Merit Medical Systems Inc. Q1 2023 Earnings Call
Speaker 2: Welcome to the first quarter of fiscal year 2023, Williams conference call for merit medical systems, Inc. at this time, all participants have in place and listen only mode. Please note that the conference call is being recorded and that the recording will be available on the company's website for a replay shortly.
Speaker 2: I would now like to turn the call over to Mr. Fred Lampropoulos, Merit Medical Systems founder, chairman, and chief executive officer. Please go ahead, sir.
Speaker 2: Thank you, and welcome, everyone, to Merit Medical System's first quarter of fiscal year 2023 earnings conference call.
Speaker 3: I am joined on the call today by Rahul Para, our Chief Financial Officer and Treasurer, and Brian Lloyd, our Chief Legal Officer and Corporate Secretary.
Speaker 3: Brian , would you mind taking us through the safe harbor statements, please?
Speaker 3: 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.
Speaker 4: Although we believe these forward-looking statements are based on reasonable assumptions, they are subject to unknown risks and uncertainties.
Speaker 4: 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.
Speaker 4: In addition, any forward-looking statements represent our views only as of today, April 26, 2023, and should not be relied upon as representing our views as of any other date.
Speaker 4: We specifically display any obligation to update such statements, except is required by applicable law.
Speaker 4: Please refer to the section entitled Cautionary Statement regarding forward-looking statements in today's presentation for important information regarding such statements.
Speaker 4: Please also refer to our most recent findings with the SEC for discussion of factors that could cause actual results to differ from these forward-looking statements.
Speaker 4: Our financial statements are prepared in accordance with the county principal's which are generally accepted in the United States.
Speaker 4: 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.
Speaker 4: This presentation also contains certain non-GAAP financial measures.
Speaker 4: A reconciliation of non-GAAP financial measures to the most directly comparable US GAAP measures is included in today's press release and presentation furnished to the SEC under Form 8K.
Speaker 4: Please refer to the section of our presentation entitled Non- GAAP financial Measures.
Speaker 4: For important information regarding non-GAAP financial measures discussed on this call.
Speaker 4: Readers should consider non- GAAP financial measures in addition to not as a substitute for financial reporting measures prepared in accordance with GAP.
Speaker 4: Please note that these calculations may not be comparable with similarly titled measures of other companies.
Speaker 4: Both today's press release and our presentation are available on the investors page of our website.
Speaker 4: I will now turn the call back to Fred.
Speaker 3: Thank you, Brian . Let me start with a brief agenda of what we will cover during our preparatory remarks.
Speaker 3: I will start with an overview on our revenue results for the first quarter.
Speaker 3: After my opening remarks, Raul will provide you with a more in-depth review of our quarterly financial results and the formal financial guidance for 2023 that we updated in today's press release, as well as a summary of our balance sheet and financial condition as of March 31, 2023.
Speaker 3: will then open the call for questions.
Speaker 3: Now beginning with the review of our first quarter revenue performance, we've reported gap revenue of 297.6 million in the first quarter up 8% year over year.
Speaker 3: Our total gap revenue growth was driven by 12% growth in the United States and 3% growth in international sales.
Speaker 3: Our total revenue increased 9.8% year over year in the first quarter on an organic cost and currency basis.
Speaker 3: excluding the headwind to our gap revenue growth related to changes in exchange rates compared to the prior year period.
Speaker 3: Our first quarter revenue results were notably stronger than the growth expectations that we outlined in our fourth quarter call. Specifically, we shared our expectation for constant current revenue growth in the range of 3 to 5 percent year over year in quarter one.
Speaker 3: Now let me provide you with a more detailed review of our revenue results in the first quarter. Beginning with the sales performance in each of our primary reportable product categories.
Speaker 3: And unless otherwise stated, all growth rates are approximated and are in a year over year in constant currency basis.
Speaker 3: We have included reconciliations from our GAP report to results to the related non-GAP item in our press release and presentation available on our website.
Speaker 3: First quarter total revenue growth was driven by 10% growth in our cardiovascular segment and 14% growth in our endoscopy segment.
Speaker 3: While constant currency growth exceeded the high end of our expectations in both segments,
Speaker 3: Our cardiovascular segment drove nearly all of the revenue upside versus the high end of our expectations in quarter one.
Speaker 3: Sales of our two-iffernal intervention products increased 9%
Speaker 3: Representing the largest driver of Total Cardiac, Cario Vascular, segment growth began this quarter.
