Fred Lampropoulos - Chairman and CEO Kent Stanger - CFO, Secretary and Treasurer Joe Wright - President Anne-Marie Wright - VP-Corporate Communications.

Tom Gunderson - Piper Jaffray James Sidoti - Sidoti & Company Jayson Bedford - Raymond James Dan Trang - Stonegate Capital Partners Michael Petusky - Barrington Research Associates, Inc..

Good day and welcome to the Merit Medical Systems, Inc. Second Quarter 2015 Conference Call. At this time I would like to turn the conference over to Mr. Fred Lampropoulos, Chairman and CEO. Please go ahead, sir..

Thank you very much and good afternoon, ladies and gentlemen. We are broadcasting from Salt Lake City, wonderful and beautiful afternoon -- summer afternoon here. I will start by having Anne-Marie Wright, who will discuss our Safe Harbor policy.

Anne-Marie?.

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

We caution you that all forward-looking statements involve risks, unanticipated events and uncertainties that could cause our actual results to differ materially from those anticipated in such statements.

Many of these risks are discussed in our Annual Report on Form 10-K and other reports and filings with the Securities Exchange Commission 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 any obligation to update any 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 of such operations.

The table included in our release and discussed on this call, set forth supplemental financial guidance 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..

Anne-Marie, thank you very much. And again, ladies and gentlemen thank you very much for joining us. We are delighted to have you and we’re pleased to be able to report our second quarter results.

And overlying all of that of course is I think execution of a plan that we have been preparing and have executed for years in preparation and have shared with you last year and I’m pleased that we’re on track on that plan and performing at or above the performance that we had expected. Let’s talk a little bit first of all about our net revenues.

Revenues were up just slightly over 7% when adjusted for constant currency over the last year it’s about 10%. So we’re pleased generally with the sales numbers. Strong performance once again from the international markets in China. The domestic market, I think has firmed up portion, it is doing quite well.

OEM did well and so just kind of across the board we had a quarter that we’re all very, very pleased with. In terms of sequential improvement, I think you saw that first of all revenues and then you take a look at our gross margins. Those have increased and we’re pleased with that and we expect that we will have further improvement.

I’m going to come to that in a minute as we discuss the balance of this year and very candidly taking a little bit of a peak into 2016. We take a look at GAAP earnings, even though we talk and we’re going to talk mostly about non-GAAP.

One of the comments that are subjects that we talked about here prior to coming on the call was essentially that our GAAP earnings doubled essentially from last year’s second quarter. And on a non-GAAP basis, they were up 70%. I think all of you would agree that that is just great performance.

The people responsible for this performance all 40 or 50 of them are sitting in this room and I love [ph] to express to them as I disclose the numbers to them, my appreciation for their efforts. I think in terms of expenses, in the budgeting process, I think that we are disciplined.

We are running through our budgets or in fact below those budgets and so I think that the process of the visibility and the accountability and responsibility that we have of bringing these numbers back to you as our shareholders and people of interest are -- we’re happy to do so and I think we’re doing a much better job internally.

I want to turn just for a few minutes and discuss our Tijuana facility. Just a week ago, on this day our Board was preparing to meet and we met last Friday in our new facility in Tijuana Mexico. This facility which was built under the guidance of George Frioux, one of our employees and many others, I think was executed masterfully.

We had a great advantage and that what we did is we had a contract manufacturer and we were able to negotiate a deal where all of the employees that we wanted to come to our new facility in fact came. In fact, out of almost 200 employees there were only two that did not come and that was really for family reasons.

The reason that’s significant is in terms of quality and we had no interruption, but more importantly we have a category [ph] of personal there and you will hear more and more about the quality people and our efforts to continue our consolidation plan that we’ve presented to you where we will continue to move products, and we can do all of that while not being at the expense of any of our existing employees.

That will come out of the growth that we continue to see and then in fact I think that as we move into 2016 will in fact accelerate on bigger numbers.

Now that’s a discussion for another day, but I think that this is a significant factor that will improve our gross margins substantially over time and I think it was just done and all of you, I mean, I know you don’t get to see these things.

You’re not there, but you will see it in the financial performance, you will see a lot of different things that will come out of it. I’m very proud of the execution. Every single product line that was in our previous contract facility is up and operational in our facility and with about 200 employees.

And now we will start to move and adjust and take advantage of the opportunities that are there. So I’m making a big deal out of it, because it’s a big deal, and it’s going to probably one of the largest contributors to gross margin improvement, at least one of those significant as we go forward.

So I’m going to turn some time over just a second to Kent Stanger. He wants to -- he is going to share with you some of the financial improvements and some of the factors that I think that you will find interesting. And with that said, Kent, let’s spend some time over -- lets have you hit some of the things that you dream about at night..

Yes, I’m real happy and pleased to report the progress we’re making in our financial statements and I’m going to focus mostly on the non-GAAP numbers. We’ve given you both of them, but all the way down to our financial statements; we’re seeing leverage on those sales growth that we’ve seen. Our gross margins improved significantly over last year.

