Q1 2021 Merit Medical Systems Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the first quarter 2021 earnings Conference call for Merit Medical Systems, Inc. At this time, all participants have been placed in a listen only mode. Please.
Note that this conference call is being recorded and best of recording will be available on the company's website for replay shortly.
I would now like to turn the call over to Fred the Propolis.
Merit Medical systems, founder Chairman and Chief Executive Officer. Please go ahead Sir.
Thank you and welcome everyone to Merit Medical systems first quarter 2021 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 provision 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 effects of the ongoing COVID-19 pandemic as well as extraordinary events of 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.
29, 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 cautionary statement 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 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 contains certain non-GAAP financial measures.
Reconciliation of non-GAAP financial measures to the most directly comparable U S. GAAP measures is included in today's press release and the presentation furnished to the SEC under form 8-K.
Please refer to the sections of our presentation entitled non-GAAP financial measures.
And notes to non-GAAP financial measures for important information regarding non-GAAP financial measures discussed on this call.
Readers should consider non-GAAP financial measures in addition to.
And 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 Investor page of our website.
I will now turn the call back to Fred.
Thank you, Brian 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 first quarter of including the business trends, we experienced during the quarter.
In the areas of our business that performed well despite the challenging operating environment.
I will then provide an update on our operating progress on highlights during the first quarter.
After my opening remarks, Raul will provide you with a more in depth review of our quarterly financial results and.
In the formal financial guidance for 2021 that we updated in this afternoon's press release as.
As well as the summary of our balance sheet and financial condition.
And then we will open the call up for questions.
Now beginning with a review of our first quarter revenue performance.
We reported total GAAP revenue of $249 million in quarter, one up two 2% year over year.
Our total GAAP revenue growth was driven primarily by a four 9% growth in the international sales and the 0.2% growth in U S sales.
Our U S sales growth was driven by low single digit increases in sales of both have peripheral intervention and cardiac intervention products, which offset low single digit declines in sales of our Cps and OEM products.
Our international sales increased four 9% year over year in the first quarter, all of which was driven by the benefit of changes in exchange rates compared to the prior year sales to international customers declined 5% year over year on a constant currency basis.
Excluding the FX benefits on our international sales results were driven by high single digit growth in sales of our peripheral intervention products and mid single digit growth on sales of our OEM products, which offset declines in sales of our Cps in cardiac intervention products compared to the year ago period.
Total first quarter revenue increased 6% year over year on a constant currency basis, reflecting the benefit of our GAAP revenue results as a result of changes in exchange rates compared to the prior year period.
Our constant currency growth results were notably better than the expectations. We provided on our quarter four call, which called for Q1 constant currency revenue declined 6% year over year.
Our constant currency growth performance was driven by a 7% growth in sales of our cardiovascular products, which was partially offset by a one 2% decrease in sales of our endoscopy products compared to the prior year.
Importantly, while our constant currency sales increase was the only modest we are pleased to return to year over year growth for the first time since the first quarter of 2020.
Now, while we were pleased to deliver positive constant currency growth in the quarter. We believe the intra quarter trends, we experienced in quarter. One reflect two important dynamics had played thus far in 2021.
First of all after a slow start to the quarter, we saw a modest improvement growth trends in each month, but our total sales were still down mid single digits over the first two months of the quarter we.
We then experienced a significant acceleration of growth trends during the month of March which ultimately represented the largest march into the <unk>.
Company's history.
Now despite the overall improvement in trends during the quarter. We continued seeing notable variation in the pace of recovery across regions of the world, where we do business, including wide variation within certain geographic regions.
In terms of our first quarter constant currency sales performance by major geographic region recall that more than 90% of our international sales come from APAC and EMEA regions, which represented 47 and 46% of international sales in the fourth first quarter respectively.
Sales growth in APAC increased in the mid teens on a constant currency basis fueled by strong demand from customers in China aided in part by an easier growth comparison in the prior year period, which was impacted by the early onset of COVID-19 in the region.
We would also like to highlight that reported sales growth in the APAC region include the sales related to our <unk> procedure pack business in Australia, which we closed in December of 2020.
Excluding those sales from this divested business, our APAC constant currency sales.
The growth was approximately 20% in quarter, one which is quite encouraging as we monitor the pace of recovery and returning to normalized growth in the region.
With respect to our EMEA business in the first quarter sales declined in the low double digits on a constant currency basis as the region continued to see material impact from COVID-19, and its still in the early stages of recovery.
Restrictions and Lockdowns are changing constantly across the region, causing limitations to sales contact and lower demand for elective procedures.
The weak demand trends in emerging markets during the quarter for continued during the first quarter with challenging conditions in Saudi Arabia, Iraq, Iran need chip as governments have diverted health care budget to fight COVID-19, and the overall weaker demand for electric procedures continues to impact the timing of tenders.
<unk> in the region.
