Q2 2022 Merit Medical Systems Inc Earnings Call
Okay.
Please standby welcome to the second quarter of fiscal year 2022 earnings Conference call for Merit Medical Systems, Inc. At this time all participants have been placed in listen only mode. Please note that this conference call is being recorded.
Recording will be available on the company's website for replay shortly.
I would now like to turn the call over to Fred and Propolis Merit Medical systems, founder Chairman and Chief Executive Officer. Please go ahead Sir.
Thank you and welcome everyone to Merit Medical's second quarter of fiscal year 'twenty Two earnings conference call I'm joined today with Raul Parra, our Chief Financial Officer, and Treasurer, and Brian Lloyd, Our Chief legal officer and corporate Secretary.
Right.
Brian would you mind, taking us through the Safe Harbor statements. Please.
Thank you Fred I.
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 real unknown risks and uncertainties.
The 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.
In addition, any forward looking statements represent our views only as of today July 27 2022.
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.
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.
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.
And can be useful for period over period comparisons of such operations.
This presentation also contains certain non-GAAP financial measures.
A 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 for important information regarding non-GAAP financial measures discussed on this call.
Readers should consider non-GAAP financial measures. In addition to not as a substitute for financial reporting measures prepared in accordance with GAAP.
Please note that these calculations may not be comparable with similarly titled measures of other companies.
For 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 and let me start with a brief agenda of what we will cover during our prepared remarks.
I will start with an overview of better than expected revenue results for the second quarter.
After my opening remarks, Rob will will will provide you with a more in depth review of our quarterly financial results.
And the formal financial guidance for 2022 that we updated in today's press release as well as a summary of our balance sheet and financial condition.
We will then open the call for your questions.
Now beginning with a review of our second quarter revenue performance.
We reported total GAAP revenues of $295 million in the second quarter up five 2% year over year.
Total GAAP revenue growth was driven by three 7% growth in U S sales and seven point to growth in international sales.
Our total revenue increased seven 4% year over year in the second quarter on an organic constant currency basis, excluding the headwind to our GAAP revenue growth related to changes in exchange rates compared to the prior year period.
We delivered constant currency revenue results that exceeded the growth expectations that we discussed in our quarter one earnings call specifically, we shared our expectation for constant currency revenue growth in the range of flat to up 2% year over year in Q2.
The strong constant currency revenue results were driven by solid execution from our team.
Stronger than anticipated demand in the U S and more favorable than anticipated international sales trends, particularly in the EMEA and rest of world regions.
Now let me provide you with a more detailed review of our revenue results in the second quarter, beginning with our sales performance in each of our primary reportable product categories.
Unless otherwise stated all growth rates are approximated and are on a year over year and constant currency basis.
Second quarter total revenue was driven by seven 5% growth in sales of cardiovascular products.
Four 4% growth in sales of endoscopy products.
Sales of our peripheral interventional products increased 7%, representing the largest driver of total cardiovascular segment growth in quarter two.
Within the PDI product category sales of our angiography products increased 18%.
And were the largest driver of our total pie growth year over year.
Sales of our embolic access and drainage products.
<unk>, nearly 8% year over year and quarter, two and together contributed roughly one half of our total <unk> growth year over year.
Notably sales of our scout radar localization products increased 9% year over year, driven by continued positive demand for this highly differentiated wireless radar guided localization system.
Used to assess breast surgeons in identifying tumors for removal during breast conserving surgery.
Within our cardiac intervention business sales increased 7% in quarter, two representing the second largest contributor to total cardiovascular segment growth year over year.
We had standout contributions and Carlos Ci growth in quarter, two from sales of our intervention products, which increased 12% year over year, driven by sales of our basic inflation device.
Continuing to deliver strong contributions to growth increasing 14% in quarter, two and a notable pickup in demand for our Phd hemostatic valve products.
Sales of our OEM product raw stronger than than expected in quarter, two increasing 15% year over year.
Driven by improving demand from larger customers in multiple categories.
Including cardiac intervention in excess fluid management coatings and kits.
We are pleased to see that sales of our Cps products posted a 5% growth in quarter, two fueled by low double digit growth in sales of trades.
Finally sales in our Endoscopy segment increased 4% in quarter. Two ahead of expectations as we saw strong demand for our elation esophageal balloon products, which offset the expected business disruption related to issues with a third party contract manufacturer discussed in our last earnings call.
Now turning to a brief summary of sales performance on a geographic basis.
Our second quarter sales in the U S increased two 6% year over year on a constant currency basis importantly, our second quarter sales results reflect improving U S growth trends on both a two and three year basis.
Our second quarter International sales increased 13, 6% year over year on a constant currency basis.
And encouragingly, despite the challenging global macro environment in quarter, two our international sales results reflect improving growth trends on a two year basis, and largely consistent growth trends on a three year basis.
We saw a contribution to our total international growth in each of our three primary regions around the world with EMEA sales growth, representing the largest driver of total international growth in quarter two.