They’re up 80 bps. They are also up sequentially another 60 bps so -- 160, so we’re improving sequentially as we promised. Our applications of overheads, the expenses in Europe due to the euro being weak are helping reduce our costs as they also reduce sales, but in the total it’s actually helping our income statement.

As we look -- we even get more leverage when you talk about SG&A. When you compare it to last year, we’ve got 250 basis points of improvement in sales and marketing and general and administrative expenses and another 50 or 60 bps in research and development efficiency.

So our distribution and even our product pipelines as a percentage of sales are becoming more efficient. So when you look at all of these factors of improved gross margins and lower operating costs, you'll see a dramatic improvement in our income from operations.

We’re also -- we are lowering our interest costs both by paying our debt down as well as lowering our interest rate. Our cash flow from operations was a new record of over $20 million this quarter. That was the largest contributor to reducing our debt leverage ratio.

Our EBITDA to debt ratio of 242 now, and well ahead of our commitments to the bank and it will again reduce our interest cost by another 25 bps in another month from now. So the EBITDA has now achieved a level of $86.7 million and again higher, it’s exciting to see these developments.

So we are again seeing leverage all the way to the statements and that's how you get a growth rate, its 70% over last year..

Okay. Well and it's nice to have a report like this. We have just kind of things hitting on all cylinders. I think the part that I'm looking forward to as Kent pointed out is, we have expenses in this quarter that were part of the start-up expenses in Mexico.

And then, it'll take us some time to absorb, but our expectation is within 18 months or so or two years we will have 500 employees in our facilities, in Mexico, and then we will absorb more and that will it turn profitable. So it's a drag now, and yet we’re still regaining this performance. It will become a big plus as we move forward.

So we have that momentum. I want to talk for a minute about the pipeline.

I made the comment that I believe that our business will accelerate in the future and I believe that because we have had a couple of products that have been delayed was a vendor issue here or this thing they are not big deals, but we have this huge introduction of new products as we move into the late third quarter, probably the fourth quarter and then start rolling them out in the first quarter of next year and as those thing just gain momentum and these are all very high margin products.

We are not going to talk a lot about them by name for competitive reasons, but there are a bunch of things coming that we are very engaged and very excited about.

And then -- and beyond that, some of our vascular stents that we first talked about at our meeting out here is Salt Lake, those projects are progressing and even though those are long-term projects, I think that as we have further assessed markets and opportunities, we find that those markets are even larger than we anticipated.

So we will start talk more about those as we get into 2016. They’re significant. They’re significant both in terms of the market opportunity, the product we have in the breadth and the profit opportunities. But again, those are for kind of later on.

Now let me tamper this all just a little bit with the same thing I do every year and that is we’re sticking by our forecast. We are not increasing anything even though we beat the numbers. We’re kind of staying where we’re, because we’re coming into the summer, and it is summer.

And you never quite know what’s going to happen and how things are shaken out. We live in a volatile world and although we are comfortable with our forecast, we don't see any reason why we should change anything, but I'm always a little bit cautious. As we come into this third quarter, sales seem to be fine.

Everything is coming on fine, but we’re just -- I always get nervous in the summer. So again, we reaffirm our sales, we reaffirm our earnings, we believe business will accelerate even further in 2016, but more importantly is this plan.

This execution is quarter-by-quarter focused on delivering the results that all of you waited for patiently for a long time. So I think that we are pleased with it. We have got a lot of work to do and that’s I think another important thing. It's not like we burnt all of our powder in the last four quarters. There is lot more runway here for improvement.

And I think that is the significant message of today is with the facility now up and running with those opportunities, with automation, with cost savings, cost-cutting, consolidation, and new products, the future is bright. And it will continue to get even brighter, but it's a long haul.

It's a lot of work and the people that make it all happen are sitting in the room and we’re pleased. It’s always nice to be rewarding for that and I think that we have been and we hope that we can continue to reward our shareholders with this performance.

Kent?.

I just want to add that we are seeing real leverages ourselves increasing and our cost throughout our distribution and our manufacturing or the fixed elements are being surpassed, but now you could really see the leverage occur when we hit the higher sales numbers like we saw in June..

Okay. Well, I think that pretty well does it. We could spend a lot of time together ask, answer your questions and so what I think we will do at this time is turn the time over to our operator and we will let her go ahead and pick some names for us to chitchat with. So operator, it’s all yours..

Thank you. [Operator Instructions] And we will go first to Tom Gunderson of Piper Jaffray..

Hi everyone..

Hi, Tom..

So last quarter I think you also had a good quarter and I think a lot of the revenue growth was coming from some of the strength outside the United States.

Can you split out U.S and OUS revenue growth for Q2?.