Despite the continued challenges in the EMEA region in the first quarter I would like to really call out too bright spot.
The first is that the demand for critical care products remained strong throughout Europe in the first quarter.
And the second is that we did see a notable improvement in sales trends on a GAAP basis in each month of the quarter from down high teens in January to flat in February and posted low single digit growth year over year in March.
Turning to the U S.
Simply stated the recovery from the pandemic in the U S continues to be choppy.
Sales increased 2% year over year, driven by low single digit growth in sales of our pie in Ci product, which offset declines in sales of our Cps and OEM products.
We reported a low single digit decline in U S sales of Cps products in quarter, one, but these results were aided by roughly 900 thousands of dollars for our culture of Schwab, which by way of reminded reminder, on not expected to contribute materially to our Cps sales results over the balance of <unk>.
2021.
Excluding sales of the culture, our U S. Cps business declined in the mid single digits year over year and quarter one.
Our OEM business continues to be slower to recover as the result of inventory management as our customers adjusted products demand in response to COVID-19 in quarter, one sales to U S. OEM customers decreased in the low single digits year over year.
Finally.
Our U S direct business posted 3% growth in quarter, one fueled by strong demand for our scout radar localization products and sales of our medallion products, which benefited from higher demand as the result of COVID-19 vaccination programs.
We also saw more willingness and receptivity from hospital customers to evaluate new product offerings. During the first quarter, which we believe is reflective of continued improvement in the underlying operating environment in the U S.
On the period.
So we reserve we delivered financial results that far exceeded our expectations in quarter, one, but I'm sure you guys are thinking what does this mean for the full year, while if youre hearing of measure of cautious optimism in our tone youre not just imagining it Raul and I are very proud of the organization strong execution of the per.
First quarter, which resulted in revenue results that we're materially ahead of the guidance expectations provided on our fourth quarter call at the end of February.
Rob will review the details of our full guidance, which we reaffirmed our constant currency growth guidance in our press release this afternoon and a few minutes.
But I will remind you of what we outlined during our guidance discussion on the fourth quarter call. We ended indicated that quote 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 per.
<unk> of vaccinated Americans.
The.
Guidance assumes no material improvement in the operating environment access to patients in elective procedures over the first half of 2021 close quote.
The guidance, we outlined on our fourth quarter call assumed progressive improvement in these headwinds and of returned to normalized year over year growth in the third quarter of 2021.
These remain our expectations and key assumptions supporting our guidance for 2021, which we reaffirmed in our press release. This afternoon, we remain confident in our plan for the year and look forward to continued strong execution from the team going forward.
Now before I turn the time over the role I wanted to comment on a few other noteworthy items in the quarter.
First we leveraged low digit.
Revenue growth to drive impressive growth in our non-GAAP operating income and non-GAAP.
The income, which increased 26, and 41% respectively compared to the the prior year period.
We also continue to make progress toward our goals towards our goals of enhancing merits of long term growth and profitability profile and there is no better evidence of that in our early success in this area with the $29 million I'll say again $29 million of free cash flow, we generated in the first quarter.
Second on.
On March 11th we announced that Dr. Jeffrey Hoggard at the RAC surgery Center LLC in Raleigh, North Carolina successfully enrolled the first two patients in the wave study of the wrap to the Endovascular stent graft and the investigational device being studied for the treatment of stenosis or <unk>.
<unk> within dialysis outflow circuits now the study has been designed to evaluate the safety and efficacy that the Rhapsody Endovascular stent graft for the treatment of venous outflow circuit stenosis or occlusion and hemodialysis patients and represents an important step towards our goal of establishing the rhapsody as the <unk>.
Standard for care for more than 2 million patients suffering from kidney disease around the world.
The way of steady follows successful completion of the Rhapsody <unk> a first in man study feasibility study, which included 46 patients in Europe.
We're pleased to announce that the six month data from this study was the subject of a podium presentation at the recent Charing Cross meeting. We also look forward to having the 12 month data from this day presented at the cardiovascular and interventional radiological side of the society of Europe, No net <unk> at their annual meeting.
In October of 2021.
And finally I wanted to highlight two important additions to our executive teams in the recent months.
In late December Michael Boyd joined as Chief Human Resources Officer, Michael brings more than 20 years of experience in HR at various positions. Most recently as the chief Human Resources Officer at <unk> from 2017 to 2020 and prior to that he worked at Gulf determined net.
The <unk> skin health lexicon Pharmaceuticals, and Verizon.
In March Rob Fredericks joined as Chief strategy and innovation Officer.
Rob is the seasoned industry executive most recently, serving as the Vice President and general manager of the vascular access devices business at Becton Dickinson and at the C. R. Bard.
Operation dating back to 2015 he.
He also worked at Medtronic from 2003 to 2015 in various positions, including Vice President of global marketing.
R&D and strategy, Vice President of Finance and senior marketing director and.
