Q2 2021 Merit Medical Systems Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to our second quarter 2021 earnings Conference call from 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 that the recording will be available on the company's website for replay shortly.
I would now like turn the call over to Fred.
Populus Merit medical systems, founder Chairman and Chief Executive Officer. Please go ahead Sir.
Thank you Valerie and welcome everyone to Merit Medical systems second quarter 2021 earnings Conference call.
I'm joined on the call today by Raul Parra, our Chief Financial Officer, and Treasurer and.
Lloyd our Chief legal officer, and corporate Secretary, Brian would you just take a moment, please and take us through the safe Harbor provisions. Please.
Thank you Fred.
I'd like to remind everyone that this presentation contains forward looking statements that receive safe Harbor protection under federal Securities laws.
Brian believes these forward looking statements are based upon reasonable assumptions they are subject to unknown risks and uncertainties.
Realization of any of these risks or uncertainties as well as extraordinary events or transactions impacting our company could cause actual results to differ materially from those currently anticipated.
Although we.
In addition, any forward looking statements represent our views only as of today July 29.2021.
And should not be relied upon as representing our views as of any other day.
We specifically disclaim any obligation to update such statements, except as required by applicable law.
Yes.
Please refer to the section entitled Cautionary statement regard 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.
Were 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 per period over period comparisons of such operations.
This presentation.
<unk> 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 presentation furnished to the SEC under form 8-K.
Please refer to the section of our presentation entitled non-GAAP financial measures.
Important information regarding non-GAAP financial measures discussed on this call.
Readers should not consider excuse me 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 assembly titled measure.
Other companies.
Both today's press release and our presentation are available on the investors page of our website.
I will now turn the call back to Fred.
Thank you Brian first of all let me start with a brief agenda of what we will cover during our prepared remarks.
I will start with an overview of our revenue per.
As I mentioned in the second quarter, including the improving business trends, we experienced during the quarter.
And the areas of our business that performed well driving better than expected revenue and financial results during the second quarter.
After my opening remarks, Raul will provide you with a more in depth review of our quarterly.
Performance from results in the formal financial guidance for 2021 that we updated in this afternoons press release.
As well as a summary of our balance sheet and financial condition.
And then of course, we will open the call for your questions.
Now beginning with a review of our second quarter.
Revenue performance, we reported total GAAP revenue of $280 million in the second quarter up 28, 4% year over year.
Our total GAAP revenue growth was driven by 34, 4% growth in U S sales and a 21, 3% growth in.
Financial sales.
Excluding the benefit to our GAAP revenue as a result of changes in exchange rates compared to the prior year period. Our total revenue increased 25, 5% year over year in the second quarter on a constant currency basis.
Our total constant currency growth.
And the Internet driven primarily by 36, 1% increase in U S sales and a 13, 1% increase in international sales.
Our second quarter revenue results were notably better.
Then the expectations provided on our first quarter call.
Which called for Q.
To constant currency revenue to increase in the range of approximately 11% to 13% year over year.
Our second quarter revenue exceeded the midpoint of this guidance range by close to $30 million or approximately 14 percentage points of growth year over year.
Now needless to say were extremely.
Really proud of the strong constant currency growth performance, we delivered in the second quarter.
We are pleased to see broad based growth across our primary reportable product categories in both the cardiovascular and endoscopy segments of our business.
Although the majority of our year over year increase in total revenue was.
As a result of strong sales in our cardiovascular business, which increased a little more than $60 million year over year in the second quarter.
Sales of our peripheral interventional products increased 45, 4% year over year, representing more than half of the total cardiovascular segment year over year.
Sales of our scout radar localization products increased more than 90% year over year and quarter, 2 and represented the largest contributor to total pie growth in the quarter.
Sales of our biopsy products nearly doubled in the second quarter and drainage and envelope therapy.
Which together represent roughly 1 third of our total pie business increased nearly 40% year over year and quarter 2.
Sales of our cardiac intervention products increased 20, excuse me 29, 8% year over year, representing approximately 1 third.
Profit of our total cardiovascular segment growth year over year.
More than half of the growth in our Ci products category in quarter..2 came from strong sales of our intervention products and sales of our fluid management products.
On the intervention side, our basics and map lines performed well on the.
Third management side, our medallion products performed well as they continued to benefit from higher demand as a result of Covid vaccination programs.
Sales of our Cps products increased 7.3% year over year in quarter..2 however, the improving demand trends in this area of our cardiovascular.
Fluid Miss was masked by the $4 million headwind from sales of the culture of product line in the prior year period, excluding called share of sales of our Cps product category increased approximately 18% year over year and quarter 2.
Sales of our OEM products increased 14.
Business, <unk>, 8% year over year and quarter, 2 driven by improving demand from larger customers.
Customers replenishing their inventory levels.
We also had better than expected sales performance in our endoscopy segment in quarter, 2 with sales, increasing 29, 7% year over year.
<unk> from a strong demand of our endo Mac stance and elation.
<unk>.
Now turning to a brief summary of our sales performance on a geographic basis.
As I mentioned, our second quarter sales in the U S increased 36, 1% year over year and our international sales.
<unk> increased 13, 1% year over year, both on a constant currency basis.
Sales to U S customers was the largest contributor to total company growth in quarter, 2 led by our U S direct business, which increased approximately 42% year over year.
Sales in our 3 primary.
Berry global regions, APAC, and EMEA and rest of World increased 4.5% 22, 3% and 33, 6% respectively on a constant currency basis in the second quarter.
Similar to the O U S trends, we outlined during our first quarter earnings.
We experienced overall improvement in trends during the second quarter. However, we continue to see notable variation in the pace of recovery across regions of the world, where we do business, including wide variation within certain geographic regions.