Absolutely. The International sales were just a little over $55 million, leaving 38 -- or $83.1 million domestic. That's a 40% rate and I will comment that if it had been in constant currency it would have been 41.3%. So -- but that's what it is, little over -- it rounds to 40% of revenues..

Tom, let me add a little color to that. China for the quarter grew at about 27%, 28%. Our direct in Europe is flat due to the euro, but our distribution is up. Our U.S sales are -- were up about 6%, up 7.3% for the year.

One of the areas that is very exciting and something that for me is personally gratifying is the growth that we are seeing in our endoscopy business, Endotek. That business is accelerating. We were up 26% ….

For the quarter..

… for the quarter. For the last month of the quarter it was up even more, its well over 30%..

40%..

40% for the month..

For the month, yes..

And we are introducing a new line of esophageal balloons and pulmonary balloons, which will come a little later on the year. And we believe that, that's going to continue accelerate this business dramatically. This is a business that is generating about 70% gross profit.

So this is one that a lot of people criticized early on and we kind of stuck with it and we believed in it and its starting to really accelerate. It wouldn’t be surprising to me Tom, if we didn’t see this business compound its growth for the next three or four years at better than 30%. So it’s pretty exciting opportunity for us..

Thanks. And just a follow-up, because China is so important too, everybody's income statement, up 27%, 28% in the quarter.

What percentage of business is China right now of your revenues?.

It represents $13.2 million and I’ve to run a quick number to give you that percentage..

Joe, let me ask you the question, we have -- we got to have that at our command. Last year we did about $50 million.

Joe, what was the year, last year?.

We should do around $50 million..

We do about $50 million, so it's less than 10% of our business..

Got it..

But still significant..

Yes, very nicely..

Yes..

And Fred made -- it’s short of 10%..

Go ahead, Tom. I'm sorry..

Nope, that’s all right. That’s a conversation..

I just want to add in that one of the other things I had a call a while back were someone, an analyst called and they were wondering about the receivable issue. Everything that we get done in China is COD. It's paid for at our facility when they pick the product up, so the receivable risk is nil.

So that's never, I think we’ve managed the business there very well. We are adding I think six more sales people that are in our budget for this year. So we continue to believe that China and we continue to invest there. So we’re excited about the opportunity and we’re pretty well established there as well..

9.6% is the number for the quarter..

Thank you. And then I'll ask an expense question and then get back in queue. But I’m curious about the gross margin and the potential for continued improvement in gross margin. Part of it I understand is your manufacturing in Europe and the euro I get that, but that's not really on your control.

Can you delineate a little bit more on how the gross margin is improving and things that are in your control? Are we leveraging the Salt Lake facility from a year-ago? Is that what's going on?.

Yes, there is this leverage in fact in almost all our facilities. We are producing more product as we sell 10% or more units if you look at it that way. We are also doing lean manufacturing in automation processes and procedures where we’re cutting costs out per unit on that basis.

And the only contrary to that is that we did start up a whole new capacity in Mexico and its underutilized right now and there is a phasing in of that to in front of us, but we’re looking at product mix improvements, so many of the products that are growing fastest were higher margin.

We’re getting more volume across fixed costs throughout and then we talked about the efficiency gains through automation and other lean manufacturing initiatives that we believe over time will all contribute to the growth.

And then when you look into ’16 and even more in ’17, the Mexico thing will really start to accelerating that gross margin improvement..

I think some of our input cost is welcome. We have a very active trade rep who and the company is very I think conscious of the opportunities we’re negotiating, because of our increased volumes whether it be from sterilization, packaging, shipping, all of these things we are very active in all these areas.

I think we’ve been looking at a number the other day that was something like over $8 million in savings in the last three years so, whether it would be these absorption levels and remember from the first quarter you have that kind of that lag that we see every year coming into the first year where that absorption we’re starting to see all positive variances across the board.

That's another very important as compared to the other. So as we come down the road, we will continue to see, we believe those positive variances despite the situation in Mexico.

And the Mexico thing which we guided and discussed and we are aware of will absorb up I think in a very orderly fashion as we have a very committed program to be able to put products there which will make us more competitive, which then will help with more volume.

So I think that it’s nice to see a plan come together, Tom, and there is a lot of runway here..

Good to hear. Thanks to you guys..

Okay, sir. Thanks, Tom..

And we'll go next to Jim Sidoti of Sidoti & Company..

Good afternoon.

Can you hear me?.

We can. It's good to hear your voice, Jim..

It’s good to hear you too, Fred.

So just so we’re not surprised next quarter, can you be clear on what the impact of starting up the plant in Mexico is? Do you think that could cost you a couple of pennies in the third quarter?.

No. We believe that the -- I’m going to put this Jim. If there is an expense to it, but with its offset ….

It’s baked in..

… but it’s already baked in..

To our numbers..

And we’re getting the benefit by the way of lower cost already of the existing products. Remember, we have 10 product lines with 200 people and so fortunately it’s not like we’re starting up from day one, we have 200 people there already and that’s helpful.

