Fred Lampropoulos - Chairman and CEO Brian Lloyd - General Counsel Bernard Birkett - CFO Ron Frost - COO.

Brooks West - Piper Jaffray Jason Mills - Canaccord Genuity Jayson Bedford - Raymond James Jim Sidoti - Sidoti & Company Gregory Macosko - Montrose Advisors.

Good day ladies and gentlemen and welcome to the Merit Medical Systems Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to hand the floor over to Fred Lampropoulos, Chairman and CEO. Please go ahead sir..

Good afternoon ladies and gentlemen. This is Fred Lampropoulos. We are broadcasting from our corporate headquarters in South Jordan, Utah. And thank you for spending the time to join us. We are excited to talk to you about the third quarter and prospects for the business.

Before we do that, I’d like to turn sometime over to Brian Lloyd, our General Counsel, to read our Safe Harbor Provision.

Brian?.

Thank you, Fred. During our discussion today, reference may be made to projections, anticipated events, or other information which is not purely historical.

Statements made in this call, which are not purely historical, including statements regarding our operating or finance results, prospective or completed transactions, governmental or regulatory including investigations or proceedings are forward-looking statements and are subject to risks and uncertainty such as those described in our annual report on Form 10-K and other filings with the Securities and Exchange Commission.

We caution you that our actual results will likely differ and may differ materially from our anticipated results. Forward-looking statements are subject to change and are not intended to be relied upon as predictions of future operating results.

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

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

The reconciling table included in our release and discussed on this call sets forth supplemental financial data and corresponding reconciliations to GAAP financial statements. Readers 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 may affect net income. Furthermore, these calculations may not be comparable with similarly titled measures of other companies..

Brian, thank you very much and once again ladies and gentlemen thank you for joining us. I’d like to start out today by briefly discussing a matter of business that appeared late last week. As we were preparing for our regularly scheduled Board of Directors meeting and audit committee meeting, we had received a subpoena from the Justice Department.

After meeting with the Board on Friday, we determined that it would be appropriate to make sure that that was made available to the public and so on Friday afternoon after our Board meeting we filed an 8-K. It is self-explanatory.

I cannot go into any detail other than to say that we've had certain requests, but as are covered about our practices and promotional and marketing materials, it is our intention to comply and we will as deemed appropriate and as required by law we will release appropriate update as they present themselves.

Now this is going to be a period when there's going to be a couple of two three months before all of this information is provided and then we'll have to wait until we get a response back from the Justice Department. That's about all I can say and I don't want that to diminish the results of our third quarter.

So let me go ahead and leave that now behind and move on to what I think is an exciting third quarter and something I'm very pleased with. First of all, a reminder, that the summer quarter is always one that we warn about and we get nervous about, that’s for good and varied reasons.

Physicians in the United States and families are on vacation, procedures slowdown and in Europe many countries simply shut down for a good portion of August and sometimes a portion of September. Despite that, we were able to report revenues as you can see of approximately $157 million for the quarter.

When adjusted for FX and you’re all aware of adjustments we've seen in the pound sterling and the euro and in the Yuan, it would have added another $1 million or so in revenues. But despite that, we had what I think and I hope that you'd agree is a tremendous quarter in our business, and we are excited about the future as well.

Now there are two things that were going on in the quarter, because while everybody else was vacationing we weren't. We were very much engaged after July 6 in the work that needed to be done in the transition of the DFINE medical business in Merit.

And I'm pleased to report to you today that a good majority, in fact more than the majority I would say 85% or so of the transition work that was necessary to be done has been completed. Let me talk to you about what some of those are.

In Europe, after a lengthy process of working with a works council and with the appropriate authorities in Germany to fill the requirements of the law, we were able to consolidate the business. We were able to move our 3PL of logistics service to our facilities, in Maastricht.

We were able to shut down the office and we adjusted the workforce appropriately to meet the requirements and the numbers that we have shared with you. We're able to meet the revenue numbers for DFINE, even during a summer quarter and those revenues were about $7 million.

And I think you'll recall that as we looked at the business, we thought that we would see about $16 million in revenues for the year. And we could see that uptick on the -- back into the year. The good news is the work is done.

The revenues were preserved and I was convinced as ever that the overall business and the opportunity is exactly what we hoped it would be. Now we're just getting started. We have trained our sales force, but we will be retraining our sales force again -- its simply as a process.

We’ve also formed out IOS division which then takes other products at those call point. And so I think, all in all, we're very pleased, but the thing that I would like to impress upon you is the extraordinary work that was done to consolidate this business.

And to do that in 90 days, is an extraordinary effort by extraordinary people and I want to really give that credit to our operations and sales and marketing staff. We're very pleased.

And I think as we now move into the future, we will see that product line will continue to serve the Company to grow and there were other projects that we’ve actually started. So we've already to some extent Meritize the business by making sure that R&D projects are combined and moving forward. So we've accomplished that as well.

Let me move on, if I could, to the HeRO.

As you all know this was the transaction that took place in February and about 90 to 120 days after that all of that processes and manufacturing we move to Salt Lake City and I’m pleased to tell you that just this week we’ve introduced at the CiDA meeting, which is the Controversies in Dialysis Access, we were able to introduce the Super HeRO.

Briefly what that product does is it allows us to attach our outflow cannula through other grafts and these other grafts are ones that you can cannulate much earlier than the one that we provide in our kit. Reports that are fresh and coming from the field this day are that we were the hit of the show.

