 is Mexico?

Yes, yes.

And then just a couple of other quick ones, on the SwiftNINJA I think you guys actually gave sort of a revenue number in the first quarter and I know this is a tiny part of your business but I am curious, you said it was accelerating I think it was around 1 million in the quarter and was it much beyond the 1 million or was it roughly in that ballpark?

I don't think we gave a 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 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 Europe, we're seeing in Australia I am seeing stuck 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 best way for me to answer that question.

Okay, and then just last question, were revenues associated with define, were they actually sequentially down in the second quarter?

No, they were actually and fairly close to what we achieved in the first quarter and as we progressed through the second quarter we actually saw those revenues improve.

Okay, So, it's still be see some momentum there. Okay, well very good and guys congratulations and great guidance as well. Thanks.

And ladies and gentlemen with that we will close our Q&A session for today, I will like to the call back to Fred Lampropoulos for his final remarks.

Well, ladies and gentlemen thank you for the questions. Thank you I know it’s a busy day and lot of other companies out there reporting today and thank you for taking the time we are excited. And we like laying these plans out, we have found as I mentioned that they've helped us. It helps us to stay focused and there is a market out there that everybody can measure us against and we are committed to making this work and doing our best. So, let me just again thank you for your support. I know that we 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 is still work to be done here as achieving Bernie and I will be here for the next hour or two. Thank you again for your interest in the company and signing-off from Salt Lake City, and wishing all a very pleasant evening. Good night.

And with that ladies and gentlemen, we conclude our program. You may all disconnect have a wonderful day.