So yes, there is a negative variance in that facility and that negative variance will be going down every month, not going up every month. So it will -- it's baked in. It will prune off and in the meantime we are getting positive variances and more volume coming through the business, new products and so and so forth.

So it's not an issue that we are concerned about, that we don't have I think perfect control of them and we can’t control the speed at which we introduced products there and so and so forth. So its there, but we have -- it’s a small ripple and we’ve a lot more tide moving in our direction..

Okay, understood.

And in regards to China, have you seen business start to slowdown a little? In the last month or so it has -- has that not impacted your business yet?.

We’ve not seen a slowdown in fact if anything we’ve seen that increased. I think our embolic business there is growing. Our microcatheter business there is growing, vascular access, so just about across the board all of the products and we continue to file for new registrations and so we have not seen a slowdown nor do we anticipate one..

Actually our June numbers for example were stellar. They were really good high growth..

Right. And then, at the Investor Day you were pretty excited about the Prelude SNAP and the new biopsy device in the embolics.

Can you just give us some color on how those products would do?.

We released the SNAP and it is a terrific product. We are taking business away from our competitors every single day. And that's a product that will continue to accelerate. We also have some potential -- not potential, but actually OEM customers. So some of the business of that we have lost in this area when we first bought Thomas Medical.

We believe some of those customers are coming back and that should accelerate that business as well. And then we have another R&D project underway. I mean another area it's kind of a complimentary product that's probably 9 to 12 months out, so that whole business of vascular access kind of across the board. I would like to add one other thing, Jim.

I want to continue to talk about radial procedures. I had a physician call me today, well-known high profile guy -- been a guy that I have known for long time, and he indicated that he sees now the radial procedures in the United States is about 25%.

Our belief as a company is that will continue to grow and will exceed in the next several years over 50%. But the thing that’s really neat about that is we’re starting to see some of the radial stuff slip over to interventional radiology and you’re seeing some of the vascular access products that are in the IR market slip over to cardiology market.

So we hope that you will may become to see as a TCT where we have some new ideas, new things that we will presenting there, and some combinations of products that we learn see in the market, the things that we are currently building. So one of the things its -- I was talking to someone today and I hope you’re not offended, no one is offended by this.

But in 1964 there was this group called The Beatles and they introduced this song that was an old song by the Isley Brothers called Twist and Shout, and of course it was a hit. A number of years later, or almost 20 years later, they -- there is a movie called Ferris Bueller's Day Off or something like that and that same song went to number one again.

We’ve products that are best-in-class that as you combine them, we're going to reintroduce some of these into package to meet some of its needs that are currently not being addressed and that our competitors don’t have. And we think that this radial revolution continues. We just finished our first training Think Radial program in Germany.

We have one coming up in Ireland and I think this whole vascular access thing is something that Merit has a strong suite [ph] in, and so although we have new products, we have the SNAP, we have the EASE, we’ve lots of different things coming. We have a lot of things in our bag that sometimes you just have to put a different ribbon on.

And so, we’re looking at a number of those things, I think our marketing department, so we’re excited about -- I'll give you another example, Jim and I’m sorry that you kind of hit my button.

Think about the amount of money that it takes to go and do a procedure, to go in and put a closure device and then do all of those kinds of things and think about a smaller hole, think about less bleeding, less hematoma, less [indiscernible], all of those sorts of things and a closure device, it maybe a third or half of the cost with results that are equal..

Based on comfort [indiscernible]..

Yes. In fact we had an employee just in the last couple of days, had chest pains, went off to the hospital and had a radio procedure. Came back and said, I went in, they did the procedure and I walked out of the hospital. And I have the [indiscernible] the last time.

So, what I’m trying to say is that, this revolution is going to continue in the United States and there is no company better positioned with existing and new products to take advantage of it. So, we’re excited about the entire portfolio of products, the elation blooms as I mentioned in the Endotek business.

A new drainage catheter system coming out in September, we’re loaded. And I don’t want to talk anymore about it because my competitors are all on the phone trying to figure out how we do what we do and -- but there’s more to come..

Right. And then the last question, if you look back over the last 24 months, I mean Merit’s really turned around. You’ve gotten the Endotek and the Thomas acquisitions integrated and back to growth. You’ve reorganized your sales force. You’ve expanded capacity.

So, what's next?.

More of the same..

What's going to keep -- what's keeping you busy now, Fred?.

Well, worried about the red socks for one thing. No, I mean lets….

Well, then what you [indiscernible] break is in the end of the season..

Yes, that’s right. That’s what they all [indiscernible] games. Listen Jim, there’s no doubt that when you start talking about $1 billion and some might say, well that’s $0.5 billion from here. I mean, it took us 29 years to get to a $0.5 billion. It will take us five years to get to $1 billion. And I think what or I spent my time on is looking to say.

Now I can already see that. I can see in facilities, I can see in products, I see that. How do we go from that to the next $1 billion beyond that? So I think strategically the thinking has to be, how do we build the business for the future. It has to do with geography.

