Fred Lampropoulos - President and CEO Kent Stanger - CFO Martin Stephens - EVP, Sales and Marketing Greg Barnett - CAO Anne-Marie Wright - VP, Corporate Communications.

Tom Gunderson - Piper Jaffray & Co. Jayson Bedford - Raymond James & Associates James Sidoti - Sidoti & Company James Terwilliger - Newport Coast Securities.

Good day and welcome to MMSI Third Quarter 2014 Earnings Conference Call. At this time, I’d like to turn the conference over to Fred Lampropoulos, Chairman and CEO. Please go ahead, sir..

Jamie, thank you very much and good afternoon ladies and gentlemen. We are assembled here, our staff, in Salt Lake City on a beautiful fall day and we appreciate your attendance. I will start our meeting by asking Rashelle Perry, our General Counsel, to discuss our Safe Harbor Provisions.

Rashelle?.

Thank you, Fred. During our discussion today, reference maybe made to projections, anticipated events or other information which is not purely historical. Please be aware that statements made in this call which are not historical maybe considered forward-looking statements.

We caution you that all forward-looking statements involve risks, unanticipated events and uncertainties that could cause our actual results to differ materially from those anticipated in such statements. Many of these risks are discussed in our annual report on Form 10-K and other reports and filings with the SEC available on our Web site.

Any forward-looking statements made in this call, are made only as of today's date and we do not assume obligation to update such statements.

Although, Merit's financial statements are prepared in accordance with accounting principles, which are generally accepted in the United States, GAAP, Merit's management believes that certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of Merit's ongoing operations and can be useful for period-over-period comparisons.

The table included in our release and discussed on this call, sets forth supplemental financial data and corresponding reconciliations to GAAP financial statements. Investors should consider these non-GAAP measures in addition to, 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..

Rashelle, thank you very much and again ladies and gentlemen, thank you for joining us. As you can see from our press release we had I think a reasonable quarter.

Our revenues were up 12% for the third quarter and as some of you recall last year, we had a very, very hot third quarter, one of our expectations in terms of revenues and to be able to follow that up with double-digit growth I think we’re very pleased with.

I think sequentially the improvement in gross margin which we will discuss a little bit further in a few minutes; we’re pleased with the income from operations as profit from my perspective.

The most important metric in fact the amount of net income on a GAAP basis that we’re in the third quarter, the summer quarter is the largest amount of earnings report in the last two years. And so it’s a pretty significant number.

The non-GAAP number, you can read a $0.25, a couple of other business developments and things would be of [ph] [interest] to you as we have finished our move from Angleton, Texas into our new facility in Pearland and so there will be some adjustments now as for the most of the cost of that facility now, almost all of that cost will now be up in the cost of goods above the line in terms of we will measure -- well in the past, a portion of that has been down, the SG&A line and as we moved in.

So there will be some adjustments in movement in SG&A that Kent discuss in just a few minutes kind of that the effect in terms of the gross margins. We just learned a day or two ago that we had received approval for our PreludeEASE hydrophilic sheath.

I think that’s very significant in that we have this very exciting opportunity worldwide in terms of Merit's radio products. We talk about and alluded to the fact that we’ve recently launched the ThinkRadial program not long ago in Salt Lake City, we had a radial training course. I think we have 16 or so physicians. We had some 50 on the waiting list.

We have another one coming up in Miami for our international markets and the last time I heard, we had about 50 or 60 on the waiting list plus a full class.

So there are people customers and physicians interested in the products that Merit is coming to the market with and this kind of fills out our line in that area in terms of having the stick to stitch concept that we talk about. We have a full line of new products that are coming.

We have a number that we think products that are I wont use the word imminent, but we have a number of other approvals that we expect in the next 30 days that we think are significant products from Merit and so we think by the end of the year we will have again two or three more approvals and when those come and we will certainly let you know.

But more importantly I think is the work that Merit is doing.

And that is we’re very serious about improving the business and I think the thing that we’re concerned about is we don’t want to have these booms and busts as (indiscernible) as people call them up and down and kind of the same old thing and I think all of the staff who are sitting in here, we’ve developed a plan or we’re working on our plan for 2015.

I’d say and I like to remind just a couple of things that would be of interest to you. And that is that we intent to have our first investors conference at Merit on or about March 5 of next year.

