Q4 2020 Merit Medical Systems Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the fourth quarter 2020 earnings Conference call for Merit Medical Systems, Inc. At this time, all participants have been placed in listen only mode.
Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly.
I would now like to turn the call over to Mr. Fred Line Propolis Merit Medical systems, founder Chairman and Chief Executive Officer. Please go ahead Sir.
Okay.
Thank you Liz and welcome everyone to Merit Medical's fourth quarter 2020 earnings Conference call.
I'm joined on the call today by Raul Parra, our Chief Financial Officer, and Treasurer, and Brian Lloyd, Our Chief legal officer and corporate Secretary.
Brian would you mind, taking us through the safe Harbor provisions. Please.
Thank you Fred.
Before we get started I would 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 unknown risks and uncertainties the.
The realization of any of these risks or uncertainties, including the unpredictable effect of the ongoing COVID-19 pandemic as well as the extraordinary events or transactions impacting our company could cause actual results to differ materially from those currently anticipated.
In addition, any forward looking statements represent our views only as of today February 24 2021.
And should not be relied upon as representing our views as of any other date.
We specifically disclaim any obligation to update such statements, except as required by applicable law.
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 discussion of factors that could cause actual results to differ from these forward looking statements.
Our financial statements are prepared in accordance with the accounting principles, which are generally accepted in the United States. However, we believe certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of our ongoing operations and can be useful for period over period comparisons of such operations.
This presentation also concerns contain certain non-GAAP financial measures.
Reconciliation of non-GAAP financial measures to the most of it directly comparable U S. GAAP measures is included in today's press release and presentation furnished to the SEC under form 8-K.
Please refer to the sections of our presentation entitled non-GAAP financial measures.
The notes to non-GAAP financial measures for important information regarding non-GAAP financial measures discussed on this call.
Yeah.
Readers should consider non-GAAP financial measures. In addition to not as a substitute for financial reporting measures prepared in accordance with GAAP.
Please note that these calculations may not be comparable with similarly titled measures of other companies.
Both today's press release and our presentation are available on the investors page of our reps or website.
I will now turn the call back to Fred.
Thank you, Brian and let me start with a brief agenda of what we will cover during our prepared remarks today.
I will start with an overview of our revenue performance in the fourth quarter, including the business trends, we experienced during the quarter.
And the areas of our business that performed well despite the challenging operating environment.
I will then provide an update on our operating progress and highlights during the fourth quarter.
After my opening remarks, Raul will provide you with the more in depth review of our quarterly financial results and the formal financial guidance for 2021 that we introduced in this afternoon's press release as well as the summary of our balance sheet and financial conditions.
Then we will open the call to your questions.
Now beginning with the review of the fourth quarter revenue performance, we reported total GAAP revenues of $250 million in quarter four.
Essentially flat compared to the prior year period.
And above the high end of our guidance range, which called for the fourth quarter revenue to decline two to five per share year over year and quarter four.
Total quarter revenue on a constant currency basis declined 1% year over year, reflecting the benefit to our GAAP revenue results as a result of changes in exchange rates compared to the prior year period.
Our total GAAP revenue growth performance was driven by a 3% growth in sales of our cardiovascular products.
It was partially offset by a 7% decrease in sales of our endoscopy products compared to the prior year.
Both of these results exceeded the high end of our guidance ranges, which called for the sales decline of $1 16, one and 16% year over year, respectively in quarter four.
Our revenue results increased 6% on a quarter over quarter basis, which reflects the overall improvement in business trends that we've experienced in recent months.
Importantly, the sequential growth was above expectations and exceeded the high end of our guidance range, which called for sequential growth of flat to up 4%, which we discussed and of course, our third quarter conference call.
I wanted to take a minute now and dig into the underlying trends we experienced during the fourth quarter is I think it may be helpful. For investors that are gauging the pace of recovery and merit medical business.
First we continue to see notable variation in the pace of recovery across regions of the world, where we do business.
And we continue to see variation within certain geographic regions.
By way of reminder, roughly 60% of our total revenues come from business in the U S and.
And sales in the U S decreased 1% year over year in the fourth quarter.
Understandably the recovery from the pandemic has been more rapid than our U S direct business, where sales were up one 7% year over year and quarter for fueled in part by improving elective procedure trends and overall demand for our peripheral intervention products like our scout access guide.
<unk> in November and December.
While the strong demand for our peripheral intervention products helped drive our total U S revenue to the higher end of guidance range in quarter four.
We continue to see the overall operating environment challenge our revenue results in other areas of our U S businesses.
Similar to what we experienced in the third quarter the recovery in our cardiac intervention business have continued to lag and while we reported a 14 per share an increase in U S sales of Cps products in quarter four excluding sales of our culture of schwab's.
Cps business declined in the low single digits year over year and quarter four.
While our OEM sales trends reflect strong improvements in growth trends on the quarter over quarter basis.
Our OEM business continues to be slower to recover as the result of inventory management as our customers adjust to product demand in response to COVID-19.
And quarter for sales to U S OEM customers decreased 5% year over year.
Now turning to a brief review of our sales results outside the U S T.
