Q3 2022 Merit Medical Systems Inc Earnings Call
Good day, and thank you for standing by walking to the Merit Medical systems third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question.
During the session you will need to press star one one on your telephone please be advised that today's conference is being recorded.
The conference over to your Speaker today, Fred Land Propolis. Please go ahead.
Thank you and welcome everyone to Merit medical systems third quarter of fiscal year 2022 earnings Conference call.
I am joined on the call today by Raul Parra, our Chief Financial Officer and Treasurer.
And Brian Lloyd, our Chief legal officer, and corporate Secretary.
Thank you Fred.
I would like to remind everyone that this presentation contains forward looking statements that receive safe Harbor protection under federal Securities laws.
We believe these forward looking statements are based upon reasonable assumptions they are subject to 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 October 26 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 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 those forward looking statements.
Our financial statements are prepared in accordance with accounting principles, which are generally accepted in the United States power.
However, we believe certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of our ongoing operations and can be useful for period over period comparisons of such operations. This.
This presentation also contains certain non-GAAP financial measures.
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 consider non-GAAP financial measures. In addition to not as a substitute for financial reporting metric is prepared in accordance with GAAP.
Please note that these calculations may not be comparable with similarly titled measures of other companies.
Both today's press release and our presentation are available on the investors page of our 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 be covering during our prepared remarks.
I will start with an overview of our better than expected revenue results for the third quarter.
After my opening remarks, Rob 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.
Beginning with a review of our third quarter revenue performance.
We reported total GAAP revenue of $287 million in the third quarter up seven 5% year over year.
Our total GAAP revenue growth was driven by eight 6% growth in U S sales and a six 1% growth in international sales.
Our total revenue increased 10, 5% year over year in the third 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 second quarter earnings calls.
Specifically.
We shared our expectation for constant currency revenue growth in the range of 4% to 6% year over year and quarter three.
The better than expected constant currency revenue results were driven by solid execution from our team <unk>.
Stronger than anticipated demand in the U S.
And more favorable than anticipated international sales trends, particularly in EMEA and the APAC regions.
Now let me provide you with a more detailed review of our revenue results in the third quarter beginning.
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.
We have included reconciliations from our GAAP reported results to the related non-GAAP item in our press release and presentation are available on our website.
Third quarter total revenue growth was driven by 10% growth in our cardiovascular segment and 14% growth in our endoscopy segment.
Sales of our peripheral intervention products increased 12%, representing the largest driver of total cardiovascular segment growth again in this quarter.
Within the Pi category sales of our embolic and access products increased 18% and 24% respectively.
And together represented nearly half of total pie growth.
And sales of our scout radar localization and geography, and biopsy products each increase in the low double digits year over year and together represented roughly one third of our total pie growth.
Within our cardiac intervention business sales increased 12% in quarter three representing the second largest contributor to total cardiovascular segment growth year over year.
Cardiac intervention growth was primarily driven by 26% growth in sales of intervention products and 25% growth in the sales of our <unk> CRM products.
Intervention products are the largest portion of RCI product category, which makes the 26% growth in quarter three even more impressive.
Intervention products growth was driven by a notable increase in the sales of our map angioplasty packs.
And mid teens growth in sales of our basic inflation devices.
We also saw strong demand for our Phd hemostatic valve products in quarter three.
The 25% growth in sales of our EP CRM products was driven by strong demand for our snap sheets, and our hearts and cheese and Transcept of needles.
Sales of our OEM products increased 23% and outperformed our expectations more than anywhere else in the business in quarter three.
Some of this is a function of the challenge in predicting this type of business with quarterly precision.
But we believe that third quarter revenue performance reflects continued improving demand from larger customers in multiple categories, including kids cardiac ask SaaS coatings and fluid management.
While OEM growth was certainly a positive surprise.
Of our Cps products declined 3% modestly underperforming relative to the flattish growth assumed in our guidance finally sales in our endoscopy segment increased 14% in quarter three at the high end of the growth range, we provided on our quarter two call.
Recall that our quarter three guidance had assumed a notably wider range of sales in our endoscopy segment, given the potential business disruption issues with a third party contract manufacturer.
As indicated on our quarter two call. We viewed this disruption as transitory and indeed it was we managed through the transition and delivered sales results at the high end of the growth range.
Of note endoscopy growth was driven by strong demand for both our elation esophageal balloon products and our <unk> fully covered esophageal stents.
Now turning to a brief summary of our sales performance on a geographic basis.
Our third quarter sales in the U S increased 7% year over year.
