Ladies and gentlemen, thank you for standing by and welcome to the Merit Medical Systems Second Quarter 2020 Earnings Call. At this time, all participants lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Fred Lampropoulos, Chairman and CEO. Please go ahead, sir.

Thank you very much. Ladies and gentlemen, thank you for joining us today. Usually, we open our comments by stating that our staff is assembled and present. However, like almost all of our activities today, only Raul Parra and Brian Lloyd are with me today. The rest of the staff is virtual like you. I would like to turn the time over now to Brian Lloyd to read our Safe Harbor provision. Brian?

Thank you, Fred. I'd like to remind everyone that this presentation contains forward-looking statements that receive Safe Harbor protection under federal securities laws. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to known and unknown risks and uncertainties. The realization of any of those risks or uncertainties including the unpredictable effect of the COVID-19 coronavirus outbreak which is negatively affecting public health, financial markets, and global economic activities can cause actual results to differ materially from those currently anticipated. In addition, any forward-looking statements represent our views only as of today, July 29th, 2020 and should not be relied upon as representing our views as of any other date. We specifically disclaim any obligation to update such statements. Please refer to the section entitled disclosure regarding forward-looking statements in today's presentation for important information regarding such statements. Please also refer to our most recent filings with the SEC for a detailed discussion of the factors that could cause actual results to differ from these forward-looking statements. This presentation also contains certain non-GAAP measures. Reconciliation of non-GAAP measures to the most directly comparable U.S. GAAP measures are included in today's release and presentation furnished to the SEC under Form 8-K. Both today's preliminary earnings release and presentation are available on our website.

Thank you, Brian and again, thank you ladies and gentlemen for taking the time to join us today. We have adapted our business locally as well as globally by conducting project and business meetings and sales training through Microsoft Teams, which has been of tremendous value to us. We have accomplished this without a hitch. The company has adapted to market conditions with health and safety as our primary concern. Because of the lower sales levels, we have had employed various strategies to reduce costs. Some of these programs and reductions will be permanent while others will be modified in order to keep the company nimble and prepared for opportunity. In some ways, we have had an advantage in that we started many of these programs well in advance of the emergence of the COVID-19 pandemic. Every day, we hear of new solutions to the pandemic. We also hear about how things are improving. From our point of view, things have improved as represented during the quarter by month-over-month sales improvements. However, over the last few weeks, the momentum has slowed down. We have surveyed physicians who are very tired and worn out. Thus, we are cautious during the third quarter as we always are especially with new variables added to the seasonal conditions. We believe in many ways that the healthcare system and how we conduct business have changed forever. Many of our conversations and negotiations have been with different personnel and administrators, which is quite a change from the past. Going forward, we will provide more clinical training and support while we shift resources from products that simply don't require the resources we have directed previously. Let me clarify for a moment our direction in the developing of new products. For many years, our core growth complemented with…

Thank you, Fred. Let me now turn to the financial highlights for the quarter. On the revenue front, revenue for the second quarter was approximately $218 million as reported, a 14.5% decrease over the comparable period of 2019 and 13.6% on an organic constant currency basis. Key puts and takes on these results included FX headwinds of approximately $2.7 million for the quarter. Peripheral Intervention products decreased by approximately $16.2 million or 18.2% primarily as a result of our biopsy, localization or Vertebral Compression Fracture endotherapy, angiography and intervention products. Cardiac Intervention products decreased by approximately $13.7 million or 17.1% primarily related to our intervention access and geography and CRM EP products. OEM products decreased by approximately $2.7 million or 9.4% primarily related to our angiography and CRM EP products, offset partially by increased kit, fluid management, and sensor sales. Custom Procedural Solutions decreased by approximately $1.9 million or 4% primarily related to our kits and trays, partially offset by increased sales of our critical care products, which saw increased demand due to COVID-19 including $4.4 million sales of our new sample collection and transport kit, used to collect and transport samples for COVID-19 testing. Endoscopy was the hardest hit sales channel and saw sales decrease of approximately $2.7 million or 30.1% as the elective procedure stopped. Our revenue contributions by sales division based on an organic constant currency were as follows. For the quarter, EMEA down 16%, U.S. direct down 20%, OEM down 9%, endoscopy down 30%, and worldwide dealers was flat. COVID-19 impact for the first half of the year resulted in a reduction of approximately $7 million from the revenue line, which includes $10 million in Q1 and $60 million in Q2. The most impacted regions year-to-date are our U.S. direct business, which is $33 million off-plan,…

