Q4 2022 Merit Medical Systems Inc Earnings Call

February 22, 2023

Okay.

Welcome to the fourth quarter of fiscal year 2022 earnings Conference call for Merit Medical Systems, Inc. At this time all participants have been placed in a listen only mode. Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly I would now like to turn the call over to Mr. Fred.

Then propolis.

<unk> medical systems, founder Chairman and Chief Executive Officer. Please go ahead Sir.

Thank you and welcome everyone to Merit medical systems fourth quarter of fiscal year 2022 earnings Conference call.

I am joined on the call today by Rob will power, our Chief Financial Officer, and Treasurer, and Brian Lloyd, Our Chief legal officer and corporate Secretary.

Ryan would you mind, taking us through our safe Harbor provision.

Thanks Fred.

I would like to remind everyone that this presentation contains forward looking statements that receive safe Harbor protection under federal Securities laws.

Although we believe these forward looking statements are based upon reasonable assumptions they are subject to unknown risks and uncertainties.

The 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.

Anticipated.

In addition, any forward looking statements represent our views only as of today.

February 22023.

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, we believe certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of our ongoing operations.

And can be useful for period over period comparisons of such operations.

This presentation also contains certain non-GAAP financial measures.

A reconciliation of non-GAAP financial measures to the most directly comparable U S GAAP measures.

As 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.

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.

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 Craig.

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 our strong revenue results for the fourth quarter.

And 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 2023 that we introduced in todays press release as well as a summary of our balance sheet and financial condition as of December 31, 2022.

Following that we will open the call for your questions.

Now beginning with a review of our fourth quarter revenue performance.

We reported total GAAP revenue of $293 million in the fourth quarter up 5% year over year.

Our total GAAP revenue growth was driven by 7% growth in the U S and 3% growth in international sales.

Our total revenue increased 8% year over year in the fourth 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 at the high end of our growth expectations that we discussed in our quarter three earnings call specifically, we shared our expectations for constant currency revenue growth in the range of 6% to 8% year over year in the fourth quarter.

Quarter four constant currency revenue results were a result of solid execution from our team and were primarily driven by a more favorable than anticipated international sales trend, particularly in the EMEA region.

And demand in the United States that was in line with the growth expectations, we outlined in our third quarter call.

Now let me provide you with a more detailed review of our revenue results in the fourth quarter, beginning with our sales performance in each of our primary reportable product categories.

Note unless otherwise stated all growth rates are approximating our 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.

Now fourth quarter total revenue growth was driven by 9% growth in our cardiovascular segment offset partially by a 6% decline in our endoscopy segment.

Cardiovascular growth exceeded the high end of our expectations in Q4.

And the endoscopy growth came in within the range of our X based expectations in quarter four.

Sales of our peripheral intervention products increased 9%, representing the largest driver of total cardiovascular segment growth again this quarter.

Within the product category.

Sales of our embolic, <unk> access products increased 14% and 15% respectively and together.

It represented roughly 44% of our total pie growth.

And sales of our radar localization and geography and biopsy products each increased in the low double digits year over year and together represented roughly 41% of our total pie growth in quarter four.

Cardiac intervention product sales increased 10% in Q4, representing the second largest contributor to total cardiovascular segment growth year over year.

Within our cardiac intervention business the three largest contributors in the fourth quarter were 16% growth in sales of and geography products.

6% growth in sales of interventional products and 19% growth in the sales of EP CRM products.

And geography products growth was driven by impressive growth results in our inquired diagnostic guide wires.

Intervention product growth was driven by another strong quarter of demand for our Phd hemostatic valve products and EEP CRM products growth was driven by strong demand for our snap sheets and our heart span sheets.

Sales of our OEM products increased 16% exceeding the high end of our expectations in Q4, which we attribute to continued improving demand from larger customers in multiple categories.

Including Merit coatings kit and angiography products.

Finally sales of our Cps products increased 2% and sales in our endoscopy segment decreased 6% both of which were largely in line with the range of growth assumption supporting our Q4 revenue expectations.

Now turning to a brief summary of our sales performance on a geographic basis, our fourth quarter sales in the U S increased 5% year over year.

Sales to U S customers came in at the mid point about growth expectations and represented 34% of our total company a company constant currency growth this quarter.

International sales increased 12% year over year, which is strong performance in light of the challenging global macro environment in certain international markets in Q4.

All three of our major regions posted growth at the high end or above the high end of our expectations in the fourth quarter, specifically sales in EMEA APAC and the rest of the world regions increased 15, 11% and 9% respectively year over year.

While all three regions were strong in Q4, we saw the most upside versus expectations in the EMEA region, driven primarily by demand from Germany, France, the United Kingdom and Eastern Europe .