Total international sales in the fourth quarter increased one 2% on a reported basis and decreased two five on a constant currency basis.
Our two largest regions outside the U S. Our APAC and EMEA, representing approximately 49 and 44% of our total international sales respectively in the fourth quarter.
The two 5% O U S constant currency decline in the fourth quarter was driven by of.
One, 2% decrease year over year and APAC sales.
A $5 five per share decrease year over year in EMEA sales.
And of seven 6% increase year over year and the sales to the rest of the World region.
All international regions continued to see material impacts from COVID-19, and they're still in the early stages of recovery.
Restrictions and Lockdowns are changing constantly across regions.
As the limitation as to sales contact and lower demand for elective procedures.
We were pleased with our performance in the APAC region. This quarter as we saw strong demand from China and strong sales of critical care products to customers in Japan, and Australia, and New Zealand. These.
The stronger sales trends, partially offset year over year sales decline and all other APAC regions due to Covid related hospital restrictions of elected procedures and sales rep access.
We saw a significant rise in COVID-19 cases across Europe, and emerging markets in the fourth quarter, However, sales in emerging markets, where notably more challenged.
Despite the pronounced uptick in cases in quarter for sales in Europe held up well relative to quarter, two and three as governments adopted the less stringent lockdown measures relative to the first wave of infections.
Demand for critical care products remained strong throughout Europe in the fourth quarter.
Weak demand in emerging markets is primarily due to challenging conditions in Saudi Arabia, Russia, Iraq, Iran, and Egypt as governments of diverted healthcare budgets to fight COVID-19, and the overall weaker demand for elective procedures led to tenders being postponed or canceled.
Now turning to a brief review of our recent operating progress during the fourth quarter.
During 2020, we moved production of 23 product lines current facilities in Mexico, or Texas, and we close manufacturing operations in Temecula, California, Malvern, Pennsylvania, and West Jordan, Utah.
We have closed our Pac business and operations in Australia and successfully transferred the related lease obligation.
Our R&D efforts are ongoing and we expect to continue our track record of new product introductions going forward.
On November six 2020, we acquired all of the outstanding membership interest of K a medical LLC.
The company founded by Dr. Curt and plants for a total consideration of approximately $15 million.
Apprised of $10 4 million in cash at closing.
And a $4 million payment deferred until 2021.
As a result, we have added K, a medicals micro plug set to our embolic product portfolio.
The micro plug set is self expanding night non vascular occlusion device.
Used for arterial amortization, which is the FDA cleared and CE marked.
We have successfully initiated our first clinical trial site for the wave of I D E and.
For other sites are confirmed for late February early March wishes for our Rhapsody product line, we continue to target enrollment of the first patient by the end of this the first quarter of 'twenty, one and we are waiting CMS approval at this time.
With that let me go ahead and turn the time over to Raul.
I'll take you through a detailed review of our fourth quarter financial results and our 2021 financial guidance, which we introduced in this afternoon's press release Raul.
Yes.
Thank you Fred.
Given the Fred's detailed review of our revenue results I will begin with a review of our financial performance across the rest of the P&L.
For the avoidance of doubt unless otherwise noted my commentary will focus on the Companys non-GAAP results during the fourth quarter of 2020.
We have included full reconciliations from our GAAP reported results to the related non-GAAP item in our press release this afternoon.
Gross profit decreased approximately 1% year over year in the fourth quarter. Our gross margin was 47, 9% compared to 48, 3% in the prior year period.
The approximate 40 basis point decline in gross margin year over year was driven primarily by changes in product mix.
Partially offset by improvements in manufacturing efficiencies.
Fourth quarter operating expenses decreased 9% year over year.
Total operating profit increased $7 7 million or 23% year over year to $40 5 million.
Our operating margin was 15, 7% compared to $12 seven in the prior year period.
The year over year improvement in operating margin was driven by a 10% decrease in SG&A expenses and to a lesser extent of 7% decrease in R&D expenses compared to the prior year period.
The reduction in SG&A expenses were the result of cost cutting initiatives and other cost management efforts related to Covid, 19, pandemic, including layoffs targeted furloughs and temporary salary reductions.
And lower discretionary spending as a result of reduced travel training and.
And chosen conventions among other items the reduction in R&D expenses was largely due to lower compensation expenses lower discretionary expenses as a result of cost cutting initiatives and the COVID-19, pandemic and a more focused research and development program.
Our fourth quarter GAAP operating expenses included two noncash expense items that I wanted to call out as well. The first is approximately $8 2 million of noncash intangible asset impairment expense.
Due to changes in revenue expectations associated with the acquired product line.
The second noncash items impacting our GAAP operating expenses in the fourth quarter was the contingent consideration benefit of $8 8 million from changes in the estimated fair value of our contingent consideration obligations stemming from our previously disclosed business acquisitions.
The fourth quarter net income was $30 8 million or <unk> 54 per share compared to $22 1 million or <unk> 40 per share in the prior year period.
We are very pleased with our profitability performance in the fourth quarter, where we reported growth in net income and diluted earnings per share of 39% of 37% year over year, respectively in the quarter, where our sales were essentially flat compared to the prior year period.