Sales to U S customers came in above the high end of our growth expectations and represented 36% of our total company constant currency growth this quarter.
OEM standout performance represented the largest contributor to the better than expected U S growth this quarter.
Ci and endoscopy revenue all came in at the high end of our expectations, reflecting continued strong execution and overall improving trends in the U S.
Our third quarter International sales increased 16% year over year, which is strong performance in light of the challenging global macro environment in quarter three.
All three of our major regions posted growth in the mid to high teens in the third quarter, specifically sales in APAC and.
EMEA and the rest of the world regions increased 14, 17, and 19% respectively year over year.
While all three regions exceeded the high end of our guidance expectations, EMEA and APAC drove more than 80% of the upside.
EMEA growth was driven by demand from customers in eastern Europe , the middle East and Western Europe , specifically in the UK, France, Germany and Italy.
APAC growth was driven primarily by mid teens growth in China, where we are seeing strong demand for our <unk> and Ci.
<unk>, which is more than offsetting the continued headwinds related to volume based purchasing.
And lastly in our rest of World region with delivered 19% growth year over year, which was also ahead of expectations driven by strong demand from customers in Canada 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, particularly in the international markets.
Now before I turn the call over to Raul 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 three.
Our non-GAAP gross profit non-GAAP operating income and non-GAAP net income increased 6%, 17% and 23% year over year, respectively in quarter three.
Our non-GAAP operating margin increased 130 basis points year over year to 16, 1% and we generated $20 million of free cash flow in the quarter.
We believe our financial results over the first nine months of 2022 represent clear evidence that we're executing towards our goal of enhancing merits 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.
Which by way of reminder, call for 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 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.
In addition to the four new products updates discussion a quarter two call. We highlighted our continued progress in these areas with four notable press releases in the third quarter.
In July we announced the launch of a new version of our elation pulmonary balloons dilator, one that happens to be the smallest in shortage configuration offered in a range of multi stage pulmonary balloons configurations.
<unk> balloon size fits a critical need in the pulmonary care space historically physicians have relied on single stage cardiovascular balloons that were often too large and too long for use in smaller Airways.
This new configuration allows physicians to accurately match ballooned diameter and linked to specific small airways in the lungs, bringing treatment options to more patients.
In August we announced the launch of our safeguard focus cool compression device.
This new compression device builds upon the original safeguard focus revolutionary idea that provides compression over post surgical sites, which can assist hemostasis in patients with pacemaker and implant implantable cardio.
Defibrillator pockets.
The safeguard focused cool offers the same high performance, but with an easy to prepare cooling solution that does not require refrigeration, making it ideal for the lab environment.
In September we announced the launch of our Prelude Roadster guide sheath.
<unk> is the newest addition to marriage vascular peripheral access portfolio.
Which includes introducing other products, including access kit vessel dilator in accessories.
The roadster is designed for deliverability visibility and resilience and torturous peripheral vascular anatomies.
Indicated for use in a variety of procedures.
Believe this device will also help deliver devices used to diagnose and treat the estimated $6 5 million people age 40 and older in the U S suffering from peripheral artery disease or Phd.
<unk> is a serious condition, where there is a narrowing or blockage of the vessels, mainly in the legs and lower extremities that prevents blood flow to these areas.
Is associated with a two fold increased prevalence of heart failure as well as the risk of limb amputation.
Diagnose and treat Phd procedures are performed to detect and opened blocked vessel.
Marriage payload can help make these procedures available to more patients.
And finally in.
In late September we announced the launch of our Timna elite soft tissue biopsy system. The Timna elite is the latest addition to merits comprehensive portfolio a biopsy devices and is a single use device indicated for use in various soft tissue locations, such as liver lung lymph nodes kidney and other <unk>.
Soft tissue suspects lesions.
We believe that Timna elite represents another example of marriage ongoing commitment to the advancement of biopsy procedures.
With its broad portfolio of products aimed at improving diagnostic accuracy impacts highlighted key labs across the nation.
And I'm 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, let me turn the call over to Rob who will take you through a detailed review of our third quarter financial results and our 2022 financial guidance, which we updated in today's press release.
Mr Parra.
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 third 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 presentation available on our website.
Gross profit increased approximately 6% year over year in the third quarter, our gross margin for the third quarter was 48, 4% compared to 49, 1% in the prior year period. The 66 basis point decrease in gross margins year over year was primarily due to unfavorable manufacturing variances specifically purchase.