I'm sure there may have been one or two analysts that may have been there and they can report in their writings. But we took about 80 to 85 lead in that conference, which only has about 300 to 400 of the most influential vascular surgeons, nephrologists, and interventional radiologists working with dialysis issues. That was in Austin, Texas.

It's exciting to see a business that you buy and a business that you can integrate and that you can launch new products and start other products.

So I think that it is important to start out by saying that although we were able to have those revenues from those products in the quarter, ongoing that the business is secure, it's in place, its Meritize and we will continue to be Meritized and we will continue to be a source of high margins and improved profits as we move forward.

Now if we adjust for these businesses, then we still saw 8.9% core growth and this is in a summer quarter. I think you would all agree that that's an extraordinary performance and a great effort in the summer. Now as part of that in fairness, we continue to see revenues coming from the Cook opportunity.

Our revenues were approximately $3.1 million for the quarter, a little less than the first quarter. But be reminded, that in the first quarter products were being gathered up. They were taken off the shelf and you had to fill up those shelves. And then as they were used people will then order.

And there was a graft test going on when that first came out and I think it was around April.

In the meantime, we've added additional capacity at our facilities and there was some cost as we talked about in the previous quarter and I believe that’s about 20 basis points, in which we were penalized because of the lower margins for some of these catheters.

That being said, the amount of comments that come from both international physicians and hospitals, as well as domestic, have been appreciative of Merit's efforts to make sure that they have the product to complete procedures, particularly in places like Australia and Canada where we've recently opened up a direct presence.

Certainly that was product benefit. It's our belief that we will continue to see revenues come from this and we will continue to see pull through. And so I think we’ve accomplished what needed to be done to make sure that we can serve our customers. Now on a non-GAAP basis and I will go directly to that.

As you know we had many expenses that were associated. We've the cost of the transaction and some of the things that needed to be done.

So I’m going to turn sometime over to Bernard Birkett, and Bernard I’m going to have you go through and just for a moment share a little bit about the DFINE transaction expenses and why you see non-GAAP at $0.26 a share. And just make sure that you can put a little clarity on that..

Thanks, Fred. Jus to recap quickly on the revenues, Q2 -- Q3 revenues of 15.3% on a reported basis, 16.1% on a constant currency basis. For the year, revenues are up 10.5% as reported and a 11.4% on a constant currency basis. And from an earnings perspective, Q3 GAAP was -- earnings per share was $0.02 compared to a $0.11 for the same period in 2015.

This was down primarily as a result of restructuring costs related to the acquisition of DFINE, Inc. And Q3 non-GAAP earnings were $0.26 per share, up 28.8% compared to $0.20 per share for the quarter ended September 30, 2015. On a gross margin perspective, on a GAAP basis, gross margin was 43.2% compared to 43.5% in Q3 of '15.

On a non-GAAP basis, gross margin at 46.8% compared to 45.6% for Q3 in 2015. So we continue to see improvement in gross margin and in earnings quarter-on-quarter as we proceed through 2016 based on the information that we've already provided with this consistent -- with our guidance.

Also on a CapEx perspective, again we see resulting in our CapEx expenditure in Q3. So that came in at approximately $5 million in the quarter and that shows a reduction in CapEx quarter-on-quarter since Q2 2015..

Okay. Now Bernard, I needed maybe -- you have to do a little bit more color on some of the expenses that will be included in the GAAP to non-GAAP for DFINE, specifically. Could you discuss that a little bit about what’s some of those expenses would have been that’s within added back in on the non-GAAP..

So the major expenses regarding DFINE that we have been adding back in would be reorganization costs, primarily driven by severance costs that we have seen within the U.S and/or European businesses.

And we have, as Fred said, being able to accelerate the program in integrating DFINE into Merit's and actually now starting to see realization of the synergies that we have forecast. We will see them come through in Q4. And again this was in line with what we had said on our Q2 call, and how we saw this actually playing out through at quarter three...

I think we’re slightly ahead of schedule and again this includes shutting down offices, moving inventory, and for instance in Europe we -- of course adjusted the customer service ranks, because we already have those folks. We move from a three PL to our facilities in Maastricht.

And I think, again overall, I don't know that you could've done anything better and in such a timely manner. So all in all, I’m very, very pleased with that. So if you look at revenues, we look at our earnings, we look at our ratios, we look at our debt, we take a look at all of these factors.

They all move in the right direction, in the quarter and will continue to do so, Let me, if I could move a little bit now on to some of the other highlights of the third quarter. During the quarter, we completed the enrollment of the EVOLVE study.

Now EVOLVE study, if you will recall, involves an esophageal stent in which we have a specific valve in that device made of a proprietary polymer. And essentially what this does is allow a patient and generate a palliative patient to be able to sleep in a prone position without feeding tubes and they can both eat and if necessary regurgitate.

Now that doesn’t sound like a lot of fun, but I will tell you that the patients who have this product in my opinion, have such an improvement in the quality of life.

Now what takes place as we have to wait approximately 6 months and then we will take the follow-up which is essentially just a safety follow-up and then we will take that data and submit it to the FDA and for the approval process. So that takes time, but I think it's one of the things that helps to enhance the Endotek division.