We will send out invitations and we hope to have folks in town so that we can share with you an answer questions for you and show you our facilities and discuss our plan, which we will share with you end of the -- late part of February.

Give or take when we get our audits and kind of get things that need to be done from a statutory point of view, we’re going to come to you and we’re going to discuss a three-year plan that we talked about our forecast, our margin goals.

It will talk about our operations and operational profit goals, talked about where we expect to be in terms of our earnings and what we expect in terms of CapEx. We will give you a plan that we expect to be held accountable for. We are working very hard on that plan and starting to develop that.

Starting with next year’s forecast and then we work for, but we have that for you sometime in February. So I think it will give you a clear view of the business as we see it over the next three years.

Now of course as well know things can change and this will be something that’s just based on what we see and what we have, not what might pop in, but it will talk about debt levels and talk about all those sorts of things and our plans to reduce that debt and to increase our operational efficiency. I personally am pleased with 9.4% operating profit.

And I’m going to take a minute now and turn some time over to Kent Stanger and Kent I’m going to go ahead and let you describe, just chat a little bit about some of the financial performance..

Thank you. First of all, I think we had a very strong finish to the third quarter in revenues. I think it was broad based .We still had a very nice growth in domestically and the U.S direct sales force was in double-digit to 10%. Our Pacific RIM worldwide dealers was at 24%. China was at 27%, Europe direct was at 25% and the EU dealers was 28%.

Those are quarterly growth numbers and they’re similar for the year-to-date if not higher. It was also pretty broad based and crossed our product lines and some of the stronger ones was our embolics.

We were up 63% in the quarter-on-quarter on our QuadraSphere, HepaSphere product which is a high margin product and our Embospheres were up 17%, a real good growth areas for us. Our basics compact and our SafeGuard which is a new product were big contributors to growth as far as the revenues in product.

It was gratifying to see a sequential growth in many areas of our Company that gross margins improved significantly, 140 bps from the second quarter to the third quarter. And a lot of that can be attributed to improving production levels and margin improvement.

It has to do with sales in China that were strong, product mix that I’ve just mentioned on some of those and so we were happy with that. When you look down in the operating expenses we saw gains particularly in the SG&A expenses sequentially.

So we’re seeing progress through the year as we predicted and expected that we were able to lower cost significantly $83 million from the second quarter to the third quarter. And we were able to hold the line and actually reduce a little bit but hold the line and reduce as a percentage of sales, the R&D expenses as well.

When you drop down below, we’re seeing interest expenses drop.

We were able to pay our loan down about $10 million and we also were able to reduce our interest costs by the rate which we’re going to see another rate drop here in just another 30 days or so, because we lowered our leverage ratio down to 3.20 to about 3.24, which puts us in a new tier of our interest bracket coming up in the next few months.

So we saw that come to the operating percent. You already mentioned Fred and to net income has grew significantly..

Kent, let me ask you, could you please discuss just briefly about a small impairment charge we have this quarter and how it compares to one last year, because there is a few little things there.

And then I want to address and remind folks of product we acquired last year and some of the effects that you will see in terms of the sales for the next quarter.

But would you like to discuss that for a second?.

Every year after the mid year numbers come out and we do -- during the third quarter we do a review of our intellectual property goodwill and other IT to value -- do fair value analysis of that. It’s required by GAAP.

And so in that process we had to make an adjustment to intellectual property involved with the product that has underperformed and it also has a contingent liability so that also was reduced. They offset each other. Net of the two, so it was about $1 million reduction in the asset and $700,000 in the liability, so you had $300,000.

And the net of that is 200 then. So it’s pretty small. But last year it was a similar adjustment on the very same product that was net of almost $4 million. So that is a big GAAP adjustment last year when you look at the two comparisons..

Yes, and I know you can’t live on both sides of the blade so to speak, but it is interesting to note for the three months that our GAAP earnings improved from 13 up to 18 and year-to-date from 23 to 33.

And Kent, do you want to comment on that?.

I just say that, that was a record quarter. The highest GAAP earnings we’ve ever had and it’s also the highest non-GAAP earnings. So the third quarter..

So those -- I mean, it’s nice to see that some of our efforts in the work is starting to come through. I’d also like to say that in terms of our growth were they’re in those double-digits during a summer quarter against a big quarter last year, that’s pretty significant there.