Turning to a review of our balance sheet and financial condition as of December 31, 2020.
Our strong profitability performance of the fourth quarter combined with strong working capital efficiency resulted in strong operating cash flow generation in the fourth quarter of $36 9 million, an increase of 37% year over year, our efforts to control of our capital expenditures resulted in the year over year decrease in Capex of <unk>.
The 48%, which feels very strong free cash flow generation of more than $26 million in the fourth quarter of.
Our year to date free cash flow generation is the result of great execution from the team and importantly early evidence that we are clearly focused on enhancing the profitability and cash flow the profile of our company going forward.
As of December 31, 2020, our cash on hand of approximately $56 9 million long term debt obligations of approximately $352 million and $389 million of available borrowing capacity.
<unk> cash on hand of approximately $44 3 million long term debt obligations of approximately $440 million and available borrowing capacity of $134 million as of December 31, 2019, our net leverage ratio as of December 31 was 172 times on an adjusted basis.
Turning to a review of our fiscal year 2021 guidance.
Which we introduced in this afternoon's earnings release for the 12 months ended December 31, 2021, the company expects.
GAAP net revenue in the range of $990 million and one point of 1 billion, representing an increase of approximately 3% to 5% year over year as compared to net revenue of $963 9 million for the 12 months ended December 31 2020.
For fiscal year, 2020, GAAP revenue guidance range assumes.
GAAP net revenue from the cardiovascular segment of between $959 3 million and $978 6 million, representing an increase of approximately 3% to 5% year over year as compared to net revenue of $934 2 million for the 12 months ended December 31 2020.
GAAP net revenue from the Endoscopy segment.
Of between $38 million and $31 9 million, representing an increase of approximately 4% to 7% year over year as compared to net revenue of $29 7 million for the 12 months ended December 31 2020.
We expect our GAAP net revenue for the 12 months ended December 31, 2021 to include a benefit of approximately $4 million from changes in foreign exchange rates, representing the tailwind of approximately 40 basis points to our GAAP growth rate this year.
GAAP net income in the range of $47 3 million to 55.
<unk> 9 million or <unk> 83 to 98 per share compared to GAAP net loss of $9 8 million or <unk> 18 per share for the 12 months ended December 31 2020.
Non-GAAP net income in the range of $104 8 million to $112 7 million or $1 84 to $1 98 per share compared to non-GAAP net income of $93 3 million or of $1 65 per share for the 12 months ended December 31 2020.
For modeling purposes, our fiscal year 2021 financial guidance assumes Q4, non-GAAP gross margins in the range of approximately $48 five to 49, 8% and modest increase in our non-GAAP operating expenses.
Largely driven by higher selling and marketing expenses related to the increase in sales as well as phasing out of temporary salary reductions, partially offset by prudent G&A expense management and approximately $8 million of other expenses largely driven by lower interest expense as a result of the reduction in debt obligations.
Standing as compared to the prior year.
Our non-GAAP tax rate in the range of approximately 24% to 25% and approximately $56 8 million diluted shares outstanding.
Lastly, given the continued COVID-19 related headwinds, we expect throughout the first quarter of 2021, we expect our total revenue to decline approximately 5% year over year on a GAAP basis and declined approximately 6% year over year on a constant currency basis in Q1 'twenty one.
With that I'll turn the call back to Fred.
Okay, well, that's a lot of lots of digest and.
I want to thank you of before we open the call to questions I wanted to provide a few considerations and key assumptions for the investment community to bear in mind as they evaluate our 2021 revenue guidance.
We have two items to call out as contributors to our 2020 revenue results of represent material headwinds to the growth rates of our guidance assumes in 2021.
We have also have of key assumption impacting our 2021 revenue ex patients over the second half of 2021, and let me give you. Some additional color regarding the two areas that represent headwinds to our 2021 revenue expectations first as we discussed in prior calls and disclosed in our filings during the fiscal year.
The 20, we announced strategic decisions to exit three businesses.
The suspension of Merit distribution agreement with nine point medical in the first quarter of 2020 the.
Of the closure of the I T L healthcare.
The procedure pack business in our Australian facility and the disposition of assets related to the manufacturing of Merit type of two product in August 2020.
Together. These businesses contributed revenue of approximately 11, 1% excuse me $11 1 million during the fiscal year 2020, and will not contribute to our revenue results from 2021.
Second our 2020 revenue results benefited from the sales of of our culture of nasal pharyngeal swab and test kits used to collect and transport samples for COVID-19 testing, which we developed manufactured and distributed beginning in the second quarter of 2020 in response to the critical need as a result.
All of the COVID-19 pandemic.
The culture of Schwab initiative was a direct response by our organization to help the state of Utah, and our neighbors and to prepare for a schwab shortage in April of last year as we quickly directed resources to the development of this kit and.
And our engineers technicians and marketers from productions debt worked tirelessly weekends holidays to bring this important product to market in 30 days.
We believe this represents a great example of not only merit strong R&D and manufacturing capabilities, but our ability to adapt quickly to the changes in our market share to respond to time sensitive demand from our customers Importantly culture is not our core product line for merit going forward and we.