Now as promised in our previous call, and if you look at the Endotek in the second quarter, it was a little slow and that was basically an OEM issue. However, I'm pleased to report that for the quarter and the three months compared to last year, our sales in Endotek were up 24.3%.

Now I believe that that's going to continue and not only that I believe that's going to accelerate.

And I say that because in addition to the revenues that we're seeing from our elation balloons and our stents, our mini-stents, we believe that we are going to see substantial growth opportunities now that we have the 5, 10 clearance for the pulmonary dilatation balloon. That's been approved.

First slots are being built as we speak and in fact I was on the production line this morning and they indicated that they would finish up the last three work orders for the pulmonary balloons. And then those will be launched.

A reminder that Merit is the leader in pulmonary stents and to have this product I think it's going to be an exciting opportunity for Merit. In addition to that, we launched the basic TOUCH40.

This is an inflation device that will go up to 40 atmospheres, primarily used by nephrologists and interventional radiologists to do high pressure procedures with grafts and fistulas. And so this is a very competitive I think best-in-class, and just part of our armament if our inflation device business and we expect it will see growth there.

So as we look back at the quarter, I think that we had improvements in gross margins. We had I think a very, very exciting sales prospect. We're able to -- as I mentioned previously transfer the manufacturer of the HeRO and launching new HeRO Europe products and we integrated with the DFINE business which is essentially complete.

And we did all of this in 90 days. Listen to my staff and to our shareholders. I will tell you that this is a Herculean effort of being able to do all of these tasks and get them accomplished in that period of time.

So as far as the business, as we look forward, Merit has a number of new products that will get launched in the late fourth quarter, and I'm very excited as we look into 2017, we have the Corvocet.

We have these balloons that I talked about and not just the pulmonary balloons, but the exciting growth that we're seeing in the standard esophageal balloons. We have this with Ninja. That continues to grow very strongly.

This is our steerable micro catheter that is in review at the FDA and we hope that that product will also get approved, but it's in that process. So I think all in all, summary we did -- what we said we will do, I think we did it with precision.

I think that the business is continuing down that three year plan of their improvement in revenues and profits. The gross margins and I hope you’re pleased as I am with this quarter and I think the prospects for the Company going forward. So that’s a lot of conversation on a lot of subjects.

We thank you for your patience and now I think what we'll do is we will turn the time over to our administrator and we will go ahead and take questions..

Thank you. [Operator Instructions] Our first question comes from the line of Brooks West from Piper Jaffray..

Hi, Fred.

Can you hear me?.

I can Brooks. Thank you very much..

Congratulations on a good quarter. I’ve just got really two questions. Question number one is on gross margin.

So I wanted to understand the main drivers of the improvement there? Is it on the mix side, is it on the cost side and I was hoping you'd call out maybe two or three products that we should keep an eye on as primary mix -- positive mix drivers on the gross margins going forward. That’s question number one.

Then question number two, you’ve strung together a couple quarters of 12% plus operating margins. I’m wondering if that's now a state level to think about as we model the business going forward. Thanks..

Okay, great. Thank you. I’m going to have Bernard to answer the question on gross margins and I will come back to mix..

Hi, Brooks. Yes, so on them we've seen a number of factors affecting gross margin and mix is part of it, you can see that and the growth rate for certain product family. So it's about 20 basis points. We were seeing on mix for the effect of and the catheter business.

That affects us negatively by about 20 basis points and on the quarter we did see a negative impact also from FX, particularly from China and U.K and that affected us again by about 20 basis points. So if you add that on, we'd have seen a 160 basis points improvement.

And some of that also does relate to DFINE being added into the mix and that’s higher margin product for us. And with that, that started to benefit us late, mid-to-late in the quarter. So mix is part of this growth.

We are seeing cost-efficiency coming from our facilities here in South Jordan and actually moving more product to make it all, that’s have greater impact as well..

So thank you, Bernard. Let me go the products that are going to help drive the business in the future. There is five of them here that I think are very exciting. But the biggest one is the Corvocet.

We're just a week or two away from release of that product, just about everybody we talk to the physicians, almost 100 cases that we've done in 10 hospitals and a lot of other work we’ve done with physicians, is it the best-in-class product. This is a full core biopsy product.

It's a global product release and it's one that’s -- that we're all excited about here and have been for a long time. So that's the one you're being -- you will hear a lot about. The elation balloons, with the pulmonary balloons now and the esophageal. Remember there is two sets of that. There is the fixed wire and the over the wire.

And when we introduce the fixed wire first we were short of having the other side of that equation. Since we’ve added that particular product we're still literally selling them as fast as we can make them. Now just a little tidbit, Brooks it's kind of interesting.

Merit launched an inflation devices a few years ago called the BIG60, that’s used to inflate the esophageal balloons. If we sold one balloon for each inflation device, that we’re selling the business, we’ve taken away from competitors will be little over $25 million a year on the existing volumes of syringes and balloons.

And I think that’s something where we have that install base and you combine those two parts together, it gives us a huge opportunity and even maybe equally important is we've already taken that business away from the market leader and that’s where we’re seeing this uptake on the esophageal side.

Now with the pulmonary side we're -- as I mentioned in my previous comments with the stents, they were going to have that stent business and be the leader and then come in with this balloon products is an exciting the opportunity. Now the PreludeEASE.