And a reminder, that as we moved into the fourth quarter, we -- in our comparisons we have last year an acquisition we made in early October.

And so as we compare the fourth quarter, that’s just something that we hope that the analysts will keep in mind that there is that product that won't and in terms of comparison or core, it now will now match up quarter-to-quarter because we will have the benefit of the revenues of that product last year as well.

Prior to this we’ve been talking core, non-core so to speak on that earnings side or on that revenue side. One other thing we’d like to just briefly discuss with you and that is that in terms of what we can see here it is October 22nd and -- I think 23rd, okay.

Yes, (indiscernible) fun and in terms of revenues, if we were to look at it, we’re likely to be on the low-end or just slightly below the upgraded forecast that we gave you for earnings and so we’re going to look at a range of about $134 million for the quarter.

We are talking about -- now this is our best guestimate at this point or slightly lower, but in that range still double-digit growth and in the earnings on a non-GAAP basis, to be between 22 to 25.

And we say that to you because we don’t want you to get too far ahead of us and we -- this is what we see today, it’s very early and that’s a guess, but it’s just what we’re looking at.

We want to make sure that that you can kind of see what we’re thinking for the year and then of course we still -- we will be planning and we will announce our plan both for the year and a three-year plan in February. So I think all in all, I need to let you know that we’re actively engaged.

You can see these international markets and the investments that we made. And let me remind you of those investments. In the beginning of the year we [ph] [split] our sales force and we have higher than I think normal expenses because of that.

But here what’s interesting to note just in the last month, I’m just talking about the last month and of course one month that’s not a quarter made, but SG&A expense for the month of September was about 26.4%. And so, I think it shows with what we’re capable to do and we also had by the way a record all-time record sales month in September.

But that being said, we do have a plan. We have the entire staff engaged in the plan. Our goal is to have our operating margins move above 10%. But we’ve got lot of work to do to get there. This is getting close, but it’s not close enough and it’s clearly not satisfactory enough. It’s not where we can be.

But there is still much to do here and I think we’re looking at products and we’re aligning our sales force and a whole bunch of folks. In fact the entire company along with the company objectives.

So that being said, I think that the planning process and the things we’re going through will kind of give us the returns, both returns on equity, return on assets, it will give us the kinds of operational results that we want, but we’re heavily engaged in this and we know we need to do better and we know that we just can’t kind of go.

We’ve made those five-year investments that we’ve talked about. We made acquisitions, we bought technology that went along with that and facilities, but we’re done with that. And now it’s a new plan and it’s to utilize and to optimize the assets and the investments that we have made. So I think that pretty well covers Kent what I want to say.

Do you want anything else before we turn the time over?.

No, let’s get questions..

Let’s go to -- so operator, we’re going to go ahead and turn the time over. We only took 17 minutes and we will take whatever amount of the time that our listeners would like to have to answer questions. So let’s turn the time back over to you..

Thank you. (Operator Instructions) And we will take our first question from Tom Gunderson with Piper Jaffray..

Hi. It’s Tom..

Hi, Tom.

How are you?.

Hi, guys. I’m good.

Let’s see, how Kent U.S., OUS, what’s the split and revenue and what’s the overall growth rates for the two?.

Yes, its great question. One that I wanted to talk about a bit. The split is $77.9 million on domestic and $60.9 million international, which is a 60-40 split. The growth rate is 21% for international and these are quarter numbers and the domestic growth rate was 7%..

Thanks.

And then, the acquired product from last October, a good look at my notes, I don’t recall it, what was that and what it’s been running at about a quarterly rate?.

Yes, Tom we acquired a product from Maquet Datascope Getinge. It was like -- I think the parent company is Getinge. It is the SafeGuard; it is a closure device for femoral and radial approaches. I think at the time we were doing about $622 million was kind of the annual run rate for the product and ….

5.5 for nine months..

So we’re going to be at some place probably around 7 -- I don’t know lets see, on an annualized basis, its probably going to go ….

Probably about 7.5..

… about 20% or something like that Kent?.

7.5 million or 8 million on that product and we have the related (indiscernible). So the last quarter was 1.8 million to give you that number. Little over 1.8 million for that product and the other is little over 2 million for the three that we brought together..

Tom, I will say that that is a sister product with a hydrophilic sheath that we just got approval for and it is now approved essentially globally. When I say that, I mean in Europe and in the U.S and this is the closer device that goes right along with it.