<unk> is a perfect example of this dynamic.
Earnings per China represented the largest.
Contributor to APAC revenue growth in the second quarter, but sales only increased approximately low to mid single digits on a constant currency basis.
Now, while China continues a measured patient recovery business trends lag in southeast.
Asia, and Australia, and our sales declines in these markets compared to the year ago period.
We would also like to highlight the reported sales growth in the APAC region inclusive sales related to our <unk> procedure pack business in Australia, which we closed in December of 2020.
South east, losing those sales from the divested business, our APAC constant currency revenue growth was approximately 8% in the second quarter.
The EMEA region was spotty as well in quarter 2 as the region continued to see material impacts from COVID-19, and is still in the early stages.
Ex recovering.
Restrictions and Lockdowns are changing constantly across region, causing limitations to sales contact and lower demand for elective procedures, we experienced improving trend demands in the United Kingdom and in certain countries in Continental Europe, including Germany, and France, primarily.
Due to improving access in these direct markets.
The weak demand trends in emerging markets, we experienced in quarter..1 continued in quarter, 2 with challenging conditions in the middle East, Russia, and Turkey as governments have diverted healthcare budgets to fight COVID-19, and the overall weaker.
Zone for electric procedures continues to impact the timing of tenders in the region.
In summary, we're very pleased with a 25.25, 5% constant currency growth in our total revenues that we delivered in the second quarter.
Now to be clear when.
We believe our second.
Demand results are not just an example of above average growth rates earned on an easy comparison, rather we believe our second quarter results reflect the combination of strong execution and overall improvements in the operating environment access to patients and elective procedures during the quarter.
For the avoidance of doubt I would like to highlight our second quarter revenue results as compared to the second quarter of 2019 and interest of stripping out any benefit to our growth performance from an easy comparison.
Specifically.
Our reported quarter 2.2021.
Revenue results represent growth of approximately 10% over the second quarter of 2019, driven by high teens growth in the sales of our peripheral intervention products.
High single digit growth in the sales of our cardiac intervention products and low to mid single digit increases in our Cps.
And OEM products in the case of our Cps if you exclude sales of the <unk> business, we divested from in quarter..2 up 19 sales increased 7% in quarter 2 of 2021 versus quarter 2 of 2019.
Our second quarter growth over quarter 2019 reflects a material improvement in growth trends in each of these product categories.
We continue to be encouraged by measured improvement in the operating environment in quarter, 2 particularly in the U S, where we saw a more willingness.
And reception from hospital customers to evaluate new.
The average in recent months, which we believe is reflective of continued improvement in the underlying operating environment in the U S. During the period.
Now Raul and I are very pleased and proud of the organization strong execution and we are pleased to see the improving business trends, we experienced in the second quarter both of.
It resolves and revenue results that we're materially ahead of guidance expectations provided in our quarter 1 call at the end of April.
Performance in the second quarter and first half of 'twenty into 'twenty, 1 gives us further confidence in the outlook, we introduced in our fourth quarter call last year, which.
Called for a return to normalized year over year growth trends in the third quarter of 2021, Raul will of course review the details of our first our full year guidance, which we updated in our press release. This afternoon in a few moments from them.
I'll, just say that we remain confident in our plan for the year and look.
Look forward to continued strong execution from the team going forward.
Now before I turn the.
Call over to Raul I wanted to comment on a few other note worthy items in the quarter first.
We delivered another quarter of impressive profitability improvement margin expansion and free cash flow.
Generation in quarter 2.
Our non-GAAP gross profit non-GAAP operating income and non-GAAP net income reflects strong operating leverage in the period, increasing 40%, 88% and 103% respectively compared to the prior year period.
Our non-GAAP.
So operating margins increased 400 basis points, and 520 basis points, respectively year over year, and we generated $34.6 million.
Free cash flow in the quarter.
We believe our financial results over the first half 2021.
Growth early evidence that we are making progress towards our goal of enhancing merit long term growth and profitability profile.
We have expanded our non-GAAP gross margin 230 voices excuse me basis points year over year expanded our non-GAAP operating margin 400 basis points year over year and most importantly.
We have generated more than $63 million of free cash flow over the first 6 months of 2021.
A 34% increase over the prior year period.
Second.
We are pleased with the progress during the second quarter of our clinical study of the wave study.
The rapid.
Shortly endovascular stent graft and investigational device being studied for the treatment of stenosis or occlusion within dialysis outflow circuits, we have more than 40 clinical sites identified more than half of which are actively enrolling patients.
This study has been designed to evaluate the.
The safety and efficacy of <unk> Endovascular stent graft for the treatment of venous outflow circuits to notice or occlusion.
In dialysis patients and represents an important step of our goal of establishing the Rhapsody as the standard of care from more than 2 million patients suffering from kidney disease around the world.
With respect to expanding clinical awareness of the clinical efficacy of Rhapsody, we look forward to presenting the 12 month data from our first in man feasibility study called.
Called Rhapsody first which included 46 patients in Europe at multiple medical meetings in the second half.
Of this year.
I wanted to provide a brief update on our foundations for growth program. Specifically, we have made very good progress over the first half of 2000.22020, including SKU rationalization product line transfers and manufacturing initiatives are all on track and.
In humans.
Science's, new global bonus programs aligned with FFG in addition.
2 of course, a new vice President of corporate communications and other initiatives are on track support functions and financing initiatives are on track commercial and marketing excellence initiatives are in the process.
<unk> overall, we continued to execute on our foundation for growth initiatives and are excited about the progress and the results we're seeing across the business.
Well that's a lot.