Yeah, Raul, thank you very much. A lot of information there. I think the cash flow and the free cash flow is a significant issue. I think the focus that we are spending on the transfers of projects and the previously announced projects are on schedule. I think the CapEx budget is well-disciplined and well within the parameters, which we set. So despite all of these challenges, I think that we are focused on improving the business and preparing the business with new products and new opportunities as well, reducing costs, inventory and really spending a lot of time on the business in many ways. We did not comment and won't comment today as I mentioned in our previously prepared comments on the DOJ, but after that is finalized, we will have an opportunity to explain the structure of the deal and why the deal was made and we'll do that in the future and we look forward to that opportunity to essentially tell our side of the story. All that being said, I hope you're pleased with the revenue line. I hope you're pleased with the things that we're doing. A lot more to come, a lot more work to do and we wish and thank you all again for being on the call, taking the time today in a very busy week for earnings calls. So with that said, we'll go ahead and turn the time back over to the administrator and we will take your calls and your questions and we will also be here for a good hour or two following the questions for clarifications of issues that you may not have understood or need clarity. So that being said, thank you again and we'll go ahead and turn the time over to our administrator to go ahead and present the calling structure for comments. Okay, well, the administrator is away. So thank you again. We'll go ahead and take Larry Biegelsen's call first. So Larry, I don't know if they have to unmute you, but if you can speak, we are here. Question-and-Answer Session

[Operator Instructions] Our first question comes from the line of Larry Biegelsen with Wells Fargo. Your line is open.

Good afternoon, thanks for taking the questions. Well, congrats on a better-than-expected result in a tough environment and the free cash flow result is nice to see.

Thank you.

Fred, I wanted to understand the trends through Q2 and the recovery a little bit better. Thank you for all the color. Is it -- are you willing to kind of give us what your growth rate was in June on a worldwide year-over-year basis. I assume it was better than the 14% decline and the July comment was helpful to hear although a little disappointing to see that it got worse in the U.S., the negative 6% decline you talked about, but on a worldwide basis, is July worse, the year-over-year growth in July worse than what you saw in June? So June growth on a worldwide basis and is July trending worse on a worldwide basis?

Yeah, we've seen a slowdown Larry a little bit in China, just a little bit there. We're still seeing some issues in Europe with dealers. Still a little bit slow. And again remember, this is a 10-day average. We go back and look to watch the trends and in June, we saw something and then it came back strong on the end. So what we're just trying to say is we just don't quite know, but the one thing I do know is this, in talking to physicians as I mentioned in my comments, we thought this year, well, there's this pent-up demand, they'll still be busy and in talking and serving our customers and I talk to no less than five or 10 physicians in different countries. They're saying, look, we're tired, we're worn out, we're going to go ahead and take our holiday and when I hear that, it sounds to me like what I would normally see in a summer quarter. And then what is a little bit of an issue at least for 10 days and remember now, it's a full month, the first half of the month was reasonably strong and then slowed just a little bit. It just tells me that people are going to take a break and I just was concerned that although we've seen sequentially every month that you could see in the quarter, maybe July slows down just a bit and then that's a big problem. We just don't know. We see signs of this and then it turns around, reverses, and you'll see this or that. So the point is, it's difficult to predict. From a seasonal point of view every year, we always see that kind of slow down and we always kind of talk about a 5% decline in the third quarter, but in this case, we said plus 5%, minus 5% because it's -- maybe we end up neutral, but remember, we've seen April, May and June all improve sequentially. I'm not going to talk about this month, we did see there's a little bit of a slowdown, but we're just trying to say that we just don't know, I don't know how else to say it any better and we still have two months. I'm going to let Raul comment on it for a moment. Raul?

Yeah, Larry, maybe to give you some color on what the quarter kind of progressed like. We were roughly, and these are rough numbers, you know, 22% down April. May looked a little worse than April, but only because of the number of selling days. So when I factor that in, you're talking about approximately 18%. And then in June, you saw roughly 1% to 2% decline in sales. So, hopefully that gives you a color of the cadence of how things are progressing. And as Fred mentioned, July, we saw a little bit of a step back, but I think we're optimistic of how things are trending.

Yeah, I think one of the other things that's interesting and these are comments, Larry, that we get from administrators. It's not as much as that in the U.S., at least that they're not there that they haven't dealt with and modified both where they can treat patients and still do electives as much as it is according to the people that talk to us about the willingness of people to go back to a hospital. So we were talking for instance to a hospital on the East Coast and he was saying that their OBL is swamped and the hospital is very quiet. So it's going to take some time for patients to want to get back to the hospital and have confidence that they're not going to have a problem there. And again, I don't think that -- the demand is there. It just that it's not at the treatment point at least in our view and we're hearing the same thing by the way in Great Britain. So it's somewhat consistent the same story is that it's patients that are foregoing. Unfortunately, that means these problems may go from being acute to chronic, if that's, I mean, I'm just telling what people are telling us is that they're worried about the patients and they're willing to get back to the hospital.