So we expect that this particular area of the market is going to grow very nicely for us going forward.

Does that answer your question?.

It does perfectly. Thanks. And then one last one, maybe a broader one for you Fred and that is you talked early on in the conversation this afternoon on what you call the W sort of the up down where we don’t get a sense of consistency across the board on the quarterly.

How are you addressing that with your team and can you keep this SG&A line stable and it looks like R&D has returned to a fairly stable level. Talk a little bit about that of what you’re doing differently to get one in a road to be five in a row..

Well, let me go through the issue, some of the factors. Some of them are these regional issues; some of them are issues like adjustments you make in the third quarter. It’s always a very interesting quarter, because you got FIN 48 and number of just adjustments that you make.

By the way, why I’m on that subject, last year we also had a -- I think a $1 million tax benefit last year that came out of the Irish facility. So I think when you look at that, I think we look even better.

I think the key to all of this Tom is the management of inventory and expenses and I think what we sat down with our staff to do is say okay, rather than kind of have this bottom up approach; we’ve taken a top down approach. These are the numbers that we have to have in order to meet our objectives.

We’ve strengthened or in the process of strengthening our counting and our reporting staff, so that we can more -- spend more time in the analysis and the review of our business instead of flying more by the seat of our pant.

So we’re doing some things here to form up areas that we haven’t done in a long, long time and that are necessary in our view to be able to get information to manage the business and to have our managers, our leadership be able to do that.

So I think those are kind of the big changes and I know that may sound maybe a little (indiscernible), but it all comes down to understanding the numbers, managing the numbers and knowing what those expectations are and then -- so rather than look at thing quarterly, we’re going to meet and we have the staff in place to meet on a monthly basis and review it and you don’t want to come to the principles office.

And that’s kind of we just need to do a better job.

So you want to comment anything about the bonus structure?.

The plan is for some of the sales, the executive sales group to have their bonuses tied to both sales growth, margins and op -- and managing operating expenses to help drive these operating expenses to a lower amount..

Yes, and I think we talked a little bit about this in our last call, but one of the things we were doing going forward, you can’t change the compensation plan in the middle of the year.

But our intention is going forward that we will align and this seems like commonsense as you talk about it, but lot of companies and Merit is one of them that has been managing for growth.

And that’s one way to do it, but I think a better way to do it is to align margins, to align expenses and it’s just not about them getting theirs, if the rest of the company, the shareholders don’t get theirs as well.

So I think what we’re going to do is we’re going to make sure that we align those numbers better, so that we’re all in and we’re all rolling in the same direction. Now again, I don’t want to in anyway defame our sales force. I think they’ve done a terrific job, but I think this will -- I think it will be more effective.

One of the thing that we’re doing is that we’re looking at the business and we’re analyzing products that aren’t giving us the kinds of margins that we want if there are things that are underwater or blow our corporate objectives, we’re going to raise the price or going to do without the business. So I think we’re in the process of doing.

That process has actually started. I think in terms of the sales force, we will also look at as we align those to make sure that that alignment is done with higher margin products in the focus.

Part of this radial program I think is really helpful because now in the past many of our products have been sold kind of (indiscernible) and this that, Merit is much more active in developing programs whether they would be our embolic programs that have to do with vascular access and microcatheters and embolics, but not below the knee types of issues where you’ve guide wire vascular access, crossing catheters and balloons and that sort of thing.

And so I think we’re looking more and more at those kinds of approaches of combining a bunch of high margin products. So there’s a lot of initiatives and things and I have said a lot. I don’t want to confuse anybody, but I guess the basic way to answer it is more visibility, more discussion and more accountability. And I think that goes for all of us.

So not only these guys be more accountable but that means when we lay those numbers out there, we’re all accounted for them too. And I don’t think we’ve ever laid out in the history a three year plan. I think that’s very helpful to us. Not a five year plan. That’s too far out and we can't see that.

But a three year plan as we sat down and talk about it, we can see where we want to take the business over the next three year, and we think that as we lay that plan out it gives us all a little bit broader scope than just one year at a time to see where do we take this and we can spell that out to investors.

So it’s a long answer, Tom, but I think those are things that are different from the way we’ve done things in the past. And we think we are already starting to see some of those results you’re seeing in this quarter, but I guess I’d point out its kind of just being -- listen, we know that we can and we need to do better.