To train approximately one to 2 million in sales from this product line in 2021 compared to more than $19 million. In 2020. This represents a material headwind to our year over year revenue profile for 2021.
The third item I wanted to highlight for investors to consider when evaluating our 2021 revenue growth profile is the key assumption of the impacts of our APAC revenue over the second half of 2021.
Our revenue guidance.
Includes approximately 11 to 12 millions of headwind related to lower pricing as a result of tenders over the second half of 2021.
Overall, we expect our total revenue in China to increase in the low single digits year over year in 2021, despite the expected pricing headwind as a result of strong unit growth during the year. While we are pleased to see the strong demand driving unit growth.
Such that we were able to offset the expected pricing had when related to tenders. This year. We note that the 11% to 12 million of blow of pricing represents approximately 120 basis points.
Headwind to our total company constant currency growth now.
To add a little color here. This is of course, China and each of the various issues that have to do with.
More of local sourcing.
And a number of the other initiatives by the Chinese government, we built them into our forecast whether they come or not we don't know, but we thought it was really important for us to put this in to talk about this.
Because theres a lot of discussion about these kinds of issues not only have we heard this but from other companies.
Now excluding the revenue contributions in 2020 from exited businesses and the sales of culture.
As well as the expected pricing headwinds from China tenders over the second half our total revenue guidance for fiscal year.
The year 2021 reflects growth in the range of six five to eight 5% year over year on a constant currency basis.
Now, while we expect to see measured improvement in our operating environment as we move through 2021 fueled by the wider availability of vaccines and an increasing percentage of vaccinated Americans our guidance assumes no material improvement in the operating environment access to patient elective procedures over the first half.
Of 2021.
As Rob outlined earlier, why we expect first quarter revenue declined 5% year over year on a GAAP basis and.
6% on a constant currency basis, the low end of our guidance still assumes constant currency revenue growth.
Excluding the impacts of the three items, we discussed above.
A five five year over year over the first half of 2021.
Our guidance assumes progressive improvements in these headwinds.
And a return to normalized year over year growth trends in the third quarter of 2021.
We also expect to report improving non-GAAP gross and operating margins and strong free cash flow for 2021, driven by a strong execution and contribution from our multiple year strategic initiatives related to the foundations for growth program.
That's a lot of information, but that kind of wraps it up and at this time, we'd like to turn the time over to Liz and we'd now like to open it up for questions.
Thank you, Sir if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.
If you're using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment we.
We do ask that you limit yourself to one question and one follow up if you'd like to ask additional questions. We invite you to add yourself to the queue again by pressing star one.
And our first question will come from Mike Matson with Needham <unk> company.
Yeah.
Hi, Thanks for taking my questions.
I guess I'll start with the.
The tenders, you're assuming in China.
Is this based on tenders that you're aware are actually going to be happening or you're just kind of putting some cushion in there in case. They do happen and then do you expect this to be kind of an ongoing thing that recurs every year.
Over time, and maybe rotate through different product categories or is this more of a one and done type of thing.
Thanks, Mike.
That's what we've seen from other players, particularly in Ptca.
Balloons and other types of things of these types of decreases debt.
People like Medtronic and other companies have announced so looking at the asset and understanding that they are basically focused on cardiovascular products, we thought it prudent to be able to go through and.
Make sure that we're not making excuses, we don't want to have to be explaining this on the back end of the year. When we felt like this is a possibility. So again governments and changes the administration can change lots of things, but we thought it wise based on what we're hearing what we see but it's not it's not something that.
We have a tender of tender that's pending or a directive that we've received but with so much chatter and the the.
The local sourcing going on and what they call. The single invoice program. We thought we would be wise to do this and so we budgeted this way.
For the year and Thats the basis for.
Talking about this today.
Okay. Thanks, and then.
Your guidance also include your revenue guidance also includes some of the divestitures. The three that you mentioned or I guess business exits that you mentioned in 2020, but what about in 2021 are you planning to do any more of that sort of activity.
I know that your.
The long range plan that you laid out kind of contemplated some of that.
So will we see more of that 'twenty one.
Will that potentially lead to guidance revisions if it does happen or what would it have more of an effect in 'twenty two.
Yeah.
Mike we're not talking about that in advance, but it's really part of our of our three year plan and our foundation for growth. So as you know that's a three year plan, we're two months into that.
We will be moving a number of products to Mexico as part of our of our foundations for growth this year and that'll be an ongoing but we're not going into all of that at the point. If it was eminent or something like that and we had something on the table, we'd certainly lay it out there, but this is really just part of our three year plan, there will be more things to come.
But nothing to announce or discuss today.
Okay got it. Thank you you bet. Thanks, Mike.
Our next question comes from Matt O'brien with Piper Sandler.
Hi, guys. This is drew on for Matt. Thanks for taking the question.
I just wanted to start out a little bit on Covid. Appreciate the commentary on both the Q4 trends domestically and outside the U S.
You've heard fairly mixed things across med tech as far as Q1. So maybe you could kind of give us a flavor of whether things have gotten a little bit better a little bit worse than last quarter.
And then you mentioned not assuming any material improvements to the operating environment.