Speaker 3: Within the PI product category, sales are both our greened products...
Speaker 3: and our access products increased 13%
Speaker 3: And together, represented roughly 41% of total PI growth year over year, and sales of our radar localization biopsy and angiotherapy products increased 10% and together represented roughly 39% of our total PI growth in quarter one.
Speaker 3: Of note, while the portfolio products in our PI category continues to be the largest driver of growth in our cardiovascular segment, I believe it is important to appreciate the value of contributions to our total PI growth in recent years.
Speaker 3: that come from our highly differentiated Scout radar localization product line. We have been pleased with the market response to our Scout mini-reflector following the commercial launch in the first half of 2022. Continuing on with the discussion of our quarter-one revenue growth drivers.
Speaker 3: Sales of our OEM products increased 24% and were the second largest contributor to our total cardiovascular segment growth year over year.
Speaker 3: These results exceeded the high end of our growth expectations, which we attribute to continued improving demand from larger customers in multiple categories, including our EPRM, KITS and intervention products, which together increased more than 50% over year-over-year in court of one.
Speaker 3: Cardiac e-dovension products sales increased 7% in quarter one, with the three largest contributors to total CI growth coming from a 12% increase in sales of angiography products, and a 15% growth in sales of both our access products and our EPCRM products.
Speaker 3: And your graphy products, growth was driven by strong growth in sales of the inquired diagnostic dive wires.
Speaker 3: Access product growth was driven by high teens growth in sales of our Prelude Ideal and Prelude Radial sheets. And, EPCRM product growth was driven by strong demand for our SNAP and our Hardspan sheets as well as our Focus Safeguard Cool Compression Device.
Speaker 3: which is receiving positive market response following the commercial launch in August of last year.
Speaker 3: Sales of our custom procedural solutions or CPS products increased 6%, which was notably better than the mid to high single digit growth declines we expected in quarter one.
Speaker 3: This website was driven primarily by stronger than expected demand for our CPS products when customers outside the U.S. Specifically in Germany, the Middle East, and China, where sales increased in low-double digits year-over-year in quarter-one.
Speaker 3: by stronger than expected demand for our CPS products from customers outside the US, specifically in Germany, the Middle East, and China, where sales increased in low-double digits year-over-year in quarter-one. Finally.
Speaker 3: Sales in our endoscopy segment increased 14%, which was modestly better than the high end of our growth expectations.
Speaker 3: Well, we are pleased to see the business return to growth in quarter one as expected.
Speaker 3: And dosca be results continued experience business disruption as we continue to navigate material shortages and work on Qualifications for our new vendor However our guidance continues to assume improvement trends as we move through the year which we expect will result in mid-teens growth For our endoscopy business in 2023
Speaker 3: Now, turning to a brief summary of our sales performance on the geographic basis.
Speaker 3: Our first quarter sales in the US increased 11% year over year. Sales to US customers came in roughly $5 million higher than the high end of our growth expectations and represented 62% of our total company constant currency growth this quarter.
Speaker 3: Our US growth performance reflects continued strong execution and overall improving trends in the US market, particularly in the month of March.
Speaker 3: International sales increased 9% year over year, which is strong performance in light of the challenging global macro environment in certain international markets.
Speaker 3: All three of our major regions posted growth above the high end of our expectation, and sales in the EMEA, APAC, and Rest of World Regions increasing 17 percent, 2 percent, and 7 percent, respectively, year over year.
Speaker 3: While we are pleased to deliver international growth of head of what our guidance has assumed, as expected, our international growth was materially impacted by COVID-related headwinds in China, our largest OUS market. Sales and training declined in the high single digit year over year in quarter one.
Speaker 3: which exceeded our expectations through primarily to material improvements in trends in March.
Speaker 3: Excluding China, our total international growth was nearly 17%.
Speaker 3: in quarter one. Now while we were pleased with all three regions which contribute to the stronger than expected growth, we saw the most upside versus expectations in the EMEA region, where the region's year-over-year growth was primarily driven by command in France, Germany, the Middle East, and Spain.
Speaker 3: Excluding China, sales and APEC increased 21%.
Speaker 3: fueled by mid-teens growth in Japan and strong contributions and growth from sales to customers in both Australia and Korea. And lastly,
Speaker 3: In our rest of world region, we delivered 7% growth year over year driven by solid growth in Latin America, Brazil and Mexico, partially offset by high single digit declines in Canada compared to the prior year period.
Speaker 5: It's hungry.