EMEA growth was driven by demand from customers in Western Europe , The Nordic region, and Africa and sales to customers in Russia, which was not contemplated in our quarter two outlook given the ongoing conflict in that region of the world.
APAC posted mid single digit growth in quarter, two which was modestly softer than expected with strong sales in Japan, Southeast Asia and Korea.
More than offsetting the 1% sales decline in China.
Our west of the World region posted 57% growth year over year and quarter, two which was well ahead of expectations as we saw particularly strong demand from customers in Latin America and Brazil.
In summary, we are encouraged by the improving growth trends and proud of our team's strong execution. Despite another quarter marked by challenging operating environment.
Before we turn the call over to Robert I wanted to comment on a few other noteworthy items in the quarter first.
We delivered another quarter of impressive profitability improvement margin expansion and free cash flow generation in quarter two.
Our non-GAAP gross profit non-GAAP operating income and non-GAAP net income increased 7%, 23% and 20% year over year, respectively in quarter two.
Our non-GAAP gross margins increased 69 basis points year over year. Despite continued inflationary headwinds and our non-GAAP operating margin increased 280 basis points year over year to a record 19, 1%.
We also generated $31 5 million.
Our free cash flow in the quarter.
We believe our financial results in the second quarter and the first half of 2022.
<unk> represents further evidence that we are making progress towards our goal of enhancing <unk> long term growth and profitability profile.
We remain committed to the financial targets that we outlined in the foundations for growth program for the three year period, ending December 31 2023.
Each call for our constant currency organic revenue to increase at a CAGR of at least 5% non-GAAP operating margins of at least 18% and cumulative free cash flow generated of more than $300 million.
Second we are pleased with the progress in recent months towards our strategic initiative to expand the body of clinical evidence for our products.
Specifically, our clinical studies the wave steady of the Rhapsody Endovascular stent grafts and investigational device being studied for the treatment of stenosis or inclusion within dialysis outflow circuit continues to progress.
We have 40 clinical sites actively enrolling patients.
We also announced first patient enrollment in two new studies in recent months the wrap it study and the <unk> study.
The rapid study will evaluate the clinical benefits associated with the use of the rapidly.
And prebuilt annual prosthesis in patients, receiving hemodialysis that experience, a narrowing or stenosis or blockage approaching.
<unk> vessels required for dialysis vascular access business.
This is a prospective multicenter observational study of up to 500 subjects without pro Circuit Historic Luke we're receiving hemodialysis at medical facilities throughout Europe .
South America, Australia, and New Zealand.
Clinical outcomes of patients after the initial placement of the rapidly selling premier endo processes will be evaluated value added over two year period in accordance with instructions for associated with it CE Mark.
The stream lock study as a Canadian registry intended to demonstrate the utility of the scout surgical guidance system to improve workflow and efficiency in Canadian centers, diagnosing and treating breast cancer.
The secondary objectives of this study is to further evaluate the safety and performance of the scout surgical guidance system when used according to the IPO and 500 consented patient with <unk> scores of <unk> five.
By assessing the utility of the re factoring surgeon at the time of biopsy. This study is designed to measure the impact on patient visits to the breast center for invasive procedures between biopsy and surgery and quantify this value to the Canadian public health care system.
Now with respect to our efforts to expand clinician awareness.
Clinical efficacy of our products.
We can continue to work with kols to identify opportunities to feature our products in leading publications and look forward to Dr. Caterina military's abstract on the European M. CRC Registry study, which was completed in December 2021.
The European M. CRC study evaluated the use and value of trans arterial chemo embolization of metastatic colorectal cancer to.
To deliver with merits happens via microspheres loaded with arena can.
<unk> abstract was accepted for the <unk> meeting that will be in Barcelona in September .
Our marketing and medical Affairs team, we're excited to host the inaugural Whatsapp Summit meeting here in South Jordan This week.
And I would just say it is a wonderful meeting to meet with these kols. This.
This is a multi day meeting offered.
A valuable opportunity to engage with them from around the world in a variety of topics, including an overview of our vendor vascular intervention and embolic platforms, New technologies are wave and wrap studies and GAA planning.
Finally, I wanted to highlight another area, where our team has been executing well towards one of our key strategic initiatives specifically the development.
Clearance and commercialization of new products.
During the first half of 2022, we've highlighted our progress in these areas with four notable press releases.
We received breakthrough device designation for ambulatory or micro spheres in the use in janicki artery embolization for Cynthia O matic knee.
Excuse me osteoarthritis.
We received clearance for the <unk> delivery system. A notable addition to the merit oncology <unk> soft tissue localization portfolio. This system addresses roughly 40% of breast biopsies performed under stereotactic, our MRI guidance.
And the related need for an additional visit for re factor placement prior to surgery Scott.
Scott <unk> is compatible with most commonly used stereotactic and MRI guided breast biopsy devices on the market, allowing the patient to avoid.
An additional office visits and procedures.
We also announced the launch of our new Scout many reflective there Scott many refractories designed for use in soft tissue, such as breast and lymph nodes.