So, I can call, you guys know it and I know it and everybody in this room knows it. So, we have to provide and do things differently not the same way we’ve conducted business in the past..

I just want to support. I have seen changes and differences in the way the things are being managed, those decisions being made and discipline to many of these respect, in the individual decisions made throughout the company, so I’m encouraged..

Yes. And you know something else, Tom and I noticed again thank you for indulging us. But it’s just not me, it’s the accounting staff. Its better information, better numbers, it’s the operational staff. This year we’ve gone through a number of management changes that we think helped to put the team on the floor that we think will execute this plan.

So we’ve traded, we’ve made some adjustments, we strengthened and I think we have the people in place to take the business forward and to accomplish what we say that needs to be done..

Thanks, Fred and Kent. That was good color. I appreciate it. That’s it for me..

Okay, Tom. Thanks so much. And Tom it was good to have you out here too and I think that having you hear it and see the business was, it was helpful for us and I hope it was of some value to you as well..

I enjoyed it. I look back to -- I look forward to coming out there during the ski season in March..

We didn’t mention anything about early March and skiing on Friday. We didn’t say anything about it, I don’t think but you’ll have to make your own choices..

I looked at the calendar right way, so..

Yes. The average -- we can give you the average debt of snow and temperature and that stuff, but we’ll get that to you later..

Okay..

Part of the new metrics..

Our next question comes from Jayson Bedford of Raymond James..

Good evening, guys.

Can you hear me?.

We can Jason. Good to hear your voice..

Thanks. So, just a couple of questions. So, the cost structure specifically OpEx was down nearly $3 million sequentially.

What was in the expense base in 2Q that wasn’t in the expense base in 3Q?.

Kent, I’m going to let you handle that..

There’s several of those. We saw reduction in payroll taxes and bonuses and shows and conventions for nearly $0.5 million and some of our vacation accruals and in travel. We have reduced some in our advertising and donation. So it was pretty broad based.

But we were seeing real discipline again and focus on efficiencies and in delivering our products to our customers and trying to save cost where we could..

Jason, I think one of the things that not only Merit but many companies are asking to do is you take a look and you and I discussed this I think out at the TCT. But we have to look with the expenses you have with the regulatory burdens, the Affordable Care Act taxes and all that sort of stuff.

I think we’re all taking the look at the kinds of returns that we get on these investments that we make. And I think we continue to conclude and one of the things we’re doing is like next year we have already -- we have eliminated two or three shelves that won't be on there next year.

We’re cutting back on some of these areas that are very nice to have, but we think we can spend our money elsewhere and some of that money a good portion of those savings go to shareholders.

So, I think we’re just valuating everything that we do and saying is it just business as usual or can we do something differently? The fact the matter is almost everything we’re doing is something that’s being looked at.

So we’ll be at TCT maybe next year but if it is it will be a 10/10 booth and not this big thing with a lot of people and lot of time with people out in the field and those sorts of things. So we’re looking at piece.

I mean all of those shows and discretionary spending and if you went through these things with Kent just a moment ago, almost all of them are discretionary expenses. Things that we have control over and things that we can make decisions on, so that’s one of (indiscernible).

The other side too, aside from just that question is, as I think operationally we are spending a lot of time asking ourselves a lot of questions on how we can better operate the business and whether it would be automation or consolidation.

And I think when we come up and share with our plan with you, we don’t want to let the cat out of the bag but I think that, I think it will be a very interesting phone call to listen to this three year plan in terms of the things that we’re doing that have to do with consolidation of facilities and a whole bunch of things that we think will bring cost savings and efficiency to the business..

That’s helpful. I wanted to appreciate the color for the fourth quarter but I want to ask about gross margin. Kent, I think you mentioned production levels and mix.

When you look at the number in the third quarter is this something you build on or is it going to be a bit of a step back here understanding that I guess you’ll layer on some cost with Pearland?.

I think what we planned and what we’re looking at this plan because its still already, I mean you do start to go to production mix and you have delivery schedules, but I think what we’re doing is we’re talking about maybe 20 or 30 basis points in the fourth quarter, improvement in gross margin.