And again, some of these things I can't go into detail because, I’m putting out information that I shouldn’t. But if you talk about geographic areas, where do we go direct? What are the products? Where are the patients? What are the trends? I spent my time on looking at those things and looking at where we direct the business in the years to come.

And I also look at succession. I think about, okay. We’re trying to build a business of lasting value, how do we make sure that there’s no interruption and the business continued to grow. And so I think about all of those things, and I have a Board that I think taxes me. I think we have a very strong Board. We just added a new Director, Ann Millner.

But I think the Board that’s engaged at Merit today is not only the best we ever had, but they have very high and lofty requirements and we’re working hard to meet those which meet the needs of our shareholders. So, that’s where I spend my time on. I’m off to a trade show this weekend. I’m off to China and Japan again in early August.

The TCT, there’s a lot of stuff, Jim. So that’s the best way for me to answer it is, my job is to think out three, five and ten years and that’s what I’m doing. But at the same time, I made a commitment to deliver the results and I think we’re doing that. And it is very gratifying, I will say that. But so much of a gratification.

So we hit a new, as Kent likes to say a new 52 year high, but rolling in business for 29 years. But its making sure that we’re hitting on all cylinders. And what's nice is, everybody in the staff that’s making this happen, they’re all sitting in the room here Jim. It’s not just me and Kent and Ann Marie and a few, they’re all sitting here.

They all know and they know the results from performance. I think we performed. But like I said, there’s a lot of runway left. I mean this is just kind of like the opening act..

Okay, Fred. Thank you..

Thank you, Jim..

[Operator Instructions] And we’ll go next to Jayson Bedford of Raymond James..

Hi. Congrats on the progress..

Hi. Thank you, Jayson..

You are welcome. Few questions, just is there any way to quantify the impact of a stronger U.S.

dollar or a weaker euro on gross margin? Meaning of the what, 80 basis points of gross margin improvement year-over-year, how much of that is related to FX?.

Yes. I’m going to let Kent answer that in just a second, but to give it back to the 30,000 foot, remember its reducing our revenues and Kent will discuss that. It’s also reducing the costs, input costs in our European operations and so we get the advantage.

And as you had pointed out in your writings, we’re one of those companies at least that has this thing hedged in such a point that the lower, the stronger dollar, lower euro actually helps us somewhat. So, Kent then why don’t you give more specific details..

So as we’ve already indicated, 2.5% or $3.4 million was a reduction in revenues, but at the same time we had almost $3.2 million in the cost of sales section of our financials that was lower cost due to FX. So the ratio change there is actually 88 bps.

That’s why we named it in our, the least is one of the major factors to the improvement on our gross margins. There are other factors too that were up and improved in offsetting things coming along like the variances and stuff. But those are the numbers I think you’re asking for..

Right.

And when we look at the gross margin level in the second quarter, is that a level you expected to build upon over the next couple of quarters?.

Yes, really there’s still forward momentum in the most of those factors. I think that our gross margins really saw improvement in, sequentially during the quarter as they have during the year.

So each month we’re seeing improvements to do all the factors I was naming earlier and lot of that’s volumes and production in our different manufacturing facilities as well as the input costs and other things that Fred was mentioning, and therefore our variances are improving as we go through.

And that’s basically a function of those volumes versus our standard cost applications of overheads. So yes, I believe we have a trend here that’s going to continue.

We could see a little bit of a slowdown in the summer if we have leveling off sales or even [indiscernible], sometimes we have lower sales from third quarter, second quarter comparison, not significantly but somewhat.

But to begin the trends are, I believe that we’ll see improvement sequentially and maybe even more in the fourth quarter on gross margins..

Jayson, let me just add in a little point there. We opened up a new facility a little over -- about a year ago in Texas. That has been operating with negative variances, because it was -- I think it was $300,000 a month additional expense if I recall.

And that’s being shipped away and products have been transferred all of our stents are now being built there. They were being done by a third party. They’re now all in house. Catheters are being sent there and that facility is filling up.

And so, those negative -- so we’re doing all of this even though there is a little bit of breeze in our face, and I’ll say that you have the negative variance there and you have the negative variance that you’ll see in Mexico. But we have enough momentum that it absorbs that.

And once we get beyond that, as we move down this three year plan again with the products and everything we see, you’re going to see I think substantial acceleration and opportunity in the gross margin areas, both because of the mix and Kent alluded to that a little bit, we’re discouraging those low margin products and we’re incentivizing our sales force in those in which we think there’s opportunity and profitability.

So, all of these things are kind of happening and even though it never -- you never always have the wind to your back, you sometimes have a cross wind. Those winds are going to shift around to the nose and that’s all going to play to our advantage as the business goes forward..

Okay.

And just the facility in Houston there, what’s in terms of capacity utilization, what are you looking at right now at that facility?.

