Q4 2024 Merit Medical Systems Inc Earnings Call
Please stand by and welcome to the American Medical System's fourth quarter 2024 earnings conference call. At this time, all participants are placed in 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.
Speaker Change: I would now like to turn the call over to Mr. Fred Lampropoulos, Merrick Medical Systems founder, chairman, and chief executive officer. Please go ahead, sir.
Speaker Change: Thank you and welcome everyone. I am joined on the call today by Raul Parra, our Chief Financial Officer and Treasurer, and Brian Lloyd, our Chief Legal Officer and Corporate Secretary. Brian, would you mind taking us through the Safe Harbor Statements, please?
Speaker Change: Thank you, Fred. 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 risks and uncertainties.
Speaker Change: 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 the expectations and projections expressed or implied by our forward-looking statements.
Speaker Change: In addition, any forward-looking statements represent our views only as of today, February 25, 2025, and should not be relied upon as representing our views as of any other date.
Speaker Change: We specifically disclaim any obligation to update such statements except as required by applicable law.
Speaker Change: Please refer to the section titled Cautionary Statement regarding forward-looking statements in today's press release and presentation for important information regarding such statements.
Speaker Change: For a discussion of factors that could cause actual results to differ from these forward-looking statements, please also refer to our most recent findings with the SEC, which are available on our website.
Speaker Change: Our financial statements are prepared in accordance with accounting principles which are generally accepted in the United States.
Speaker Change: 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.
Speaker Change: A reconciliation of non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in today's press release and presentation furnished to the SEC under Form 8K.
Speaker Change: Please refer to the sections of our press release and presentation entitled Non-Gap Financial Measures for important information regarding non-gap financial measures discussed on this call.
Speaker Change: Readers should consider non-GAAP financial measures in addition to, not as a substitute for, financial reporting measures prepared in accordance with GAAP.
Speaker Change: Please note that these calculations may not be comparable with similarly titled measures of other companies. Both today's press release and our presentation are available on the Investors page of our website.
I will now turn the call back to Fred.
Fred Lampropoulos: Thank you, Brian. Let me start with a brief agenda of what we will cover during our prepared remarks.
Fred Lampropoulos: I will start with a summary of our fourth quarter and full year 2024 results.
Fred Lampropoulos: Then Raul will provide a more in-depth review of our quarterly financial results and our financial guidance for 2025, which we introduced in today's press release.
Then we will open the call for your questions.
beginning with a review of the fourth quarter results.
Fred Lampropoulos: The constant currency revenue growth we delivered in the fourth quarter exceeded the high end of the range of growth expectations.
The Better Than Expected Total Cost and Currency Revenue Results
Fred Lampropoulos: were driven by strong organic growth with contributions from acquired products coming in largely in line with what our fourth quarter guidance had assumed.
Fred Lampropoulos: With respect to our profitability performance in the fourth quarter, we delivered financial results that significantly exceeded our expectations.
Fred Lampropoulos: We leveraged the stronger-than-expected revenue results to deliver non-GAAP operating profit growth of 30% and a non-GAAP operating margin of 19.6% of sales up approximately 305 basis points year-over-year.
Fred Lampropoulos: We also delivered 26% growth in our non-GAAP earnings per share, which exceeded the high end of our expectations as well.
Fred Lampropoulos: We were pleased to deliver strong performance in the fourth quarter, capping off an impressive year of operating and financial performance in 2024, highlighted by
Fred Lampropoulos: More than 8% total constant currency revenue growth, including 6% organic constant currency growth.
Fred Lampropoulos: Significant improvements in our profitability profile with a 51.7% non-GAAP gross margin and a 19% non-GAAP operating margin, both of which are records for merit.
Fred Lampropoulos: and perhaps most importantly, we delivered strong free cash flow generation of more than $185 million, up 67% year-over-year.
Fred Lampropoulos: This performance was a direct result of our team's continued hard work and commitment to our strategic objectives.
Fred Lampropoulos: We are very proud of the strong execution our team delivered in 2024.
Thank you.
Fred Lampropoulos: We believe our fourth quarter results reflect continued strong momentum in the business and we are confident in our team's ability to deliver the financial guidance for 2025 we introduced in today's press release.
Fred Lampropoulos: and which Raul will review in detail later on in the call.
Fred Lampropoulos: We are focused on delivering continued strong execution, solid constant currency growth.
Fred Lampropoulos: improving profitability and strong free cash flow in 2025 as well as continued progress in our continued growth initiatives CGI program and related financial targets for the three-year period ending December 31st 2026
Fred Lampropoulos: Now with that, let me turn the time over to Raul for an in-depth review of our quarterly financial results and our financial guidance for 2025. Raul.
Raul Parra: Thank you, Fred. I will start with a detailed review of our revenue results in the fourth quarter, beginning with the sales performance in each of our primary reportable product categories.
Raul Parra: Note, unless otherwise stated, all growth rates are approximated and presented on both a year-over-year and constant currency basis.
Raul Parra: Fourth quarter total revenue growth was driven by 8% growth in our cardiovascular segment and 88% growth in our endoscopy segment. Cardiovascular segment sales exceeded the high end of expectations we outlined on our third quarter call.
Raul Parra: Our total revenue results included approximately $7.6 million of revenue from our acquisition of Endogastric Solutions and approximately $5.5 million of revenue from our acquisition of the Lead Management Product Portfolio from Cook Medical.
Raul Parra: Excluding sales of acquired products, segment revenue growth on an organic constant currency basis was 6.1% and 6.5% for cardiovascular and endoscopy segments respectively.