This is our radio product and I think radio program that product is going to accelerate substantially. As you're well aware our numbers and our place is at about 40% of the procedures in the U.S now are down radically.

I think that’s going to continue to move over the next three or four years, I think eventually we are going to end up with European tight numbers. Where at some places they are doing 90%, overall I think a 70%. Our competitor in the U.S., our primary competitor there is doing almost $16 million a year and this one product in the U.S.

They really haven't any competition. So we're excited about the entire radial products that includes EASE, our Rad Boards, our Rad Rests and our guide catheters. So we’ve a full portfolio including a compression device, this is a new that you will hear, the preludes think. I’m just going to leave that one there for now. The SwiftNINJA.

We’ve been selling those very well in Europe. They’re selling for about $1100 million to $1200 there. And that product and the release of that product in U.S is eminent. And then we’ve added a couple of product line extensions in our Resolve drainage catheters.

So if you look at those four, five products, those are going to be the things that we are going to be talking about as we move down to end of this year, but mostly as we start moving into '17. All very exciting, high margins, high opportunities and best-in-class. Now your question was with operating margin. Let me answer that question.

I think in Bernard's comments about CapEx, we still have capacity, but I think we’ve been developing better and better disciplined in terms of the products and our spending habits I think if these products come on, and we start to get even more absorption and higher margin.

I think we’re going to not only be there, but I think we are going to exceed that. So I think we’ve everything moving the way we want to. Taken the time, better time to get here. But I think we’ve done the things that need to be done to get the kind of performance that you'd like and certainly we’d all like here as well..

Perfect guys. Thank you so much..

Okay. Thank you very much..

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

Hi, Fred. Congrats on a terrific quarter.

Can you hear me, okay?.

We can, Jason. Thank you very much..

So I want to just stick with the gross margin conversation a bit, Fred and you gave some good detail there, but could you talk about your efforts globally from your manufacturing footprint standpoint. And over the course of the next couple of years, what can be done to continue to drive efficiencies and economies of scale.

Maybe any specifics you are willing to give on projects you have in the works and where you're from a capacity standpoint. In Mexico, and I’m sorry if I miss that, I’ve being jumping between a few calls this afternoon. And ultimately maybe give us an update on your thoughts for gross margin expansion.

You’ve been willing to sort of give us some guideposts for basis point of expansion. This year guidance is in place, but maybe you could update us for -- on your thoughts for the next couple of years..

Okay. That’s a big question, but I’m happy to address it. One of the things, that everybody is aware of that, Merit went on a major expansion program, I’m going to say five years ago and built facilities both for customer service that we built in Mexico and let me just address Mexico for a second.

One of the challenges we have had in Salt Lake City is we have a three in a quarter percent unemployment rate and everybody in town is fighting for the same workers. As I look now at our plans that we did in Mexico, we were able to move 15 production lines to Mexico without essentially affecting a single job in Salt Lake City.

Now that’s a broad statement. Actually there were one or two, but they're not a lot of folks that were affected or any types of layoffs as we move back, we simply absorbed those folks here continue to build the new product.

For me, as I see it, there is more opportunity from consolidation and I think you can appreciate that we have to be careful about the things that we say. We don't want to alert or get people in a tizzy. But there a lot of opportunities and there are some more products going to Mexico from various facilities.

Here in Salt Lake City and yes, I almost hate to have to admit this, but I will. And that is some of the projects that are big projects that some that I’ve talked about here, have been late and you have the expenses of R&D, you have the expenses of the space and the overhead and those adversely affects the gross margins.

As these things rollout, and we start to absorb the costs with these new products it's going to have a dramatic effect on absorption. You take a look at the lean manufacturing that we're working at in all of the facilities, but let me share something our lean manufacturing. This is more anecdotal, but we had company recently call us.

They were having a problem, because they got lean, but then what they did is they became emaciated and they couldn’t produce products. So now we’ve people calling us.

What I think in terms of where we’ve adequate inventory, we’ve had adequate capacities, we have these new products that are rolling out, all of them have a high impact on the business going forward. I think that we’ve a number of cost reduction programs in Salt Lake City and of course the plant utilization target.

So I think some of the things that Bernard did when he arrived and things that we’ve talked about that we thought needed to be accomplished was the addition of a stronger financial team to be able to help and find information and target.

And I think working with our COO, working with finance with these products, but the biggest single opportunity of these new products in the absorption and then all of the pull-through that comes through.

And it even includes the Cook on that issue too, because as I mentioned that we’re going to continue to see and believe that we're going to retain a lot of that business and you can see that these products we’re talking about in many ways are going to that same customer and by the way, don't want to leave out Jason, the fact that as we talked about DFINE.

So we've consolidated, we’ve done the things that needed to be very painful, and not something that's enjoyable but we've accomplished that. We form that new IOS group and as now that training and cost terminations through the Merit team and the DFINE team and these new products come forward.

We haven't really seen anything in terms of the opportunities from the DFINE business. We just were able to maintain the revenues while we are going through this transition. I think that by the way in itself was a bigger accomplishment.

So summary, you’ve got Mexico, you got the main programs here cost-cutting, you got absorption and you got acceleration of revenues to make those -- that absorption and both in terms of market increase as well as absorbing fixed costs.

So Bernard you want to add anything to that?.

No, I think you covered it pretty well..

Okay..