Thank you. That's very helpful. Just two quick ones from me and I'll drop. One, China is a big market for you, about 10% of sales. Could you -- Raul, are you willing to kind of disclose what the growth was in China in Q2 and Fred, the sample kit, I know you said $4.4 million in the first half and the slides said it's difficult to predict, but you did say in your prepared remarks -- one of you said that you could have -- that could be a good opportunity for you, a rapid increase in revenue is I think I heard. Anyway to -- any color you can provide and how big that opportunity could be in the second half or going forward. Fred, thanks for taking the questions.

Let me have Raul answer the first part of it on China and then I'll come back on the test kits.

Yeah, on an organic constant currency basis, it was about 12% Larry, growth.

But that's compared to 20% what we've seen in the past like last year, year-over-year growth. So let me go to the test kits. We're awaiting approval of our VTM, Viral Test Media from the FDA. We believe that approval is imminent and I think that's part of what drives the ability to take the business and ramp up from there. So swamps are all well and fine, but it really is the kit and the entire solution. Another thing that we are doing Larry is by -- I'm going to say September, 1st of September, Merit will have its -- all of its own vials. So we are tooled and once those are qualified they'll be molded here and then we'll have all of the pieces. And so I think that's really what drives it and the biggest limitation right now is the ability to get those vials from other vendors. The good news is we've invested capital, still staying within the restraints of our CapEx that we promised, but we have capacity that can be both for OEM as well as for our own kit. So, we will provide the demand for full kits to customers and then we will use our excess for OEMs. So those are the factors. It's getting the final approval, which could be as I meant imminent. What does imminent mean? In the next week or so, two weeks in my view. And then having our own molding. So it's kind of hand to mouth on the molded parts on the vials right now. Once those things are in-house, then I think it changes the dynamics and allows us to ramp up pretty quickly to meet the demand.

Thanks so much guys.

Thank you. Our next question comes from the line of Steven Lichtman with Oppenheimer. Your line is open.

Thank you. Hi guys. As we look at the opex saving sequentially into 2Q, how much of that would you say is sort of durable expense savings looking ahead versus obviously some of the temporary shutdown that you -- in response to COVID?

I think that's a great question. If you remember back to kind of our original guidance, we essentially were keeping operating expenses flat. Since then, we've identified a few other cost saving measures. So I think essentially if you compare it to Q1, I think Q1 is a better number on kind of where we expect operating expenses to be from a kind of a more permanent standpoint. I think Q2 obviously has a lot of the furloughs and salary reductions and some of the temporary things we've done. So I think Q1 is a better baseline. I think if you're kind of trying to point to where we should be and that's before any new identified cost savings.

Okay, got it. And then just a clarification, Raul. So you mentioned that 10-day down in the U.S. So that was year-over-year that growth rate you were talking about, it was down year-over-year in that 10-day average?

Yeah, no, that's really just comparing it to our most recent trends, right? So as we compare it to the prior 10 days, we looked at, we noticed that we saw a little dip. Just a slight dip.

Got it and then lastly, Fred, you mentioned in your prepared remarks, obviously, lots of changes in the delivery of healthcare, a lot is fluid. Just wondering what that means to you and how things are changing at Merit to prepare for that?

Yeah, thank you. Listen, one of the things that we do and I allude to this in the release and that is that for instance like on the issues of test kits, that's almost done at the administration level and at the level where you're working with Premier and those guys. That's what's kind of driving that part of it. And although we always contract for various types of products, that's where it's being driven, not down on the unit level or down like you would if you were in the cath lab or in the specials lab. So I think that is an important part of the things are changing and I think the other thing that, and thank you for asking this question, one of the things and I wanted to use this word and I didn't, but I will say it here today. Some pieces of our business are very sticky and by that I mean there are things that people use routinely and products that people get used to using and although they may be parts of bids and this and that and the other national accounts, they are things that people like, they like Merit products. I think one of the things that we've been looking at and Raul alluded to it somewhat and that is as we take a look at the resources that we're directing to those kinds of products, I think we're going to ease up a bit and not just a bit, but quite a bit and say that some of those can stand on their own or have much -- a lower level of support while we take the much higher margin products like the WRAPSODY in Europe, like our biopsy products like our Cianna products and those areas that…

I mean I think everybody is probably experiencing this. I think people like face to face and they're used to doing business face to face. I think what this allowed was really kind of a big testing environment to see how things would work out via webcast. I mean I think business is being conducted just fine. We haven't skipped a beat and I think a lot of people are finding that. So I think as we look at our office space, our meetings, our sales meetings and shows, I think all those things we've got to really think about and see what type of ROI we're getting.