And measures eight millimeters in length, 33% shorter than the standard Scott reflect our operating more utility and difficult to localize areas.
The scout many reflector offers enhanced directionality to achieve more precise pinpointing affected tissues within plus or minus one millimeter of accuracy consistent with merit standard Scott reflectors.
Scott many refractory supports multiple treatment needs include replacement and breast tissue and lymph nodes and can be used pre or post new adjunctive chemotherapy at the time of biopsy and for bracketing discount indication for use also support placement and other soft tissue malignancies broadening the use of scout.
Technology outside the traditional use for breast cancer treatment and.
And finally.
Keep saying finally.
We announced the launch of the resolve pneumothorax trade. The resolve pneumothorax Cray is is the latest edition of marriage vascular peripheral drainage offering.
Portfolio of interventional catheters stent systems training systems bottles procedure trades sets and complementary procedures, the new resolve pneumothorax tray contained to our products need to perform in the third cost to me.
Italy invasive technique that allows patients to avoid an open surgical procedure to drain fluids or air from the chest.
Each trade component has placed an order views supporting procedural efficiency.
Your views.
Now I am proud of the team's continued commitment to strong execution in the areas of development clearance and commercialization of new products.
Now with that said and this will be my last finally.
Let me turn the call over to Robert who will take you through the detailed review of our second quarter financial results and our 2022 financial guidance, which we updated in today's press release.
Thank.
Thank you Fred.
Given fred's detailed discussion 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 second quarter of fiscal year 2022. We have included reconciliations from our GAAP reported results to the related non-GAAP items in our press release and present presentation available on our website.
Gross profit increased approximately 7% year over year in the second quarter, our gross margin for the second quarter was 49, 3% compared to 48, 7% in the prior year period to 69 basis point increase in gross margins year over year was primarily due to changes in product mix and lower <unk>.
The lessons expense offset partially by unfavorable manufacturing variances, primarily related to purchase price variances and higher freight costs compared to the prior year period.
As expected our second quarter results refractory inflationary headwinds, we are seeing in logistics labor and increasingly in raw materials, specifically, while our prior guidance assumed higher raw material cost compared to the second quarter of 2021, our second quarter results included an incremental headwind to our non-GAAP gross.
Returns of approximately 50 basis points from higher than expected raw material expenses.
Second quarter operating expenses decreased 2% compared to the second quarter of 2021.
Year over year decrease in operating expenses was driven by a 1% decrease in SG&A expense and a 5% decrease in R&D expense compared to the prior year period.
Our operating expense performance in Q2 was better than expected and reflects continued prudent expense management as well as modest delays in hiring expenditures given the ongoing challenges in the labor market.
Total operating income in the second quarter increased 10, 7 million or 23% year over year to $56 4 million.
Our operating margin for Q2 was 19, 1% compared to 16, 3% in the prior year period the year over year change in operating margin was primarily.
Second quarter other expense net was $1 1 million compared to $1 9 million last year. The change in other expense net was primarily related to decreased interest expense as a result of lower average debt balance despite a higher effective interest rate.
Second quarter net income was $42 3 million or <unk> 73 per share compared to $35 3 million or <unk> 62 per share in the prior year period.
We are very pleased with our profitability performance in the second quarter, where we reported year over year growth in non-GAAP net income and diluted earnings per share of 20% and 19% respectively. Despite the incremental pressure on our gross margin and a higher than expected tax rate in the period.
Turning to a brief review of our financial results over the first half of 2022 total revenue for the six months ended June 30 was $570 4 million up $41 2 million year over year or 9% growth on a constant currency basis gross profit increased 7% year over year to approximately two.
<unk> hundred $77 million, representing $48 six.
Percent of sales in the first half of 2022 compared to 48, 9% of sales in the prior year period.
36 basis point decrease year over year operating profit increased 14% year over year to $96 6 million, representing 16, 9% of sales in the first half of 2022 compared to 16% of sales in the prior year period a.
And 95 basis point increase year over year.
Net income increased 12% year over year to $72 7 million or $1 26 per share compared to $65 2 million or $1 14 per share in the prior year period.
Turning to a review of our balance sheet and financial condition as of June 32022, we had cash cash equivalents and restricted cash of $65 2 million.
Long term debt obligations of approximately $246 million and available borrowing capacity of approximately $481 million.
This compares to cash on hand of $67 8 million.
Long term debt obligations of approximately $243 million and available borrowing capacity of approximately $490 million as of December 31, 2021, our net leverage ratio as of June 30 was <unk> eight times on an adjusted basis.
With respect to our cash flow generation in the second quarter, our strong profitability performance in the second quarter of 2022 combined with strategic working capital investments resulted in strong free cash flow generation of $31 5 million in the second quarter.
As expected our use of cash for working capital increased compared to the prior year period in recent quarters, we have discussed our strategies to proactively invest in our inventory balances to build a requisite safety stock and ensure high customer service levels. This strategy represented roughly one half of our total working capital use of cash in.
The second quarter.