Speaker 3: We couldn't be happier with a strong start to fiscal year 2023. We are certainly encouraged.
Speaker 3: by the improving growth trends in both the US and international markets. But we recognize that the impressive results we delivered in quarter one are a direct result of our team's continued focus on executing our multi-year strategic plan.
Speaker 3: In a few moments, Raul will review our financial results for the quarter and the updated guidance between us and our press release this afternoon.
Speaker 3: I expect you will share my view that our financial performance in Q1 continues to demonstrate that the team's hard work in commitment to our foundations for growth program is paying off.
Speaker 3: NONGAP grows in operating margins of 50.1% and 16.1% respectively, and more than 20% growth year-over-year in both NONGAP net income and NONGAP earnings per share.
Speaker 3: Clearly, we are very, very proud of significant year-over-year improvements in profitability we delivered in the first quarter.
Speaker 3: Now that said, we're not losing focus.
Speaker 3: And we know we have a lot of work to do this year. We have updated our 2023 financial guidance to reflect the better than expected financial results in the first quarter. Importantly, we remain confident in our teams ability to deliver continued progress in the three year and in year three, excuse me, of our foundations for growth program and the related financial targets.
Speaker 3: for the three-year period ending December 31, 2023, which calls for our constant currency, organic revenue growth to increase at a figure of at least 5%, non-GAAP operating margins of at at least 18% and cumulative free cash row of more than 300 million.
Speaker 3: Now with that said, let me turn the call over to Raul, who will take you through a detailed review of our first quarter financial results and our 2023 financial guidance which we updated in today's press release.
Speaker 3: Let me turn the call over to Raul who will take you through a detailed review of our first quarter financial results and our 2023 financial guidance which we updated in today's press release. Raul. Let's push this topic almost romantic. Awesome.
Speaker 4: Thank you, Fred.
Speaker 4: 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.
Speaker 4: For the avoidance of doubt, unless otherwise noted, my commentary will focus on the company's non-GAAP results during the first quarter of fiscal year 2023. 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 13% year over year.
Speaker 4: improved op-cellestance expense, freight and distribution, as well as other FFG-related efficiencies.
Speaker 4: As expected, our first quarter gross margins were impacted by the inflationary headwinds we are seeing in freight, logistics, labor and raw materials.
Speaker 4: The 230 basis point increase in gross margins year over year exceeded the high end of the expectations we outlined on our Q4 call Which call for gross margins to increase 90 to 190 basis points year over year do primary to fixed cost Leverage on the better than expected sales performance in the period
Speaker 4: Operating expenses increased 11% year-over-year in the first quarter. The year-over-year increase in operating expenses was driven by a 10% increase in SG&A expense and a 14% increase in R&D expense compared to the prior year period. Our operating expense performance in Q1 was better than expected.
Speaker 4: and reflects strong operating leverage due to our continued focus on expense management and prioritization of investments to support our future growth initiatives. Total operating income in the first quarter increased $7.7 million, or 19% year-over-year to $48 million. Our operating margin for Q1 was 16.1% compared to 14.6%
Speaker 4: First quarter other expense net was 0.7 million compared to 0.9 million last year.
Speaker 4: 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 effective interest rates.
Speaker 4: year over year.
Speaker 4: Note, our other expense net line was roughly 1 million lower than what our guidance had assumed as a result of lower non-cash expense realized on foreign currency gain loss in the period.
Speaker 4: First quarter net income was $37.5 million or 64 cents per share, compared to $30.4 million or 53 cents per share in the prior year period.
Speaker 4: We are pleased with our profitability performance in the first quarter, where we delivered 23% growth year-over-year in non-gap net income, and 22% growth year-over-year in non-gap diluted earnings per share, exceeding the high end of our expectations.
Speaker 4: Turning to a review of our balance sheet and financial condition.
Speaker 4: As of March 31st, 2023, we had cash and cash equivalents of 57.9 million total debt obligations of 197.8 million and available bar and capacity of approximately 521 million compared to cash, cash equivalents of 58.4 million total debt obligations of 198.2 million.
Speaker 4: and available and borrowing capacity of approximately $523 million as of December 31, 2022.
Speaker 4: Our net leverage ratio as of March 31st was 0.6 times on an adjusted basis.
Speaker 4: We generated 1.8 million of free cash flow in the first quarter. Cash from operations increased 21% year-over-year in the first quarter driven by the strong improvements in gap net income year-over-year, offset partially by 11% increase year-over-year in the use of cash for working capital.