Well and very casually, even investor conferences. Now, I think of all the time we spend week-after-week going back and forth, the cost and all those things. I think we're going to be the virtual guys. We can do a virtual investor day. There's a lot of things we think that we can do that will be more efficient for us, less costly, and allow us very candidly to get our message out I think better than we have in the past. So those would be my comments, Steve.

Got it. Thank you, guys.

You bet.

Thank you. Our next question comes from the line of Cecilia Furlong with Canaccord. Your line is open.

Hi, Fred and Raul. Thanks for taking our questions. Fred, I guess I just wanted to start with your commentary around prioritization of your pipeline and really your focus on EP and just see if you could provide a bit more color in terms of what your targets there are and what your focus areas are?

Yeah, there were a number of those, Cecilia, that we could've picked and I was trying to point out a couple of areas, but let's go to the EP area. Access coronary sinus cannulation, the various types of products for closure, bailout balloons and things that you need to do to help to preserve life if you have a problem when they are removing leads. I could go on and on and on of those opportunities. Many of the bigger boys and we know who they are. I mean we talk about Abbotts, St. Jude, you talk about Medtronic, and then, of course, Boston and others really are doing the defibrillators, the pacemakers, those sorts of things, but almost all of those players that I just mentioned use our delivery systems and being a double-digit growth area and one of the few in the cardiovascular area, we have just -- I think we have seven or eight products that we have developed and several more. So we've got this full pipeline and people, no matter what they buy on the other side, Medtronic, Abbott, whoever Boston, they almost all use our delivery system and all these other ancillary products, which are high margin, and have that Merit quality and things that we're good at. I Mean, whether it'd be any things that came out of the the Thomas Medical acquisition years ago, transeptal needles, steerable catheters that can sell up to a $1,000. Those sorts of things which we do well, we have focused a lot in that development and we see a lot of opportunity there. When we go over to and talk about the WRAPSODY, the technology around the WRAPSODY in terms of and again I don't want to give away my competitive advantage, but even as an…

Yeah, just one follow-up and thank you for that, Fred. Fred, I was just wondering if you could talk a little bit about your outlook around Cianna going forward. Just your relative view versus other potential areas of strength and your evolving portfolio focus. And how you really view the ability to unlock the full potential of that?

Yeah, it's a good question. And one -- it was one of those areas because it had a capital part to it. It was really -- essentially elective and you know, it's interesting, we're talking about a woman with breast cancer, and that's elective. I mean I think that's part of this whole balancing issue that had to be looked at. We're doing cases now that are starting in Europe. We've placed units in Europe. Of course, now we've missed three or four months with all this, but we are starting to see light coming into it and I was talking to a physician the other day who took the time to call me and said she had used a competitive product and she took the time to call me and say, I want you to know that I looked at this. Yours is the best product and I want to get it in these other hospitals. So there is that part of it and that's always comforting and one of the things that we hope to do in -- I don't know if it will be in the fall or early part of next year, but we have not stopped the R&D in that particular area. And we have I think some of the most exciting things we have to advance the art from where it is today even beyond that point and those are the kinds of things that we'll be talking about as we start to deliver our forecast and talk about next year or the year-end results. So we've been actively engaged, people in the office practicing all the things that we should, but there is a lot of activity and some pretty neat stuff we're working on. So we have not lost any enthusiasm for Cianna. I want to make sure that's very clear. We think it's a terrific technology. We think it's a market-leading technology and we have something that's going to increase our lead from a technology point of view in the future.

Thank you. Our next question comes from the line of Mike Petusky with Barrington Research. Your line is open.

Hey, good evening guys. So I guess, second half of last year '19, you guys had stubbed your toe and you I think you and I were out and you sort of reassured investors, hey, we're going to start delivering free cash flow next year. Thanks for delivering on that. Can you just speak to maybe the two or three biggest contributors to sort of turning that metric around in a pretty significant way. Thanks.

Yeah, focus. I mean I think there isn't a day that goes by that we talk about free cash flow. Fred and I, we essentially with the help of our FP&A Group changed how we monitor CapEx. We're meeting every three weeks on it and making sure that we understand what's going out the door, what's coming down the pipeline. So I think that's a big driver, really the focus and also kind of the reduction in R&D projects as Fred mentioned. That also helps ease the pressure. We've developed essentially a process, it's very nimble for our liking and so we're able to make decisions and act quickly on opportunities that we see.