So right now based on what we see, that’s kind of where we’re estimating will come in, in terms of what we talked about in terms of GAAP earnings, non-GAAP, GAAP and then of course gross margins and revenues. So we don’t see a stepping back.

We see slight improvement and then we’ll have a -- we’ll have different programs that we’ll discuss that we think will help gross margins and we’ll lay those plans out for you in February..

Okay.

And that includes cost related to Pearland, the 20 to 30 basis point in improvement?.

That’s correct..

Okay..

Yes, I mean we are going to have those (multiple speakers)..

It’s in the model that I just gave you, yes..

Okay..

Now remember, if I could -- Jason let me just say this. Remember now, we are there and one of the things that we’re doing in Pearland is we are moving a lot of stuff that was being built by other people and our goal in Pearland is to fill that plant up over the next 18 months to 2 years.

So we’ve got a lot of work to do to be able to offset the expenses of that new facility. At the same time we have a plan to do that. We know what those products are. There’s literally millions of dollars to be saved and to be absorbed by taking and moving those facilities.

Some of them have to do with building products out of, that are being built in other locations by other companies and moving those in and having those costs help us to offset those expenses. So, those plans some of which are already in place and some continued things that will be moving in there as well.

So, we are -- and we’re happy to be there by the way. It’s a beautiful facility and there’s a lot of opportunity there. So, anyway we -- I think that’s going to be a great opportunity for the company..

Okay. And just last one for me, when you look at your business the last two years it’s become very seasonal and that you have seen quite a bit of earnings in the back half of the year and it seems to be the case here in ’14, it was in ’13.

It never used to be that way and I realize that healthcare utilization is getting a little bit more backend loaded towards the end of the year.

But when you look forward to future years, is this the way the earnings profile is going to be kind of soft first half, very heavy second half or can the expense base be spread out more evenly throughout the year?.

Yes, it’s a really good question. But Kent, I’ll let you answer..

I must say lending, there’s been a long time consistent difficulty in the first quarter with a step up within expenses that come in the first of the year and we tend to have a little bit of a production swing too after Christmas and stuff.

So I’ve seen in the first quarter there’s usually pressure on gross margins and there is sometimes increases in cost like wages and stuff that will happen then. But it has been that’s no longer than two years, there’s been a long time that’s happened, had a seasonality and I don’t know if that’s going to go away entirely.

But I think there is a new consistency I believe we can see in some of the other expense controls that we’ll see like we’re not going to be splitting the sales force again this January like we did last year. And so some of those things I think are going to see less of that..

Okay. Thanks. I’ll get back in queue..

Okay. Thanks, Jason..

(Operator Instructions) We’ll take our next question from Jim Sidoti with Sidoti & Company..

Good afternoon.

Can you hear me?.

We can Jim. It’s good to hear your voice..

Great.

Well, I guess the big question that sort of everybody is worried is, what's Merit going to look like going forward? Is it going to look like Merit from the third quarter this year or Merit from the second quarter this year?.

More like the third..

Jim, let me answer the question, okay. It has to look like the quarter, this third quarter or better. We cannot operate this business at 4% and 5% operating profits. We can't run a business like that. It’s not sustainable. It doesn’t take us where we need to go. It doesn’t do anything for anybody.

And so, we have to operate the business in double digit operating profits and that’s what we have to do, so we can make some money for our shareholders. And in fact, so the people in this room can be compensated as well and align those interest. It has to be that way. There is no choice and there is no time. So it’s not optional any longer..

Well, I agree Fred. I mean if you can run the business even if you can maintain a mid or 6% to 8% top line growth with a 10% operating margin, you’re going to see a lot of leverage on the bottom [ph] [load]..

Yes. And Jim, let me tell you one other thing too and again I don’t want to kind of hash the old, but just for a second, we built tubing connectors and stopcocks and manifolds and kits and trays and that sort of thing. And that’s been Merit’s legacy business.

Five years ago we looked at the business and said, we’re not going to be able to compete in the long-term with that kind of product mix. We started making investments in research and development that went from $2.3 million up to up about $7.5 million.

We looked at acquisitions that we thought was strategic whether it be embolic or whether it be (indiscernible) based devices or chemistry and looked at what we thought were emerging opportunities such as radio, embolics, PAE, UFE and some on and so forth. We also felt that and we invested heavily in places like China, in Asia and South East Asia.