Well, one of the things that you have, when you have that facility up is it takes a while until -- what I call balance it. And some of those products by the way, some of the products that are in there are going to be -- are also moving to Mexico.

These are some of our catheters that are -- that have low margins and some of that will go to where we can produce them more economically, and that will create more capacity. I would say right now, kind of the Kentucky windage that would probably add about 60% capacity maybe 50% capacity on two shifts.

So we’ve got runway there, but it’s going to be kind of a dynamic world and moving stuff there and then filling it back in with products that are higher margins and have a little more complexity.

Part of those by the way is, if you take a look at this Endotek line, those stents and those products are some of those that are going to be produced there, and we think we can produce some of those products for about 25% to 30% less than what we were doing or more than what we’re producing at our -- at a contract manufacturer.

And things like the AERO mini, our EndoMak stents, all of these are accelerating and they’re going to accelerate even more -- and Mistral. So that’s another thing we’re doing, is we’re producing our extrusions and our own microcatheters will be produced in this facility..

They haven’t come online yet. So those things are soon to be adding to the production level..

So, I mean, so I think as we look at this plan that has all of these factors in it. We have a cause to be I think, very optimistic for the future, but again you got to take it kind of quarter-by-quarter, year-by-year.

But the point is and I think you see this, we’re executing and its one of the reasons we have this three year plan, because we wanted people to understand that you’re going to start up this Mexico facility in the middle of the year.

And we wanted to make sure that people could see the progress that we were making and the opportunities that are presented, and I think we talked about it one time.

The Mexico facility itself when its up and fully operational, lets say, when I say or capacity wise and in 18 months or so should generate up to 250 basis points of additional gross margin, just for that. That’s pretty significant. That didn’t talk to the issue of mix, the new products, the absorption and everything else.

So I mean, its fun time at Merit, but still a lot of work to do..

We are also going to consolidate on of our facilities at the end of September and eliminate some overheads over here about a mile and half from in Utah..

So, anyway, lot of opportunities still left here. I mean, we’re coming down the runway. It’s just kind of like we just let the breaks go and just applied the throttle. So we’re just starting down this runway..

Okay. Just a couple of quick ones here.

Kent, did you say that cash flow from operations was north of $20 million in the quarter?.

That’s correct..

What was [technical difficulty] capital expenditure?.

$39.4 million year-to-date and it was a little over $28 million, this is a year-to-date statement. I just know they were $19.7 million last quarter. So it was little over $20 million..

And trading 12 months EBITDA is about $86.5 million?.

Yes, $86.7 million..

Yes..

What was CapEx in the quarter?.

CapEx was $28.4 million, and year-to-date again I’ll say for the quarter it was roughly $10 last time, so that’s about $15 million for the quarter..

A lot of that CapEx of course going into our new facilities and….

Yes, some of it’s in the buildings, some of its equipment..

And that will [technical difficulty] or now that Mexico is in place, right?.

Yes, it will slow down. We still have lagging payments to make as we just barely finished billing in all the invoices [indiscernible], and we did -- we’ve just really finished up the Maastricht facility payments too just recently. So they were some of those in the quarter, but those are going to pay it off too..

Okay..

So yes, it will slow down a little bit. The leasehold improvements that are running nearly $10 million this year are mostly behind us..

Okay. And then, last question for me.

I know there’s been a lot in China, but how much of your kind of core portfolio are you selling in China right now? And then is there visibility to expanding that portfolio meaning, I’m guessing the 27%, 28% growth you’re putting up in China is due to new products coming online?.

Yes, actually it’s very little of the new products, and I would estimate that we have probably 50% of our portfolio that are being sold there, and a active registration process under Merit’s registration. So again, there’s a long, long ways to go in China, a long ways.

So we’re just -- we’ll hit $100 million in revenues there in the next couple of two to three years. So, it’s going to continue to, I mean if you take 30% growth you can do the numbers. So there’s -- we’re not selling everything there.

It’s a complex market, but we have a great guy that’s running it, and we have great leadership here in the corporate office. So a lot of opportunity still for many, many years to come in China..

We’re really getting just started in the radiology area which is a lot of the stuff that we’ve come out within the last few years that still need registrations and it sort of sometimes varies in the distribution and so forth. But there’s a lot of runway there..

Thank you..

Okay. Good to hear your voice, Jayson. Thanks so much..

And we’ll go next to Dan Trang of Stonegate Capital Partners..

Hi, all there. I have [multiple speakers] of question..

Hi, Dan.

How are you?.

I’m doing well. Thanks. Most of my questions have been answered. But Fred, you mentioned the summer time is a cautious time for you.

I’m kind of wondering what makes it challenging for your all compared to the other quarters? And is this something that’s unique to Merit or is also shared by your competitors as well?.

Well, I think historically Dan, what we’ve seen is that, Germany and many, many part of Europe shutdown for the entire month of August. They started getting ready in July, and then they still, they kind of linger on into September. It’s just then the reality of that, that situation for many, many, many years.