Mike, if I could just -- it's about data. It's about having the information and having a budget and then being able to essentially have a pay for attitude. If we're going to do this, then what we have to do is we have to give up this and the data comes forward. We sit down with the ops group, the R&D group and Raul, FPA and myself and say OK, here's the budget, where do we stand and if we need to do this, then we have to -- we're going to have to back off on this or defer that. So it's about having the data from the FP&A Group, bringing it forward and just keeping an eye on it and I think that's kind of -- it's new and we should have been doing it a long time ago. So I think it's really great credit goes to a lot of folks who have to have the dividend -- or the discipline, but the problem is if you don't have the data. So we're looking at the front window and not looking at the rearview mirror. And that's a big help. Go ahead, Raul.

So one thing also, receivables, the collection obviously with the drop in sales. That helped out in Q2. Maybe to give some color on what, you know, going forward, I think Q2 was a very good quarter for us, but obviously if sales start to rebound, we will eat into that, specifically in Q3. We've got a payment that's going out to the DOJ of $18 million. We might -- depending on the demand, inventory builds might eat into that a little bit too. So I think we're still excited about the number we can hit for the year, but just want to kind of level set expectations for Q3 as we move forward, but we're very excited about it, Mike, and obviously, the focus is there and we want to continue to deliver on it.

Excellent. Okay. So just turning to sales, and specifically to the commentary around Q3 expectations. I guess I'm having a hard time believing that the range, particularly the bottom-end of the range is anything other than super conservatism because you're comparing the plus or minus 5% -- you're comparing to a quarter in which April and May, two-thirds of the quarter was down in aggregate 20%. So it's hard for me to see unless -- the minus 5% assumes just a severe deterioration in terms of the corona and just sort of widespread shut downs. It's hard for me to see how 5% down is a realistic expectation. Can you just speak to what's anticipated in a down 5%?

Yeah, let's just maybe if we talk about it in the terms of the prior year. So last year we did around $243 million assuming you kind of have the same growth rate as you did in Q2 that kind of puts you at that 5% bottom. You'd essentially kind of be at 15% year-over-year growth for Q3. If you go kind of to the top, that 5% increase sequentially. That gets you to roughly 6% decline in sales over Q3 of 2019. So I think what, if you kind of look at it that way, you do see some progression in kind of the decline in sales from Q2 to Q3, but look, again historically, we do see a decline in sales and so we've got to factor that in to along with what we're seeing on COVID-19. Does that help out a little bit?

Yes. And I guess last one for Fred. Fred you're part of that committee that's sort of trying to come up with a longer-term target and I think particularly maybe operating margin. Is there any chance the uncertainty around COVID causes you guys to sort of punt that down the road or are you guys coming out with sort of a long-term sort of normalized target and come hell or high water, you're going to speak to that in Q3.

Yeah, the old -- I don't like this term, but I'll use it. You can't spit into the wind. I think what we want to do is take a look and analyze the business and we are doing that. We're having other people help us, consultants looking at the longer-term situation and we've met at least five or six times. Lonny Carpenter is the Chairman of that group, and again, I mean that's a recommendation that goes to the Board, but I think what we want to do is to make sure that under normal conditions that we would see these kinds of goals. Listen, if you take a look at our operating income, if you take a look at our growth rates if you look at this, we want to make sure that we can have a plan and a goal and we want to be responsible in doing that. Here's what I do know, Mike. When we've set goals before and we get the entire team working on it together, whether it be this free cash flow, whether it be on improving gross margins, whether it be on this, that or the other, we've been very successful in doing so, and you're seeing some of that already with the plant consolidation. Many of the things that we'll be talking about going forward, some of those things, we've already done. I mean we don't need a consultant to tell us this, that, but we have engaged the Boston Consulting Group and we are working with them to analyze, you know, they've worked with many of the larger companies and we are going through the process of making sure that what we look at is bona fide, it's professional, it's looked by third parties so that when we bring those…

Yeah, no, I mean I think we did carve out Pat, who was head of our FP&A Group. That's going to be his dedicated job. He's the day-to-day guy and he's going to lead the transformation. Fred and I and along with Ron Frost will sit on the committee and we're laser focused on it and as you can see by dedicating one person and carving that out as a specific job and a long-term job, we're serious about it.