We invested in Europe and in Russia and in Saudi Arabia, and in all of these areas we put this infrastructure in place to do and to build the business. It’s all there now. We don’t really need anything.

We have maintenance and we’ll have R&D projects and we haven’t talked about that today other than just making a statement that our R&D pipeline is robust. We have lots of stuff, lots of opportunities and more of this program selling that you’ll see in the future where it’s not just a product, but it’s a systems approach.

And again I mentioned about embolics and delivery vascular access, the same things and some of the things people are hearing today that we’ve not talked before is below the knee, and there’s numbers of products that go together there and we have those products and we’re focusing on those products.

So, I want to remind folks that whether we articulated that, I obviously did not articulate that plan well enough. And that’s one of the reasons why we’ll lay out the three year plan. We’ll let you have your best shot at it and then we have to accountable for it, we’ll lay it out.

It’s not near to year because we can't operate the business that way, we just can't. We don’t want to operate the business. I would make the investments and done the things but now we have to perform. So, this is a good quarter -- by the way it’s a summer quarter.

So, I mean I think we certainly have the ability to a lot better than this, but there’s not a choice..

All right. Can you just help me around one thing? You look at this quarter compared to the June quarter where your revenue was basically flat, maybe down a little but your earnings is doubled.

Your gross margin up 140 basis points; is it a function of mix or just help me reconcile this?.

Well, I think it is a function of mix. Some of it, our deliveries of embolic materials..

(Indiscernible)..

I’m sorry, Greg..

(Indiscernible)..

Yes, well let’s go to the kit business. Kits were down by $1.4 million sequentially a greater sum number like that, $1.2 million sequentially. We don’t make very much money on those things. We think strategically it’s been important, but that’s not where our emphasis has kind of been.

I think when we have talked about aligning of the sales force its not just about getting a sales number. So we may in fact going forward see a little bit slower growth, but we’ll be making a lot more money. Now, I dislike immensely by the way. I dislike immensely slow to grow. I think its crap just so you know.

You can focus on the products and doing away the things that don’t make us money and focusing on the things that do is a plan that I can subscribe to..

And that’s what mix is about..

And that’s what mix is all about. So you will see the mix and the products that we’re developing in R&D and the things that we’re doing will have to add to this and we’ll lay that out in our plan but that’s -- we’re already working on it, we’re already doing it and we’ll see more of that and we’re all involved in that.

So, I think that’s the main focus. And the sales guys, I have been very pleased, I’ll say this to them. When we started talking about this early in the year, say we need to do this and move this around and change this. We couldn’t kind of jump right in front of them right after we asked them to administrate and manage this switch in the sales force.

But as the years moved on, we have kind of now conditioned them to where they were like looking kind of stargaze now they are starting to nod their heads and its going up and down not left and right. So we have got them think somewhat conditioned.

But until we actually layout their compensation plan over the next two weeks we’ll see if their heads are still going up and down, but they have to be part of this. We’ve done a great job across the board in growing the revenues. Now we just have to grow the right revenues to get the right mix.

And I think you’ll make more money, we’ll make more money, the share -- I mean it will be right thing for everybody to do. That’s what we’re working on..

All right.

Last question, the 25% growth would be embolics, was that mostly in China and what drove that?.

Yes, I mean if you’re talking about the quarter it was about 25% for the whole group, yes. China is a big contributor to that, so is Japan. That’s opened up this year and it has really boomed for us and it’s a big part of the growth. By the way, all of our business in China is turning more and more profitable.

We’re getting leverage there and its one of the things that’s helping gross margins by the way..

Now we do get some leverage, about $1 million in the quarter from second to third quarter $1 million in revenue and the China margins are well above the corporate margins..

Yes..

And you know what, we’re actually starting to see quite a bit of improvement in Europe where that’s been a profit over there, where we’re getting some headway and on the embolic side there as in Europe, so we’re focused on that. And candidly in North Africa and other areas, Russia has been a very, very big area for embolics this year.

So anyway I think ….

And the biggest market is still the U.S. and that’s growing..

Yes, because last year we went backwards in the U.S. This year the spread has helped. This is one of those areas where the spread has helped because there’s more focus on this stuff in the U.S. so that market is growing better in the U.S. this year after a down year last year. So, I think some of our plans have actually worked..

All right. Thank you..

Okay..

Our next question comes from James Terwilliger with Newport Coast Securities..