APAC growth was driven primarily by high single digit growth in China, where we are seeing strong demand for pi in Ci product, which is more than offsetting the continued headwinds related to volume based purchasing.

Low double digit growth in Japan also contributed to strong growth in the APAC region in Q4.

And lastly.

In our rest of the World region, we delivered 9% growth year over year, which was also ahead of expectations driven by 20% growth in Canada and mid teens growth in Latin America, and Mexico, partially offset by high single digit declines in Brazil compared to the prior year period.

In summary.

We're encouraged by the solid growth trends and proud of our team's strong execution. Despite another quarter marked by a challenging operating environment, particularly in international markets.

Now before turning the call over to Robert I want to comment on a few other noteworthy items in the quarter.

First we.

We delivered another quarter of profitability improvement margin expansion and free cash flow generation in Q4.

Our non-GAAP gross profit non-GAAP operating profit and non-GAAP net income increased 4%, 8% and 13% year over year, respectively. In Q4 are.

Our non-GAAP operating margin increased 47 basis points year over year to 17, 8% and we generated $15 5 million of free cash flow in the quarter.

We believe our financial results in the fourth quarter represents a continuation of the strong performance that we've delivered throughout fiscal year 2022.

Importantly, we believe our financial results. This year represent clear evidence that we're executing towards our goal of enhancing long term growth and profitability profile.

Specifically in fiscal year 2022, we delivered more than 9% constant currency revenue growth.

Improvements in our profitability profile with a 17% non-GAAP operating margin and 91 basis point improvement year over year, and we generated strong free cash flow of nearly $70 million.

We remain committed to the financial targets that were outlined in the foundation for growth program for the three year period, ending December 31, 2023, which by the way a reminder, called for constant currency organic revenue to increase at a CAGR of at least 5%.

non-GAAP operating margins.

<unk>, 18% and cumulative free cash flow generated of more than $300 million.

Second.

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.

Throughout fiscal year 2022, we highlighted via press releases.

Progress, including eight new product launches a.

A FDA 510 clearance in a breakthrough designation from the FDA.

I'm proud of the team's continued commitment to the strong execution in the areas of development clearance and commercialization of new products in 2022.

Finally, we also made progress in recent months towards our strategic initiatives to expand the body of clinical evidence for our products specifically our clinical study the wave study of the Rhapsody Endovascular stent graft and the investigational device being studied for the treatment of stenosis or occlusion we.

In dialysis outflows circuits continues to progress.

We have 42 clinical sites actively enrolling patients and we are targeting full enrollment of the first cohort by the end of quarter three of 2023.

We were pleased to begin enrollment in Brazil in the fourth quarter as well.

The rapid study is underway with 27 sites selected in 10 countries around the world roughly.

Roughly half of these sites have already been enrolling patients in a study designed to evaluate the clinical benefits Association associated excuse me with the use of Rhapsody selling permeable endo prostates in patients receiving hemodialysis that experience, a narrowing or should notice or blockage.

Our blood vessels required for dialysis.

The stream lock study is progression towards a startup phase in the coming months and we are working through site selection for this Canadian registry study intended to demonstrate the utility of the scout surgical guidance system to improve workflow and efficiency in Canadian centers diagnosing and treating.

Breast cancer.

Finally, we have four sites enrolling patients in a prospective observational study of ammo cube amortization gelatin used to control bleeding or hemorrhage.

<unk> is designed to enroll 100 patients across multiple centers in Australia, and France and represents a key step towards expanding our clinical portfolio of embolic agents and provide critical relate to diverse patient populations worldwide.

With that let me turn the call over now to Raul, who will take you through a detailed review of our fourth quarter financial results and our 2023 financial guidance, which we introduced in today's press release.

Raul.

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 fourth 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 are available on our website.

Gross profit increased approximately 4% year over year in the fourth quarter, our gross margin for the fourth quarter was 49, 5% compared to 50% in the prior year period to 57 basis point decrease in gross margins year over year was primarily due to unfavorable manufacturing variances specifically purchase price.

Fragrances as expected our fourth quarter gross margins were impacted by the inflationary headwinds we are seeing in freight logistics labor and increasingly in raw materials.

Despite the continued challenging operating environment, we were pleased to deliver gross margin results at the high end of expectations, we outlined on our Q3 call, which called for gross margins to be flat to up 100 basis points on a quarter over quarter basis.

Fourth quarter operating expenses increased 2% compared to the fourth quarter of 2021, the year over year increase in operating expenses was driven by a 7% increase in SG&A expense.

Offset partially by a 16% decrease in R&D expense compared to the prior year period.

Our operating expense performance in Q4 was largely in line with expectations and reflects continued prudent expense management offset partially by continued investments to support our future growth initiatives.

Total operating income in the fourth quarter increased $4 million or 8% year over year to $52 3 million.