But now the best is yet to come I will turn the time over to Rob <unk>, who will take you through the detailed review of our second.
Quarter financial results and 2021 financial guidance, which we updated in this afternoons press release.
Mr. Parra the time is yours, thank you Fred.
<unk> Fred detailed review of our revenue results I will begin with a review of our financial performance across the rest of the P&L.
The.
Avoidance of doubt unless otherwise noted my commentary will focus on the Companys non-GAAP results during the second quarter and first 6 months 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 40% year over year and the SEC.
Our gross margin was 48, 7% compared to 44, 7% in the prior year period. The approximate 400 basis point increase in gross margin year over year was primarily due to changes in product mix decreased obsolescence expense and improvements in manufacturing efficiencies on higher volumes.
Second quarter offset partially by inflationary headwinds, we are seeing in raw materials labor et cetera.
Second quarter operating expenses increased 24% year over year the year over year increase was driven by a 25% increase in SG&A expense and a 21% increase in R&D expense compared to the prior year period.
The increase.
On SG&A expense was primarily due to higher selling expense, including commissions and bonus expense and other increase in sales euro and an increase in sales year over year.
And lower Opex in Q2, 2020 from cost cutting initiatives lower head count and lower discretionary spending as a result.
Result of the reduced travel training and chosen conventions during the COVID-19 pandemic.
Our continued focus on managing expenses proved effective again in this quarter as we were able to limit the growth in G&A only expenses to just a 3% increase year over year.
The increase in R&D expenses in Q2 was driven.
By the combination of the lower spend in the prior year period related to Covid and outside expenses for certain R&D projects, and particularly related to Rhapsody clinical study and an increased compensation expense related to our acquisition of <unk> medical and 2 other new projects.
Note as discussed on our first quarter call, we expected to see.
Price increase in our operating expenses in the second quarter as a result of some modest timing related delays in discretionary selling and marketing spend in Q1, and the fact that our Rhapsody clinical study would be enrolling patients for a full quarter versus that partial period in Q1.
Despite these expected increases we were pleased with the operating leverage we.
See amount on a sequential basis in Q2 with non-GAAP operating expenses, increasing just 8% quarter over quarter compared to the 13% sequential increase in sales.
Total operating income increased $21.4 million or 88% year over year to $45.8 million our operating.
Delivering was $16.3 compared to $11.2 in the prior year period, an increase of 520 basis points year over year.
Second quarter other expenses net was $1.9 million compared to $3.2 million last year.
<unk> and other expenses net was driven by lower interest expense as a result of lower.
<unk> Martin of interest rate and a lower average debt balance.
Second quarter net income was $35.3 million or 62 per <unk>.
<unk> per share compared to <unk>.
$17.4 million or <unk> 31 per share in the prior year period, we are very pleased with our profitability.
Our effective performance in the second quarter, where we reported growth in net income and diluted earnings per share of 103% and 100% respectively year over year.
Turning to a brief review of our financial results over the first half of 2021.
Total revenue for the 6 months ended June 30th was.
<unk> hundred $29.2 million.
Up $67.3 million or 15% year over year total revenue for the first half of 2021 increased 12% year over year on a constant currency basis.
Gross profit increased 20% year over year to approximately 259.
Representing 48.9 percentage of sales in the first half of 2021 compared to 46, 7% of sales in the prior year period, a 230 basis point increase year over year.
Operating profit increased 53% year over year to $84.6 million, representing a 16% of sales in the first half of 2020.
<unk> 5 compared to 12% of sales in the prior year period, a 400 basis point increase year over year net income increased 69% year over year to $65.2 million or 1 point or $1.14 per share compared to $38.5 million or <unk> 69 per share in the prior year period.
Turning to review.
<unk> balance sheet and financial conditions as of June 32021.
Our strong profitability performance in the second quarter of 2021 combined with strong working capital efficiency resulted in strong free cash flow generation of $34.6 million in the second quarter. We have generated a $16.63.6 million of free cash flow for the 6 months.
<unk> of 2021, representing a 34 <unk>.
Percent increase over the prior year period.
Our free cash flow generation over the first 6 months of 2021.
As a result of great execution from the team and importantly continued evidence that we are clearly focused on enhancing the profitability and cash flow profile.
<unk> of our company going forward, we continue to expect to generate approximately $100 million of free cash flow for the full year of 2021 period, driven by continued improvement in our profitability and strong working capital efficiency offset partially by investment and capital expenditures of approximately $40 million this year.
We have used a portion of our strong free.
Will flow to reduce our outstanding debt obligations over the first half of 2021, specifically, we paid down approximately $58.9 million of debt on our line of credit facility, including $28 million, which we paid down in the second quarter.
As of June 32021, we had cash on hand of approximately $69.7 million.
Free cash return debt obligations of approximately $293 million and $444 million of available borrowing capacity 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.
Loss ratio as of June 30 was 1.1 times on an adjusted basis.
Turning to a review of our fiscal year 2021 financial guidance, which we updated in the afternoons earnings release for.
For the 12 months ended December 31, 2021, the company now expects.
GAAP net revenue in the range of 1.6 billion and 1 point.
Oh 7 billion, representing an increase of approximately 10% to 11% year over year.
The prior guidance range assumed growth of approximately 33, 1% to 5.2% year over year.
The GAAP net revenue range now assumes a benefit from a change in foreign currency exchange rates in the range of approximately $10.5 million to.
Net leverage point 5 million, representing a tailwind of approximately 110 to 120 basis points to our GAAP growth rate this year.
The prior guidance range assumed a benefit in the range of approximately 8 million to $8.5 million or 90 basis points to our GAAP growth rate in 2021.
The GAAP net revenue.