In our situation where we are very active and have a good portion of our revenues come from these international markets. These are things that we always kind of keep a very close eye on. And yes, that being said, we have orders from places like Kuwait and Saudi Arabia. Large orders of business that we’ll be delivering in this next quarter.

But it’s just always something that, I just keep an eye on. And listen, if people -- if docs are out, if technicians are out, if people are kind of kicking back a bit, there’s going to be less procedures done.

So it’s just been something that’s always been part of our business and something that we always kind of -- and I mean every year we always kind warn okay, third quarter is coming, its summer time. That being said, go back and take a look at the last couple of years, they’ve been pretty strong quarters.

I just don’t want to get overly optimistic and then all of a sudden say, well it did exactly what we thought it would do. So we’re just always in this third quarter and ours is just a little unique because of the, I don’t want to call it concentration, but because we do have a wide global business and people go on vacation.

And you see the same thing in the U.S. by the way. Doctors go on vacation. Patients think well I’ll get this done when I get back in the fall and that kind of thing. So it’s just kind of that -- just kind of little cautious. We’ve always been that way..

And we’ve had histories to back it up..

Yes..

Okay. Thank you..

You bet, sir. Thank you..

And we’ll go next to Michael Petusky of Barrington Research..

Good afternoon, guys. I have few questions.

Fred, I want to make sure I heard, did you say 50% of your product portfolio is being sold in China?.

Yes, I think it maybe half, maybe a little bit more. I mean its kind of half the cost, but there are a lot of products for instance our Thomas products, our Electrophysiology products, our Endotek products. Most of those products are not being sold there over yet.

So Joe Wright who overseas that, is that pretty close Joe or?.

Yes, I mean our legacy products are growing at about the procedure growth rate. We’re getting a lot of acceleration in the interventional radiology product line, the embolic’s, micro catheters and such. We still haven’t penetrated the EP product lines..

Yes. So there’s a lot of things that Mike just are in the process of getting starting up. So it’s probably about half of our product line. At one time, the input is for us to go direct so to speak in terms of the licenses. We had like, five or six of our product lines being sold out of 50%, it was 10%.

So by having our own [indiscernible], we just expanded our warehouse by the way in Beijing.

And I’ll tell you another area that’s accelerating [indiscernible], all of South East Asia and we’re looking at Taiwan, Vietnam, Malaysia, Indonesia, all of these places are kind of, and even Japan which has been a lag down for the last couple of years is starting to show some life. I think they’re up about 12% Joe, for the year.

So I mean, all of South East Asia, and we’re fortunate that we’re in all these places. We’ve gone direct now in Australia. So as we move into the fourth quarter into next year, we’ll start seeing a little different picture down in Australia.

So, I’m kind of expanding the question, but -- and there a lot of other places in which models that we have used that have been successful are being expanded into. So, again because of competitive reasons and other reasons I’ll just kind of hold the comments to that. But plenty of runway.

I mean I’ve said that I think about 10 times today, and I don’t mean that, I mean to offend anybody by doing it. But again, I think everybody in this room believes we’re just getting started. We’ve got long ways to go for this business..

Great. I guess, the CapEx number surprised me a little bit.

Kent, I was thinking maybe 32% for the year, but now it sounds like you guys are going to be closer to 40%, is that a better guess for CapEx for the year?.

No. I would say 35%. It should slow down because you’ve got a lot of building cost that won't be in the second half of the year as high or low..

Mike, one of the things that we touched on but we just finished, over the last couple of years we had two expansion projects in Maastricht, one was for our warehouse which we finished up a little over a year ago -- year and a half ago and then we just finished in the last 90 days the new corporate offices, sales and marketing and training center, that’s just finished.

And we just had our grand opening I think in May, and we just had a couple of sales meetings there. So remember there was money spent on that, but those things as Kent pointed out, short of things that will flow through that’s essentially taken care of now and we’ll slow down substantially.

And Mexico, although it’s not all through the statements yet, pretty much -- and we don’t have, I don’t know that other than small projects everything is -- I’m out of the construction business. I’ve been in that business for the last 10 years and now I’m out of it. And hopefully we’ll get back into it, because we’ll have the need and the demand.

But anyway we’re out of it now and that means that we’ll start to accumulate a lot of cash and much more the way we’ve invested in the past and it’s paying off..

Okay, great. I guess, I wanted to ask you a question also on the -- you guys did a big meaningful change in your sales alignment, and then I know you’ve done even some tweaking since that change.

And I guess, I’m just wondering, if you could characterize how that -- the numbers would indicate its gone pretty well, but I guess, what I’m wondering is, has there been much turnover in sales or your sense of morale and all the rest of it related to that still changes..

Mike, it’s a really good question. At the end of the day everything that we’re talking about right now starts by selling something. And so, we’ve seen very little turnover.