And we're very excited to add the sharp and talented individuals to our executive team as part of our effort to continue to enhance the company's foundation, which we expect to support many years of strong growth profitability and cash flow generation going forward.
Now with that said I will go ahead and turn the time over to Rob <unk>, who will take you through a detailed review of our first quarter financial results and our 2021 financial guidance, which we reaffirmed this afternoons.
In our press release.
Raul.
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 first quarter of 2021.
We have included full reconciliations from our GAAP reported results to the related non-GAAP items.
In our press release this afternoon.
Gross profit increased approximately 4% year over year in the first quarter.
Our gross margin was 49, 2% compared to 48, 5% in the prior year period the APA.
Proximate 80 basis point increase in gross margin year over year was primarily due to changes in product mix as well as decreased obsolescence expense and improvement in manufacturing efficiencies on higher volume the.
The first quarter operating expenses decreased 4% year over year the.
The year over year decline in operating expense was driven by a 6% decrease in SG&A expense offset partially by a 9% increase in R&D expense compared to the prior year period.
The reduction in SG&A expenses were a result of lower compensation expenses as the result of reduced head count from cost cutting initiatives in 2020.
And lower discretionary spending as a result of reduced travel training and chosen conventions during the COVID-19 pandemic.
The increase in R&D expenses was largely due to increase outside expenses for certain R&D projects.
In particular related to Rhapsody and increased compensation expense related to acquisitions of <unk> medical and other new projects.
Note, while we were pleased with our operating expense performance in the first quarter. Our expenses did benefit from some modest timing related delay in selling and marketing spend and our investment in our Rep City clinical study.
We're for a partial period of Q1 both of these dynamics will result on a sequential uptick in operating expenses in the second quarter.
Total operating income increased $7 9 million or 26% year over year to $38 $9 million. Our operating margin was 15, 6% compared to 12, 7% in the prior year period, an increase of 290 basis points year over year.
First quarter other expense net was $1 5 million compared to $3 $4 million last year. The change in other expense net driven by decreased.
Was driven by decreased interest expense as the result of lower effective interest rate and lower average debt balance.
First quarter net income was $29 9 million or <unk> 52 per share compared to $21 1 million or <unk> 38 per share in the prior year period.
We are very pleased with our profitability performance in the first quarter, where we reported growth in net income and diluted earnings per share of <unk>, 41% and 39% year over year, respectively in a quarter, where our sales were up less than 1% on a constant currency basis compared to the prior year period.
Turning to a review of our balance sheet and financial condition as of March 31, 2021, our strong profitability performance in the first quarter combined with strong working capital efficiency resulted in strong operating cash flow generation in the first quarter of $35 2 million, an increase of 22% year over year.
<unk>.
Our efforts to control our capital expenditures resulted in the year over year decrease in Capex of roughly 56%.
Which fueled very strong free cash flow generation of more than $29 million in the first quarter of.
Q1 free cash flow generation is the result of great execution from the team and importantly continued evidence that we are clearly focused on enhancing the profitability and cash flow profile of our company going forward.
As of March 31, 2021, we had cash on hand of approximately $58 5 million.
Long term debt obligations of approximately $321 million.
$418 million of available borrowing capacity compared.
Compared to cash on hand of approximately $56 9 million long term debt obligations of approximately $352 million and available borrowing capacity of $399 million as of December 31, 2020.
Our net leverage ratio as of March 31 was one four times on an adjusted basis.
Turning to a review of our fiscal year 2021 financial guidance.
Which we updated in this afternoons earnings release.
For the 12 months ended December 31, 2021, the company expects.
GAAP net revenue in the range of $994 million.
And one point of one 4 billion.
Representing the increase of approximately three 1% to five 2% year over year as compared to net revenue of $963 9 million for the 12 months ended December 31 2020.
The net revenue range now assumes the benefit from the changes in foreign currency exchange rates in the range of approximately 8 million to $8 5 million, representing a tailwind of approximately 90 basis points to our graph.
Our GAAP growth rate this year compared to the prior guidance range, which assumes the benefit in the range of approximately 4 million to $4 5 million.
Or 40 basis points to our GAAP growth rate in 2021.
The fiscal year 2021, GAAP revenue guidance range assumes net revenue from the cardiovascular segment of between $963 million and 982 million representing the increase of approximately three 1% to five 2% year over year as compared to the net revenue of $934 two.
$2 million for the 12 months ended December 31, 2020 of the prior guidance range assumes growth of approximately two 7% to four 8% year over year.
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.
This net revenue range is unchanged from prior guidance expectations.
GAAP net income in the range of $47 3 million to $55 9 million or <unk> 83 to <unk> 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.
The GAAP net income range is unchanged from prior guidance expectations.
Non-GAAP net income in the range of $104 8 million to $112 7 million or of $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.