The guidance range also assumes net revenue from cardiovascular segment of between 1 point or $2.8 billion and 1.38 billion, representing an increase of approximately 10% to 11% year over year.
The prior guidance range assumed growth rate.
Approximately 3.1% to 5.2% year over year.
Net revenue from the Endoscopy segment of between $32.5 million and $32.7 million, representing an increase of approximately $9.6 million or.
9.6% to 10, 2% year over year, the prior guidance range assume growth of approximately 4% to 7% year over year.
With respect to profitability guidance for 2021 our updated guidance calls for GAAP net income in the range of $43.2 million to $51.8 million or <unk> 75 to 91 cents per diluted share.
The prior guidance range assumed GAAP net income in the range of $47.3 million to $55.9 million.
We're 83 to <unk> 98.
Per diluted share non.
Non-GAAP net income in the range of $118.8 million to $127.1 million or $2.7 to $2.22 per diluted share.
The prior guidance range assumed at non-GAAP net income in the range of.
$4.8 million to $112.7 million or $1.84 to $1.98 per diluted share.
For modeling purposes, our updated fiscal year 2021 financial guidance now assumes.
Non-GAAP gross margins in the range of approximately 48, 8% to 49, 1% compared to the.
Our prior range, which assumed a 48, 5% to 49, 8% non-GAAP operating margin in the range of approximately 15% to 16% compared to 13, 7% in fiscal year 2020.
Approximately $7.5 million of other expenses compared to the prior guidance range, which assumed approximately $8 million 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 22 to 23 per cent compared to prior guidance, which assumed a non-GAAP tax rate for full year 2021, and the range of 24% to 25%.
And diluted shares outstanding in the range of 57 to <unk> 50.
$7.5 million compared to prior guidance, which assumed approximately $56.8 million shares for full year 2021.
Lastly.
We expect our total revenue in the third quarter of 2021, and the range of 259 million to $263 million representing growth of approximately 6% to 8% year over year on a GAAP.
And growth of approximately 5.3% to 7.6% year over year on a constant currency basis note, our third quarter growth expectations assume the improvements in the operating environment. We saw in Q2 continue offset partially by the normal seasonality, we experienced in the third quarter each year.
GAAP base, we also expect flattish non-GAAP gross margins quarter over quarter, and we expect a low single digit increase in our non-GAAP operating expenses compared to Q2 'twenty 1.
With that I'll turn the call back to Fred.
Well very good sirna and thank you very much travel now before we open the call to questions.
<unk> I wanted to review the important considerations and key assumptions for the investment community to bear in mind as they evaluate our updated 2021 revenue guidance, we have 2 items to call out as contributors to our 2020 revenue results that represent material headwinds to growth rate our guidance.
I assumed for 2021, we also have 1 assumption impacting our 2021 revenue expectations over the second half.
Now let me provide some additional color on each of these items now and I'll note that we have a detailed reconciliation of these items impacting our 2021 revenue growth.
In our earnings call presentation slides, which are available on the Investor Relations page of our website.
Now regarding the 2 areas that represent headwinds to our 2021 revenue growth first as discussed on prior calls and disclosing filings during fiscal year 2020, we announced strategic.
Strategic decisions to exit 3 businesses in 2020.
The suspension of Merit distribution agreement with 9 point medical in quarter, 1.2020.
The disposition of assets related to manufacturing of Merit typo tube product in August 2020.
And the closure of the.
Our health care procedure pack operations in Australia in December 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 benefit from the sale of the culture of nasal pharyngeal swab and test kits used to collect from transport samples for COVID-19 testing, which we developed manufactured and distributed beginning in the second quarter 2020 in response to the critical need as a result of the COVID-19.
<unk> pandemic.
We believe this represents a great example of not a merit strong R&D and manufacturing capabilities, but also our ability to adapt quickly to our markets and to respond to as time sensitive demand from our customers.
Importantly, culture is not a core product line from merit going.
Ford and we expect to generate approximately 2 and a half to $3 million in sales from this product line in 2021 compared to more than $19 million in 2020.
Now this represents a material headwind to our year over year revenue profile in 2020, 1 roughly $13 million of this.
Of this headwind will impact our second half 2020, 1 results, representing roughly 270 basis points to second half growth year over year.
Now the third item I wanted to highlight from vessels to consider when evaluating our 2021 revenue growth profile is a key assumption that impacts our APAC revenue.
Over the second half of 2021.
Revenue guidance includes approximately $11 million to $12 million of headwinds related to lower pricing as a result of tenders in the second half of 2021.
Overall, we continue to expect our total revenue in China to increase in low single digits.
<unk> 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 are pleased to see strong demand driving unit growth.
Such that we were able to offset the experience expected pricing headwind related to the tender.
This year, we note that the 11% to $12 million of lower pricing represents approximately 120 basis point headwind to our total company constant currency growth in 2021 and represents a 240 basis point headwind to our total company constant currency growth rate in the second.
And half of 2021.
Now we are confident in our updated 2021 guidance, which calls for total revenue growth growth on a constant currency basis of 9% to 10% year over year importantly.
Importantly, excluding the impact of divestitures and product sales that uniquely benefited.
<unk> from pandemic related demand trends in 2020, our constant currency revenue growth now reflects growth of 12% to 13% year over year in 2021.
Excluding the expected pricing headwinds from China tenders over the second half of 2021.
Second our total revenue guidance for fiscal 2021 now reflects growth in the range of approximately 13% to 14% year over year on a constant currency basis.
Now we also expect to reported improving non-GAAP gross margin operating margin strong free cash flow.
In 2021, driven by strong execution.
And contributions from our multi year strategic initiatives related to the growth foundations for growth program.