Our operating margin for Q4 was 17, 8% compared to 17, 4% in the prior year period.

The 47 basis point increase in the operating margin was driven by 104 basis point reduction in our non-GAAP operating expense margin compared to the prior year period.

Offset partially by the 57 basis point decrease in our non-GAAP gross margin.

Fourth quarter other expense net was $2 1 million 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 higher effects.

Interest rates year over year.

Fourth quarter net income was $46 million or <unk> 79 per share compared to $40 8 million or <unk> 71 per share in the prior year period.

We are pleased with our profitability performance in the fourth quarter, where we delivered low double digit growth year over year in both non-GAAP net income and diluted earnings per share exceeding the high end of our expectations.

Turning to a brief review of our financial results for fiscal year 2022.

Total revenue for the 12 months ended December 31 was $1, one 5 billion up $76 2 million year over year or nine 3% growth on a constant currency basis.

Gross profit increased 6% year over year to approximately $561 million, representing 48, 8% of sales compared to 49, 3% of sales in the prior year period.

A 50 basis point decrease year over year.

Note compared to fiscal year 2021, we estimate that we have experienced incremental headwinds to our gross margin of approximately 240 basis points related to inflationary pressures in raw materials freight and logistics. The early benefits. We are seeing as a result of the team's hard work and dedication to our foundations for growth program are the primary.

Reasons, we have managed to offset the majority of these inflationary headwinds to our gross margins in fiscal year 2022.

Operating profit increased 13% year over year to $195 1 million, representing 17% of sales compared to 16% of sales in the prior year period.

91 basis point increase year over year, we are driving strong operating leverage through prudent expense management and our FFG program, which resulted in operating profit growing notably faster than revenue growth in fiscal year 2022.

Net income increased 14% year over year to $155 8 million or $2 70 per share compared to $136 2 million or $2 37 per share in the prior year period.

Turning to a review of our balance sheet and financial condition.

As of December 31, 2022, we had cash and cash equivalents of $58 4 million total debt obligations of approximately $198 million and available borrowing capacity of approximately $523 million. This.

This compares to cash on hand of $67 8 million total 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 December 31 was <unk> six times on an adjusted basis.

With respect to our cash flow generation in the fourth quarter.

Our solid profitability performance in the fourth quarter of 2022, combined with strategic working capital investments, resulting in strong free cash flow generation of $15 $5 million in the quarter.

As expected our use of 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 $69 million of free cash flow during the 12 months ended December 31 2022.

This was modestly below our target of $75 million due to higher cash taxes year over year and continued proactive investment in our inventory balances as part of our strategy to build the requisite safety stock to ensure we can meet customer demand amidst the ongoing challenges and disruptions in the global supply chain environment.

Turning to a review of our fiscal year 2023 financial guidance, which we introduced in today's press release.

For the 12 months ended December 31, 2023, we expect GAAP net revenue growth of approximately 4% to 5% year over year.

This GAAP net revenue range assumes that headwind from the changes in foreign currency exchange rates of approximately 10 million to $11 million, representing a headwind of approximately <unk> 90 to 100 basis points to our forecasted GAAP growth rate this year the.

The GAAP net revenue guidance range now assumes net revenue growth of approximately 3% to 5% in our cardiovascular segment and net revenue growth of approximately 14% to 16% in our endoscopy segment.

Note the mid point of our 2023 constant currency sales growth expectation assumes approximately 5% growth year over year in the U S and approximately 6% growth year over year and O U S markets.

With respect to profitability guidance for 2023, we expect GAAP net income in the range of approximately $100 million to $105 million or $1 72 to $1 80 per diluted share and non-GAAP net income in the range of approximately $163 million to $168 million or $2 80 to $2 89.

Per diluted share.

For modeling purposes, our fiscal year 2023 financial guidance assumes.

non-GAAP gross margins in a range of approximately 54% to 51%.

non-GAAP operating margin in the range of approximately 18% to 18, 2% GAAP and non-GAAP other expense of approximately $7 6 million and $7 million respectively.

non-GAAP tax rate of approximately 21%.

And diluted shares outstanding of approximately $58 million.

We expect capex in the range of $55 million to $60 million and free cash flow of approximately $115 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 first quarter of 2023 spin.

Specifically, we expect our total revenue to increase in the range of approximately 1% to 3% year over year on a GAAP basis, and up approximately 3% to 5% year over year on a constant currency basis.

Note the mid point of our first quarter constant currency sales growth expectations assumes approximately 7% growth year over year in the U S and approximately 1% growth year over year and our U S markets.

With respect to our profitability expectations for the first quarter.

We expect to see non-GAAP gross margins increased in the range of 90 to 190 basis points year over year. We also expect to see non-GAAP operating margin in a range of down 10 basis points to up 80 basis points year over year. These.