The non-GAAP net income range is unchanged from prior guidance expectations for modeling purposes, our fiscal year 2021 financial guidance assumes non-GAAP gross margins in the range of approximately 48, 5% to 49, 8% and modest increase is on.
On a year over year basis, and 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 outstanding as compared to the prior year.
A non-GAAP tax rate in the range of approximately 24% to 25% and approximately $56 8 million diluted shares outstanding.
Lastly, while it is not our standard guidance practice, given the significant impact of the COVID-19 pandemic in the second quarter of 2020, and the related benefit to our Q2 'twenty one.
Year over year growth rate for the avoidance of doubt we expect our total revenue in the second quarter of 2021 to increase approximately 14% to 16% year over year on a GAAP basis, an increase of approximately 11% to 13% year over year on a constant currency basis.
With that I'll turn the call back to Fred.
So a lot of information role in 19 of very well presented thank you very much and before we open the call for questions I wanted to review the important considerations and key assumptions from 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 that represent material headwinds to the growth rate of our guidance, which is assumed for 2021.
We also have of key assumption impacting our 2021 revenue expectations over the second half of 2021.
Let me provide some additional color.
Regarding the two areas that represent headwinds to our 2021 revenue growth expectations first.
As discussed on prior calls and disclosed in filings during fiscal year 2020, we announced strategic decisions to exit the three businesses in 2020, the suspension of Merit distribution agreement with nine point medical in quarter one of 2020.
On the disposition of assets related to the manufacturing of Merit Hypo two product in August 2020.
And most importantly, the closure of the <unk> health care procedure pack operations in Australia and December of 2020.
Together these businesses contributed revenue of approximately $11 1 million.
During the fiscal year, 2020, and will not contribute to our revenue results in 2021.
Second.
Our 2020 revenue results benefited from the sales of the culture of nasal pharyngeal swab and test kits used attached and collect transport samples of COVID-19 testing, which we developed manufactured and distributed beginning.
In the second quarter of 'twenty in response to the critical need as a result of the COVID-19 pandemic. The culture of Schwab initiative was a direct response by our organization to help the state of Utah.
The other states and prepare for the swap shortage in April of last year, and we quickly directed resources to the development of this kit with our engineers technicians marketers from production staff working tirelessly to bring the toll product line from.
From start to finish in 30 days.
Now we believe this represents a great example of not only merit strong R&D and manufacturing capabilities, but also our ability to adapt quickly to changes in our markets and to respond to time sensitive demand from our customers.
Importantly, culture is not our core product line from merit and so going forward, we expect to generate approximately $1 million of 2 million in sales from this product in 2021.
<unk> to more than $19 million in 2020. This represents a material headwind to our year over year revenue growth profile.
The third item I wanted to point out for investors is to consider when evaluating our 2021 revenue growth profile of it.
As the key assumption that impacts of our APAC revenue over the second half of 2021.
Our revenue guidance includes approximately <unk> $11 million to $12 million of of headwind related to lower pricing as a result of tenders in 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, we expect during the year.
While we're pleased with the strong demand driving unit growth such that we are able to offset the expected pricing headwind related to the tenders. We note that $11 million to $12 million of blow of pricing represents approximately 120 basis points of headwind to our total company constant currency growth rate in 2021.
Excluding the revenue contributions in 2020 from exited businesses.
And sales of culture as well as the.
Pricing headwinds from China tenders over the second half of 2021, our total revenue guidance for fiscal year 2021 reflects growth in the range of approximately $6 six to eight 7% year over year on a constant currency basis with respect to our expectations per year over year constant currency.
Fee revenue growth for the second quarter in the range of 11% to 13% <unk>.
Include approximately 300 basis points of growth headwind related to the revenue contributions in 2020 from the exited businesses and the sales of contour.
Yeah.
We remain confident in our 2021 guidance for total revenue growth on a constant currency basis in the low to mid single digits year over year and importantly, excluding the impact of divestitures from product sales that uniquely benefited from pandemic related demand trends in 2020 are constant.
Currency revenue guidance continues to reflect growth in the mid to high single digits year over year and 2021.
We also expect to report improving non-GAAP gross and operating margins and strong free cash flow in 2021, driven by strong execution and contributions from our multi year strategic initiatives program related to the foundations for growth.
Now.
Of that Theres a lot of information.
And but that does wrap up our prepared remarks, and I think right now to our administrator, we would now like to open up the line for questions.
Thank you, Sir ladies and gentlemen would you like to ask the question. Please take note of 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 do ask of you limit yourself to one question and one follow up if you would like to ask additional questions. When bite you the at yourself to the queue again by pressing star one.
And our first question coming from the line of Jayson Bedford with Raymond James Your line is now open.
Good afternoon, guys and thanks for taking the questions.
Welcome Joe.
So so I got on the call a little late so I apologize if these have been covered.