Assume you mean from a patient throughput perspective.
Is that correct and then just how material of a drag are you assuming in your guidance for that.
Yeah, well listen we saw business softened somewhat in December.
And ahead of expectations for the first two months of the quarter. They are still locked down now.
<unk> further lockdown in Ireland in the us from that and the other so I think in part of the Covid issue, we still see these locations, particularly in some of the emerging countries. So I think in looking at this we do have confidence in the second half of the year. We are seeing I mean, some of this is of course of anecdotal but.
But for like for instance, we're seeing lower cases, and I think this is part of the national discussion lower amounts of Covid cases, more people getting vaccinated, but outside the U S. There's still a lot of this lockdown area and some people talking about initiating even more so I think that that's kind of the way that we looked at it in COVID-19.
It's it's bumpy it's.
Theres pockets, but it's still not back to the point, where it's totally under control as we all know and it's going to be awhile and incidentally, if we could Steve I think this is kind of been the way we've been thinking about for.
For a long time, we talked about this last year that we saw that in the second half of 'twenty, one and one of the thing that we also saw.
Is the.
The issues in the February weather, So we got hit.
Hard, but we suffered somewhat down in Texas. Our plant was shut down we had employees we have to keep people away from work. We all watch they saw on the news last week, what we have of facility there and that affects our ability to deliver so that was another part of this debt. We wanted to make sure that we are.
We contemplated as we considered the numbers that we wanted to huge Raul do you want to add anything to that no.
I think you kind of see our reaction to it right I mean for Q1, we've essentially said in the 5% down year over year.
A lot of big portion of the that is obviously, the COVID-19 related impact and as Fred mentioned the weather. So we're I think we're expecting the yes does.
The answer your question Steve.
Yeah, absolutely. Thank you and then.
On your your foundations for growth call. A couple of months ago, you were a little bit hesitant to provide a lot of detail on on the margin cadence.
But now I guess with guidance out there maybe you could help us understand in a little bit more detail.
I think the gross margin improvement was the big focus in the near term. So maybe you could just kind of give us an idea of what youre baking into your 2021 guide in the gross margin side.
And then on the SKU rationalization, that's obviously a big component of it.
Have you started that process and I guess, how far along are you in and how much more of you got baked in for 2021, Yeah. I'll answer. The question in terms of we started at the answer is yes. We have we have Matt first of all of it was a lot of work done in the initial.
Assessment part of that program, it's being driven internally by various teams and silo leaders they've met with me.
We've agreed on how we were going to proceed.
It's aggressive but necessary and something we've been we've been needing to do.
I will be meeting with them in a couple of weeks to get an update so it is in full momentum.
In terms of SKU rationalization, and a number of our business segments. So I'll answer that part and then I'll turn the rest of it over to Rob will the answer the other yes. So on the gross margin.
I think maybe to give you some color on how we get to the gross margin guidance for the year.
There is really kind of two components of revenue mix.
And the initial contributions from the <unk> initiatives, including the <unk> in Malvern activities.
So on the revenue mix, obviously were expecting as the <unk>.
Elective procedures come back higher.
Higher margins and we've seen that essentially quarter over quarter since since the bottom.
In addition, geographic revenue mix of the U S is growing faster than O U S. In 2021, so that contributes so.
Yes.
If you kind of break down those two items at the lower end of the range roughly 140 150 basis points roughly half of it is related to mix and then the other half is related to.
FFT of foundations for growth.
Obviously, the upper end would be driven by a higher sales mix.
Benefits.
Thank you.
Okay. Thank you.
Our next question comes from Steven Lichtman with Oppenheimer.
Thank you hi, guys.
So obviously as we think about the pipeline.
I appreciate the crazy.
The way that remains a big long term targets I was wondering in the near term what are the.
Some of the.
The product lines that youre looking to in terms of sort of of above corporate average growth here over the next 12 to 18 months.
Thank you.
And one of the things that we've continued to do during this process is too.
Keep our R&D going and we have I think I hate to say this but we have about 10 products right now that have to do with inflation devices electrophysiology products vascular access and others that are part of.
Things, but but it's hard to get to the Vac committees, it's hard to get into.
For the hospitals they are still a lot of restrictions. The good news is the products are.
We have regulatory approvals the products, either CE or the FDA. They have first lots to stock of the other side is we don't want to build of inventories until we know that these are products and get out there. So we've not started that and we expect that I think I'm just trying to think about the number.
But let me just say that it would be in cadence what we've done in previous years of additional new products that are being developed so we haven't stopped we think once these things start to lift its going to be a very very exciting time for the business, which is why we are optimistic as we said in the second half of the year because we believe at least are present.
Blake.
So as things open up.
That merit is going to be in a just a terrific position with these new products the Rhapsody itself in Europe.
Is selling and selling well and then of course as I mentioned in our comments that we hope that in the next few weeks.
We'll start the trial, we have at least for hospitals that are ready to go another for in the Q and many many more after that.
For our wave study and we'll be ready to go relatively soon so we'll give you more detail on that as we treat our first patient Raul do you want to comment.
Just.