We generated $34 million of free cash flow during the six months ended June 32022, we continue to expect strong free cash flow generation. This year and remain on track to deliver our goal of generating at least $75 million of free cash flow in 2022.
Of note this free cash flow target assumes planned investments related to the foundations for growth program that are expected to drive our capex investments in the range of 55 to 60 million to $60 million in 2022.
Turning to a review of our fiscal year 2022 financial guidance, which we updated in today's press release.
For the 12 months ended December 31, 2022, we now expect GAAP net revenue growth of approximately 5% to 6% year over year.
This GAAP net revenue range now assumes a headwind from the changes in foreign currency exchange rates in the range of approximately $18 6 million, representing a headwind of approximately 170 basis points to our forecasted GAAP growth rate. This year. This FX impact reflects an incremental headwind of $15 million to $15.
$6 million as compared to our prior 2022 guidance had assumed note roughly one third of this incremental FX headwind was realized in Q2 with the balance of the increase expected to impact our GAAP revenue results in the second half of 2022.
The GAAP net revenue guidance range now assumes net revenue from growth of approximately 5% to 6% in the cardiovascular segment.
Net revenue in our endoscopy segment in the range of a 5% decline to an 8% increase year over year.
With respect to profitability guidance for 2022, we now expect GAAP net income in the range of approximately $62 4 million to $68 3 million or $1 eight to $1 18 per diluted share.
non-GAAP net income in the range of approximately $139 6 million to $145 5 million or $2 42 to $2 52 per diluted share.
For modeling purposes, our fiscal year 2022 financial guidance now assumes non-GAAP gross margins in a range of approximately 49% to 49, 5% compared to a range of 51% to 56% previously.
The revised gross margin expectations reflect inflationary pressures in the areas of raw materials and freight and logistics. While we are pleased with the continued progress we are seeing as a result of our <unk> initiatives and then the area of pricing we have seen a material increase in raw material costs in recent months and these cost increases were not contemplated.
Our prior guidance assumptions.
With respect to freight and logistics costs recall that our prior guidance did include the assumptions that we would see freight and logistics headwinds.
Dissipate in the second half of 2022, given easier comparisons based on the uptake in these expenses over the second half of 2021.
Our updated guidance now assumes we do not realize the benefits of these easing comparisons as we now assume a higher mix of air freight versus shipping freight over the second half of 2022.
Partly this is a direct result of our strategic decision to respond to the stronger than expected demand for our products around the world.
Returning to our review of other key modeling assumptions supporting our updated financial guidance for 2022, we expect non-GAAP operating margin in the range of approximately 16, 6% to 17, 1% compared to a range of 60.
6% to 17, 3% previously.
GAAP and non-GAAP other expense of approximately $6 5 million and $4 8 million respectively.
Diluted shares outstanding of approximately $57 7 million compared to approximately $58 million previously.
And our full year 2022 tax rate of approximately 24% versus a range of 22% to 23% previously.
Lastly, given the continued uncertainty in the global macro environment, we would like to provide additional transparency related to our growth and profitability expectations for the third quarter of 2022.
Specifically, we expect our total revenue to increase in the range of approximately 1% to two for one to two.
1% to 4% increase year over year on a GAAP basis, and up approximately 4% to 6% year over year on a constant currency basis, our growth expectations for the third quarter of 2022 reflects two items of note first the midpoint of our third growth third quarter growth expectations assumed constant currency sales growth of them.
<unk>, 3% year over year in the U S and approximately 7% year over year and O U S markets.
Our third quarter guidance range assumes a notably wide range of sales of endoscopy devices, specifically a decline of 37% on the low end to an increase of approximately 12% on the high end as we continue to manage through business disruption related to issues with a third party contract manufacturer. We view this disruption is transitory.
<unk> and expect to return to more normalized growth trends in the fourth quarter with respect to our profitability expectations for the third quarter, we expect to see flattish non-GAAP gross margin trends compared to last year and modest declines on a quarter over quarter basis, driven by previously mentioned the inflationary pressures, we're seeing in raw materials and incremental freight and logistics costs.
Compared to the prior year, we also expect to see non-GAAP operating margin trends remain flattish to modest improvements compared to last year.
These margin expectations combined with a notable increase in our non-GAAP tax rate compared to last year are expected to drive a change in non-GAAP net income and EPS in the range of down 4% to 5% year over year on the low end to up 3% to 5% year over year on the high end with that I will turn the call back to Fred.
Well. Thank you in closing despite the challenging upper operating environment in quarter, two I am very very proud that we were able to deliver revenue and profitability results.
That exceeded expectations, we are confident in our 2022 guidance, which now calls for total revenue growth on a constant currency basis of 5% to 6% year over year, we continue to expect to see progressive improvement in our operating environment, specifically access to patients in elective procedures.
As we move through 2022.
We also continue to expect to report improving non-GAAP gross and operating margins and strong free cash flow in 2022, driven by strong execution and contributions from our multi year strategic initiatives related to the foundations of growth program.