Just on the guidance very strong one Q the exceeded your guidance you didn't raise the full year. So I'm. Just wondering is there anything out there that you can point to is the reason for not raising guidance or is this more reflective of.
Hey, the overall caution given the dynamic world we're living in these days.
Yeah, well I'll comment briefly on rent roll weigh in if he wants to but we still have this pricing issue. That's unresolved in China, We don't know, how that's going to shake out and.
So thats part of it there are still some hot spots out there you know and so I think Jason It's just we're confident in our full year.
Confident in that and.
I think we were just.
Hum that confidence remains of business is improving as we discuss it just seemed a little bit early with the potential headwinds out there and without that knowledge to move it up and it's only the first quarter I think we'll reevaluate it and the second quarter as we're able to look at how the business progresses of role yes Jay.
And I think I'll just start off the same we're really excited about Q1 panned out we're excited about our feel really confident in our guidance for the year I think really kind of came down to is we got off to a slow start for the <unk>.
Any of the quarter first couple of months.
Kind of in line with our original guidance that we had given and then.
We just saw really really good March and so I think what we want to do is just let's say the <unk>.
Rest of the.
In the quarter plays out at the end of the second quarter, we can kind of evaluate where we're at and update guidance, if we need to but for now there's just.
Still some choppiness and we want to see some more consistency before we move on from that.
Have trends in April differed from the trends you saw on March.
So we gave some some Q2 color I think thats, the kind of where we're going to we're going to leave it at obviously, if you look at kind of what.
<unk>.
The guidance I think you'll you'll see that it does show.
Improvement.
The mortgage debt.
Okay.
The last one and then I'm sure, there's others that want to get in.
And do you expect to hear about the what's called the at risk China tender.
The one that's.
The 11 12 months of of your guide, what's the timeline on that yet so those tenders of open up in the third quarter.
Early third quarter. So I mean, we'll start to get our field force.
We haven't had any indications of anything at this point.
But again as we discussed in the fourth quarter and on this call.
There is that risk out there and we thought of much better to point that risk out and again as we all know if it happens we think we have a number that might be a.
A reasonable number if not the notes to the benefit of the business. So we.
Again, we still stand by the fact that it needs to be there until we see.
Otherwise it was again as you know and we will recall it was really based on some trends and some other issues that youre seeing out there.
And with some other companies and things we were following maybe maybe we avoided maybe we don't.
But nothing I don't have anything that would indicate today one way of the other I think that's really the point I want to make of Jason.
Okay. Thank you good thank you very much.
Yes.
Our next question coming from the line of Steven Lichtman with Oppenheimer. Your line is open.
Yes.
Thank you hi, guys.
Total net first.
Sorry, if you could talk a little bit about Rhapsody in Europe, I know you mentioned some early data.
But I'm wondering if you could just talk about the progress of.
Of Rhapsody rollout in Europe overall.
Yeah, well listen as you all know and everybody follows. This every day.
Europe is very choppy.
Now there was some announcement this was on the news today that there are certain places are going to open up.
And this net and other places are still hot so we're selling the product.
I think maybe a bigger indicator is just this evening.
We were part of a symposium.
Sponsored by the British Society of Interventional radiology.
And we had approximately 130 physicians on this call I was told that this.
This involvement this participation was higher than anything that they had had recently so I think it shows the interest in the product it's being sold we're getting new orders of almost every day.
But again, it's going to take.
A little bit more time to get this open back up so we have more access and I will say. This also saved is that theres more access in the U S than there is in Europe, It's still you know.
And I think I've discussed this on other calls, but I haven't if I haven't.
Seeing right now moving to use as kind of as a general number of about 50% of our sales reps.
Can get access to hospitals.
They can show products. They can do this on that 50% and that's up by the way dramatically, it's almost doubled from the previous quarter in Europe.
The best 25%, so it's about half of that access and that comes from kind of almost zero. So on.
Again these are our numbers that are anecdotal.
But they are coming from reports that come from our sales force. So it is improving.
But the access in Europe, but to go to the to the base of your question, we're selling the product maybe what's even more exciting is when you see the people.
Excuse me that of ordered in the past reordering and as you know reorder is almost as important if not more important than making that initial sale.
So I'm fine with where we are I'm fine with the technology.
It's still going to be everything we hope for is just playing itself out and then of course as we announced it.
In the in the prepared comments.
We've now opened up of course of the U S trial.
And as that starts to unwind and we get more hospitals in there.
See that trial move along at the end of the day when we get that done this can be two of three years.
But again, our enthusiasm for the Rhapsody has not changed at all.
And if anything I would say it has improved.
Great great. Thanks, Thanks, Fred and then just free.
Free cash flow, obviously continues to impress.
Given that and where your leverage ratios are.
Are you thinking about increasing.
M&A tuck in M&A at all or.
Just wondering what youre thinking about in terms of the use of cash and so what the landscape is out there.