Price variances as expected, we experienced higher freight cost compared to the prior year period, we continue to prioritize meeting customer demand and managing back orders, which has led to a higher mix of air shipments and delayed the transition back to a more cost effective ocean alternative.
As expected our third quarter results reflect the inflationary headwinds we are seeing in freight logistics labor and increasingly in raw materials.
Similar to what we experienced in Q2, while our guidance assumed higher raw material costs and freight logistics expense year over year, our third quarter results included incremental headwinds from higher than expected raw materials and freight and logistics expenses.
Each of which represented headwinds to our non-GAAP gross margins of roughly 30 basis points on a year over year basis.
Third quarter operating expenses increased 1% compared to the third quarter of 2021, the year over year increase in operating expense was driven by a 2% increase in SG&A expense and a 3% decrease in R&D expense compared to the prior year period, our operating expense performance in Q3 was better than expected and reflects continued.
Prudent expense management.
Total operating income in the third quarter increased $6 7 million or 17% year over year to $46 2 million.
Our operating margin for Q3 was 16, 1% compared to 14, 8% in the prior year period the year over year change in operating margin was driven by 128 basis point reduction in our non-GAAP operating expense margin compared to the prior year period, offset partially by the 66 space.
This point decrease in our non-GAAP gross margin.
Third quarter other expense net was 800000 compared to $1 6 million last year. The change in other expense net was primarily related to decreased expense from realized and unrealized foreign currency losses compared to the prior year period.
Partially offset by increased interest expense due to a higher effective interest rates year over year.
Third quarter net income was $37 million or <unk> 64 per share compared to $30 2 million or <unk> 52 per share in the prior year period.
We are very pleased with our profitability performance in the third quarter, where we delivered year over year growth in both non-GAAP net income and diluted earnings per share of <unk>, 23% exceeding the high end of our guidance range, which called for low single digit net income.
And EPS.
Turning to a brief review of our financial results over the first nine months of 2022 total revenue for the nine months ended September 30 was $856 6 million up $61 $3 million year over year or 10% growth on a constant currency basis.
Gross profit increased 7% year over year to approximately $416 million, representing 48, 5% of sales compared to 49% of sales in the prior year period, a 50 basis point decrease year over year.
Compared to the first.
You can bet that we have experienced incremental headwinds to our gross margin of more than 250 basis points related to inflationary pressures in raw materials freight and logistics. The early benefits. We were seeing as a result of the team's hard work and dedication to our foundation for growth program are the primary reason, we haven't managed to offset the majority of these infill.
<unk> headwinds to our gross margins this year.
Operating profit increased 15% year over year to $142 8 million, representing 16, 7% of sales compared to 15, 6% of sales in the prior year period, a 110 basis point increase year over year, we are driving strong operational leverage through prudent expense management, which is resulting in.
Operating profit growing faster than revenue growth over the.
First nine months of 2022.
Net income increased 15% year over year to $109 7 million or $1 91 per share compared to $95 4 million or $1 67 per share in the prior year period.
Turning to a review of our balance sheet and financial condition as of September 32022, we had cash and cash equivalents of $51 5 million long term debt obligations of approximately $217 million and available borrowing capacity of approximately 509 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 September 30 was <unk> seven times on an adjusted basis.
With respect to our cash flow generation in the third quarter, our strong profitability performance in the third quarter of 2022, combined with strategic working capital investments, resulting in strong free cash flow generation of $20 million in the third quarter.
As expected our use of free cash for working capital increased compared to the prior year period in recent quarters, we have discussed our strategy to proactively invest in our inventory balances to build the requisite safety stock and ensure high customer service levels.
We generated $54 million of free cash flow during the nine months ended September 32022, we continue to expect strong free cash flow generation this year and remain on track to deliver our goals.
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 programs that are expected to drive our capex investments in the range of $55 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.
For the 12 months ended December 31, 2022, we now expect GAAP net revenue growth of approximately six 5% to seven 1% 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 $23 7 million, representing a headwind of approximately 220 basis points to our forecasted GAAP growth rate this year.
This FX impact reflects an incremental headwind of $5 million as compared to our prior 2022 guidance note roughly $2 million of this incremental FX headwind was realized in Q3 with a balance of the increase is expected to impact our GAAP revenue results in Q4.
The GAAP net revenue guidance range now assumes net revenue growth of approximately six 6% to seven 1% in our cardiovascular segment compared to 5% to 6% and our prior guidance range and net revenue growth of approximately three 8%.
To five 4% in our endoscopy segment compared to our prior guidance.