The biggest things, I think that we really focus our operations, team on is really helping those guys identify targets, cost reduction targets, targets that we want to see generated from lean manufacturing programs, And so really build that indoor margin forecasts and the people understand the impact that they have and how they can influence that number.

And that’s what we’ve really been working hard on for the last 12 months and that will be factored into our '17 numbers..

So Jason, and finally to your last part of your question about where do you kind of go from here, we’ve said at the beginning of the year that we grow between a 100 and 150 basis points for the year.

I think I’m going to feel very comfortable just staying there and kind of making sure expectations of properly and check and then of course our job here will be try to do better than that. And so, but I think some of the factors that we mentioned give us the tools for that opportunity..

Okay. That's wonderful detail. I wanted to just put a finer point on a couple of things and a follow-up here. To drive on a pro forma basis, a 100 -- just a low end to that region, 100 basis points, it would imply pro forma gross margin ticked up about 40 to 50 basis points in the fourth quarter. What is your level of comfort with that.

And then next year, you’ve talked about at least 100 basis points, and you’ve given us some things that could actually drive it better than that. I think the street is generally right around 100 basis points were a little bit low, a 100 basis points.

But is that a level that should be in models and you aspired to more or could you comment on that finer point..

Yes, I think those models are fine. Certainly we aspired to more. I mean, I think even in this quarter, I think we will be what I think other expectations are, that will be continued to be our efforts is, but we want to think, I keep things properly aligned and then our job is to meet expectations.

So I think it's okay where it is right now and we’re not prepared at this point that start moving numbers around at all, but remember, again, I think the other thing that we’ve said at several times, I will say it one more time. This was a summer quarter. this was a quarter in which we were integrating really two businesses.

One of them was substantial and was global. And then, to be able to get the revenue base and do all this other work. in my opinion was extraordinary for summer quarter. You know how summer quarters are and how we usually guide lower.

So I think, all in all, I’m satisfied and then we will just have to now bring this fall over the lines, and then get ready to play the Super Bowl in 2017..

Great. Okay. And then just as a follow-up for me, as we think about the revenue line and you give us a lot of detail there. The one line you may -- I may have missed this and I apologize. The inflation devices, it seems about last year, the comp is very, very low.

So we’d be expecting inflation sort of a similar sequential run rate that we've seen this year and I guess overall as you look at some of the components of the business it's growing well standalone devices and others mid-teen growth quarter. But a little difficult comp in the fourth quarter.

How would you -- how to think about growth in the standalone devices. And I’m thinking about it, ex-DFINE, by the way.

How would you have us think it in the fourth quarter?.

Well, again, I think we are going to stick with the numbers that we have. We have a couple of other products that are being introduced, that we’ve not talked about that are kind of incremental.

I think -- do you want to comment, Bernard?.

Yes, the standalone is probably the low teens growth, if you exclude DFINE and HeRO, if you back those two out, you’re going to see probably close to 13% growth in the third quarter. We'd expect to see that continue..

So in that standalone basis, Jason. some of the products we have in there are snares, just some -- just a little bit of color on that. Our En Snare for the year is growing at 17% and that’s an exciting prospect, but in the third quarter it grew at almost 40%.

If you take a look at our RAS products, these are associated with our radio program, those grew substantially. And again I can take the HeRO out, but I hope we get some credit for the launch of the Super HeRO, because that's something that we did and that will be incremental.

Another one that’s very exciting -- again these are these little esoteric products, but I think they go to answer your questions. If you take a look at our ONE Snare, this is a product that -- and Merit is the only Company that has a three-loop Snare and a one-loop Snare. Last quarter or for the summer quarter, that business was up 37%.

So there are a lot of things going on internally in a number of existing -- for instance, the ONE Snare has been out there for probably two years, but these internal products that we develop and release are continuing to grow in double-digits and I think you would agree this.

Some of these products at 36% to 37% and 80% gross margins for the kind of things they’re going to help to drive gross margins, revenues, and for us to be able to achieve the objectives that we’ve set. I hope that answers your question..

Yes, that makes sense. One last one, and I'll get back into the queue, I promise. The Cook, I’m and sorry, if I missed it, the Cook Medical recall, you said contributed a little over $3 million. I'm wondering if you could comment on what you are seeing in the field to be able to retain that in 4Q, and then maybe into 2017.

And then you mentioned some of the accelerated growth rates in Snares and some of these other products. Are you getting business outside of just catheter products that you are supplying customers that Cook can't? Are you getting these customers to order other products in your portfolio? Thanks, Fred..

So let me go to Canada and let me go to Australia for starters, because those were the startup businesses. The ability to go in and serve your customers needs and give them products when they were literally taking patients off the table.

That’s -- I mean, that’s a nice thing to be able to do and we made those priority, because of the distances in the startups. And we're getting a lot of business in Canada, a lot of business and a lot of pull-through from those catheters.

When you start taking a look at the whole Cook, I mean, it's my belief that in talking to a physician last week, who was talking about our marker band catheters. This physician said, you listen, we use your -- we’ve been using these catheters, they’re great catheters, I intend to continue to order those catheters.

I can only take that at its face value. I mean, I didn’t solicit the comments, it was one that was made directly to me. Again, I’m not in any way trying to say anything about Cook. They’re a great company and like all these companies, you follow and that we’re aware of, everybody falls on some form of misfortunes sometimes.

But I think our presence there I think the HeRO, now think about this.