Speaker 4: was also impacted by a 34% increase year over year in cash invested in capital expenditures.
Speaker 4: Turning to a review of our updated fiscal year 2023 financial guidance.
Speaker 4: We now expect GAPnet revenue's growth of a Proxima 6 to 7% U over year compared to 4% to 5% previously.
Speaker 4: The updated gap net revenue range now assumes a headwind from the changes in foreign currency exchange rates of approximately 3.5 to 4 million, representing a headwind to our forecasted gap growth rate of 30 to 40 basis points, compared to our prior guidance range, which assumed 10 to 11 million and 90 to 100 basis points, respectively.
Speaker 4: The gap net revenue guidance range now assumes net revenue growth of approximately 5 to 6% in our cardiovascular segment and net revenue growth of approximately 15 to 16% in our endoscopy segment.
Speaker 4: Starting with selection of been selected remedies for all of the first quarter. 1-8 2-3
Speaker 4: Note, the midpoint of our 2023 constant currency sales growth expectations now assumes approximate 6% growth year over year in the US and approximately 7% growth year over year in all US markets.
Speaker 4: quarter. With respect to profitability guidance for 2023, we now expect
Speaker 4: GAAPNIC income in the range of approximately $100 million to $105 million unchanged from prior guidance, and GAAP diluted earnings per share of $1.71 to $1.79 versus $1.72 to $1.80 per diluted share previously.
Speaker 4: And non-GAAP net income in the range of approximately $166 million to $171 million, or $2.83 to $2.93 per diluted share, compared to $163 million to $168 million, or $2.80 to $2.89 per diluted share previously.
Speaker 4: For modeling purposes, our fiscal year 2023 financial guidance assumes non-GAP gross margins in the range of approximately 50.7 to 51%, reflecting a 30 basis point increase at the low end versus prior guidance assumptions.
Speaker 4: Non-GAP operating margins and a range of approximately 18% to 18.2%. GAP and non-GAP, other expensive across me, 6.6 million and 6 million respectively, both of which reflect a $1 million lower expense versus guidance which benefited our first quarter results that I discussed earlier.
Speaker 4: non-GAAP tax rate in the range of 21.5% to 22.5% versus approximately 21% previously, and diluted shares outstanding of approximately $58 million.
Speaker 4: We continue to expect CapEx in a range of $55 to $60 million and free cash flow of approximately $115 million.
Speaker 4: Lastly, we would like to provide additional transparency related to our growth and profitability expectations for the second quarter of 2023. Specifically, we expect our total revenue to increase in the range of approximately 4 to 6 percent year-over-year on a GAAP basis and up approximately 5 to 7 percent year-over-year on a constant currency basis.
Speaker 4: Note that the midpoint of our second quarter constant currency sales growth expectations in suit assumes approximately 6% growth year-over-year in the US and approximately 7% growth year-over-year in all US markets.
Speaker 4: With respect to our profitability expectations for the second quarter, we expect to see non-gap gross margins increase in the range of 70 to 130 basis points year over year. We also expect to see non-gap operating margin in a range of down 20 basis points to down 60 basis points year over year.
Speaker 4: These margin expectations combined with higher interest expense year over year are expected to drive a year over year change in non-GAAP EPS in the range of flat year over year on the low end to up mid single digits year over year on the high end of the range.
Speaker 4: That wraps up our prepared remarks. Operator, we would now like to open up the line for questions.
Speaker 2: Thank you, sir. If you'd like to ask a question, please sign up by pressing start 1-1 on your telephone keypad.
Speaker 2: If you're using a speakerphone, 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'd like to ask an additional question, we invite you to add yourself to the queue again by pressing star 1 1.
Speaker 2: If you're using a speakerphone, 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 an additional question, we invite you to add yourself to the queue again by pressing star 1-1. One moment for our first question.
Speaker 2: And our first question will come from the line of Steve Lickman from Oppenheimer. Your line is open. If members agree this is how it's going to be.
Speaker 6: Thank you. Even guys. So it's really balanced strength here on the top line in the first quarter. I guess this is for my question and my follow up front here just touching on a couple of different areas. One, OEM, very solid again. If you can talk about the drivers there and...
Speaker 6: what you think is from the sustainable growth looking ahead for that segment. And then secondly, just in China, I think geographically, given the strength in March, how are you feeling overall about the outlook for your business in China? Thanks. Yeah, Steve, hey, thank you very much. Listen, I think the OEM issue really comes
Speaker 3: the OEM opportunity is. In terms of sustainability, we're just going to stay within our forecast for the year. And if we see other things, we'll discuss that in further calls. But as you can see, the business is doing well there.