These margin expectations combined with high higher interest expense assumptions are expected to drive a year over year change in both our non-GAAP net income and non-GAAP EPS in the range of down 1% year over year on the low end to up high single digits year over year on the high end of the range.

With that I'll turn the call back to Fred.

Thanks travel and.

In closing our fourth quarter growth and profitability performance came in at the high end of our expectations and importantly capped off a great year of results in 2022.

We believe this is a direct result of our team's continued strong execution and relentless focus on our strategic initiatives, we would like to thank all of the team members around the world that made our performance in fiscal year 2022 possible.

Our 2023 financial guidance reflects our confidence in our team's ability to deliver continued strong execution. Despite the operating environment around the world.

We intend to build upon the significant progress we have made during the first two years of our foundation for growth program.

We remain committed to.

The financial targets that we outlined for the three year period, ending December 31 2023.

That wraps up our prepared remarks.

I'd like to now turn open up the line for questions.

Thank you.

Thank you, Sir if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.

If youre 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 if you would like to ask additional questions. We invite you to add yourself into the queue again by pressing star one one and our first question.

Will come from Steve Lichtman with Oppenheimer you May proceed.

Thank you.

Guy.

I guess.

Ask my one and as a follow up around the area of cash so.

Looks like you are implying a nice step up in free cash flow conversion in 2023.

Well can you talk a little bit about beyond margin expansion with some of the dynamics there and your confidence in.

And in that growth will take you're also stepping up capex I'm wondering if some of the moving parts. There and then just as a follow up to that just given the cash position balance sheet position.

Fred I was just wondering if you could just sort of update us on your views on on M&A.

Could you could we see you getting a little bit more aggressive on that front in 2023, and you could just talk about that environment overall, thanks guys.

Alright.

Yes, Thanks, Steve Yes look I think the step up is really around the working capital piece. If you remember at the beginning of the year, we made a commitment to make.

A bigger investment in inventory as we brought inventories back to normal levels.

And then as we progress throughout the year. We also saw an investment in inventory to meet the demand that we were seeing specifically as you saw kind of the logistics issues happening and also the supply chain. So we wanted to make sure that we made that investment.

We're not expecting to have as big of a as an investment this year, which feeds into that and obviously, we're going to be more profitable, which will also help. So those are the two things kind of driving the increase in the free cash flow.

And Steve Let me go to the M&A.

I mean, you can see where we are in terms of our balance sheet is very strong.

<unk>.

I think it's really a matter of patience.

And finding the right.

Businesses.

That meet the need of our sales point gross margins that are.

Complementary to our foundations for growth.

You heard me really emphasize that commitment to foundation for growth.

But it has to be the right thing and.

We've been spending time, we've been looking and when we find it will move but we're not in any hurry.

Yes, I still think about it I personally values are still a little high.

There is no rush, but at the same time I mean, we're in the best position we've ever been in so we're looking we're spending.

I think we're better organized in terms of internal.

Great.

And with John Altmeyer, working on all of that and Chris Jeremy So we're organized.

We have our views wrong I look at them, we meet we'll discuss.

But patients.

Doing the right thing is more important than doing anything.

There's a lot of deals out there and there are a lot of deals.

And many of them are early and that creates somewhat problematic because it conflicts so I am going on and on but I think you can get the theme of what I am trying to say on that is that.

There will be deals and opportunities.

There'll be divestitures from larger companies there'll be opportunities, but we just have to make sure. It's the right deal.

So that's my best way to answer your question. Thank you.

Thank you that's helpful color. Thanks, guys.

Thank you.

Our next question comes from Jason Bedford with Raymond James You May proceed.

Okay.

Hi, good afternoon, and congrats on the success this year.

Jacob.

I'll, just kind of keep it to the two.

You talked about high single digit growth in China off what I remember it was a pretty strong comp, but you also mentioned that the growth was offset by GBP measures. So I just wanted to confirm that I.

I heard that correctly and that you are facing and fighting through ongoing BV team measures in your business.

Yes, Jason we continue to see volume based purchasing.

That will impact us the way, we're kind of looking at it just to give a little bit of color is really.

Hopefully, we can kind of get through the.

The bulk of it here through early 2024, and then kind of that becomes.

The low end or.

Volume based purchasing and we can kind of get past it but.

As of now we do have it.

It's in our guidance, we don't call it out specifically.

I'll say that China's a big material driver of the six months to 7% in constant currency growth that we're expecting in the APAC region.

And so we continue to be high in China, but we've been able to.

Offset some of some of that growth just by that.

The delivery and execution by our sales force, there and leadership and if I can just add that we continue to register products that we think give us an advantage that may not exist or produce locally and that takes time, but we continue to do that and we think that will pay as part of our strategy going forward.

Okay.

And I hate to waste my other question on other expense, but I feel like it was kind of notable.