Which assumed a range of a 5% decline to an increase of 8% year over year.
With respect to profitability guidance for 2022, we now expect GAAP net income in the range of approximately $64 8 million to $68 3 million or $1 13 to $1 19 per diluted share. This compares to our prior guidance range, which assumes GAAP net income in the range of $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 $146 9 million to $150 4 million or $2 55 to $2 61.
Per diluted share.
This compares to our prior guidance range, which assumed a GAAP net income.
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 48, five to 48, 8% compared to a range of 49% to 49.15% previously.
While we are pleased with our continued progress we are seeing it as a result of our <unk> initiatives in the area of pricing, we continue to see significant increases in the areas of raw materials and freight logistics.
The 40% to 50 basis point revision to our non-GAAP gross margin expectations. This reflects the impact of rising raw material costs and freight and logistics expenses over the second half of 2022, which are incremental to the increase as contemplated in our prior guidance assumptions.
Roughly 20 basis points of their change in our gross margin expectations was it related to Q3 with the balance expected to impact our Q4 financial results finally, while impact of higher raw material cost is largely outside of our control the impact on our gross margins in the second half of 2022 comes from a higher mix of.
Air freight versus shipping freight, which 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 now expect non-GAAP operating margins in the range of approximately 16, 8% to 17, 1%.
Compared to a range of 16, 6%.
To 17, 1% previously.
GAAP and non-GAAP other expenses of approximately $6 1 million and $4 2 million, respectively, compared to $6 5 million and $4 8 million previously a full year 2022 tax rate of approximately 22% versus 24% previously and diluted shares outstanding of approximately 57.
$6 million.
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 fourth quarter of 2022.
Specifically, we expect our total revenue to increase in the range of approximately three.
3% to 5% increase year over year on a GAAP basis, and up approximately 6% to 8% year over year on a constant currency basis, the midpoint of our fourth quarter constant currency sales growth expectations assumes approximately 5% growth year over year in the U S and approximately 10% growth year over year and O U S markets.
With respect to our profitability expectations for the fourth quarter, we expect to see non-GAAP gross margins in the range of flat to up 100 basis points on a sequential basis.
We also expect to see non-GAAP operating margins increase in the range of 120 basis points to 240 basis points on a sequential basis.
These margin expectations combined with a notable increase in our non-GAAP tax rate compared to last year, specifically, 23% versus 13% in Q4 of 21 are expected to drive a change in non-GAAP net income and EPS in the range of down high single digits year over year on a low end to flat year over year on the high end of the room.
<unk>.
With that I'll turn the call back to Fred.
Well, thank you Rocco.
Lot of numbers and a lot of work done there. So I appreciate it very much in closing our third quarter growth and profitably performance exceeded our expectations.
Which we believe is a direct result of our team's continued strong execution and relentless focus on our strategic initiatives.
We now know how hard they are working and how they are delivering these strong results. Despite the continued challenging operating environment around the world, we'd like to thank all of our team members around the world.
Our performance over the first nine months of 2022 possible.
Importantly, we are not resting on our prior success, we remain committed to continued progress for.
We're confident in our 2022 guidance, which now calls for total revenue growth on a constant currency basis of 9% year over year.
Also continue to expect to report improving non-GAAP operating margins and strong free cash flow in 2022 now.
Now that wraps up our prepared remarks, and we'll turn the time back over now to our administrator for questions and then following that Raul and I will be available for the next couple of hours.
To visit and get into more detail if necessary.
We will now turn it over to the administrator. Thank you very much.
And as a reminder to ask a question you will need to press star one one on your telephone please stand by we compile.
The Q&A roster.
Okay.
Our first question comes from the line of Jayson Bedford from Raymond James Your line is open.
Good afternoon, and congratulations on the quarter you guys are doing a nice job.
So I guess just just a.
A few for me.
First our fourth quarter guidance.
Specifically on the implied organic growth there I guess the question is and I can appreciate it.
Dynamic market out there, but was there anything one time ish in the third quarter result that.
Kind of propped up the organic growth in the quarter.
Jason the answer is now.
Okay.
Maybe for roll or some.
Some of the gross margin dynamics.
Stress kind of the ocean versus air in terms of when does that dynamic clip.
I'm guessing sometime in 'twenty, three but any kind of framing on that would be great.
Yes, we wont get ahead of ourselves to talk about 2023, Jason but I think what we're looking for is reliability I think things are definitely opening up and there is more capacity.