Speaker 4: And we're very, very pleased with the OEM. Raul, do you want to pick up the China question? Yeah, look, I think I'll start off with just saying, our international sales grew up 9% on a constant currency basis. Essentially, all three of our major regions posted above the high end of our expectations, which I think we were really excited about. And as expected, our OUS growth was impacted by
Speaker 4: the COVID-related headwinds in China, which we expected. I will call out that, you know, excluding China, our international sales were up, you know, nearly 17% on a constant currency basis. So I think we're, you know, excited how China came back in March, and we'll see how the rest of the year pans out. But excited about how our international sales did.
Speaker 2: Our next question will come from the line of Jason Bedford from Raymond James. Your line is open. The line is open.
Speaker 4: Hi. Good afternoon and – excuse me – congrats on the success here. So just a couple. On your comments on the strength in March particularly in the U.S. Fred, you've been doing this for a few years. I'm just curious why do you think March was so strong and kind of what are you seeing out there?
Speaker 7: are there from a procedure standpoint or even a company's specific standpoint that maybe perhaps you're gaining a bit more scar than than others.
Speaker 3: Yeah, listen, I think Jason, as I mentioned my previous comments on OEM, a lot of it's reliability and merits ability to deliver while others are maybe still trying to catch up. And the procedural growth rate. So if you, I mean you take those things, it's kind of consistent across the board.
Speaker 3: globally is our ability to do that, the vertical integration. Other things that we do as a business, I think are playing well, have in the past, and we think will play well in the future as well. Yeah, go ahead. I'm wondering, do you think there's kind of a catch up of procedures out there? Is it an access?
Speaker 3: situation here where hospital staffing has come down to allow hospitals to perform these more procedures and I'm just curious from a macro perspective. What was driving? It's the question of the day. We get this all the time. I was talking to another senior executive of a medical, a large medical device company. And...
Speaker 3: They were still talking about the issues of staffing. We see some trends in staffing. On the other side of the coin, I think that you are seeing there's some pent up demand out there clearly. I think it's going to be out there for a while. I think all of the factors, all of the macro factors, in my view, our viewers of company,
Speaker 7: I think we're paying in marriage favor. Okay. Just on gross margin, it was clearly quite strong in the first quarter. You lifted the gross margin guide, but the operating margin assumption didn't really change for the year. So I'm just curious as to where the incremental reinvestment is going.
Speaker 3: Yeah, I'm going to pick up the front end and let Raul talk in the back. Listen, we talked about in previous calls about sales meetings. We talked about trade shows and those things. And we talked about making those investments in our previous phone calls saying they were coming as this.350
Speaker 3: COVID situation unwrapped. And in fact, that's exactly, you know, we have a couple of trade shows this week. So it really is trade shows and sales meetings. And just briefly on the sales meetings, I attended them, and it's just nothing like getting the team together.
Speaker 3: talking about their successes their opportunities and the commodity you know the camaraderie that comes with all of that is important in any type of organization I've seen it through my military career and my business career that role you want to pick up the gross margin park yeah look I think on the gross margin you know clearly the the strong
Speaker 4: it's kind of foundations for growth, right? There is a level of investment that we're making in the business, specifically as this gross margin comes in. We've been, you know, we've continued to talk about that, about that prudent investment in growth initiatives. And so I think it's really just about balancing, Jason, the growth that we're seeing, the profitability in our gross margin that we're seeing.
Speaker 2: One moment for our next question.
Speaker 2: And our next question comes from the line of Mike Matheson from Needham. Your line is open.
Speaker 6: Yeah, good afternoon. Thanks for taking my questions.
Speaker 6: I guess I'll start with gross margin was obviously really strong and you called up product mix. I was wondering if you could maybe just talk about what you're seeing there, kind of the categories that are higher margin and maybe growing faster or someone that are lower margin maybe growing slower driving that mix benefit.
Speaker 4: Yes, you know, well, I'll call out a couple things first, right? We saw improved obsolescence expense. Obviously, the freight and distribution as we shift from air to ocean is helping. We also have some related FFG initiatives that are flowing through that are helping it. As always...
Speaker 4: side, we continue to see growth in our SIANA product line, in our peripheral intervention mark areas. OEM was a strong player too, which has increased gross margins. So just kind of a mix of different things, Mike.