I think that, as we did this split of the bags last year into the interventional and to the cardiovascular, one of the things that we learned from that is that, some of the territories that we had were very large, and it was very difficult -- and a lot of times spent from people traveling.

And I think what we’ve looked at as we’re tweaking this going forward is to say, well we need to kind of reevaluate that. And so, at least on the West Coast or the western part of the U.S. a few months ago we started kind of a tweaking and kind of a re-touring of that area, that’s been completed.

We didn’t loose anybody that I’m aware of [indiscernible] is that fair, Monroe. So we didn’t loose anybody, in fact if anything I think people who were our sales force was very receptive of the fact that we kind of listened and we watched and we made the changes.

And we will continue as new products come on or as things gain more favor, you have to adjust this. So you don’t just throw a sales force out there. You see what's hot and what's not and you adjust to it. And I think Merit over the years has a long record of that sales force, and so it’s continuing to be tweaked.

We looked like as -- I mentioned earlier that with the growth and the opportunities in our budget this year, we had another six sales people in China that have been authorized and budgeted and we’re in the process of hiring those folks. So, its just kind of an ongoing never ending.

But I think we have tweaked and then we’ll start taking to look at some other areas in the country that we can again solve some of the issues of kind of expanded territories and we’ll start to reduce those to make it more convenient. But we really haven’t lost anybody other than those that we’ve invited to leave and they’ve accepted the invitations.

But then a few, one or two, that’s it. Why in world would you ever want to leave this company? You have to be out of your mind to leave this place.

I mean, why would you do that?.

Especially if you own stock. All right, so let me ask you one last question. Around the guidance, I guess the reaffirming with guidance. When I look at the last couple of years, you guys have done about 35% of your adjusted EPS and this goes for both ’13 and ’14.

About 35% of your adjusted EPS was in the first half and then 65% in the back half with basically improving revenue, higher gross margin and lower SG&A percentage is driving those bottom line results. And I guess, based around your commentary on gross margin, things like that at the very least mostly hold together.

I’m assuming then you must be assuming kind of a meaningful ramp in both SG&A and R&D in the back half. I mean, is that fair, I don’t know how else to get there other than that..

I don’t see a meaningful or substantial ramp up in SG&A and R&D expenses in the third and fourth quarter. In fact I think that we will continue to have the discipline. We’re operating in some of those areas under budget which is what we’d like to be able to do and still be able to deliver the numbers.

So I mean, the numbers speak and your analysis is I think correct in terms of where you see this because we have kind of lag in the first quarter and we’ve discussed that.

So, I don’t know if you’re asking me if we’re being conservative, I really don’t know where you’re going with it, but again I think we feel comfortable particularly in this third quarter of just saying, lets just stay packed. I mean listen, we’re a little bit ahead.

I mean you can see the numbers, we’re a little bit ahead and hopefully we’ll be a little bit ahead or maybe even a lot, who knows. But we’re just going to stick with where we are right now, and we’ve got these facilities up and running and then we’ll let this thing play out.

So we’re just not, we don’t -- I never thought why as to ever go out and do any adjustments as you enter December quarter for the various reasons that I discussed previously..

Okay. Just partly real quick on that, if you guys were to come out ahead of your guidance for this year. You would still in terms of the three year plan I’m assuming you’d still be looking for kind of double digit earnings growth off of whatever number you might deliver this year.

You wouldn’t take half of that back just because you maybe came out ahead this year.

I mean is that a fair way to think about it?.

We would not do that. I think if we have it, well that becomes the base and we take it from there forward. No, we’re not going to pull anything back down. We’re going to -- no..

Okay, fantastic. All right, great -- great job there guys. Thank you..

Okay. Thanks very much, Mike..

And there are no further questions from the phone lines. At this time, I will turn the conference back to Mr. Lampropoulos for any additional or closing remarks..

Well, first of all again thank you very much for joining us today and asking your questions, I’m pleased. But we have a plan and we’re going to continue to execute. I think there’s a lot of opportunity for the Company, a lot of runway. We don’t want to sound overly optimistic or pessimistic, but I think you can see the numbers.

I think you can hear what the opportunities are. We just have to continue to execute and that’s our plan, and we hope to and look forward to reporting back to you. It’s an exciting time and it will be for not just a quarter or two or a year or two.

It’s just, we’ve made a lot of investments in facilities, in products, in infrastructure, in sales and marketing, in geography, I mean we paid the price and there’s a lot of runway. So we’ve got lot of work to do and so we’re going to go ahead and thank you, and we’re going to go back to work. And we’re wishing the very best.

And just a reminder, tomorrow is Utah’s Pioneer Day and a great pioneer heritage here in Utah. Have a good weekend and we look forward to talking to you in the near future. Kent and I will be around for the next hour or so -- and or two, and we’ll be happy to take and to clarify any of the questions or thoughts you might have. Thank you very much.

We’re signing off from Salt Lake City. Good night..

And this does conclude today's conference. We thank you for your participation and you may now disconnect..