The $7 million in other expense or all of it seems like a pretty big step up from what you did in 'twenty. Two so can you just walk us through why the step up yes.

Yes, a portion of that is interest expense, obviously with the higher interest rates. There's also we did pick up some some exchange rate foreign exchange gain that flowed through there we're not expecting that big of a benefit this year as rates kind of reset to normalized level. So those are really the two primary things that hit that line item.

Yeah.

Okay I'll keep it to two and go back in the queue.

Okay, Hey, Jason. Thank you. Thank you Jason.

Thank you. Our next question comes from Mike Matson with Needham <unk> Company you May proceed.

Yes, thanks for taking my questions.

I guess I'll I'll start with <unk>.

Just on Rhapsody.

The two trials going on wave and broth.

So what I think the wave trial as the pivotal for the U S FDA approval.

Can you maybe just talk about when you think we could potentially see data from that.

What's the latest expectation on the timing of FDA approval.

Yes.

No.

The WAF the wave study I'm sorry, the weight study continues to progress as you recall, Mike there's three cohorts.

One of those will trigger the opportunity to prepare and file a PMA.

We have one segment of that I'm, not going to get specific into which cohort, but we have one that's kind of leading the way there and I think that we're using a.

If I recall what is at the end of the third quarter ended the third quarter.

For 2023 of this year that will have.

We think at least one cohort possibly too.

That will be completed so it has accelerated.

From.

I'll just come out of Covid in contrast issues.

I think we're making a lot of progress I mean, we're getting there and.

We've had all the sites are enrolled so I think it's going to be just fine and then you just file a PMA.

And I think it's one year follow up if I recall.

On the data roll I think Thats correct.

So we're getting there Mike.

In the meantime, as you are.

Uh huh.

Youll recall that.

That's kind of where we're going to stick for right now but.

We are pleased that we began enrollment in Brazil in the fourth quarter and of course as you. All recall, we we also continue to sell the product and in Europe , and Brazil, and other locations, but as we all know the U S is the big problem and we're just working diligently.

Diligently to get down the road so.

That's the update that we're going to provide today.

No that's fine I, just want make sure I'm understanding that you're saying that the enrollment would be completed in the third quarter of this year and then you have like a one year do you have the follow up period, and then after that you'd be able to submit the FDA PMA.

That's my understanding incidentally.

That third quarter will have at least one cohort can not the entire study to central's there as well.

Going to go through all of them because for competitive and other reasons, but yes.

But we'll have at least one of those that will be finished in the third quarter, but.

But when you say finish you just mean the enrollment curve.

Correct, that's correct, Okay, Alright, and then.

I guess my other question would just be around the positives as you went through this but the.

Gross margin kind of guidance for 'twenty three what have you assumed in terms of currency inflation impact there.

Okay Raoul online pick that one up yes, so on the gross margin.

Obviously.

It's a little more robust than it was this last year. We're looking at the low end of the guidance is about 170 basis points.

Up to 220 basis points.

Obviously, we don't expect is as.

As many headwinds as we as we had in 2022 related to.

The pricing of raw materials freight and logistics and so as we as we move forward. We think we can make some headway there we're really focused on our <unk> initiatives there on pricing.

And also leveraging our fixed cost so a lot of initiatives around operations and really leveraging that gross margin line. So we can make some investments in opex.

We will have some tailwind related to.

FX and then we're also expecting some tailwind related to freight and logistics as we get back to ocean shipping versus air.

Okay got it thank you great. Thanks, Mike.

Okay.

Thank you.

Our next question comes from Jim Sidoti with Sidoti <unk> Company you May proceed.

Good afternoon, and thanks for taking the question.

Thanks, Jamie.

So if you look at least on a GAAP basis R&D expense over the last couple of years, we have gone up.

Really substantially is that primarily European regulatory cost of clinical trials.

How much how soon do you think that some of those investments start to turn into sales.

Well.

The funny thing about MTR right. I mean, you are registering products that are currently being sold.

But youre absolutely right Jim.

A lot of the expenses the increase there it's re registering of those products and getting them up to the new standard.

No obviously, we expect that expense to trickle down.

To normalized levels here over the next.

A couple of years I would say there is just additional upkeep that comes with MTR that will have to absorb.

But those products are being sold right now and it's really just to maintain those sales.

Going forward.

One of the unfortunate parts.

And then as far as the inflationary costs are you starting to see those come down now or do you think it'll.

It'll be another six or eight months before.

<unk> sees things like shipping and.

Freight costs come down.

I think it'll it'll get gradually better through the year.

Alright. Thank you, yes, thanks Jeremy.

Yeah.

Thank you.

Our next question comes from Laurence <unk> with Wells Fargo. You May proceed.

Hey, Brad Hey, Raul area.