We’ve Snares, and you have the HeRO and you got the catheters, you’ve got the marker band catheters, you’ve got the nonvascular access catheters, you’ve all of these things and then add on top of it some of the training programs we're doing for interventional radiologists in regards to radio procedures.

It's kind of all of that up together and it’s a nice formula. It’s a really nice situation. So my expectation is that we will continue to keep that business. We will continue to get more pull-through and that will retain a good portion of that business. Cook is trying too.

They’re making statements about some other catheters they have and they got I even heard somebody say that they got back 50% of their business. Well, but they didn’t get back 50% of our business. We built it up at 3.6%. we came in the December quarter at 2.1%.

The other thing I’m seeing Jason, is initially there were these large bundles that were ordered and went into U.S hospitals.

But what I’m saying a lot of this now is very candidly we're getting a ton of business out of China, we’re getting a ton of business out of Japan, we're getting a lot of things in the UAE and other parts of Russia and Eastern Europe. So it started up in the U.S and then now its moved out to these other areas.

We are starting to see some of the volumes that we saw and these were initial orders, so we’re going to keep the business. We are doing the pull-through and I think that pretty well covers it, yes..

Thanks, Fred..

Okay. Thanks, Jason..

Thank you. And our next question comes from the line of Jayson Bedford from Raymond James..

Hi. Good afternoon, guys..

Hey, Jayson, how are you?.

Doing well. Thanks. Just a couple of quick ones.

I hate to go back to gross margin here, but when do you start to see the impact of moving the HeRO graft manufacturing in-house?.

Yes, that’s a good question. So one of the things that when we modeled and we purchased that business, we modeled at around 55% gross margin. As part of the transfer and making sure that we get our manufacturing up and running, here we built bridge inventory.

I believe when I talked to our good friend in the back of the room, that we will finish up that inventory in less -- in the next 30 days or less, is that fair? Okay, so in the 30 to 60 days we were used up all of that higher costs and remember that’s pretty high cost, because we gave incentives for people to stay there, they were -- it was a much higher cost.

What we found out is that when we brought it here, put it into a production system with Neil Peterson, who oversees our manufacturing and our engineering and Ron Frost, our COO, we essentially doubled the throughput. And so we’re now estimating that those revenues are going to be about 70% ….

Margin..

Margin, excuse me, gross margins at 70, you add on to that now the Super HeRO and there are some common pieces there. So if we were to say at mid-October that is essentially 30 to 60 days, you will see a little teeny bit probably in the fourth quarter.

But for all intents and purposes Jayson, the first things that go out in Q1 are going to have those higher margins on them and we’re also seeing some momentum in the business as well. So we're -- we think it’s great product. So let me answer your next question..

Yes, that’s helpful. Thanks. In terms of the DFINE integration, I think, Fred, you mentioned 85% complete. What still needs to be done.

Yes, it’s a good question. So what we did is we’ve shutdown the European operation. We’ve consolidate and take -- I think we’ve about five or six of the 37 folks. So that that’s a big deal. We put and moved customer service and removed the inventories that were at a third-party out there. What we have here us some wrap up.

Its HR, some accounting things and audit that have to be completed.

There is facilities and of course we’re keeping some R&D people, but you want to maybe -- a little bit more on that?.

Yes, it's primarily wrapping up the facilities, Jayson, in Germany. We’ve reached an agreement there.

We're looking at opportunity with the facility in San Jose and pulling that together and there is some car leak or some other operation leaks that need to have to be taken care of, but essentially all of the work regarding personnel has been done and that was the biggest piece of the equation for us.

Some of those costs will run into the fourth quarter. But we're actually ahead of where we had forecast on that, so just some of those non-personnel releases and items need to be wrapped in the fourth quarter..

And Jayson, we had our OICs out on TDY for civilians. That’s officer in charge and temporary duty where we had folks from Salt Lake City that were there on the ground in place running the businesses. They’ve now all been recalled. They’re back on post and I think that speaks to the issue of having those issues substantially complete.

It's just a few other things that we need to wrap up, but the management, the sales, all those things have been completed, but there is not much left to do but a few little housecleaning details to wrap this up..

Okay.

And then I know it's early, but have you seen any of the potential pull-through benefits associated with this deal?.

I would say no. I would say we have not at this point and what we did is we wanted to stabilize MHO, we retain the revenues. We wanted to get the business pieces done. We had an initial sales training and remember the sales force now consist of half Merit people and half DFINE in this OIS division.

So we will continue to have our sales meetings at year end and planning for next year. There will be more training, but what we are seeing is that we’re starting to see a science of our people picking up business on the DFINE side. I saw a couple of accounts today.

And then we’re seeing some of the DFINE people were picking up some of the Merit business. Its starting. That will accelerate and by the way just because you gave me this opportunity, these are great products. This was a company that you can go through the structural issues and talk about this things, but the product themselves are great products.

I had a physician here the other day, we were chatting about this company, just looked in the eye and he said, Fred, you need to understand the quality of these products and why we use them.

And we knew that, but it's really nice to have that reinforced and I believe it will prove and as that accelerates, your take that on top of the momentum, the Cook, all of the new products, all of these sorts of things that we have, that’s a pretty nice line up.

I don’t know how you could pencil in, I mean, we’ve got everything, there's no excuses, there are none. We have everything we need to play ball here. So it's really all on us and we’re the guys. I'm looking forward to future reports, Jayson..