Yeah as we've previously said when when we generate that cash we're paying down our debt I think you and I think you've said this steve that the waiver.
We are of very strong balance sheet, and we're very capable we're out looking.
There are things that come to us I think you have to be very disciplined in this market.
To buy right you have to look right.
So we are there.
We're actively looking around and things are coming our way and considering things, but nothing of course to talk about but again I want to remind everybody of.
Of the disciplined on the selective and the important thing and maybe of the whole question is we don't have to do anything we're not forced to do it. So we can grow we have of full pipeline of R&D projects.
These markets open back up.
Things will get back to normalization.
But if the right thing comes along we'll be prepared to move.
Great and then just lastly, I apologize if you mentioned this I know you are keeping the sort of conservatism on the potential.
China tenders.
When do you think youll get visibility as to whether those are in place or not.
I know you've already built it into guidance, but just wondering on that.
Yes.
It's the question of the day.
We know that they'll go out in Q3 remember extend the province by province, So it's like dealing.
With each state almost you get these guys of do it Youll get this and so we'll start to have some visibility as we go into the third quarter.
And because we know the tenders go out from lots of things, it's not just our products for a lot of products, but it will play itself out in the third quarter.
Great. Thanks, Fred Alright.
Alright, Thank you Sir.
Our next question coming from the line of Matthew O'brien with Piper Sandler Your line is open.
Afternoon. Thanks for taking the question guys one per Raul and then probably one for Fred.
Well for starters the gross margin.
The adjusted on the quarter was really good parts of sticking kind of with the full year outlook for that metric, but can you talk about.
Some of the benefits that you saw there and then why why it would be kind of go back to the midpoint of the range of you've provided versus kind of the higher end based on what we saw in Q1.
Yes look I think.
As we noted.
Product mix was.
I'm looking at it more sequentially quite frankly, Matt.
If you look at kind of where we came out of the fourth quarter, but the reality is we had good product mix. Our obsolescence expense was less and then obviously.
With the volume.
That is helping also so.
I think we feel comfortable with our guidance.
For the year.
And our.
I think the gross margin quite frankly was.
Kind of are where we expected it so.
Okay. Okay.
It sounds like you're being somewhat conservative, which is understandable and then and then Fred the peripheral business.
I know, we all want to talk about the different segments here, but if you go back to <unk> 19 in.
In the Q1 performance there you grew nicely in the peripheral business off of 19 twenties of little bit more challenging to look at but.
That chunk of the business is doing quite well can you just talk about some of the dynamics that are assisting that business and how we should think about the trajectory of for peripheral over the course of this year and even the next couple of years. Thank you.
I don't have that the numbers, Matt in front of me, but I will just say generally as you know in our research and development.
We've focused on that market, which is highly fragmented been one that we've invested in for years. So.
If you look at products like the serve for sure you look at products like the Rhapsody you look at embolic. She looked at all of these thing the scout non U.
Take a look at the.
<unk> catheters those of the areas that are getting a lot of interest and those of the areas of merit continues to invest in probably heavier than some of the other areas just simply because of the opportunity. So I think it's been more of a company focus.
Now all of that being said.
As these markets open back up we have.
Lot of electrophysiology products and the other thing that'll be coming to the marketplace that would go over on the cardiac side, but clearly peripheral has been in the area of interest in development and investment for quite some time and we'll continue to do so.
Okay. Thank you.
You bet. Thank you Sir.
The next question coming from the line of Mike Matson with Needham. Your line of your line is now open.
I guess first wanted to ask about Rhapsody.
The just curious if you had of estimate of the cost of the PMA trial of the U S and kind of the timing of that that'll be occurred in and what that sort of means for your R&D spending as a percentage of sales.
Yes so.
Remember our guidance at the beginning of the year over the last quarter of <unk>.
Like we actually included debt and it's one of the reasons why our R&D expenses is going up so.
I won't talk to the actual dollars.
Of the actual study, but it is baked into our guidance.
Some of that was delayed I guess in Q1, so we will start to see additional expense.
In Q2 for it.
But again I'll just I'll just keep it high level and just say that it is.
Included in our guidance and it's part of the reason why our R&D expenses growth.
Okay Alright.
And then.
Strong quarter from operating margin perspective, and some of that I guess is due to the continued savings from reduced travel conferences and things like that.
So how should we think about the ramp up.
In Opex over the next few quarters and.
Do you think youll get back to the full kind of pre COVID-19 levels, there or is there any kind of of permanent savings we can see.
Yeah.
Yes so.
We do expect an uptick in the operating expenses.
For Q2, I think we talked about that in the opening statements.
But as far as our non-GAAP operating expenses, we do expect modest increases year over year. Obviously, there is some you know some savings that we plan on keeping.
But there's also investments, we're making such as the wave study as we talked about and Mike I think you asking on where you'll go back to normal on the answer is.