Our team continues to execute well and remained focused on our strategic initiatives, while standing ready to adapt quickly to changes in our markets.
We would like to thank all of our team members you really can't do any of this without the entire team that made.
Globally by the way that made our performance over the first half of 2022 possible.
And with that said I will turn the time back to our operator, and we will now open up the line for questions.
Thank you Sir if you would like to ask a question. Please signal by pressing star one 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 that you limit yourself to one question and one.
Follow up.
Again, if you would like to ask if there are no questions. We invite you to ask yourself to the queue again by pressing star one one and.
And our first question.
Comes from the line of Jayson Bedford of Raymond James Jason Bedford. Please go ahead.
Hi, Good afternoon can you hear me Okay, guys. We can hear you fine Jason Thank you.
Alright, good afternoon.
Yes.
I guess I guess first.
Q2 was quite strong I guess on the revenue side were there any one timers or notable orders that elevated the revenue level here.
No no no I think it was business as usual.
But it was strong but nothing unusual yes strong execution from the team.
I think we saw stronger than anticipated demand in the U S.
And then just more favorable trends.
In EMEA and rest of the world.
Okay and then.
As I look at the implied.
Third quarter guidance, it looks like sales will be down seven 8% sequentially, which seems a little heavier than historical and so I guess what im.
Asking is what do you see here in the third quarter that may be a bit different than what you saw in Tokyo.
Yes, I think the biggest thing that we're seeing there is really related to our endoscopy devices. So as we mentioned on the opening script.
We're down on the low end, 37%.
Up to 12% on the high end.
Just.
Really has to do with the disruption that we've seen from the third party contract manufacturer, we're on track to achieve.
Thanks.
Just just in case something goes out it is a dynamic environment.
And I think for our perspective, we're just making sure we have a little bit of room. There in case, we don't meet our objectives.
But we're confident in our updated 2022 guidance.
Which implies total revenue growth of 3% to 6% in the second half of 2022, which is really unchanged versus the prior guidance guidance assumptions.
And then maybe I know squeezing more than one question in here, but they're all kind of related.
Just.
Similar question on margin in the third quarter realized.
There's lower revenue sequentially, but it's also a big step down in the operating margin is there.
Timing of spend that occurred that didn't occur in Q2 that will occur in <unk>.
Just kind of curious as to the higher level of Opex implied in the guide.
Yes, most of it quite frankly is related to the.
Modest decline in I guess.
non-GAAP gross margin.
What the inflationary pressures, we're seeing in raw materials, plus the incremental freight and logistics cost compared to the prior year that is having an impact on the operating margin.
We do expect operating expenses to incrementally go up from where they are at right now just because of the way of the spend happens but.
That's really what's driving that Jason.
Okay I'll get back in queue.
Yes.
Thank you.
Our next question comes from the line.
Larry <unk> of Wells Fargo, Larry vehicles on your line is open.
Hi, good afternoon, thanks for taking the question.
Further in railroad congratulations on a nice quarter.
There were two headwinds it don't seem to have impacted you much in the second quarter. The contrast shortage in the primarily in the U S and the Lockdowns in China.
How much better do you think you would have done if not for those two issues.
Alright.
Larry I don't know.
I think you are fair to say that we didn't see a lot of impact from the contrast, I thought we might but we just didn't it wasn't there so but it's hard to it's hard to tell.
China is always very hard to read.
It's a really difficult question and I'd have to spend a lot of research on it to get to zero.
Just going to leave it with a general comment I don't know.
Fair enough and I guess, given Fred the inflationary headwinds what gives you the confidence in.
The foundation for growth targets for 2023 will come in this year around will you will come in this year the midpoint of your guidance for operating margin of 16, 8% or so.
What gives you the confidence that you could.
To improve margins by more than 100 basis points next year. Thanks, guys.
Look I think Michael I think I'll start off by saying look we just delivered a 19, 1% operating margin.
So the confidence is there and I guess I'll just.
Reaffirm.
What we called out for foundations for growth on our November 20th call constant currency.
Organic revenue CAGR of 5% at least.
Feeling confident they are the non-GAAP operating margin by at least 18% again, we just delivered a 19, 1%.
And then cumulative free cash flow generated of at least $300 million.
Free cash flow, we continue to be very strong and delivered $31 million of free cash flow in the quarter $34 million for the year and we remain on pace to deliver the $75 million. So.
We see the initiatives working the foundations for growth initiatives.
And are really excited about it.
Continuing to deliver on those.
Look I think as we all know.
The Big Mall momentum, it's the focus of the staff we talk about it. It's worked we're committed to it our board.
He is committed to it so I think it's really the focus.
The goals that we've set and and this is in spite of all the other challenges that are out there. So.
It's just the focus of the team and when you get the momentum you get that spirit amongst people.
I am pleased with his team it really is a team effort, but I know that everybody says that.
But everybody has a team not all of them win.
I just think that.
The way, we're approaching it as a management team the board, but more importantly, the staff. They are the guys that have to execute.