Our next announcement will be when we start enrolling well let out of the pressures that first patient and hits. The deck, then which is very soon and we will go ahead and while that book and that's kind of a kind of a monumental thing because as you. All know we think a lot of this product and its future.
In at Merit, So, it's a big opportunity.
Alright, Thanks, guys and then just quickly.
Raul line of free cash flow, obviously again solid.
In 2020, we're kind of range do you think we could see in 2021 able to provided or any anything.
Relative to the inputs if not that you can provide in terms of capex or anything like that thanks.
Yes, I mean look.
Look I think for Capex I think we were we kind of announced maybe a three year plan rates of about $50 million of year 35, maintenance 15 million for FSC related items.
I think sales for free cash flow.
We're going to go for approximately $90 million.
In 2021, we think that's a good number.
I know if you kind of compare it to 2020.
Obviously, we had a big impact from working capital just because we did take inventory down as sales slowed we didn't want to overbuild.
So just just as a heads up.
Okay.
Our next question comes from Jim Sidoti with Sidoti <unk> Company.
Hi, Good afternoon can you hear me, yes, we can Jim how are you.
Great great.
The hope you're all well.
A couple of more details on the quarter I think you said for the year of the sales of the swab or for a 19.
The $19 million.
Moving back in my notes I think you did about for.
$4 million in the second quarter of about nine in the third so.
Am I safe to assume the fourth quarter for that was about $5 million to $6 million.
You are.
Alright, and then.
You talked about a little bit you mentioned it in the.
The press release, there was the acquisition you did in the fourth quarter related to the of bogs product line can you can you just give me a little more detail as to what debt loads do you think that's something that the pull through.
Sales of the box as well as the device required.
Yes, thanks for asking Jim listen.
As you know America Merit is one of the leaders in.
M'bow spheres.
QUADRA spheres. These are really very very small.
The.
Spears that are used to embolize for <unk>, and <unk> and so on and so forth. There are however, larger areas from larger vessels.
That have to be blocked off you could have for instance in the trauma case are spurring the Carter's blade I mean, this is a critical issue and you've got to get in there and you've got a you've got a block of that vessel.
And you need the larger device what people are doing today as they oftentimes will take coils and they will have to take one at a time and you could see 10 coils.
The patient well that takes time and each one has to be individually moved.
We bought this company that was founded by current and Platts Dr. Rahm platform first of all of the and Platts name in medicine.
Is the AMT platts gooseneck snare the M class wire, the <unk> catheter and when he was a tremendous innovator and physician passed away about 15 day of 16 months ago.
And he had the small company in which he had license out of a G. As some of you recall, Jim that AG was.
Was the company that had <unk> devices and others. It was sold to.
To St Jude for over $1 billion.
They license back some of the smaller devices.
And that's what we bought so it's a license.
What's now wish from Abbott because they acquired St. Jude for these devices that would be used for instance, if youre doing y 90.
That is the isotope if those things get into the stomach. The cure is worse than the disease. So these are.
And you can go to the website.
K, a medical and look at them and these are these might be very very small plugs that you would then deploy into these larger vessels and they go from.
From three to six millimeters.
It takes one.
And it usually will block that vessel off in one or two minutes. So.
Again. These are things that are used by the and interventional radiologist the same person that uses PVA.
Our.
<unk> cube torpedoes.
And our ambo sphere, and it's a tool that allows them to really get a larger part of of.
This whole embolic market. So we're quite excited about the opportunity here and it'll be something that you'll be hearing more about.
As we go down the road in terms of how it fits of that holding yes. It will pull through other opportunities micro catheters guide wires and other embolic because sometimes they will use this as the primary and then they'll chase ship, well, let's say with PVA or with gel foam. So.
So you got to be pretty excited by as you can see I I know a lot about the product and I've worked hard on this.
This acquisition, but we've kept it really kind of quiet until we get the product out in the market.
But it is of great technology.
And is it fair to assume that the gross margin on this product is above the corporate average.
It would be safe to assume that it's well above the corporate average.
And that seems to be the trend if you look at the guidance for.
2021, youre forecasting about 15% EPS growth on the.
About 3% to 5% top line growth with most of that coming from gross margin is that the way we should think about merit going forward as the company in the mid single digit topline rate per day.
Much better bottom line right because of gross margin improvement I think Jim you hit the nail on the head.
I'm going to let Rob I want to make sure I'll. Let you go ahead and fire of that one well I think just.
We set out of a three year target right foundations for growth.
Contemplate the 5% to 7% CAGR.
So just wanted to get that out there, Jim obviously, 18% to 21% operating margins I think we gave details there on how we how we get there, but yes, I mean I think it's.
The five to seven is a slightly slower growth rate than we've historically had.
Again, we're very focused on making sure we're profitable, but I think the midpoint of 15% earnings increases right right on target that's right yeah.
And just to be clear for this year, you had about $30 million of.
Discontinued products of products.
Things out and then you have the issue of charges.
Without that your top line rate would have been closer to 67% that's correct that's correct.
Okay Alright. Thank you, yes, thank you Jim.
Yes, six five to eight and a half.
Our next.
<unk> comes from Jayson Bedford with Raymond James.