<unk>.
We're going to be things in fact, we've met several times. This week in terms of some office issues and consolidation and things like that and in those issues. We will continue to have them on.
Number of people continue to work at home as an example, I think we discussed this.
In the conference we were in but our entire customer service Department is working at home interestingly enough.
At higher labor of Love.
<unk>.
The efficiency.
Hum.
The customer satisfaction. The surveys we've done have shown us that these.
These are things that are continuing to be.
Helpful and in fact, what we did this week is reallocated that space.
For other areas in moving to make it more.
Efficient internally for departments to meet I won't go into all of the details, but we're reallocating and the reason I'm, saying. This is your question was what do you expect to go back to normal and the answer is nothing at merit is going back to normal.
There are modifications and efficiencies.
And business is an SKU rationalization all of the things we've talked about as part of our foundation for growth.
Those things are of high priority.
And some of those are now just beginning remember we worked all of last year, a good portion of the year at least six months of that evaluating and assessing and planning and those things are starting to go and that plan is for three years, So I think that momentum.
And the things we're doing there would tell us that things are not going to go back to what would be considered normal and past performance. So we believe that we will continue to improve the business across the board as we have promised to do so and you've seen that in our plan of course, so I don't want to get too much on the soapbox, but.
It's pretty important to us.
Its helpful and we'll all be happy of the costs are lower than normal on the revenue and EPS are higher than normal so thanks.
I think we agree.
Yeah.
Yes.
Anything else Mike.
I'll kind of that up okay, alright, okay sorry.
And our next question coming from the line of Larry <unk> with Wells Fargo. Your line is open.
Thank you for taking the question. This is Sheldon on for Larry.
Hoping you could talk about the impact from new product launches I believe a number of products.
You couldn't launch a number of products during the COVID-19. So how significant is that backlog of new products and then Fred you recently hired a chief.
The strategy also that you mentioned briefly on the call that the neutral. So can you talk a little bit about why you added that true what dropped brings to the table and how youre thinking about succession planning. Thank you for taking the questions yes. Thank.
Thank you.
So let's go back to the new products I think one of the encouraging signs.
Of.
What we believe is.
The early stages of recovery of the industry.
As some of the products that we introduce essentially stalled.
You introduce from and then hospitals locked down on elective procedures locked down.
But what we've seen as those products come back to life and by that I mean, we're getting orders with.
With increased <unk>.
Access that we talked about just previously.
Two of <unk>.
Comment on a few minutes ago.
We're starting to see that those products are good products interesting and are things that fill in to the areas.
Again that we talked about peripheral on cardiac and so on and so forth. So.
But it's still very very early and all of these products and more to be launched.
But I think the key parts of the all of this.
Is the fact that we didn't stop our development of new products and that.
We will continue to see the benefit of that as we go forward as part of our overall growth strategy now let me go to the individuals.
Sure.
I think there.
You can read in there.
In the parts that are in the press release this is.
The good people experienced people.
Part of our.
Succession planning is part of being able to build.
Build a base of experience of talent going forward in our business.
These are guys that.
Uh huh.
That have experience are helping us for instance, in the HR area in recruiting and in compensation and benefits and helping the proven make sure that we're competitive in changzhou the globally.
And again on the operation side, let's say on the sales marketing and strategy.
I've been doing a lot of this myself from many many years I've got people that helped me, but I think that it's been helpful to have Rob here.
And to be able to bounce ideas off of him.
And I think this is just part of what we had talked about this isn't we had talked about this on our foundations for growth. We have talked about this and we think it's necessary. This is something the board is engaged in and Thats the structure and part of our foundations for growth. So we're pleased we've seen the difference.
<unk>.
Of the experience.
At the same kind of it's been kind of interesting because in many cases.
They're pleased with things.
And the culture of agility and things that we've talked about that maybe they didn't experience of other places and then we get the benefit of.
Of their wisdom their experience and looking at things and giving us things to consider so I think when you add all of that together you have a stronger company you were able to attract even more kind of went down the road as the company growth and we think thats the central for both.
Succession planning and just for the well being of the business. So I think it's I think it's been a good process and over time, we will fill in other places that we think are necessary.
<unk> continued growth and supports our talent development is an important part and talent acquisition is the important part of our strategy and foundations for growth.
So its planned its not haphazard of 12 planned and thought out and we have a schedule in three years to execute that plan that we delivered.
Great. Thank you for taking the question Youre welcome. Thank you for the question.
Ladies and gentlemen, that's our line of to ask the question. Please press star one.
Yes.
The next question coming from the line of Jim Sidoti with Sidoti <unk> Company. Your line is now open.
Hi, good afternoon.
Can we stick on net new products.
Subject to a little bit can you give us a little color on.
What you have in the pipeline.
Are you able to start launching those now and do you think there'll be significant by 2022.
Well you know.
Jim.
It's a good question the lesson.