Yeah and on that note, the other members of the committee have really melded into the business and by that I mean we haven't convinced them that we're right. What I'm saying is they are people who are experienced, who've been through taking a $1 billion company to several billion. They've been on the other side of -- they even had to go through this. So this isn't like foreign to them. They've all had to work at these things and to have the benefit of these directors who are on the committee, and remember it has to go to the full Board for approval, but I think we have developed this Board and the members of this Board into a really good fighting unit. I mean it is a good group of people who are working hard. There is -- no one's offended, no one's threatened. We're working toward a common goal. We're all in it together and it's been an improvement in our business. I'm going to just flat out say it's improved our business and we're working together all well and you'll see that as we move forward. You've seen some of it already, but you'll see even more in my view. [Indiscernible]. Okay, all right, Mike.

Thank you. Our next question comes from the line of Jayson Bedford with Raymond James. Your line is open.

Hi guys. Excuse me, appreciate all the detail. I got on the call a little late. So I apologize if any of this has been covered. You mentioned the U.S. softness in July and I guess a bit in China. Are you seeing any relative softness in other geographies in July?

Yeah, I mean there's places like Brazil has just been -- has never recovered. It's been very slow in some of those, but it's a small part of our sales, but there is a few places like that. We had a good -- I think Russia has kind of heated up, but there are a few little areas. They've been a little slow in Southeast Asia.

Yeah, I think if you think about it, the emerging markets is kind of -- and again we're talking slight softness here. So don't really kind of want to point that out. Just a general slight slowdown, not as good as June but --

Yeah, and remember this average we saw -- we're talking about July is a 10-day rolling average. So I mean we need to make sure that we keep that in perspective, but I think I'm not going to say it spooked us, but I said, OK, well let's make sure that we're conservative and that and we can't ignore things that have happened in the past or what you do is repeat them and we don't want that to happen. So I think we're trying to be conservative, but realistic and maybe tomorrow it picks back up on the other side and the next 10 days takes that off the table, but I mean, it would be irresponsible if we didn't pay attention to this and we have and we will.

Okay, if I back out the $60 million in, let's call it lost COVID related revenue, I think it implies about 8%, 9% underlying growth, and I realize that the $60 million is not an exact science here, but I guess the question is, do you think you can sustain high-single digit revenue growth even with a slimmed down cost structure?

Yeah, well, I'm just going to say that, and I did address this a little bit. I think that what this has taught us is we put and weight certain things with certain amounts of cost and what we've seen through this without a sales person being in and without this and that, there are certain areas of our business that are -- I use the word sticky and as people buy -- like our products, they like our products, they are competitively priced and because of the breadth of our portfolio, they buy several products. I think we are going to take and kind of redirect resources for the areas that we think have higher growth opportunities. So what I'm really saying is, it's kind of there's some areas on the legacy side that don't require as much support and expense and other areas that we think have higher margins and higher growth opportunities and we're going to focus and pivot to those areas. So we do think that we can sustain growth, but we're just looking at it again through a different set of eyes than we would have, let's say six months ago or a year ago.

Okay, that's helpful. Gross margin, is there a revenue level where the overhead absorption becomes a little less of a drag. And maybe if you can just kind of identify the key drivers here that could help gross margin expand from these levels?

Yeah, I mean I think a lot of it is really kind of sales driven, right, unfortunately. So we had some negative variances obviously that we created during April and May. June actually turned out to be a fairly good month and we've got obsolescence, which some of it is related to COVID-19 we're looking at. That is one of the initiatives that we're working on because we think there's leverage there to be had and freight. To be honest with you, we had less revenue, less shipping to customers, but the freight costs are up. So as a percentage of revenue, they're kind of almost fixed and kind of squeezing the margin. So I think as we progress and revenue grows, I think we should see the gross margin rebound specifically as some of these higher margin products start to come back.

Yeah, as Cianna as our business -- our esophageal business which is coming back. GI business, it's starting to come back. I think it's also has to do with mix. So if you take a look at our critical care business, we had a lot of demand in the last quarter to meet needs of the National Health Service with CBCs, pressure infuser bags and some of those things that are all relatively low margin. So what will happen there is we think that will shift back over to some form of normalization at some point. And then I think you'll see as those products come along including WRAPSODY. That starts to go in and those costs drop and it's just a matter of absorption there. So I think it was really the effects of COVID and the mix and what customers were buying tubing products and things like this, and they've started to slow down. We're not seeing as much there as already that we're going forward. So we now just need to come back in with those other products and I think you'll see an improvement over time of the gross margins back to the area that we've seen previously.

Okay and just last one for me, I think you mentioned closing the PAC business in Australia. Do you -- or shutting it down. I'm just trying to figure out is there a revenue impact to that move or are you manufacturing those products elsewhere?

No, so we manufacture and sell those products in Australia. The revenue impact would be about $10 million, but it will be immediately accretive once that's fully shut down. So sometime in Q1 of 2021.