Hi, Good afternoon, I guess just to follow up on a few of the growth comments first and I apologize if I missed this row, what's the assumption for FX.
In 'twenty one on the top line.
It's about $4 million for 40 to 40 to 50 basis points Okay.
And then in terms of just getting back to the China dynamic or let's say the headwinds that you've disclosed the.
The strategic divestitures the.
The COVID-19 related revenue that is not going to recur and then is the China dynamic factored into guidance.
Yes, and let me give you a little more color on that one Jason.
These.
Situations really had to do with Ptca as I mentioned.
And of course, one of the things we're concerned about is where a big inflation device player now nothing's come down nothing's been pronounced, but if youre going to see it on this slide you may see it on the other side of.
That that capability on the inflation devices of which we're a very big player over there. So we wanted to make sure that we just didn't put our head in the sand and that we we were wise about there. So we werent trying to explain why we didn't do it later on so we just said in our guidance, we're going to take that particular aspect.
Whether it comes or not if it comes we'll be prepared if it doesn't then it will just be to our advantage and it'll be more of the icing on the cake so to speak.
Okay, and the impact of a thought I heard was 120 basis points.
Yeah, Yeah, roughly 11 of $12 million for Jason.
Yes.
And then we're just we're just trying to be transparent. So you can do any of these things yes, that's all I mean, we're.
No the price of interest rate, Yeah, depreciated I guess just.
The timing on when we will know.
It sounds like the tender Hasnt been set I'm, just kind of curious as to when.
When will we know so our China.
Management and leadership have indicated that if we see it it could come in the second half of the year and that's how we've kind of planned debt going forward.
And then also Jason just on our slide deck.
The reconciliation.
The items, we talked about that are impacting the revenue growth. So just just as the heads up.
And again.
Have you already know these are not things that have happened, but these are the things that we're just trying to get ready for in case they do.
Okay. That's helpful. Thank you.
Welcome.
Our next question comes from Larry <unk> with Wells Fargo.
Hi, its way of calling in for Larry Thanks for taking my question.
Oh.
One of start by asking I think you mentioned.
In response to an earlier question that the first couple of months of year has been ahead of expectations can you give a little more color on that in terms of relative is that relative to December of about one third of your relative tier, especially expectation for Q1, and if theres any color on which type of outperforming.
Go ahead, and let Rob will answer that one were not.
I think if you look at our guidance for the first for months.
It implies 5%.
The decline year over year, 6% on a constant currency. So we are seeing softness in.
Our business and have accounted for it.
In addition to the items that we mentioned on the weather.
Impacting.
The impact in February.
Okay.
And then my second question is just looking at the revenue cadence for the year.
So the headwind in the first half.
Normalized growth in second half, but that's the.
The potential for the China tender impact in second half.
In that context can we see sequential revenue growth through the year.
Yeah, I mean, I think if you look at our.
At our growth and essentially implies that right I think if you look at our growth for the first half of the year.
It implies.
Essentially some growth in Q2, so I think we're.
Yeah.
We do expect.
That growth to kind of get back to normal as we had.
Out of Q1 and into Q2, and then Q3 Q4 kind of normalize.
And that's based on current today's environment right. So we'll have to see how that plays out.
And that's again, assuming the China tender impact is in second half you would still see that normalize graph.
Correct, Yeah, I think I got it.
Yes.
Okay, great. Thank you.
Thank you.
As a reminder, ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.
Our next question comes from Mike Pitofsky with Barrington Research.
Hey, good evening guys. Thanks for all of the information I may have missed this earlier, but the Raul did you give.
The D&A expense for the quarter and stock comp for the quarter by any chance.
Yes, I can just give me a minute here my computer went to sleep hanmi, but have of here for you for a second here.
So.
Yeah.
Yes.
So on DNA, we've got.
Net.
My point is to look at that you have the second another quite for sure Yeah I do.
So I was just curious.
And again I may of I may have missed this because I think it was touched on twice the.
The Texas facility, how many days of that was that down for and is there an estimate of of.
A quantification of the impact.
Yes, I think we're back up and running now we did have some disruption of course of employees, who had damage in their homes for sure.
And that sort of thing so I'm going to say it was approximately.
Five to seven days of production.
Okay.
I mean does that actually then show up in the quarter or is that just something you can catch up on and you move forward.
Well no I mean, if youre not producing product.
Catch up with the down the road, but in the quarter.
You are I mean.
We will catch up on it down the road, but it's going to show in the quarter I mean, we're trying to make it up.
I mean, it has an impact in Q1 yeah.
Hey, Mike.
It was obviously right in front of me, which is why I can find it.
So the 23 and a half on the DNA and then for one and.
And stock comp.
Yeah.
I'm sorry, what was Capex also.
Capex was $10 4 million 10 point for and did I hear the free cash was 26 in the quarter correct, yes, $26 five roughly.
And then Fred I think you guys mentioned the strong demand in China of sort of offsetting the otherwise negative. The APAC region can you quantify that I mean was it up 10% or can you just talk about what you saw in China specific yes.
I don't have the number in front of me about the second.
The second here, we go channel was up seven 7% year.