And they've done a good job so I'm, just thrilled with our people and the efforts they put forward.
And the rewards that light very candidly for all of them and the shareholders and everybody else.
As this effort.
Progresses.
I am pleased I'm, just glad we did it and as you know from the history, we kind of started our.
The merit foundations for growth program prior to that and we had a head start but it works, we're well into the full second year, when we take that extra six months of the initiatives.
We worked with US before that and then we got more data. So again I don't want to linger on but I'm convinced in this team and their ability.
And our focus on all of that together.
It'll take us where we need to go.
Thanks for taking the questions.
Thank you Sir.
Thank you. Our next question comes from the line of Steve Lichtman of Oppenheimer <unk> Company.
Your line is open thank you guys.
Fred just given some of the moment underlying momentum you just talked about it seems like you guys are you leaning in on some of the growth initiatives you talked a lot about some of the R&D programs Tonight.
Where does M&A.
It is not that in your current thinking you've given.
The momentum and also the free cash flow.
<unk> talked about.
Or is that.
Potentially going to see some increased activity here for you guys over the next 12 to 18 months.
Yes.
In terms of that area I think we are very disciplined when we needed to be things were frothy and we stayed on the sidelines you can look at our balance sheet and see the strength that we have there. So we're working we're looking but it has to fit the parameters that we've set aside so it is not to frustrate the effort we don't want.
To disrupt that so.
As values come into place and we're seeing more opportunities and as pricing become more realistic then there'll be more opportunity for merit, but we're not we're on the field play.
That way, we're not just sitting up in the stands.
Yes, I think I'll add Steve that given our and Fred mentioned that our the strength of our balance sheet. Our leverage ratio is <unk> eight times on an adjusted basis, we did do two small investments.
You will see when the.
<unk> goes out one of them was were $1 4 million in fluid ex medical it's a company we had invested in previously.
We ended up buying additional stock in that company. We also did a second investment that was a $3 million of initial cash outlay to acquire restore <unk> systems. So we've done a couple of small things, but we're definitely looking at what other possibilities are out there.
Yeah.
Great and then just.
Secondly on the macro I.
I guess quick.
Two quick ones one.
<unk>.
Success in it.
You alluded to is pricing I was wondering if you could maybe put some more color around perhaps getting some price.
Offset inflationary headwinds.
And then secondly are you.
Seeing a backlog build it all out.
Hum.
Opportunity because of the supply chain, obviously, we know the impact on the expense side, but is it are you seeing any impact relative to supply constraints and making your ability to sell at all.
Listen one of the great blessings Merit has an unfortunate thing is that we're vertically integrated we've talked about it a lot.
And so although as we've said many times in the past, we're not immune to these pressures in the marketplace.
We're in a good position because of our extrusion are molding braiding and so on and so forth sensors of the things that we make ourselves. So that's part of I think the thing that helps us in terms of the supply chain Raw you wanted to comment look I think one of the inflationary items that maybe give you a little bit.
More detail on is the freight and logistics, we had anticipated moving more to ocean shipments versus are we haven't been able to do that quite frankly because of the demand of our products and we think it is important to meet our customer needs.
So we haven't made we haven't been able to shift things.
As fast as we had anticipated so from a.
Kind of a macro standpoint that is something that we can control I think we will get to where we need to be over time, but.
When you are living quarter to quarter, you can't just doesn't sometimes work out because your ship doesn't turn that yeah. So I think we're trying to meet customer demands and so haven't been able to shift as much to ocean is we wanted to.
And lastly, I'll, just say look we're really excited about our <unk> initiatives and the progress we've made Fred.
Fred mentioned it earlier about the team and everybody kind of.
Doing their part and one of those items is pricing and so I think where we are.
Excited about what we're doing there, but there's definitely more wood to chop and it'll be.
It doesn't come all in one quarter right. It takes time to get to where you where you need to be.
Okay got it thanks Paul.
Thanks, Dave.
Thank you. Our next question comes from the line of Jim Sidoti Sidoti <unk> Company Jim.
Jim Sidoti Your line is open good afternoon, thanks for taking the question.
So.
Yeah.
20000 foot story here it sounds.
Sounds like you are able to raise your topline guidance despite the stronger dollar.
So obviously you must be seeing.
Stronger.
Stronger demand or stronger growth in procedures was that primarily in the U S or is that worldwide.
Well I think I can speak to EMEA and I can speak to the U S. I think we're seeing more demand for the procedures I think those are progressing and as I've listened to other <unk>.
Players I think Thats in fact.
Whats going on.
Robert do you want to comment you have your hand up there.
I was just going to say.
That's true specifically on a constant currency, we're up $60 million at the midpoint. So that was a good pickup.
Jim that I think we're excited about the momentum in the business.
The U S constant currency growth is went from 3% to 5% versus the 1% to 4% in the prior guide that we had so again I think we're seeing the momentum in the business and tried to reflect that data and that was the biggest portion of our revenues, yes give us a big advantage there.