Okay. That sounds good. I'll let someone else jump in queue. Thanks..

Okay. Good to hear your voice. Thank you very much, Jayson..

Thank you. And our next question comes from the line of Jim Sidoti from Sidoti & Company..

Good afternoon.

Can you hear me, Fred?.

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

Great. Great. Good to hear you too. I just wanted to just confirm a couple of things. You reiterated your EPS guidance in the press release.

Should we assume that your -- the sales guide that you gave last quarter is also intact?.

That’s correct..

Okay. And then just to go over the numbers, you said it was about 8,9% organic growth, so that puts the prime revenue at just under $9 million.

Is that right?.

No, in the third quarter we did about $7 million, in the fourth quarter it should be about $9 million. So that will accelerate, because remember it was about $16 million that we felt that we would capture to the balance of the year to fit our program and incidentally think about it for a second, Jim.

You got a business that you buy, sales people leave, you got the disruption, you're shutting down and you can maintain those revenues..

He is including the HeRO..

Oh you’re including the HeRO, okay. Moving the HeRO ….

He is including the HeRO on that number for Q3..

In the fourth quarter? Oh, in the third, okay, I’m sorry. [Multiple speakers] HeRO in there, I’m sorry..

Yes..

So the combination of the HeRO and DFINE was $9 million or so …?.

That’s correct. There you go. Okay. I’m sorry..

Okay. All right, yes, that makes sense. Okay.

Can you just give us an update? Is the Mexico plant, is that fully up and running at this point?.

Oh yes, Mexico has been running for 18 months. I got to tell you some of the really blessing of Mexico. First of all, the people that work there are hard working, wonderful human beings, The great part, Jim, is our turnover rate.

Think about this, a business establishing down there with a lot of device companies, we have a turnover rate that’s less than 1%. I can't think of anything happening better to Merit than having made the decision to get that business up and running. And again, there are cost benefits, I will -- of course there are.

However, the more important thing is the availability of labor and that being able to retain those people and we’ve done it, I think with good management techniques in terms of how we take care of people, how we feed people, how -- we even have an air-conditioned warehouse. Those things may sound a little trite, but they’re not.

And they’ve made a huge difference in Mexico, the company to work for in Tijuana is Merit Medical..

Okay. In terms of the Cook business, you said you think you can retain a good piece of that.

Have you been able to introduce some of your other products to the customers that you were able to get because of the Cook recall?.

Yes, I think -- listen I don’t think there's any question that when you can grow in a summer quarter on your core business and try that business they were getting pull-through, its coming through and vascular access, needles, we've introduced a new inflation device into the interventional business there.

And incidentally, just to kind of comment on one of the other questions about inflation devices, cardiology procedures are somewhat flat, the radio procedures are improving, but we never include our inflation devices in the endoscopy business, in the inflation device numbers, we throw them into that area or throw them into the endoscopy business.

And so, that that’s something that we don't even put upstairs in that other product and that product is for this -- for the sake of discussion is up almost 15%. So we're continuing to sell those inflation devices as one of the balloons and the other things. So again as I look at the business, Jim, overall, it's very healthy.

We are getting pull-through. We are solving problems for customers and we have this big pipeline of new products. And I think -- yes, go ahead, Jim, I’m sorry..

Sorry, sorry. The last question is everything seems to be going in the right direction. The one area where you had a down year, or a down quarter year-over-year is embolization devices.

Can you just give us an update, what's going on with that? I know you had some clinical trials going on for those and do you expect that to rebound in the fourth quarter and into 2017?.

So the biggest factor on the embolization side of the business was the reduction in orders that we got coming out of Nippon Kayaku out of Japan.

So they fill their shelves, so we had to kind of that we saw the big numbers there and then now what they’re doing is they’re -- I guess, I will say they’re coming to reality, they’re managing their inventory. S So that's the biggest single issue there.

And the other thing too is that, all of our sales people were really working on maintaining this business from the DFINE. So there is all that training, people out of the field, people maintaining the business, and that was our priority. That's where we spend our time..

Okay. All right.

So you would expect that that gets to a more normal growth rate over the next quarter or two?.

Yes, and there is one other factor that will help that business and that is we’ve a couple of new products that are in the pipeline. So that will be one thing and another maybe the more important thing is the SwiftNINJA. I don’t think everybody really understands the impact is, but I try to state that, but remember this is a steerable microcatheter.

And listen when you can sell product for $1,200 in Europe, and we expect and we hope -- I will just add hope, I hope that we will have that part approved here in the next couple weeks, if it’s a big deal and what do they put through those? The answer is embolic materials.

So it’s a big, big factor for us to have that present and to work with interventional radiologists. It will help that substantially. That’s the pull-through that I think with a number of product that will certainly pull-through embolics..

And are you coming to the close for any of the clinical trials for that product line?.

Well, Jim, for good and varied reasons, I’m not going to comment on that. We have a clinical trial out there, and but there's other things that we're working on and I’m just not going to answer that right now, other than to say that that is an active trial.

It's not under any scrutiny or anything like that, but I’m just going to kind of hold back on that and it has nothing to do with any of the stuff at DOJ. But there is an opportunity out there that at the appropriate time we'll discuss on the trial..

All right. Thank you..

All right, Jim. Good to hear your voice..