Year over year on a constant currency basis in the fourth quarter.
And for the year.
For the fourth quarter Okay.
Is that right.
The 7% in the fourth quarter, Okay, and then at the end here I'm going to ask one more question.
Fred in terms of M&A as you think of out the.
The next 12 months next.
Even three years.
What's your what's your appetite and obviously you guys are generating a lot of free cash now and it feels like there's more flexibility to do things, but obviously you want to be prudent.
Sort of generally talk about what youre seeing out there and sort of your appetite et cetera.
First of all you're right, we've I think really.
Improved our balance sheet, we've taken this free cash flow and pay down our debt and you also have seen the commitments that we've made over the next three years as part of our.
Foundations for growth.
We really like the little.
Situations.
And so that was part of the K medical seem to be right in our wheelhouse for product thats in our existing silos.
It's a pretty expensive out there we've had a couple of things that have been shown to us and.
And some of them that are gone.
For other companies, but they are very expensive and and.
They haven't been attractive to us.
We'll say that although we were resting for about a year that we do have our eyes open there are some but I think the key is that they have to be able to be bought properly they have to be able to fit into our global footprint.
Foot print.
And they have to be something that we feel will give us an advantage, but we're certainly not going to go chasing anything and like I mentioned with Rhapsody coming down the road.
With what we see as improving business trends remember last year, Mike We were the guys that we're talking about the hockey stick we were talking about this this gradual improvement in our performance you've seen that and again, we've said that we will see it a little bit.
The first and second quarter, but for the year and really I think substantially improving in the second half of the year, even with these of each headwind. So we have we are.
Fine with the growth and the things, we're doing but we will be opportunistic for the right deal at the right price, but we don't feel like we have to do anything.
The right things around and we think it fits our long term strategies. Then we certainly are going to spend some time and more now than we would of a year ago.
Gotcha.
Congratulations on managing through a very challenging year, you guys did a really really performed well.
Thank you Mike Thanks appreciate it.
Our next question comes from Doug Free with World Capital Group.
Hi, Brad Hey, Jeff.
Good good so regarding China, you mentioned, the single invoice program and more local sourcing as kind of the headwind to consider.
Along with government initiatives et cetera to what extent have you explored increased partnerships or joint ventures with local market participants to be viewed more as the local solution through the Chinese partner.
Yes.
That's a good question Doug lesson.
Most of we could spend a lot of time talking about China, but the way the we've chosen to approach. It in the past is to make sure that the products that we registered where products that had.
Really good IP and they were really innovative youll think of our Swift Ninja Sterba micro catheter, that's approved and now we've launched that and we've also done.
The <unk> speaking of the implants name again, our <unk> guide wires and some other guide wires over there that are not easy to do and not generally available in the marketplace. So that's what we've done which of these have been looking backwards.
I've always been concerned about partnerships and I've always been concerned about our IP and I could go on and on about the stuff, but I'm going to hold back a bit.
We've been resistant of reluctant I think to look at these other issues because of the fear of losing our intellectual property and our knowhow.
Thank though as in all conditions and in all fairness for your question I think we have to reexamine that and then take a look if there's ways that we can partner with Chinese companies and be part of the solution to meet the needs of that economy. So, we'll probably look at that more in the past but.
Again, the things that I've discussed about my concerns and the areas to protect the company for the long term are also the things that have to be considered so.
We will probably spend more time at that now someone might say well why didn't you do it in the past and I think I've answered the question.
And listen we've grown very nicely over there for years and our model has worked just fine now you have this pricing issues and merit.
Is probably as good as anybody at adapting to the marketplace and pivoting, but not pivoting wildly in other words youre not just because of say okay. Now everything is going to be produced in China, but we will spend time evaluating this Joe Wright, who oversees that area for us and Leon Lam, who is a resident.
General manager for the area and I have spent some time together and we will be looking and spending more time trying to evaluating the if im looking for opportunities going forward.
Thank you as a quick follow up.
And I agree with you and that's the high consideration is protecting the IP. So regarding China of the current revenue contribution by Asia Pac of about 36% of the U S revenue.
What is your target or guidance on market penetration into the China market in the next 12 to 24 months.
Yes.
Doug We don't respond I mean, we just don't comment on that.
Other than China has always been important to us, but so has all of APAC. So.
Just unfortunately, not going to be able to answer that in any detail.
No problem, Thanks, Brent Alright, Sir thank you.
Yes.
I'm showing no further questions in queue at this time I would like to turn the call back for closing remarks.
Thank you very much of well listen thank you very much I know theres a lot of stuff out there a lot of meetings going on and you've had the jump into the jump out Raul and I are here. We have scheduled calls we will do the best to give you color that it's appropriate to give on the.
From each of you will be up for the next I think three hours. So thank you very much we're looking forward to another year of improvement and I mean, we're always as you always know and have known forever. The we're always engaged and excited about this business. Thank you for your support and we'll.
We'll look forward to talking to you soon thank you very much and good night.
That does conclude our conference call for today. Thank you for your participation.
Got it.
[music].
Okay.
Yes.
Yes.
Okay.
[music].
Okay.