Wow.
This wraps up our prepared remarks, operator, we would now like to open up the line for questions.
<unk> you very much.
Thank you again, ladies and gentlemen, if you like to ask a question. Please press Star then 1 on you touched on telephone 1 moment for our first question.
Our first question comes from Jason Bedford of Raymond James Your line is open.
Yes.
Hi, good afternoon guys.
Thanks, and congratulations that was a nice quarter.
<unk> results were clearly ahead of expectations do you think.
A tough answer here, but do you think the quarter benefited at all from from pent up demand given the flow through into free acute my guess is no, but if you can comment on that that'd be great.
Yes.
Jason I think that there is pent up demand and I think we will see it over the next 12 months to 18 months I don't think it's just all popped up in this quarter.
But as we've kind of been saying all along we never.
Never believed in you know kind of a V.
We adopted and patented I'm joking now.
The robalo swoosh, but.
We are seeing positive trends the environment, especially in the U S.
As been very very positive.
New products are getting looked at.
Much more often and they are selling.
And I would be disingenuous, if I didn't say.
Whenever you have.
Sales like this you've got to make it you got to produce it.
So I think our execution from an operational point of view, it's also something that like to mention that our ability again going back to.
The ability, we have to respond and react to be able to meet.
Customer needs, Okay, Raul do you want to come in at all.
Just say that.
<unk> got that Jason and then also I mean hats off to our sales force for being ready to take advantage of that good point, but I think they did a great job.
Okay.
Fred you mentioned some softness in a handful of emerging market.
Say that what.
What percentage of your business do you think is tied to those emerging markets that are still lagging.
To be honest with you I don't have that right in front of me, maybe Rob or Ken.
Can you comment on that.
We're really talking about.
<unk> like Indonesia and.
Some.
Some of those areas in southeast Asia.
And also in the middle East as kind of a geographic part of that Robert do you want to comment on percentage.
<unk>.
Percentages I don't I don't have here with me.
Jason I don't know that we want to give that much detail, but middle East Russia, Turkey.
In EMEA.
And then APAC.
It.
As just a little spotty too but.
But overall I think it's it's.
Generally improving I would say, yes and of course.
The biggest market of all is the United States and that's the 1 that's responding in.
Of course, the most important.
Emerging markets is probably the best.
<unk> vessels descriptions, both in EMEA and APAC.
Just just on the China tenders still impacting the growth in terms of the guidance when will we know meaning is there a timeframe here that we should look to.
Well, we've always expected that we would start to hear things kind.
Third quarter is tenders went out.
We will be there.
Are there now in terms of the turnaround so.
You can never rely or nor do we know when they will respond we haven't seen anything yet, but we don't want any surprises so we're kind of maintaining that until.
And the further evidence 1 way or the other.
Okay. Thank you and I guess just last 1 from me.
The sales force clearly has some momentum there can you just comment on new product flow, maybe realized Rhapsody is up and running but maybe some other new products that you expect to introduce in the second half of the year.
Yes.
Well listen we have a lot of them from the last year that really didn't get much attention because of the.
Vac committees and that sort of thing and as the as the market is open back up.
We have I don't know no less than 10 products.
That really didn't get a fair shot and then we have as you know every year $10.12.15, new products coming out so things like the splash wire things like the focus.
<unk> products.
Like the <unk>.
<unk>.
Gel foam.
Our products.
And others so.
It's nice to see that theyre getting attention and reorders and that sort of thing Jason.
That's the best way without getting into too much detail, but they're.
Theres plenty out there I guess the bottom line is there is plenty out there for our sales guys to sell them.
2 reasons for customers that want to share our folks because the products, we make help people.
To do that.
Job safer jobs.
And provide both physicians and <unk>.
And for patients.
Thank you.
Our next question comes from Larry <unk> of Wells Fargo. Your line is open.
Thank you so much for taking my question.
We'll go next with Navy I was hoping you could talk a little bit about trends from the second half.
<unk> across the different business segments or geographies, especially relative to 2019.
Hi.
How we should think about the guidance in the back half and then similar question on margin. It seems like just given your guidance. It seems like you're assuming flattish gross margin in the back half.
Versus the first half book lower operating margin so any color there would be helpful.
Yes, so I guess.
In.
To break down the question I'll, maybe take the revenue piece first clearly.
We see.
I guess, what I'll call modest improvement.
We see some momentum in the business and we're doing better or we wouldn't have updated guidance.
So again I think.
When you look at the I think at the growth.
Maybe I'll just hit on our guidance right. So if you take the bottom of our guidance from 994 million that we had previously provided you tack on.
$66 million to our new <unk>.
<unk> guidance of $1.6 billion.
Really the first.
$50 million was strong beats.
In the first half of the year.
I guess, we're feeling.
That we can do a modest improvement in the back half of the year and we're tacking on $16 million there.
Which I think is a modest improvement in I think shows kind of the upbeat nature of what we're what we're expecting but also knowing that we are not completely out of the woods, yet and so I think it's important to call that out because I think when you see the increase in the guidance. It does look like a big number but.
Big portion of that has already been.
It's already on hand, I guess I'll say, well then we can't forget about this resurgence of Covid and so we are being.
Cautiously optimistic and also on the seasonality.
We are coming into this summer quarter, but listen I don't want to takeaway from our confidence in the business and the momentum in the business.
But at the same time, we don't want to get over our skis.
Robin do you want to add.
Gross margin look I think.
We've done a great job. This year, we did tighten the range we brought it up.
And really the assumptions is driven by product mix.
And in some of the inflationary headwinds, we're seeing that everybody has seen but I think the real.