Accretive to margins or [indiscernible].

Accretive to EPS, gross margins, and operating margins.

Okay, thank you.

Thank you.

Okay, let's go.

Our next question comes from the line of Jim Sidoti with Sidoti & Company. Your line is open.

So just a couple of quick ones. You've got WRAPSODY approved in Europe, but can you launch it or are you kind of being put in a holding pattern now until your reps are able to get in to see physicians?

No, no, it is not in holding. We have in fact launched it. We've received orders. We have I think another three or four cases before the week is out. Now, all that being said, Jim, the access and the ability and things like this are not what they were before, but I will tell you that there is so much enthusiasm because as you'll recall, we did -- most of our first in man -- all of our first in man were done in Europe. In many of the physicians and hospitals, this is a product that's a superior performance gives you in my view, superior outcomes and that's what people especially for these dialysis patients. You want to keep them out of the hospital. So if you have a product that can reduce restenosis and thrombus and those sorts of things that's pretty important. So, no, it is launched. It is starting up. It's slower than I'd like it to be, but it's not slower than what I've expected. So it is out there. And then as I mentioned, we've done some cases in Australia on the special access and were approved in New Zealand. Remember, we'll be talking about the WAVE study, the WRAPSODY arteriovenous efficacy product and that's a big deal. There's about 30 U.S. hospitals that will be engaged in that. And again, it's going to be -- it's an exciting future for this company, very exciting future.

Are you able to start enrollment of patients now even with COVID or are you waiting for COVID to calm down before you start enrolling patients in the next --

Well, we don't get to say, Jim. It's the hospitals, but we are in the enrollment. We have a number of the hospitals already -- they are all tied down in contracts and more that are being negotiated and as things get up and hospitals are able to find the proper mix of how they treat COVID patients and how they treat elective -- so-called elective procedures, those procedures will come online. I actually had -- I mean to give you kind of an example, I had an Individual call me who is a KOL from an East Coast hospital yesterday and was arguing -- not arguing, but was trying to convince me that they ought to be, please, we need to be in this study. This is significant. So I've got them calling me and that's kind of a nice thing to see. So we've seen that as well.

All right and then the last one for me on the legal. I know you have the settlement that you're going to announce details on next quarter, but it's been kind of a drip, drip, drip, the last couple of years with legal expenses and the lawyers. Now that this is resolved, does that go away and about how much were you spending on that?

Yeah, all of this is in our K -- in our Q, it's all disclosed there and all that information is in there. I would say it was a little more than a drip, drip, drip. It was a lot of money to defend ourselves and to go over 4.5 years. Now that all being said, Jim, I've said and now I'll say it to you, what we've agreed to do is the final documents will be done we think in the next four to eight weeks, but again, this is the government and when they're done, they'll make their statement and then we will have our so-called, if I could use this, our day in court. We'll get to tell our side of the story and I think it will become very, very clear to you exactly what the situation was and something that I'm looking forward to telling the story. Let's just put it that way.

So the fact that that expense goes away in 2021, we should see an improvement in cash flow from that as well.

Yeah, I mean it was a big drain of both time and money for something that we'll talk about in the future.

We spent about $6.5 million in legal costs last year and [5.6].

Yeah, that's more like a bite, bite, bite instead of drip, drip, drip.

Okay, but all that should go down to free cash?

That's correct.

Thank you.

Thank you, Jim. Nice to hear your voice again.

Thank you. Our next question comes from the line of Mike Matson with Needham & Company. Your line is open.

Hi, thanks for fitting me in since the call has gone over an hour, I'll just limit to one question here, but can you just talk about the WAVE trial design for WRAPSODY and you're expectations around the timing of enrollment and follow-up and when you could potentially have that product launched in the U.S., the WRAPSODY product launch in the U.S. Thanks.

Yeah, let me hit a couple of pieces of that. We'll start enrolling patients in January. So we still have a few months to get everything squared around, make sure we have all the inventories in place and many of these sites, Mike, are places where you don't have one, you've got maybe 30 to 50 stents in there and you could have 30 accounts. So I'm just saying you've got to put them in there and then they'll size them according to the patients. My estimates that I'm hearing from my regulatory staff is 3 years to 3.5 years to get it fully done and to go through and follow through with the appropriate follow-ups. I don't have all of the information on that, but I will say that and I'm looking, it's 350 patients. I've got my regulatory guy here sending me a text filling me in and what else did I want to say about 350 -- oh, don't forget that we have breakthrough status on three of the cohorts. They're involved with this that were issued by the FDA and then incidentally getting approved for an IDE is a very long and cumbersome process in which we had to take the first in man data, we worked with the FDA -- by the way, they are working fabulously. They believe and at least this is my assessment that this is an important product and so we've worked well with them and we've come to an agreement on all of the numbers and all the things that need to be done. We'll start in January and then you know it's all about the data, but the first in man data, which by the way, we hope to publish sometime in the very near future I think will answer the questions for a lot of people as to the significance of this product. So that's the best way for me to answer it and I'll have some more stuff from my regulatory, Mike, if we have a follow-up. So nothing that's out of line, but just more to your questions.