Just not reliable enough for our for our customers' needs quite frankly, and so to the extent we continue to see the demand that we're seeing.
We'll continue to kind of use the current.
Sure.
Versus ocean mix that we have so I guess, it's dependent a little bit on on that reliability of the carriers and the demand from our customers and I would I would just say that's correct and I think you saw that international result, and that was a result of making decisions to meet customer needs. It's as simple as that.
Okay, and maybe just a last one from any product related can you comment on Rhapsody in Europe , and then just a reminder, as to where we stand in terms of U S timing for that product. Thanks.
Sure Rhapsody.
As in terms of timing, we're about halfway through pretty close to halfway through the trial.
Again, there was a <unk>.
Number of we have the whole Covid thing and then.
But it has been accelerating in terms of that enrollment so I'm going to still say its two two and a half years out.
For that approval, we still continue to be very.
I'm pleased and we've also seen a.
A lot of interest there continue to build the business over in Europe , as well as Brazil.
Thank you.
Thank you one moment for our next question.
Our next question comes from the line of Larry <unk> from Wells Fargo. Your line is open.
Good afternoon, Thanks for taking the question and.
I'll Echo my congratulations on a really nice quarter here bread and rolls.
Thank you very much.
Hey, Fred.
Wanted to start maybe on 2022 year to date Opex is relatively flat R&D spending was actually down a little bit. So how are you holding opex flat.
And in an inflationary environment.
Yes, it's a good question Larry.
Raul and I were talking about this and I think he has a better explanation that I would have I'll, let him pick this up and then I'll come back and comment if I need to add anything for that role.
I think we.
A lot of the right investments this year Larry.
Certain things like trade shows and travel some of that some of some of the expenses up and you'll you'll see it in the SG&A line I think on the R&D line quite frankly, there is.
Theres cost initiatives and things that are ongoing.
From that standpoint, including R&D and clinical I think on the clinical side things have been a little bit slower than we anticipated on the enrollment so that that helps.
Also just as we shift and move on priorities within R&D that tends to push expenses out one way or the other so again I think it's just prudent expense management on our side, making sure that we understand that we're still in a choppy environment on the way to kind of normalized recovery.
So just just being patient with our expenditures and then some of it is just kind of outside of our scope.
Our production and to adapt to the conditions and that continues to be a very big deal for us Merit.
Just doesn't really well I mean, we made those investments for a long time and over the years, but it has made a difference I think lastly, too I just want to make sure that I pointed out our executive team and our employees were all really committed to it.
<unk>.
The 18% non-GAAP operating margin as we head into 2023, so I think there's a broad commitment from the executive team and the employees on making sure that we're <unk>.
On our expenses.
That's helpful.
If I think about 2023.
You guys could.
You guys could have flat sales essentially instill.
Meet your foundations for growth.
5% CAGR.
As you have done so well.
Since since you gave those goals in 2020.
How do you want people to think about the momentum you have here.
The guidance implies about 9% organic growth in 2022 deal the momentum and how do you want people to just think about.
The growth algorithm.
For merit going forward, thanks for taking the question.
Welcome. Thanks, Larry Larry we want them to think about February of 2023, when we will go through our entire program. That's what we want the people we want to finish the year, we want to stick to the goals that we've set and then in 2023 around February ish, we will go through and we will lay out our plan from there.
Alright fair enough, thanks, guys alright.
Alright, thank you.
Thank you one moment for our next question.
Our next question comes from the line.
Mike Matson from Needham Your line is open.
Yes, thanks for taking my questions.
I wanted to ask one on currency.
I understand the you're pretty clear what the impact on the top line, but I was just wondering if you maybe talk about the impact on the.
The expense side or P&L.
Has it had a material impact on your earnings how well hedged are you in as we head into 2023.
Is there a risk of any surprises there in terms of hedges rolling off or anything like that.
Yes, so we obviously have a hedging program in place that.
Buffer some of the impact that we're seeing we also have natural hedges in place as you know we have operations in Europe .
And then also some level of expenses in the APAC region that help also with our hedging. So I'd say generally we don't disclose the impact to the rest of the P&L I would say that we might have some geography mixes within gross margin and opex because of the FX, but our hedging program is really designed to minimize the.
The impact on EPS.
And so I think thats, why youre seeing kind of a minimal impact on the earnings side.
Okay, and just as we head into 2023 I mean, there is no reason to expect that to change at all that you should be able to continue to offset most of the impact.
So yes the.
Etfs.
I think we're going to be like most people right from a from an FX standpoint, I think most people as things lapse youre, probably looking at the.