The Merit has always been known as the company of.
Of innovation, we've incorporated.
The new products into our guidance and again when appropriate if appropriate we'll discuss that down the road, but the lesson. If you take a look at the business we got here.
And built this business on the foundation of innovation and meeting customer needs and we've been doing a long time. It is a cultural thing that we do all the time, so again, whether it be.
In the area with scout and or in the peripheral area from your toe up to your head or whether it be in the cardiac area with our electrophysiology product Merit is building a foundation of.
Complex.
And needed products.
For continued growth in the future what it also I think is very pleasing is to see that.
As things start to come back and procedures is the fact that people want these products.
The product, sometimes you sit on the shelf, but as this thing is starting to come back together people want these products and that the for me is.
Things were dark a year ago, Jim you never know if you get a chance to show people great innovations, but we're showing them and I think going back to the Rhapsody just on this <unk> thing.
The symposium I told you about I mean to have 130 physician spend an hour on an hour and a half on whatever on the on AR.
Assume.
The teams meeting.
Is terrific in the evening I mean, they've been working all day, they're tired, but thats, how exciting that technology, so I'm not concerned that.
That anything has changed despite the foundations of our growth on the innovation side. In fact, it's the thing that we are really really spend a lot of time, making sure it's preserved and passed onto the next generation.
Alright, and then.
The working capital I mean, it's just.
Working capital management improved quite a bit in the last 12 months, if we look a year ago.
Sales are higher now receivables are flat inventories quite a bit lower.
Whats change there and has that changed sustainable.
Yeah.
I've got my Chief operating officer on the Rome.
Got my financing staff here properly spread out.
And.
When we announced our initial plan.
18, 20 months ago, Robert talked about what we were going to do with.
Yeah.
With some facilities in the products, we were going to move this was really just the beginning.
And then we looked at all of the other things you get so busy sometimes that there are some things right in front of me I don't care of whose business. We're talking about there are nuggets all over the so-called both.
The low hanging fruit.
So we're looking at that and then the stuff that's on the mid range and the stuff that maybe it's a little more difficult. So it's how we get compensated Jim.
And you know humans respond to incentives in the incentives are these of the goals.
We meet.
Italy.
Sometimes daily to talk about.
Are we on track on somewhere ahead on somewhere behind on.
But again, if there were measured to leave today.
It's <unk>.
I don't want anybody to Mitch.
Misunderstand or underestimate our commitment to completing our foundations for.
The growth.
It's not foundations for being cheap it's not the foundations for lower cost, it's foundations for growing the business and growing it more profitably and I think we've done a good job and I think you will see the continue to see the benefits and the fruits of our labor going forward.
Maybe being too assertive aggressive here, but where are we.
We're engaged and we continue to be and we will hit those goals.
<unk>.
Yeah.
Okay, and as targets every year and it's fun, yes theres targets.
We see it.
Track of them.
Ron.
We're in close contact almost on a weekly basis actually on a weekly basis, we get an update where the inventory stands receivables.
We're just we've got a good handle on it we're keeping an eye on it and what I would call is still a difficult you were talking about the goals and forecast of listen there's a lot of stuff out there, let's not forget the storm that's out there I am sure on other medical device calls you guys of pick things up like shortages that people have.
<unk> and transportation.
<unk> Canal and I mean, all of these things that are going on out there.
Their stuff.
It's a constant battle.
The staff and everybody of committed working hard.
And I just have to say because you're left is wide open for me I am really pleased with the results of this quarter.
And I'm pleased not just looking backwards, but looking as to what everybody is committed to do and how we're working together I think I.
I don't know if we've surprised people it hasnt surprised me to see the things that what the question is always what why didn't you do it before and I think there is.
We should all ask ourselves that the same question of almost every aspect of our lives right why don't we do this from why didn't we do that well, we're doing things and I think youre seeing the results of that Jim So I better stop because I could go on another half an hour and I committed to keep this call the one hour.
Jim anything out.
No I think.
It sounds like the the the.
The focus on on improving cash management, and working capital management as well it sounds like that's something that's not going away anytime soon and bear no no.
Watching that debt go down and watching the sadness and banker's eyes, because theyre not getting as much as of absolutely the amount of the most pleasing things that can ever happen and maybe more important the flexibility of gives it to us.
Seen grown men bankers and women weeping, because we won't take their money and don't need it.
Thanks, Greg.
Alright, Thanks, Jim.
And I'm showing no further questions at this time.
Well listen everybody. Thank you I know, it's a busy day will take no more of your time, we appreciate you taking.
Taking the time to listen this probably will not be around for the next two of three hours on <unk>.
Going forward of your calls thanks again, we look forward to coming back to you when appropriate to do so soon.
Soon thank you bye bye.
Ladies and gentlemen that does conclude the conference for today. Thank you for your participation you may now disconnect.
Okay.
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