Hi, guys.

Can you hear me?.

Hi, James we can. It’s good to hear your voice..

Excellent. Real quick, I’m going to switch gears here a little bit and maybe look forward and not so much backwards. A lot of my questions have been answered. But Fred, I wanted and Kent you can jump in too, but Fred maybe its better for you in terms of this quarter.

I want to ask you a little bit about the -- I think in October you put out a press release regarding the ThinkRadial initiative..

Yes..

And I wanted you to talk a little bit in terms of how Merit is positioned. I think this is significant how Merit is positioned for the move from femoral to radio access and closure. I know it’s big in the international markets, now it’s big in the United States.

I wonder if you could just educate me a little bit on your view on this and how Merit is positioned to capture this..

Thanks James. Well let me first of all talk about this product mix because I think that’s part and an important part. It goes back to some acquisitions we made last year and some international development. We talked about a stick-to-stitch approach. So, you have to have the vascular access which Merit has.

Merit has had a radio sheath that’s been very well accepted and we’ve done well with it. Now we’ve just got approval for this hydrophilic sheath. So it allows us to have a product that we haven’t had and it’s a very, very big deal.

In fact I would estimate this is just kind of (indiscernible) but almost 75% to 80% of radio sticks are done with hydrophilic products. So even though that business has grown very well for us, it was this product that we’ve worked on and developed over the last two to three years.

We then also have the arm boards, we have the arm rests, we have the catheters, we then also have the closure devices, the guide wires. So we have a full line of products to cover this area. Now, there’s another little thing going on out here James that some people are missing.

And that is everybody has assumed that for whatever reason that this is all a cardiology issue. Well we have been in several conferences and we have several initiatives going on and several collaborations going on in which we’re starting to talk about a lot of IR docs.

We’re starting to do transradial approach for embolics, for UFE, for all types of procedures. And so in our last training class that we had here we had a number of interventional radiologists as well. So some people think that 20% is all that we’re going to get in the U.S. and I just don’t believe that.

I believe that we will see a 50% utilization rate in the next five years in the United States, why? Its lower costs. You have the same safety issues. You have better ambulation. You have a smaller hole.

You have a whole bunch of reasons and maybe more importantly if it were you or me, do you want to take an 18 gauge needle and stick in our leg and have the risk of and the cost associated with closure devices and hematoma, subdural aneurysm and all this stuff or do you want to do it in our wrist and do you want to be able to get up and literally within hours and in some cases walk out of that hospital.

Well, I think it’s -- I think you know the answer to that. I know what I would have done if I needed to. I would prefer the radial artery. So, I think the revolution in United States is just starting.

But more equally important maybe even more important is the fact that Merit can compete in the international markets with this broad length of array of products and this hydrophilic and we’re not done. There’s other parts to this too. There are long sheaths. There are all other kinds of products that go along with this. So I think radio is here to stay.

And we see it because if we did take a look at the people they’re trying to get into our [ph] [process]. I mean we could accommodate them.

We would -- we need to put a 100 in there, but it’s just not -- we bring in cadavers, we bring in testing, we bring in models and we bring in all of these things and we have physicians -- trained physicians and it’s kind of out the board. I mean people are just doing all they can to get into these classes that we’re sponsoring.

It’s new for Merit, that’s part of some of the expense that we have had, but it turns into revenues very, very quickly. So that’s the best way I think I can comment on it. We’re very excited about it..

Thanks. That was a lot of detail. A lot of good information there and the comment about the IR docs jumping in there is very, very interesting. I’m doing some work in this area maybe we’ll talk a little off line, but thanks Fred -- thanks very much for the detail..

You are welcome James. Good to hear your voice. Thank you, sir..

Thank you..

(Operator Instructions) And at this time there are no further questions..

Okay. Well listen, we’ll go ahead and close it up. We’ve got work to do and plan and all these sorts of things. We want to thank you for your time. Kent and I will be here for the next couple of hours.

If you have questions we’d be happy to discuss them to the best of ability and whatever we can talk about that would be helpful to kind of define the things that -- and the numbers that have been issued today. I’m not going to say anything more. I’ve got work to do. The staff has work to do. Thank you for the call, and best wishes to you.

We look forward talking to you soon. Thank you and good night..

Thank you for your participation. This does conclude today's call..