Speaker 3: Can I add something, Raul, if I could just? I think with our chief commercial officer and aligning all of our global initiatives and support is also something that just overall plays well for the business. That's Joe Wright and his team. I think it's a much more cohesive.
Speaker 3: effective unit in the commercial side that drives because remember we're all tied everybody in this company is tied to margins and and results and when you line all that up it's just really interesting to see what happens
Speaker 6: Yeah, okay. So it's more of a, this is more of a kind of a deliberate effort on your part as opposed to just kind of something that happened. You're deliberately powering this product. Yeah, let me just tell you, everything out here is deliberate. You're going to get some deliberate. Somebody in their office that got.
Speaker 4: the guidance that we had given.
Speaker 6: Okay, thanks. Kind of a related question, I guess. I feel like when you started the Foundations for Growth Program, I think one of the things you talked about was some skew rationalization, product rationalization of some kind of lower margin categories and things like that. I just wanted to get an update there. Has that sort of been accomplished or?
Speaker 4: you know, is that maybe having an effect on, or has that had an effect on gross margins? So yeah, look, skewed rationalization is a program, it's quite frankly a multi-year program, and if we're successful, you shouldn't notice other than gross margin accretion.
Speaker 4: We've gotten rid of some pack businesses in Australia, some pack business in Ireland, in Europe also, that'll be kind of fully gone here by mid-year. So generally, it is one of the initiatives that we continue to work on and again, it's a multi-year approach. Most of it is kind of...
Speaker 3: We've got you know better higher quality and higher gross margin products that we want to replace it with and you know Mike some of it comes in efficiency to where we might be We have a catheter that we're selling hundreds of a month and it might be five centimeters longer or shorter And then we have something that we sell about tens of thousands a month and we move them over. So that's Q rationalization
Speaker 3: comes not only just in low products but also in margins there but in the efficiency of manufacturing. Low runners. Yeah, low runners. And I think we keep our customers happy. They're thrilled that we talked with them and worked this out and have this transition. So that's why you have to do this in a sequence and it has to be well disciplined. You want to keep your customers happy.
Speaker 3: happy instead of someone and I've seen this happen with other players. They just go out and just knock something off with no input this or that and they upset their customers. It's just not a smart way to do business. That's what we've tried to do.
Speaker 2: Okay, great. Thank you. One moment for our next question. Our next question, ComforLine of James Siddoti from Siddoti. Your line is open.
Speaker 8: Hi, good afternoon and thanks for taking the questions. You know, it's been a couple years, I must back where Q1 exceeded Q4, but it isn't very common, especially when you have a slowdown in China due to COVID. So it's especially impressive this year. Were there any one-time things in the quarter or is it just the procedure?
Speaker 4: But nothing that I'm aware of, Raul, I'm not aware of any one time anythings. No, I mean, our guidance is built on things kind of opening up over the year. So we'll see, March is one month and the quarter is one month. We'll see how the rest of the stuff, but we're excited about things have trended so far.
Speaker 8: And has pricing been a factor? I know you have thousands of products so it's hard to say what your...
Speaker 4: your average price increase in, but how much in the growth would you estimate came from pricing? That's a great question Jim, but you know I we're not going to you know discuss that on the call or we just don't re we actually don't disclose that publicly, but I will say that most of our growth continues to be volume.
Speaker 8: pricing is a benefit that we're getting and continue to expect together. Okay, then on the expense file in R&D up, you know, three or four million in a quarter, is that due to trials or what's going into that?
Speaker 4: Yeah, trials and just making sure that we invest, you know, continue to invest in the business. Again, I think what we're trying to do is make sure that we're prudent about, you know, the way we deliver profits, but also continue to invest in the business.
Speaker 8: Okay, and then the last one from the inventory, you noted how that increased from the beginning of the year. Is that all safety stock? Is there any anticipation of continued strong growth in the rest of the year? What can we read out of that?
Speaker 4: Yeah, look, a large part of it is really kind of our strategy just to make sure that we can maintain the customer service levels that our customers expect of us. We've been in a good position that we've been able to deliver product and we want to continue to be able to do that. Secondarily, we've got the shift from air to ocean, which does require a little bit more inventory. We've got the shift from air to ocean, which does require a little bit more inventory.
Speaker 4: you know, as it is a lag. Yeah, in the lag. And then also just, you know, some of the site consolidations and product line transfers that we have. So it's a combination of a few things, but mostly it's really just about making sure that we can meet our customers' needs.