Thank you..

Thank you. And our next question comes from the line of Gregory Macosko from Montrose Advisors..

Yes, thank you..

Hey, Greg.

How are you?.

Very good. Very good. I guess I have to pose my question on gross margin, everybody else has and the one thing I wondered about was Canada and Australia, I know that you’ve gone direct there. And you were profitable, you said, last quarter in Australia and Canada, and -- I believe Canada.

What do you see with regard to the gross margin improvement with those -- with regard to those two going direct?.

We are making more -- we get higher prices in those locations for our products and what I call our more advanced products, kits, fluids administration that sort of things are about like they are in U.S., but all of our other products are higher margins and higher prices than we get in other locations.

I mean, surprisingly the prices that we get in Canada are higher than they are in U.S and most of our products out there. So that it continues, we still have some wind down over the next 60 days with our former distributor.

So when we work to deal, we took a portion of products, but anything that they had was on -- that was on national contracts, we continue to supply them and those are at lower margins than so its wholesale versus retail.

That’s all are going to come to an end here in the next 60 days or so and so we’re going to see additional margin improvement and revenue improvement there. The only factor about and I this is important to discuss in order to get product to Australia, it’s a long ways.

And when you’ve to get all these products that we sent down there and still maintain a competitive posture with what they were paying and I think that's another thing, Greg, that I didn't mention. When this stuff with Cook happened, we did not go in and raise prices. We didn't want to gouge the customers.

We essentially said we'll meet what you're paying. And I think that was the right approach, but it takes a lot of money to get those products there and they had to have them.

So one of those things is we will see a pretty big decrease in expenses, because we are able to get things on the water and get them there in a period of time instead of all of this rush. So we should see lower costs and we should see continued growth.

We’ve had the sales guys steer this week from Canada, I think they’re still here -- from Canada and Australia. We’ve gone through their sales numbers for next year and their forecast and we feel quite comfortable. And again, you will see that both in terms of gross and sales and in gross margin.

So I think we are very satisfied with what we've accomplished there and the timing couldn't have been better. You couldn’t write a script. You had the products and the issues, we had a distributor partner down there, that got bought up by Teleflex and it all worked out I think we're -- and even Bernard. Even Bernard, good old Mr.

Birkett here, who was kind of like, I don’t know if we have to do this and maybe we can just slow it down and this and that. What do you think now Mr.

Birkett?.

Great idea..

What a great idea..

Well it sounds like ….

So I [multiple speakers] Greg, and I hope that answers your question..

Yes, it sounds like those gross margins will kick in really nicely in '17. And then just a last question with regard to TOUCH40, the inflation device. I believe that was launched in the quarter or last quarter.

And how's that coming, and that's probably -- you were optimistic about it?.

Well, listen it's the one thing that Merit is as you know is the global leader in inflation devices and procedures change, the biggest issue is that when you’re doing declots and you have to do a PTA for these patients, they require higher pressure, and they have higher pressure balloons.

There it had a 35 atmosphere, but some of the larger balloons are rated at 40 atmospheres. We had a competitor that came out with a 40 atmosphere and we were able to respond to it, we actually have already had it in the mill.

So there was a little business lost, I would say in the second quarter, maybe the first and second just a little bit not a lot and then I think there is a bottom line as this people prefer the basic Touch and certainly the higher pressure. Incidentally, just so I can say this, so my competitors to hear it, we have the capability to go up to 55 or 60.

So, in our technology and the things we’ve qualified as higher pressures are needed, we already have that capability in-house. So hopefully that will discourage our competitors, but we’re set, we’re ready to go. The higher the need, we have that capability, that’s already proven. So that will be a little tip for my competitors. We're already there..

All right, good. Thanks very much, Fred..

Okay, great. Thank you so much..

Thank you. And that concludes our question-and-answer session for today. I’d like to turn the conference back over to Mr. Lampropoulos for any closing comments..

Well, again everybody we had a lot of folks on the phone today. I think there was 120 and I want to thank you for taking the time and I know that there a lot of calls that you’re jumping back and forth. The business is strong. We have some issues that we will have to deal with and we will keep you briefed on those. We’ve a great product pipeline.

We have plenty of capacity and plenty of opportunity. So I think that we delivered on our promises. Our debt ratios are appropriate. Our ability to run the business and again I hate to keep banging this drum, but our operational and engineering folks and R&D folks, did a great job of transitioning this business. Now the fun will be, that starts to grow.

Again, all we're trying to do is to maintain those revenues and we did that. And now I think we will see the benefits and we started some R&D projects already.

So they haven't done anything for a long time and at DFINE and Merit, just like we did at when we bought Alveolus, just like we did at Thomas, just like we did at Biosphere and now here at DFINE, we get in and Meritize these businesses and I should say Malvern at Thomas Medical. But we invest and we build for the future and we improve the products.

So, again, I have three physicians here in the facility today and I just have to tell you and this is a statement from one of them and I think there are several people in the room that when they said to me the thing that’s great about Merit is you guys build the best products.

Now what else can you say, and that is about from a customer and from the physician, that’s the highest compliment. So again we appreciate your time. Bernard and I will be here for the next couple of hours. If there is any other questions that we can answer, that are appropriate to do so. And again, thank you, best wishes.

We look forward to talking to you again soon. Goodnight from Salt Lake City..

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a great day..