First half of the year next year.
People are going to be challenged with what's FX, but again for us.
I think it's kind of business as usual and I think Brian to your point, we have what we think is a successful program and we'll stick with that program.
Okay got it and then just one on China. So.
I think you said you saw mid teens growth there.
But you did call out some impact on some of the Pvp program. So I don't know if youre willing to quantify what like how much better your growth would've been without DVT and then just whats the longer term outlook. There in terms of Edp do you expect.
<unk> headwinds from that over the next few years as they expand into more product categories.
Yes, Mike, let some volume based purchasing tenders are happening, but they are contemplating in our guidance. So we've taken that we don't talk specifically about this that or the other but we have contemplated those and those are part of our guidance that we've provided and will be part of our discussion in February .
Okay got it thank you.
You bet. Thank you Sir.
Thank you one moment for our next question.
Our next question comes from the line of William <unk> from Canaccord. Your line is open.
Great. Thanks, good evening.
A question on guidance for this year.
If im doing my math right and please correct me if I'm not you are basically saying revenues going to be flat sequentially in Q4 in EPS there'll be about flat sequentially, when we get to the low end of guidance.
What are you contemplating in that low end of guidance.
Yes.
Fourth quarter is typically a much bigger quarter for everything so I'm just trying to understand.
What gets us to the low end versus the high end.
Sure for sure look I think first of all we had a great Q3, I think our Q4 growth really reflects kind of the continued improvement in the operating environment.
As we've talked about over the last year and a half so again it kind of a recovery.
Choppy recovery to normal as kind of how we see things. So we expect Q4 total revenue growth of approximately 6% to 8% year.
Year over year on a constant currency basis.
The midpoint of our fourth quarter constant currency sales growth expectations assumes.
Roughly approximately 5% constant currency growth year over year in the U S markets and.
And approximately 10% constant currency growth year over year, and our O U S markets. So a grant.
Those are pretty pretty solid growth numbers when you look at it on a year over year basis.
Okay and then.
Sure.
How.
How does a S X the hedging impact your gross margins.
Obviously, you are taking a hit to revenue.
Do you how does help us understand because the question really lies is okay. So.
You have in your gross margins have actually come down a little it doesn't seem like you would get the benefit from it.
Pending on where you put your FX into the P&L and I'm just trying to trying to understand okay is <unk>.
Rates kind of the dollar peak strengthening in search weakening again, how does that flow through into next year in terms of gross margin as we're looking at it.
Yes, again, I guess, we're not going to get into the details of that as you know Bill I mean, these things are pretty complex, especially companies from company to company I would just generally say that.
We have operations in Ireland, so as the euro drops obviously that helps us.
But also as revenue drops that hurts us so theres a lot of offsets and hedging that goes in place along with intercompany balances I'd also kind of feed into that.
From a hedging standpoint so.
I'd say, it's pretty complicated stuff, but which is why we don't get into all the details of what it does to the rest of the P&L I'll.
I will just end with saying that that our hedging program.
Is made to really minimize the impact on EPS right. So that's the ultimate.
Test for US is how is our EPS moving one way or the other and so far I think it has done a pretty good job of keeping us within our original guidance.
Last question, if I may just on China, I mean, you guys have a significant exposure to China.
I think it's 13% of your sales or something like that it's a pretty big piece of your business help us understand.
Obviously in this day and age Theres, just a lot more protection isn't coming in and how are you protected from a topline and bottomline perspective in terms of that business.
Well I mean look I think if you look at our growth for one.
We had outstanding growth in almost every region.
So I would say that we're not overly dependent on China, I mean, our our APAC growth was pretty stellar.
So I would say that generally China is a big part of our business, but and we continue to invest there we continue to register products.
But I think theres other areas that we're investing also that can help minimize the impact from that standpoint.
Great. Thanks for taking my questions.
Thanks Bill.
One moment for our next question.
Our next question a question will come from the line of Jason Bednar from Piper Sandler Your line is open.
Hey, guys. Congrats on the solid quarter, you got to go down here on for Jason.
So a bigger picture question on pricing dynamics it sounds like some of the initiatives from the company are having some real positive effects and a few under 20 questions here, but could you give us a sense as to where you're having the most success taking price in this environment on a product level or country level basis, and then how sticky do you think this price increase trend can be as we look forward to 'twenty three.
Yes.
Let me just say that pricing is part of one of the pillars of our foundation for growth and I think that is.
Generally the area.
Not going to address specifically, but it is one of those issues that we identified a long time ago.