And I think you mentioned in your part of the script that our R&D expenses were down.
Year over year.
Is that just the timing of some of the east.
These trials.
Well, it's a little bit of a trial. It's also some of the hiring.
The current market. It just takes longer to hire people quite frankly, finding the right candidates.
So that's been part of the slower spend that was anticipated on top of people kind of imagining their expenses better just given the environment.
Alright that was it for me thank you.
Thanks, Jamie.
Thank you our next question.
Comes from the line of Mike Matson of Needham and company.
Mike Madsen your line is open.
I guess, let me see work.
Currency.
Didn't hear a lot of comments and maybe I missed it but about the <unk>.
Currency on your margins or bottom line is it is it effectively neutral due to hedges that you have either natural or otherwise.
Yes, we.
We're not going to quantify the impact to our operating expenses our gross margin.
So.
We do talk about revenue and I think we'll leave it at that.
It just gets pretty complicated as you can imagine.
Okay.
But I mean, youre, not really lowering your guidance or anything like that because of it.
Big enough headwind tier tier earnings right. So.
That's correct yes.
The only the only really the only impact Mike.
<unk> to our guidance was the what's the gross margin, which we took down.
Third 10 to 150 basis points, but that again.
The one item that they are the two items that really hit us there, where the raw materials in the freight and logistics raw materials.
It's a 50 basis point incremental to what we were expecting.
And it's something that's kind.
Kind of out of our control I think on the freight side of things.
60 to 80 basis points, we feel pretty good about that one because we tend to be able to control that.
But given the demand that we're seeing for our product.
We think it's an advantage to be able to deliver product in this environment right now and so we've opted to deliver product as opposed to change.
Changing the ratio of from air to Ocean.
Okay got it and then I wanted to ask a product question. Our pipeline question I guess about this generic geniculum artery embolization from the arthritis.
Can you maybe talk about the market opportunity there.
The timing of when you could launch that.
Indication I guess for industrial product.
So as we mentioned in our press release, we have had a kols meet.
Meeting here all week and we're talking about this.
This opportunity.
It's early Mike I'm, just going to be very honest with their studies and experience that has to be done, but it's with an existing product. That's the key to it. So we're working with our Kols and other groups in terms of <unk>.
Structures or things that they wanted to do in their facilities.
Whether being Canada or whatever as they go through there. So it's too early to comment on.
Exactly the opportunity in the filing we already have the product.
The evidence and the support has to come into place and then I think we can we've talked that's going to be a while it would be premature.
There are other people as you know working on this and talking about it.
So if they're throwing numbers around we're going to we're not going to do that at this point other than to say that we're actively working with.
People physicians.
Rheumatologist and others to really taken understand the opportunity here.
And we will in the future take a look at that marketplace and how many people have osteoarthritis, we'll do some of those things, but that's not for today. So it's too early.
But we're working on it because like.
<unk> our PAA. This is kind of that next horizon four for our <unk>, our micro catheters and our access products. So.
So thats the best way I can answer for now.
No I understand got it that's all I had thank you. Thank.
Thank you Sir.
Thank you. Our next question comes from the line.
William <unk> of Canaccord Genuity.
Sure.
Great. Thanks, Good evening and thanks for taking my question.
I just have one is.
Obviously interest rates are moving up and doing a little back of the napkin math.
You're probably looking at an extra half a million to $1 million a quarter.
Does that help color your decision on M&A and kind of.
Or.
Can you just accelerate the paydown of the debt kind of how are you thinking about that and offsetting that kind of increased cost less.
Less in interest cost and all of those issues and cost of capital all have to be calculated in the formula. When you look at stuff. So I mean that those are the realities and trying to handicap, where those rates are going to go. So that's part of it but in terms of I think on your numbers. Robert do you want to comment on that I was just going to say the same thing look if you'll find the right al.
Asset.
The cost of capital is going to be obviously factored into that.
Should be kind of taken care of from that perspective, but we did factor in.
Some rate increases in our in our debt calculation, we're obviously paying things down.
And so we'll continue to do so.
The extent, we generate free cash flow. So I mean, I think things are on pace for what we anticipated no changes there.
Thank you.
Thank you. Our next question comes from the line of Joseph Darling Piper Sandler Your line is open.
Hey, guys congrats on the solid quarter I'm on here for Jason.
Just digging a little deeper into the China point as you mentioned that the stock market you've got a read on but can you just describe a little more detail. What you are seeing on the ground in that market.
Our procedure volumes recovering as lockdowns are lifted and.
What are you seeing thus far on the tendering side, whether it be good or bad.
Yes, it's interesting that you asked the question.
Just this morning, I read where they were talking about they.
They were locking down Wuhan again, and another 11 million people.
Stay tuned, we'll see what happens Tonight and tomorrow. It changes every day I think all in all I would just say that everything is as it pertains to China is contemplated in our guidance to the best of our ability to do so so I'll answer the question that way because it is just there are a lot of factors.
And it changes daily but to the best of our ability.
On the ground.