The focus should be on operating margin, which we're really excited about and you can see the leverage that we're getting there.
And so I think we continue to be excited.
And we continue to be excited about using being.
He has a full P&L to to drive higher profitability.
Got it and then just a question on China I believe it represents about 10% of total company sales and it looks like value.
Deutsche Bank.
2 other categories. So how are you thinking about growth in China over the next few years.
Being able to keep it. Thank you for the question.
Yes, I think we still have a lot of confidence in China.
There are a lot of wins in sides and that sort of thing, but I think our ideas that we've talked about on our last call about expanding into markets that cater for I don't want to say been ignored but.
But there are a lot of I think I mentioned last quarter, there was like 30.
Cities with over 5 million people as you move kind of into the center.
The country and I think our strategy is to move into those areas that will give us more opportunity.
Haven't lost faith at all in China.
Got it thank you.
Thank you. Our next question is Matt O'brien from Piper Sandler Your line is open.
Hi, guys. Good afternoon. This is drew on for Matt and congrats on the impressive quarter here.
Thank you.
I wanted to start off on the free cash.
Number obviously very.
Very impressive well.
Well ahead of the street and it seems like it puts you guys on schedule as far as getting to that.
That $100 million target for the year. So just wondering if you could speak to the stickiness of that level of performance, especially as the spend starts ramp up a little bit and then you know what.
It's a good jumping off point as we start to think about that metric in 2022.
Yeah, well look I won't give you the 'twenty 'twenty 2 number but I will tell you that you know as part of our foundation for growth program, we have a minimum of $300 million.
<unk> out there so I guess the stickiness is.
It is our goal.
Or is that.
We have set and were pretty dedicated to it.
Obviously as we look at the $100 million target for this year.
We do have capital that we have.
I would say we've underspent for the first half of the year, we do plan to spend a budget for.
The back half.
We have met with our operations group just to look at initiatives where for efficiencies.
And so we do plan to.
<unk>.
To use additional capital in those areas. So I would say I feel it's pretty sticky we do have a.
Working capital programs in place to try them.
And make sure that we hit our targets. In addition to we just have a more robust capital allocation process for fixed assets and whatnot I think we instituted some other programs.
We met yesterday, we go for wheat, Mont each month, we monitor and approve or.
Or asked for more information.
I think we're very disciplined.
And listen if you go back a couple of years ago and I wont finished quickly to go back a couple of years ago was 1 of the big criticisms, we listened to our shareholders told us.
And.
And we've performed so.
I think we're doing a great job and then like <unk> said.
We really want to spend our money on automation and things will help to offset labor and these other issues that are going to be an issue for everybody going forward. So I think it's and 1 last thing.
We are also compensated I mean part of our compensation is to make sure that we.
Hit the goals that we set out in our foundation for growth. So the interest are aligned to make sure that we do that but still growth. The company. So we're not going to stop spending.
We need to expand and invest but we have goals and we will hit those goals.
Long platitude, but that's it's sticky.
Very sticky.
Good to hear and very helpful.
And then just second question from me I apologize for being a little bit nitpicky here and I know you just alluded to it a little bit but on the gross margin side.
Just a little step down versus Q1.
Is that primarily a mix dynamic.
As we're thinking about the full year is there anything from a mixed perspective or.
Or otherwise that we need to be aware of just as we're modeling that gross margin. Thank you.
Yeah, No look I think we've.
Brought the bottom up right. So we went from $45.48.5 to 48, 8 and again I think we are.
As.
And then the forward there is a lot of inflationary pressures that I think we're trying to account for and just be cautious with we're seeing.
Freight expense go up.
That cost us roughly 20 basis points in the quarter.
Even though we have we actually negotiated better rates last year and.
And.
And as a percentage it was down we actually ended up paying more because air freight.
More product to our customers and so.
And our distribution centers so.
I think our foundations for growth program is just getting started it 6 months in we've got a lot of initiatives for.
Our operations group for.
For the cost of goods line and I think we're I think we feel pretty good about where we're at right now on and I also think role that.
As we go down the road here, we believe that these freight issues.
Let me give you an example.
Spending a lot more by air and part of that is because things getting.
Blocked up in ports.
The surface approach shipping theres not enough ships out there, but we believe that that market will balance out in time like they do so there is an under supply.
It will swing the other way and so that's something that we don't think is permanent but it is here for now.
Now until we get back into equilibrium.
Just.
Maybe just to call it out because I think.
Our guidance basically implies a 170 to 200 basis points in spec expansion. So again I want to call that out because I think that's correct.
Got it thank you.
You bet. Thank you.
Sure.
Our next question comes from Jim Sidoti of Sidoti <unk> Company. Your line is open.
Good afternoon Fred.
Just to follow up on that.
You, obviously youre seeing growth across all your business line.
Several of the companies that reported.
Yeah.
Indicated that now some of them are concerned about having having enough supply to meet demand in the back half of the year are you guys prepared.
Business keeps ramping up.
Is your supply chain.
Able to handle it.
Yeah, Jim Thank you very much for the question lesson.
But you know and I want to make sure everybody else as well is that merit is a very much a vertically integrated company and whether it be sensors for critical care or for other product lines inflation devices, and so on or better be extrusion or catheters or injection molding all of those things that we do.
And we've been criticized sometimes what I'm, saying, we won't do that but I'm really glad that we we've done that over the years, but.
But at the same time, we didn't see much in the previous 12 months, maybe even 15 months, but as those supplies got used up I mean, you can hear them, whether it be chips, whether it be.
Resins, whether it be this or that almost everybody and we're not immune but I think whats really important part is is if you look at our revenue numbers.