Speaker 8: Do you think you'll see a similar increase in the second quarter or do you think you've already built it up to the point where it's going to be more of a slower increase?
Speaker 4: You know, we don't give intra-quarter or intra-month guidance on free cash flow just because of the timing of things. We haven't changed our free cash flow target of $115 million. So I'm going to leave it at that Jim if you're okay with that.
Speaker 4: know, we don't give intra quarter, you know, or intramont, you know, guidance on free cash flow just because of the timing of things. We haven't changed our free cash flow target of $115 million. So I'm gonna leave it at that, Jim, if you're okay with that. Yep. Got it. Thank you.
Speaker 2: One moment for an ex-question. Our next question, cuffline of Jason Bednor from Piper Seller. The line is open.
Speaker 9: Any good afternoon, actually, the questions and congrats to on a really nice start to the year, guys. Thanks, you know, apologies in advance, man. This one covered. I've been having a couple of calls here. Roll just to start with you. Really, maybe just trying to understand the components of the full year guide at the Rebony line as we've got one.
Speaker 9: on the second half, pricing probably getting a little bit better, China's probably better in the second half and the first half. So maybe just help with the sequencing as we think through the factors, influencing like the cadence of that organic growth.
Speaker 4: Yeah, we really didn't change any of the assumptions, you know, from Q2 to Q4. You know, it's really that what you're seeing from a guidance perspective or the updated guidance is a strong Q1. Again, what we saw is, you know, January , February in line with our expectations and then a very strong March. And we don't want to go out and get ahead of ourselves, Jason. I think what we want to see is.
Speaker 9: you know, let's see if this one month turns into, you know, three months and then, you know, six months and then a full year. So I think that's where we're at. Again, nothing, not much has changed in the back half. Okay, yeah, fair enough. And then on the free cash flow outlook, maybe building on a little bit of Jim's question there previously, but how do we think about that, the cadence of that $115 million coming through, you know, working towards moving all the way back to ocean versus air freight?
Speaker 9: And then how should we think about the capital location here this year? Is it still the working assumption you just continue to pay down debt?
Speaker 4: Yeah, yeah, we'll continue to pay down to it. And again, I think 115 million is still our target for the year. We did talk about some timing-based items in our Q4 call just a couple of months ago related to Q1, but we don't give in to a quarter information on free cash flow just because it's so tricky on a timing-based. But look, we haven't changed our target yet. So.
Speaker 9: I think hopefully that gives you the confidence that we see in here. Yeah, definitely. Okay, and then Fred or Raul, it seems like you're clearly picking up share here in the market, have been for multiple years now, but maybe talk about the competitive landscape as it stands today as we look out across your key geographies, the US, Europe , and China. Any shifts or changes that are worth calling out? Well, you know, I think the real factor is our ability to provide product.
Speaker 3: in the reliability. That's where this comes from and that goes back to vertical integration, all the things we've talked about for a very long time. It's really the core of marriage business is the opportunity you've heard by will say several times on this college is you know getting the product to customers and the reliability.
Speaker 3: Everybody's out there fighting for the same health care dollar and the question is who does it better and our goal is to just continually improve to meet that need and also as was pointed out to invest in the business for new products that make it easier for physicians and technicians to be able to do their job.
Speaker 2: It's kind of the same thing we've been doing for a long time, but with maybe a little bit more of a sharpened focus. All right. Well, congrats again. Thank you very much. One moment for our next question. Our next question comes from the line of Michael Batuski from Baratini Research. Your line is open. Good evening, guys.
Speaker 2: for a long time, but with maybe a little bit more of a sharpened focus. All right. Welcome, grads again. Thank you very much. One moment for our next question. Our next question comes from the line of Michael Pataski from Barrettian Research. Your line is open. Good evening, guys. I guess slightly being...
beating the dead horse. But I just want to ask, the free cash flow generation in the first quarter, and I understand certainly the Q1 is always going to be the lowest, but I mean did that come in a little soft even relative to internal or was that actually relatively in line?
Again, Mike, I think we talked about it being soft in Q1. As a matter of fact, I believe you asked the question, right, you know, hey, what's the cadence of free cash flow? And again, I always call out Q1 because it is lighter than what we expect. And so….
I'll just leave it at that. You know, again, we haven't changed our free cash flow target for the year. So hopefully I give you some confidence of where we're at.