And it is helping.
A lot so I'll just leave it at that and it helps to offset of course, the inflationary pressures that as part of the reason we delivered.
Actual results in the third quarter. So it's an important part of our overall program and again, we'll talk about maybe these factors sometime in February .
Yes.
Great. Thanks, So one more from us.
I have in my notes that you were executing in some product line transfers from our Texas facility down to Mexico, and we're wondering if you could update us here on the progress you've made with that initiatives are complete and what's the right way to think about the cost savings from this effort.
Yes, im going to let Rob will pick that one up yes, it's obviously one of our foundations for growth targets.
We don't give detailed kind of.
Status of where things stand I would say it's in progress. It is a multiyear effort as you can imagine moving that many product lines that are registered all over the world just takes time and which is why we don't call out the specific details, but I would say.
The work is ongoing.
And Theres still wood to chop there.
And part of our another pillar in our foundation for growth.
These are the things that we identified.
We talked about when we came out with our program in terms of footprint and consolidations or it's an important part of our overall program of improving the operations of the company.
Thanks really appreciate it guys.
You bet. Thank you.
Thank you for a moment for our next question.
Our next question comes from the line of Jim Sidoti.
Your line is open.
Yes.
Hi, good afternoon, thanks for taking the questions.
Youre welcome Jim.
So you increased your revenue guidance despite.
The increase in the currency headwinds so far.
Are you doing that because youre seeing share gains are you.
Getting better traction with the new products or the price increase is starting to take effect.
Yes, yes, and yes.
Yes, it was a good answer.
I don't want to be a wise guy, but I think the performance is always as you know Jim a function of a lot of factors.
I'll take a minute to.
Maybe think our sales force for the efforts and the execution on their part not just one region it's across multiple regions.
And then also our operations group for being able to deliver the product.
I think it's a challenging environment right now.
Procuring raw materials.
And getting people to show up to work they are doing a magnificent job not only on execution on the sales side, but then being able to also deliver the product so.
We're pretty excited about the efforts on their part and wanted to just income I think publicly.
Well, then I agree with.
It sounds like the supply chain issues with the Endovascular business are behind you at this point.
Do you see any of the other supply chain issues, starting to improve or do you think theres still going to be a factor going into next year.
Yeah.
Jim Thats a great question, we continue to see kind of modest disruption right I think.
It is hard to predict.
That's what I would say I think things are generally getting better, but we have a hard time predicting whether things.
Whether things are going to be stable or not and it's just one offs. That's the problem that.
That we see right. It's it's.
Little plastic part that you wouldn't have thought of.
It's random things and its still difficult, but again I think we're doing a pretty good job. Obviously, you can see the sales numbers.
We were executing at a very high level and thats not possible without our operations group delivering the products. So.
I think it's going to I don't know how long it will stick around but what we want to be able to see before we are comfortable with it.
Just.
Just getting a little <unk>.
Casting those raw material purchases, a little bit better and not getting surprises.
<unk> is what we're looking for this year.
Yeah. Good luck.
It seems that they're out there, yes, yes, yes.
I'd say generally it's better, but we're still getting surprised so there you go.
Yes.
And you highlighted a few of the new products that benefited during the quarter and then you mentioned that youre about 50% enrolled.
Enrolled on Rhapsody.
When Rhapsody gets approved do you think that'll be.
A contributor on the same order of magnitude as the new products you have now or do you think that'll be something that'll be.
A much larger contributor.
Well I'm not going to go into that number Jim in terms of matching it up on something that we have a belief that we'll we'll wait to see how this develops and again it'll be maybe part of our discussion down the road, but I think what is really important is that merits ability to work.
Through the supply chain meet the demands of customers and continue our the same thing that merit has been known for for so long and Thats coming out with a new products whether it be.
Breakthrough designations or the new Skype <unk> delivery system that many reflect the resolve pneumothorax Trey all of those things all add up and I think a part of merits heritage.
Alright, and then the last one for me if we do hit a risk.
If it is a recessionary environment next year.
Are there any product lines that you're concerned about in particular or do you think youll be able to plow through that.
No.
Good question, Jim and it's one that I'm happy to answer and that is.
Generally speaking over the years, our business does not suffer from as you might have other consumer types and other product lines and businesses people still get sick people still need to be treated.
And so.
Recessions.
We are not a big factor at Merit I mean, it's just as simple as that I think history would go back and look at it Youll find that merit has done quite well during these.
Economic pullbacks.
Alright.