That those are orders that were built and shipped and do we have more than we did last year and the answer is yes, however, our ability to.
The bond and to be able to work through these things because we're involved in it every day road yet to come in.
I want to make it clear right, Jim because I think it's a valid point and again I'll point to the to the modest increase in the back half of our our guidance right. So again, we're excited about the business a lot of good momentum but.
But we're also being cautious just given the head so we've essentially got $60 million uptick in our guidance for the back half.
I just wanted to make sure that that's called out and people understand that because.
Okay.
Uptick in our guidance on it but we've already got $50 million in the bag.
Yes.
Yes.
Alright, and then just another kind of a big picture question I think Fred you and I are old enough to remember inflation, but I'm not sure how many other folks on the call, but it definitely seems like we're in an inflationary environment.
Are you are you pricing power or do you have.
Hedges in place on your materials.
Oh you.
We were able to handle some inflation in the near term.
Yeah.
We all know and.
We heard about it every day, we all know the wages and the ability to bring people back to work.
Wages are never going to go down and my belief I have never seen them in my lifetime I'm sure you do.
Of those and the ability to attract people. So I think that's going to continue however to offset those theres things like automation moving products too.
Other facilities that are more competitive and that sort of thing in terms of cost. So we have those things in place roll Lastly, I mean I look.
We've been able have been able to absorb certain things because of our <unk> program. So I don't want to take away from the operational group because they've done a lot of work on the purchasing side.
That's helped offset some of these headwinds.
And some of the automation and data that we've already done.
And another point role as as part of our foundation for.
For growth and you've heard US talk about this several times per day, but part of that with SKU rationalization, SKU rationalization, which is a big initiative.
Helps us to be more efficient in our manufacturing by not making 10 up something but better to make 10000 of something and we think we can do that without really.
Really affecting the revenue stream. So that's another thing is that we can become more efficient and then that's all going to flow through so Jim I think.
So we're not immune we have some issues, but not anything that I can currently see that would create a problem for us to meet our goals. So I want to make sure that that's understood as well.
Yeah.
Fred when you founded this business back in the eighties sell an inflation devices.
When did you think you'd get to a 1 billion in sales and is there going to be.
Some kind of event that merit when you do cross that threshold.
Well, that's an edge yeah, there'll be about a 32nd.
And maybe.
Oh that was case that you put on a big trade that's about price.
I think we will do that and then of course, the target is now making sure that and by the way Jim I think theres a lot of opportunity in the marketplace.
When you talk about our stuff.
Seeing a lot of problem.
Problems from competitors and that plays into marriage hand in our ability to respond to customers.
For US now is making sure we have a plan in place and that we're working towards both infrastructure efficiency.
Strategy Therapeutics 2 billion, so I mean $1 billion without sounding cavalier.
<unk> is.
Almost in the rearview mirror.
Okay Alright.
Thanks, Fred Thanks for the total okay. Thanks, Jim.
Thank you. Our next question comes from Mike Mattson of Needham <unk> Company. Your line is open.
Yeah, Thanks for taking my questions.
So I took.
Okay.
The growth that you're categories saw over the second quarter of 2019.
And it looks like peripheral was the strongest.
Up about 19% from 19.
But then custom procedural was kind of the weakest up just 3%.
Was wondering if you could just call.
Comment on those 2 businesses, what's really driving the growth there.
The difference I guess from the growth rates and I would assume the custom procedural areas, maybe an area, where you've had some of the SKU rationalization.
Yes I'm.
I am glad you brought that up because the growth actually if you compare it is.
<unk> is around 7% once we strip out the <unk> business, which as Youll recall we.
We got rid of last year right. So that's the Pac business that was sitting there so.
When you strip that out the <unk>.
Growth in Cps is 7%.
Okay, No that's fine, but just from a from.
Total I mean.
I guess, what sort of peripheral whats.
Why is that performing so well right now I mean, there's the new products and you just procedures rebounded more quickly do you have any feel for that or yeah.
I think it's the same reasons.
We had such a strong growth in Q2 'twenty.
A higher 1 compared to 2020 right last year I mean, you look at the the scout.
Radar localization that was up almost 90% in Q2 biopsy products nearly doubled.
<unk> in both therapy products.
40%, so ideal vascular access.
Theres just a lot.
<unk>.
Okay.
We've got a pretty robust portfolio I would say and it's just unreal well.
Along with our sales force going out there and deliberate and as I mentioned earlier, Mike I think there were a lot of products that werent getting much attention because we didn't have the access that's improving so those products are.
Starting to show I think.
And it's still very early I think there's a long runway here for these new products, but I think thats part of it and that means the sales guys are getting out there.
A sales Rep call me and say, we have a little product.
I won't mention the name of the product, but the guy.
As Guy call me today and said.
You know Fred and I got a call from a doctor there starting to call me because 1 of his buddies was using a product and he asked me to come over because he wants to use it. So I mean, we haven't had that kind of discussion for a long time.
For at least the last 15 months, where people are calling you up.
Please come on over to Sami So we're starting to see.
Again in that.
And even with the Delta variant, yes, Theres a lot of new vessel now knew that but it's not going to be I'm, not a physician or an epidemiologist, but it's not going to be like that initial part there'll be people get sick there'll be this from that and so on and so forth but.
I think we're going to.
You see that improving environment continue over time because hospitals.
Have learned to deal even though I mean, if you listen to the press everything's fallen and everything is at the end of the world.
Our evidence is maybe a little different than that yes, they might be full but hospitals have learned how to do both and manage both because they.
Need to to run their businesses.
Yeah, Okay got it.
And then.
You've obviously come a long way since the challenges from what you.
You experienced in 2019 and foundations for growth is going really well I know, it's just in the early stages of being implemented but.