Thanks for taking the question.

Fred could you talk a little bit about price.

In 2022, and what your expectations are for 23. Please.

Yes.

I'll answer that by saying that the price is one of our strategic initiatives as part of <unk>.

As you'll recall from our previous conversations we hired.

An experienced person.

To do that as some of this will be layered in as we have national accounts come due.

So we picked up some but some of them will be expiring and I think we've been extremely vigilant in terms of.

<unk> changing dramatically the way that we look at the business and how we price whether they be for new products coming out in the U S or what we're doing in terms of taking advantage of the opportunities and by the way as you guys. All know I mean, we were not immune.

Two.

Inflationary cost ourselves so we have been doing pass arms.

And that program continues.

So it's not just a one year program or something that started from the beginning it took a little time to get started I think we had a very positive year do you want to add some to that role I was just going to say really our pricing initiative for foundations for growth is really about just maturing the company.

A different level than we were at before so we have better tools we have.

Better visibility better transparency around what we're doing as Fred mentioned this is kind of a multiyear approach as we get through contracts. Both here in the U S and globally. So there's a lot of work I think we were pretty happy with what we were able to accomplish in.

In the first year of its initiative last year, and there's more work to be done to get to where we want to be.

There's a lot of I guess a lot of opportunities still here.

I mean, how about pricing a net positive for you guys or are you willing to say how much.

We're not going to quantify it Larry.

But we want that interest margin.

It is positive yes.

Okay.

Thank you.

On two of the businesses.

OEM was extremely strong in 'twenty two.

Could you just talk about the sustainability, there and endoscopy what drives the acceleration.

And the guidance in 'twenty three thanks for taking the questions.

So listen on the <unk> on.

On the OEM, we of course exceeded the high end, which we attribute to the improving demand from larger customers going away from I'll call. It the just in time.

People are starting to make sure they have enough product.

We all know, but everybody was cutting edge. It includes merit coatings kitsch angiography.

It's a dynamic business.

This next year rollout.

We called it out but yes, its high single digits for 'twenty three Larry I think what we're seeing is a lot of opportunity in the OEM business, especially as people struggle with our logistics.

In supply chain I think we're becoming we've been.

Very fortunate to be able to deliver to our customers because of our vertical integration and so I think theres a lot of customers that continue to come to us and explore new opportunities for us to be their supplier, but we are.

I would say temporary that growth I mean again high single digits is what we're expecting for 'twenty three.

So I think Thats <unk> personally I think that go to your question of sustainability of bad at that high single digit is historically, where we've been at and we think that.

It has to have sustainability, let me go on to the endoscopy.

That's really quite simple.

You know, we had a problem with vendor.

Qualified three out of four there is still some supply chain issues, but it is improving and we will continue to improve.

If you look at the.

Of what we'd call out this year for the full year it dramatically.

Up from last year, well into 60% yes.

That's significant.

In the script that talks about that the 14 to 16 versus downside. So its just working off that we're on the backend.

That challenge, we've got a lot of work to solve that and bring it onshore.

Larry and I think it's going to be a big contributor.

Going forward, it's a great business.

Thank you you bet.

Thank you.

Our next question comes from Michael <unk> with Barrington Research you May proceed.

Hey, good evening. Thank you.

<unk>.

I don't think you've touched on this.

Free cash flow sort of.

Cadence in 'twenty, two with sort of all over the board.

I'm just curious if you have any commentary.

Whether it's a first half second half or or anything else I assume Q1 will probably be relatively low but.

Well, it's sort of jump around or you think it's going to be a little bit more consistent 23.

Yes, it'll definitely be paced by the SSG initiatives, but thank you for calling that out Mike because I don't think I did a very good job last year of <unk>.

Given the cadence.

Just as a reminder, Q1 will be kind of just.

It's probably the low end.

We do have bonus payments that go out tax payments.

And we also have additional expense so that flows through specifically this year as we ramp up on the.

On the sales meeting that we haven't had in.

Two years so.

<unk>.

There will be a cadence to it I think it will typically lineup with our cadence for earnings.

But Q1 will be the low point.

Well, if I could add the $115 million that we're calling out is for full year target.

<unk>.

That's impressive.

It's a big deal and again the focus Mike is finished.

<unk> finished what we committed to and that's what we'll do.

And.

I just have to tell you it's got everybody's attention and it's also tied to compensation. So there's a lot of incentives to make sure that people are paying attention and the discipline of saying no and trying to prioritize so I think I think we've done a good job, but at the end of the day, there's one more year and just as a reminder.

For everybody listening, we we said <unk> would deliver a minimum of $300 million in free cash flow. So that's what we're focused on.

Over the three year period, I have to say I did like that 0.6.

Our leverage ratio at that 0.6, whatever it is but I mean, it just continues to improve and these are things that people were calling out two or three years ago, and we listen to what you said so.