OK, fair enough. And I didn't catch the commentary about China in March. It sounded like you said it got better. But did you quantify that or just essentially say, hey, China got better in March?
Yeah, no quantification, just China got better. It exceeded our expectations and so hopefully that will continue.
And I guess Fred, in terms of what you guys are seeing out there in terms of assets, are you seeing more? What kind of valuations are you seeing with interest rates, where they are? How has that changed the landscape? And I guess you're thinking about assets.
put it, Mike, is that we are looking for things that, you know, fit our sales channels, things that are complementary to our foundations for growth. And our you know, the profitability, all the things that we talked about, we are seeing things though loosen up, as you know, and we've said before on previous calls.
things were just simply too expensive. And I think that's, you know, without getting too prophetic here, I mean, we talked about that, is that it just didn't make sense to us to be, you know, in these prices. So things are loosening, there's more availability, a lot of them are still those startups or those companies that are not making money.
That's not of much interest, but at the same time, there are assets starting to show up, and we'll look at them and see if they meet our criteria. Yeah, I'll just add that, you know, I mean, I think if you look at our growth, you know, we continue to display pretty strong growth. And so I think we can continue to exercise patience.
and we don't have to do anything because we don't, you know, we're not suffering from a growth issue. It's a really good point, Merle. We don't have to do anything, but we can be opportunistic. That's right, that's the opportunity to buy. Just real quick, let me sneak one more in. One question that I've gotten increasingly over the last few months regarding merit, and I think this is truly a compliment to you guys in how you executed 2 1 3rds of the way in, or a little more than 2 3rds of the way in on foundations for growth. I've had multiple questions from investors about do I think that merit will do some other.
multi-year sort of target plan after 23 is over. I understand you're super focused, hyper focused on executing what you've put out there.
Do you have any comment on whether it's likely you'll do something similar going forward? Thanks. Yeah, I can tell you that Raul and I would do a duet on this and it would sound exactly like that. So, give them your part of the duet. Because I have the same answer. Yeah, I mean, I think the way to look at it is, the way we look at it internally, is we don't want to be that wide open receiver that drops the ball at the one yard line. So, we want to, I understand everybody's focus of past 20...
football, I'm a baseball guy. I mean, you know, we got to get the last out in the ninth inning and then you win the World Series. You don't win it in the sixth inning. So, what it would say, well, I guess it would be if you had four quarters, twelve, it's the eleventh inning, we're playing extra innings. So, we just want to finish it up and that's what you'll hear say it's very consistent.
And then we'll talk about where we go from there. Well Fred, the only comment I have on that is given the state of the Red Sack from Surprises, the old baseball fan, but good luck. Thank you. Now that's a cheap shot, my friend. And not only that, I got an Oreo's guys in the room here with me. They won 62 today. I'm really hurt. I'm very, very hurt over that kind of. Sorry, Fred, that's far.
Yeah, especially a guy from Chicago. Come on. All right. Thanks, Mike. One moment for our next question. Our next question comes from the line of William Plovonic from Canaccord. Your line is open. Great. Thanks for taking my questions.
I just have two. One is, you know, looking at the business today and understanding, you know, everything you've done, what do you think peak operating margins could be for this business eventually?
And then my second question, I'll give it and then I'll go on mute is, you know, one of the questions that I get from investors is, you know, Fred, you've built this company since the 80s, you've done a phenomenal job. You know, how should we think about, you know, is there some point which you step down? Is there succession planning? Or how do we think about that? Thanks for taking my question.
Yeah, you're welcome. Let me hit that the last one there. Listen, we have a formal program. We will have an announcement by this year in the second half of the year that lays it out in a public release to everybody. You shouldn't read into that that that's the end. I want to make sure that's clear, but it'll spell out the succession program.
that's being run by our ESG and our comp committee. So that will come out formally and that'll answer your question. In terms of peak performance, we just don't talk about that. Remember that goal line, Bill? It's the home plate, the goal line, the net. That's it. Touchdown. Touchdown, yeah. We'll cross that bridge when it's time to cross. It's not at this point and we want to stay consistent.
And there was silence. All right, thank you. And I'm not showing any further questions in the queue. I'd like to turn the call back over to Fred for any closing remarks.
Ladies and gentlemen, thank you very much for your time. There's a lot of calls out there. I know you're busy. So we'll just again, thank you once again. We appreciate it. We'll sign off now from Salt Lake City. Raoul and I will be available for the next few hours to answer questions and we'll talk to you then. Thank you very much and good evening.