Your.
Your balance sheet is also in better shape I mean, your leverage ratio is down I think you said the 1.1 so I.
I guess, where does M&A fit in foundations for growth I mean is it still really off the table or would you consider.
Doing some some deals here now that things have stabilized and kind of on the upswing in.
The growth in margin every day.
Yes.
Did take a vacation we hadn't put things in place we had to get foundations for growth, we have to clean up our house.
But no it's not off the table, but it still has to meet the needs of our foundations for Gov and not frustrate the goals that we've set.
Net forward and that we promised we would deliver to our shareholders now I mean, clearly if you did something in you had the free cash flow, we still have to do all of that Mike. So there are deals out there, but as you all know and everybody on this call knows they're pretty pricey.
And.
We just need to have that discipline too.
Look at the right things, but we don't feel like we have to do anything from 1 great thing about having internal R&D.
We've got those 10 to 15, new products this year and the ones from last year, we have plenty to sell.
But on the other hand, there will be opportunities and I think the word people have used as opportunistic.
It's the right business at the right price and it fits our goals.
We'll be there looking.
Okay, great. Thanks, congrats on the quarter. Thanks.
Thanks, Mike.
Thank you.
Our next question comes from Steven Lichtman of Oppenheimer. Your line is open.
And if it thank you congrats guys.
I guess just 2 from me first Fred.
Fred on the Rhapsody first data.
Obviously, assuming it's positive how do you think it can help.
In your education and marketing effort.
Do you see that as a as a catalyst for sales in Europe.
Yes, I don't think theres any any doubt about that at all.
We're enrolling in the in the U S study.
That hasnt been easy because even though you have access to the physicians.
A lot of hospitals cutback in their investigators and things like that but we have I think close to 40%.
3% to $40.47.
Accounts that have been up and that had been trained that are authorized for these procedures, but in Europe.
I think.
We mentioned in our press release, a comment about the <unk>.
1 year data.
And we did not.
Identify and it's not appropriate to do so for US today, but we did we did say that in an upcoming.
Medical Convention medical show in the proper discipline that merit will be.
B.
Hopefully published and released at 1 year.
Data.
And again in a product like this.
It's all about data.
And then of course, we have the U S going and then we're looking at other.
<unk>.
Studies or other types of things small little things that we would do that helped to support what we believe is really a an extraordinary just another.
Stent graph I want to go on and saying this is not just another stand graph, but I hope that you will.
Pay attention when this well you won't have to we will let you know about it. When this is published we will make a press release.
And you can study that income to your own conclusion.
Great. Thanks, Fred and then roll.
You know obviously you guys are are driving strong operating leverage what are your latest thoughts on potential tax rate leverage do you see opportunities in the near term or are you. So more of a wait and see approach given the and.
Potential landscape change there.
Hi.
I.
I can see that we've got an initiative out there to go out and look at see if we can drive it lower I think the reality is you've got a new administration.
We're still trying to they're still trying to define some of them.
Last tax law changes and so I just think there's a lot of noise there into.
I wish aten and invest and.
Dollars in that area right now and then Havent change.
It's just not an area that we currently want to invest in but it is a discussion that we're having internally.
We're just trying to figure out what the right timing is.
Got it makes sense. Thank you guys.
And I think we're up to our last call now so let's go ahead and get our last 1 up and we then will follow up with other phone calls so.
I think bill <unk> from Canaccord Europe.
Okay.
I'm from Bill Tonight, Thanks for taking our question.
First just.
On Scout sales I know you said.
Over 90% year over year, and large contributor to <unk> in the quarter.
Is there anything specific driving that is it just.
Uptake or is there specific cadence that price and you've made or from a sales standpoint driving us.
Yes, well remember now we're approved in other location.
<unk> like Rod price insurance Europe, we had to get the CE Mark we have the CE Mark. So that's part of what's driving it I think its utilization and I don't have any difficulty as saying that.
With a physician just last week and the comment was.
Actually a position in.
And on long island, saying theirs.
Question, we've looked at all the other products that you guys have the best technology and the best product. So I think it's it's uptake I think it's geographic and I think that a pent up demand there.
Pent up demand coming from the fact that it was considered to be elective. If you can imagine some of it has breast cancer being elective but anyway.
There is no. So I think thats part of it and I think you'll see continued momentum there.
Great. Thanks, and then just for a follow up to we noticed from changes to the wave study on clinical trials that goes I see there's 2 new arms added 120 more patients how do you see this impact from timelines I believe last call you targeted 6 months followed.
Way fleet by year end 'twenty 2.
Does this extend that a little bit or any changes there.
And so the 6 month data is already out the 1 year data will be coming we think in the next couple of months.
We havent changed anything on the back end at this point at all yeah enrollment.
Because we expect enrollment still ended December 2022, which is what it says out there.
Okay, great. Thank you.
Okay.
Thank you.
I'm showing no further questions at this time I'd like to turn the call back over to Fred land Propolis for any closing remarks.
Thank you very much ladies and gentlemen, thank you for joining.
It's a busy night, so we're not going to spend a lot of time.
Sure.
Take any more of your time to get a lot of work to do listen we're enthused about the business as you can see I think.
We are working hard to meet our goals and.
And we're committed I mean, we've always been committed we put.
Other items together, we've executed plans kudos to the sales force to our R&D group our operations group.
They are the ones that really are carrying the water and I wanted to just call that out. So thank you all for your time, we will be available for follow up calls, which are scheduled and again, we look forward to reporting again.
And in the very near future. Thank you very much and good night.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you for participating you may all disconnect have a great deal.
Okay.
Good day.
Thanks.
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