That's it for me. Thank you again for taking the questions Hi, Jim Good to hear your voice. Thank you.
One moment for our next question.
Our next question comes from the line of Michael Partis, Keith from Barrington Research. Your line is open.
Hey, guys, it's Mike.
Okay.
Yes Fred.
No.
First of all are impressive.
Impressive Q3, when you sort of.
Think about all the macro issues that are out there, whether it's labor retention inflation shipping challenges currency headwinds.
As the previous question a possible recession.
Flu COVID-19, possibly coming back heavy in the winter I mean.
What are the two or three things if you could narrow them down to two or three things that really are sort of like.
This concerns me or this is going to be a challenge and we're really going to have to be.
Bringing our a game to this particular area of this particular headwind how do you how do you sort of I can't remember a time when theres been more to think about on a macro level than than right now.
I think.
When you were talking about roles at more I mean, thats another factor, what's that going to do and what goes on all of these places.
I think maybe the better way to answer the best way to answer that question is if we look over the 35 year of years of marriage history.
Whether it be financial meltdowns, whether it be threats here and there whether it be wars, whether it be terrorism I mean, when you really kind of look at all of this.
<unk>.
Covid.
Can't forget all of those are the things that happened what it did to slow down.
911.
War in Iraq.
War in Afghanistan, I mean, all of these things we've been hit by all of these things over the year. So I guess to answer the best way to answer. Your question is the ones that we've already been hit with we know how to deal with those generate it's always the one that you don't see coming but even with that.
As Covid came through merit adapted our workforce adapted our sales force adapted to meet customer needs. We found products that we can build like the swaps that were temporary but it helps the business to keep 200 people employed.
Helped people we help the nation so.
I think our success of our business and I'm going to speak military for 30 seconds, you adapt to the conditions.
That's the key to it and it's one American strong suits. It always has been.
Taken on whatever it is and a lot of it too we talk a lot about all the issues that are out there Mike I think.
You can lose focus very quick if you just focus on those on those issues right there, but the reality is a lot of that is outside of our control and so really being focused on what we can control and execute on is what we've been doing really the last few years and I think it has helped US tremendously obviously and I think that's a terrific answer.
But we'll work on the things that we can and will adapt to the things that we can't exactly yeah fair enough.
Our pivot off that question.
Suspect that some other companies maybe haven't managed.
Through all of this quite as cleanly as you guys have and I'm not minimizing I know, it's been a herculean effort on your part but.
There are probably some other companies out there that.
Maybe are looking to divest product lines or that sort of thing and really what I'm getting around to us.
You're generating a lot of cash balance sheets.
<unk> de Levered in great shape, I mean, I would assume valuations for assets are coming down as far as the type of assets you guys look at I mean, what.
What are you seeing and what are your thoughts.
Well I think Youre right I think those things are out there, but I want to make sure that I emphasize again that merits goal is to finish that third year foundations for growth, while keeping our eyes open we understand that we do and are in a position to look at things so, but they have to fit and we're very patient in the business.
I think is doing fine its just the discipline and the focus and I think that's what's helped us to be able to deliver these kinds of results. So we know they're out there we've talked about them theres opportunities.
Again, they have to be consistent with our long term goals that we've set out.
Our foundations for growth, Mike So I mean that may sound like a canned answer.
I kind of asked because we have a cam program.
<unk> laser focused on what we wanted to accomplish and what we promised.
I think I've talked a lot of investors are giving you a standing O for that answer.
Last quick question on the.
On just this idea that flu could be heavy this winter and maybe Covid comes back are you hearing anything from your contacts and hospital systems about concerns about staffing of hospitals or anything that would sort of really curtailed surgical volumes.
Yes.
Not specifically into surgical but staffing.
We have a member of our board that runs a hospital system and.
Staffing is a problem for everybody.
Until we get the potential patient rate higher and things like this it's a challenge for everybody as Mike its not not going away. So we're not hearing.
Things that we were hearing before like.
Elective procedures and that sort of stuff I'm not hearing that language just staffing in general is a problem, but not in terms of procedural rates at this point. Okay. Got you. Thank you so much alright. Thank you Sir.
Yes.
That will conclude Q&A I'll turn it over to Fred for any closing remarks.
Well, ladies and gentlemen, thank.
Thank you very much for your time, it's a busy day.
And just one closing note, it's snowing like Crazy out here come out and say is we'd love to host you here in Salt Lake City. Thank you again for the time and we look forward to talking to you again soon best wishes and good night from Salt Lake.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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