And Mike we listen to you because you're in one of the guys that were speaking to it.

That too has allowed us poised for heaven sake.

Thank you.

Take credit work no credit is due whatsoever.

So I did want to ask also Fred.

Yes.

During the last few years have sort of tried to streamline your R&D projects and really focus on what you thought it was the highest.

Potential.

Roy is et cetera, and I guess.

Just in sort of.

Looking at it right now I mean do you feel like you feel like Thats worked in terms of hey, Yeah, I feel like we pick the right projects or have there been some sort of misses in some things that maybe were eliminated initially and you've gone back to I'm. Just curious how that's sort of laid out in practice well, let me just say that in terms of the availability of ideas.

There's plenty of them out there I think what has happened going back to the previous question is sitting down with the team and prioritizing those and make sure that they are budgeted for so that we can afford to pay them.

And afford them I think has been very important and Youll recall, Mike a couple of years ago. We talked about we may have had in fact, we did have too many things going at was spread out a lot and that ate up a lot of capital and it slowed things down. So I think I'd like to always would like to have more money for R&D that money has to be earned.

I think it's budgeted for and I think we have the priority because it's not just me I've got Joe Wright, who is our chief commercial officer Joanne.

<unk> I've got Jim Mazzola.

Our sales force, we should meet and talk about the things that you need the things that we fit into our franchise. The things that will give us a competitive advantage to go to your question I think it's much more disciplined and much more focused.

And there has to be a Brian again, I don't have to have everybody nodding their head.

But it's nice that we're all on the same page.

Okay very good well congratulations on a great 2002.

Thank you Sir.

Yes.

Thank you.

Our next question comes from Jason Bednar with Piper Sandler You May proceed.

Hey, guys. Good afternoon, thanks for taking the questions and congrats on the results.

First apologies in advance if any of these have been covered but I've been hopping between calls.

But maybe as a follow up to some prior questions.

I'd be curious if you could talk about whether maybe in response to Larry's question as Youre expecting greater price contributions in 'twenty three versus 22, it sounds that way, but maybe if you could confirm that and then.

Kind of on a related point, just China grow faster in 'twenty three than what we saw last year.

Now that we're on the other side of the of the zero Covid policy and procedure volumes.

Presumably accelerate here this year.

Okay, I'm going to I like the.

China went out and I'll come back to the other question, but yes, I mean I think.

From our China perspective, it is a contributor to our APAC growth, it's one of the largest contributors.

But we're not going to call out the specific country growth just know that we're excited about what is contributing and it is a material driver to that 6% to 7% organic constant currency growth in the APAC region.

And now that I've listened to him Jason you've got to restate the question.

Pricing the pricing, we don't spell it out.

It is a key initiative.

And it is part of our compensation I think that answers the question.

Yes.

<unk> and it's got our attention and it's got a lot of our attention. So I'll answer it that way.

Yes, maybe to clarify I mean.

Any reason to think it's not as good as it was in 'twenty two.

Jason Jason Jason I think I answered the question, but thank you very much for asking again okay.

Thank goodness, that's yes, he's really good at.

[laughter].

Yeah.

Maybe then a couple on <unk>.

On the margin side.

Maybe you can discuss with where youre at with your transition efforts down to Mexico.

And then as you do transition back to more of a normal structure of air and Ocean freight.

Can you throw a dart at where you'd anticipate normalize logistics structure this year.

Getting back to 80% Ocean, 20% errors that happen <unk> <unk> <unk>, just trying to figure out if it's.

Reasonable to think we should see some margin benefits from that initiative this year.

So it is an initiative.

Jason.

We are not going to share the specifics on the cadence of how we're going to get there I just think it just confuses things too much but it is an initiative as part of our foundation for growth initiative for expansion of our gross margin. This year and it's got our it's got our focus on it as far as Mexico.

We continue.

It's not a it's not a one year initiative right I mean, we spent the last five years moving stuff to Mexico.

I would say that.

There has been things that have moved.

Ahead of plan.

At plan and behind plan I mean, that's just.

That's just the way it works.

We continue to move stuff down there continue to analyze our business for things that make sense and we will continue to do so over the years.

In addition conclusion to that thought most comment.

It's been a great success overall and continue to have our focus.

Going forward in <unk>.

But again as Bob pointed out it's not a perfect.

That transfer and particularly on the early parts when you're going to recover or very difficult I think that a smoothed out in most cases, yes, but at the same time little things pop up from time to time, but we actually had a board meeting down there about three months ago and it was impressive to be there and particularly to have the board there as well.

So I think whenever the board go someplace that speaks volumes.

Okay, Yes definitely.

Maybe I'll try one more time with the clarifying follow up here, but.

Yes.

On the on the Ocean Air.