What's going on here, it's in our guidance and baked in.
Yeah.
Okay, and then anything else.
Well you mean on China are.
Sure.
I think.
But you're still on there that can be dropped.
Yes.
<unk>.
Yes, Okay, I think we lost him.
It might come back here.
We'll take Mike, Yes lets go take Mike Alright, Our next question comes from.
Michael Kotowski your line is open.
I may have I may have missed this role I'm trying to understand this endoscopy guidance and I understand you guys were sort of looking for some impact in Q2. It didn't come now it appears like yours.
Maybe it can come in Q3, but maybe it won't and I guess my question is is it absolutely sort of a downdraft inevitable. It's just timing or is it possible you avoid this issue altogether. So so so it did happen Mike I think what what mast. It was that we had increased demand on the balloons on the elation.
Balloons at endoscopy, so so we're neck deep in it we're dealing with it like I said, we're on track to.
To do better than that low end.
But it is a very sensitive matter, we've got to go through qualifications and Theres a lot of the macro environment just right now.
We're trying to cover for the macro environment quite frankly, but my guess is it's not a mystery.
We don't have an idea it is actively being worked.
And Walt and it will come into play in.
In the end of this quarter. The question is what happens in this next quarter. The third does that roll into the early fourth or whatever but in the meantime, as Raul pointed out the elation balloons were sold at record levels. Yeah. Okay. So did you take the full hit that you expect it to take.
In terms of that issue in the quarter and not the full not the full hit that we anticipated, but but for the most part I think we probably ended up at 75% 70% of the hit I'd have to pull the numbers, Mike but yeah.
Yes, I won't say that vendor, which is a U S company and someone we've worked with in the past.
One of the best vendors I mean, these are geyser were solid and we are optimistic yes, we're feeling optimistic but nevertheless, I think we've tried to cover for now we don't want to give anybody a surprise.
Even though things are on track so okay.
Okay.
I guess, just one mostly for Fred Fred you work the phones, all the time talking to docs talking to your sales guys talking to hospitals I mean any concerns as you sort of look out at sort of this <unk>.
New variant that seems to be contagious, but doesn't seem to be nearly as deadly I mean do you have any concerns around either hospital staffing procedure volumes.
Anything you've picked up in terms of your conversations.
Yes, I think everybody is sick and tired of all of it I think the variance out there it's not going away.
But there is.
Theres a different attitude at the hospital level I mean as soon as I get done with this and I know we have some calls I'm heading over to the hospital to do exactly what you just said, but I can meet with I mean, I recently I met with four doctors in a day.
In southern California, and northern so the ability for us to meet their attitudes they're busy.
They are glad to be back.
At full steam I mean, it's quite a it's almost like it didn't happen, but it's still there it's kind of interesting. So like you had a broken arm, but it's fixed.
Mike So I think the general attitude out there we've had enough of this we've done the things we needed to do and let's get on with it.
The U S business continues to do and it's doing better so we're getting better we're not having a problem getting into hospitals.
It's not 25% like it was at one time.
We can get it any place we want to.
Let me sneak one last one there's been a lot of talk about.
Pricing power not as much about manufacturing efficiencies. Obviously, you guys did some heavy lifting in that areas. The last couple of years and heading into Covid and just early in the Covid as you look out over this business. The next few years. I mean are there are there opportunities sort of on the manufacturing side, where were you guys can just get a little bit.
Better and be a little bit more streamline to work or do you think.
Where do you think.
Sort of captured most of what you can possibly capture their lesson.
<unk> for growth.
Was a plan that was three years.
Some of the benefits are in place and there's more to come but it's a three year program. We're halfway through it so I'll answer it by saying there is the other half to come and that's the best way to do it but I.
I mean, if they're one message I could get across to everybody on this call today is we're committed to it.
Not something that just passing or we forgot about it.
It's what we live it's what we're compensated on and Thats. What every employee in this company is incentive by in their bonus program. So it's a big deal and it's the commitment and enthusiasm around it because.
They got paid for their effort, we all did and that's a nice feeling so foundations for growth.
The key for US, Yes, I mean, Mike I think just to repeat what Fred said foundations for growth contemplates not only product line consolidations, but site consolidations and all sorts of efficiencies from a manufacturing standpoint on top of pricing. So its SKU rationalization multiple levers that we're attacking.
To try and streamline and make Cogs better quite frankly.
Got it. Thank you so much nice job.
Nice to hear from you. Thank you.
And if there are no further questions in queue are there any remarks from management.
Well, let's just close by thanking everybody. It's a busy day, we've taken the full hour.
Again, please understand our commitment.
Pleased with the quarter, we hope you are well.
Look forward. If you have any comments, we'll look forward, we're going to do some clarifications in our one on ones now. So thank you again for attending and we look forward to reporting again in the very near future best wishes from Salt Lake City and good night.
That does conclude our conference call for today. Thank you for your participation.
The conference will begin shortly.
As Johan during Q&A, you can dial star one one.
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Yeah.
Okay.
Yes.
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