Okay, that's helpful. Thank you.

Okay, sir. Thank you so much.

Thank you. Our next question comes from the line of Matthew O'Brien with Piper Sandler. Your line is open. Matthew O’Brien: Afternoon. Thanks for taking the questions. I'll ask two here together and then drop. Raul, the free cash flow and I know you've got a DOJ payout here coming and you've had a benefit from collections on the COVID -- due to COVID and inventory benefits etc, but if you were to net out those benefits you've seen on the COVID side, what does the free cash flow for the year look like and can we extrapolate that kind of performance, I don't know if it's $20 million year-to-date, if you exclude the COVID benefits if there is such a thing or is it $25 million, would that have been $40 million or $50 million for the full year, just excluding the DOJ, which is one-time, how do we think about that metric specifically and where do you use that cash, not necessarily this year as you are probably hoarding cash given what's going on around you but are you paying down debt aggressively next year, how do we think about that. And then for Fred, just on the operating committee side of things. Who makes the final decision as far as what exactly you're going to commit to and then what kind of metrics should we be thinking about beyond just a typical operating margin kind of commentary. Are you going to give more on gross margins, exactly where the benefits are going to be derived from, products that you're going to stop selling in the future, lower margin stuff, things like that. What else should we expect come next quarter? Thank you.

Sure, so real quick. I think originally at the beginning of the year, we had thrown out free cash flow of $40 million to $50 million. I think given everything that's happened, we'd love to be somewhere in the $35 million or closer to $40 million range. Matthew O’Brien: So Raul that's the adjusted number?

That's excluding the DOJ, yes, that's the adjusted number. Matthew O’Brien: So, then why would you be at the lower end of the range if you're making these improvements on the CapEx side of the business elsewhere? Why would you be $35 million to $40 million versus $40 million to $50 million.

Because you're going to have AR that will come back as sales come back and then you're also going to have inventory. I think a little bit -- a few questions ago I did mention that Q3, we expect to see essentially negative free cash flow, just because of the working capital component of that and as things bounce back. So you'll eat into the $47 million for year-to-date and then we'll see how much of that we can retain in Q4, but right now we're shooting for -- we'd love to hit that the low-end of the range, but I think there is upside, Matt. I think hopefully we can get there. We'll see how it works out. Matthew O’Brien: Okay and then, Fred, on the operating committee side?

So again it's the three new directors and myself. The ultimate decision is made by the full Board. Let me just say that we have met with a number of advisors and analysts including Starboard and looked at various types of models of what others have done, how they've done it and we're analyzing the capabilities and what we think that we can do and analyze, we don't want to do something that's irresponsible. We don't want to get out in front of ourselves and I don't want to get in front of the committee. So we are meeting I think every two weeks and then we have committee assignments in between that and then we will bring that thing forward. As I mentioned, I don't know if you were on the call, we brought in the Boston Consulting Group that's going to walk through our business and as those things are all formulated and the staff buys into the recommendations and we will have a negotiation with that consultant who works for Merit and then we will bring in the committee, we'll go ahead and establish what they think is realistic, what they think is sustainable. And then we will make that recommendation to the full Board, the full Board will decide and then we will make that presentation to the shareholders at the end of next quarter. So that's kind of the scenario. Matthew O’Brien: Okay, thank you.

You bet.

Thank you. I'm showing no further questions in the queue. I'll turn the call back over to management for closing. Well again, ladies and gentlemen, I know it's been a busy day. We had Boston and we had CONMED and a whole bunch of people out there reporting today and so we appreciate the time you've taken to be on the call. I'm pleased with this quarter. I think the entire staff is committed and we'll look forward to the next call and we're engaged and we like the challenge. So I want to thank you again. Raul and I will be here for the next couple of hours if you need clarification on some things. And again, we thank you for your interest in the company and wish you a good day. We'll sign off now from Salt Lake City. God bless you all and thank you. Good night.

Ladies and gentlemen this concludes today’s conference. Thank you for participating. You may now disconnect. Everyone have a wonderful day.