Normalizing that structure.

Is it right to think that we should have that complete by the end of this year.

It is an issue it is an initiative.

Our gross margin as we called out we're looking to get a 170 to 220 basis points for the year.

And it will it will definitely be a tailwind to our gross margin.

As we increase the percentage towards ocean.

Okay. Thank you okay. Thanks, Jason.

He's good.

Thank you and as a reminder to ask a question you will need to press star one on your telephone.

Our next question comes from William <unk> with Canaccord you May proceed.

Hey, Barry Thanks, Good evening.

Zero.

No.

You've done a tremendous job growing the topline and this kind of folds into the original M&A question earlier, but.

As we think of 'twenty, three and beyond and that 5% growth that you've targeted and you've definitely been growing beyond that.

Is that something that you can maintain organically or do you need to meet or exceed 5% on a longer term basis M&A.

M&A to help augment what you have.

Yes, listen we understand what the street is focusing on what is next for our growth and profitability.

Again, we're 100% focused on the <unk> in those targets as we and listen.

The ratio isn't over until you cross the line and we may be seeming a little bit stubborn, but what what we have been doing and what we said we would do on the commitments. We've made we've kept up with that in terms of the numbers that you have up there that we've given of course, that's all organic when we talk about this year and if you look at the history.

I'll, let you do that work, but if you look at the history Youll see that.

It's well within what we've done for many many many years. So you have a better finely tuned company.

That has been growing prolonged time and I think if just quickly look at that back and look back at that growth rate, but I want to say something you said, we've been doing great at growing the top line I think we've done fine, but take a look at that bottom line and what we've been proved there over the last two to three years and that is extraordinary as well. So I just have one part of it without talking.

About the other yes, I mean, I think if you look at the operating margin and the expansion that we've done over the last couple of years last few years to be honest as has just been anything but impressive I mean, I think there's a lot of hard work that goes into it from our employees.

Employees and.

Peyton not having you call that out that I had.

<unk>.

And again, that's if you take a look at the objectives.

The growth, 5% to 7% if you take a look at the operating margin and the free cash flow they speak to top and bottom.

I think lastly, too bill.

I know theres a lot of.

People want to focus on beyond 2023, but we still have a lot of work to do in 2023, it's the final year of FFG.

And we just want to make sure that we can deliver what we.

Promised and we don't want to lose sight of that.

But we've got more work to do but we've got a solid game plan.

We do have a sliding scale.

Half of my question, which is where does the incremental operating margin really leverage come from outside of gross margins. So if we talk about opex. You've spent a couple of years really optimizing the organization, where do you see the real incremental improvements in terms of <unk>.

Average on the Opex standpoint, driving from is it just scale.

Scale in R&D or is it really more about leverage of the G&A line I mean, how do we think about it.

It's a great question and I can't wait to discuss them when we get to 2024 and we finished 2023.

We're just focused on delivering FFG.

It's a great question and I understand the question the reasoning behind it but we're just not going to get ahead of ourselves, but I don't want to go back and say this if I could and that is we said that we were going to leverage every aspect of that income statement.

That's always been the goal and just want to bring that back to your attention.

Yes.

Great. Thanks for taking my questions.

Okay.

Thank you for.

That concludes our Q&A session I would now like to turn the call back over to Mr. Fred.

I am propolis for any closing remarks.

Well again, thank you very much incidentally just for a point of interest for inviting you all out to Utah, We've had a major blizzard and we've got two feet of snow outside.

<unk>.

And I think theyre doing that up in Minneapolis today, I heard as well all that being said. Thank you for your interest I think you can hear our commitment.

Been solid it hasn't changed we have work to do we will complete this program and then next year about this time will tell you about where we're going from there we have a lot of work to do and a lot of exciting opportunities in this company. We appreciate your interest we thank you for your time today, and we will sign off from a snowy.

Lessard in Salt Lake City, Utah have a good evening Goodnight.

Thank you that does conclude our conference call for today. Thank you for your participation.

The conference will begin shortly.

Lower Johan during Q&A, you can dial one one.

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I'd like to turn the call over to Mr. Fred Lin Propolis.

Merit Medical systems, founder Chairman and Chief Executive Officer.

Go ahead Sir.

Thank you and welcome everyone to Merit medical systems fourth quarter of fiscal year 2022 earnings Conference call.

I am joined on the call today by Rob will power, our Chief Financial Officer, and Treasurer, and Brian Lloyd, Our Chief legal officer and corporate Secretary.

Brian would you mind, taking us through our safe Harbor provision.

Thanks Fred.

I would like to remind everyone that this presentation contains forward looking statements that receive safe Harbor protection under federal Securities laws.

Although we believe these forward looking statements are based upon reasonable assumptions they are subject to unknown risks and uncertainties.

The 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 anticipated.