Raul Parra: Turning to a review of our fourth quarter revenue results by product category. Sales of our peripheral intervention or PI products increased 5.5% and was the largest driver of cardiovascular segment upside versus the high end of our growth expectations for the quarter.
Raul Parra: Growth in the PI product category was driven by the following factors.
Raul Parra: Sales of our Axis and Embola Therapy products increased in the low teens.
Raul Parra: delivery systems product sales increased 28% and radar localization product sales increased 9%.
Raul Parra: Cardiac intervention product sales increased 7%, slightly above the high end of our growth expectations.
Raul Parra: driven primarily by strong sales of EP CRM products and to a lesser extent growth in sales of fluid management products.
Raul Parra: Excluding the contributions from the sale of acquired products, cardiac intervention product sales increased approximately 1% on an organic constant currency basis.
Raul Parra: Sales of our Custom Procedural Solutions, or CPS, products increased 3.5%, which was in line with our expectations, driven by strong sales of critical care products.
Raul Parra: Sales of our OEM products increased 22% in Q4, well ahead of what our guidance assumed.
Raul Parra: OEM customers demand in the U.S. remains strong as expected. Product sales to OEM customers outside the U.S. were impacted by a more challenging raw material supply chain environment as discussed on our Q3 call, but we were encouraged by the better than expected order demand in the quarter.
Raul Parra: Turning to a brief summary of our sales performance on a geographic basis, our fourth quarter sales in the U.S. increased nearly 14% on a constant currency basis and 9% on an organic constant currency basis.
exceeding the high end of our expectations.
Raul Parra: We were pleased to see continued strong demand from our U.S. customers in the fourth quarter.
Raul Parra: International sales increased 5% year-over-year and increased 2% on an organic constant currency basis.
Raul Parra: Sales results in APEC and rest of world exceeded the high end of our expectations while sales in the EMEA region were softer than expected, driven by softness in Russia and distributor markets.
With respect to China specifically, sales increased 4%.
modestly better than what our guidance had assumed.
Raul Parra: We continue to see quarter-to-quarter variability and growth trends related to volume-based procurement programs.
As expected.
Raul Parra: That said, we were pleased to see a continuation of the dynamics we have talked about throughout 2024. Specifically, we saw better than expected sales of units, which offset continued pricing headwinds related to volume-based procurement.
Raul Parra: Turning to a review of our P&L performance. For the avoidance of doubt, unless otherwise noted, my commentary will focus on the company's non-GAAP results during the fourth quarter of 2024 and all growth rates are approximated and presented on a year-over-year basis.
Raul Parra: We have included reconciliations from our GAAP-reported results to the related non-GAAP item in our press release and presentations available on our website.
Raul Parra: Gross profit increased approximately 16% in the fourth quarter. Our gross margin was 53.5% up 304 basis points.
Raul Parra: The increase in gross margin year-over-year was driven by a favorable product, geographic revenue mix, and improvements in pricing, freight, and distribution costs.
Raul Parra: Operating expenses increased 9% from the fourth quarter of 2023. The increase in operating expenses was driven by a 6% increase in SG&A expense and a 26% increase in R&D expense compared to the prior period.
Raul Parra: Total operating income in the fourth quarter increased $15.9 million, or 30% from the fourth quarter of 2023, to $69.7 million.
Raul Parra: Our operating margin was 19.6% compared to 16.6% in the prior year period, an increase of 305 basis points year-over-year.
Raul Parra: Fourth quarter other expense net was $1.1 million compared to expense of $2 million last year.
Raul Parra: The change in other expense net was driven by higher interest income associated with higher cash balances.
Raul Parra: offset partially by higher interest expense associated by higher average outstanding debt compared to the prior year period.
Raul Parra: Fourth quarter net income was $56.3 million, or $0.93 per share, compared to $43.1 million, or $0.74 per share in the prior year period.
Raul Parra: We are pleased with our profitability performance in the fourth quarter, where we leveraged the stronger-than-expected revenue results to drive significant expansion in operating margin and strong growth in non-GAAP diluted earnings per share, both of which exceeded the high end of our expectations.
Raul Parra: Note our fourth quarter non-GAAP EPS results included incremental dilution related to our convertible debt that represented approximately two cents to Q4 EPS.
Thank you.
Raul Parra: turning to a review of our balance sheet and financial condition.
Raul Parra: We generated $65 million of free cash flow in the fourth quarter of 2024 and generated more than $185 million of free cash flow in fiscal year 2024, up 67% from 2023. The year-over-year improvement in free cash flow generation was a result of growth in net income and significant improvements in cash used in working capital.
particularly in terms of cash use for inventory.
Raul Parra: We used $23 million of this free cash flow to pay down our term loan in the fourth quarter, bringing our total debt pay down to $99.1 million for the full year 2024 period.
Raul Parra: As of December 31st, 2024, Merit had cash and cash equivalents of $376.7 million, total debt obligations of $747.5 million, and outstanding letter of credit guarantees of $2.9 million, with additional available borrowing capacity of approximately $697 million.
Raul Parra: compared to cash and cash equivalents of $587 million, total debt obligations of $846.6 million, and outstanding letter of credit guarantees of $2.7 million, with additional available borrowing capacity of approximately $626 million as of December 31, 2023.
Raul Parra: Our net leverage ratio as of December 31st was 1.9 times on an adjusted basis.
which we introduced in today's press release.
Raul Parra: For reference, we have included a table in our earnings press release, which details each of our formal financial guidance items and how those ranges compare to the prior year period.
Our 2025 guidance ranges assumes the following.
Raul Parra: gap net revenue growth of eight to ten percent year-over-year which we expect to result from
Raul Parra: Net revenue growth of approximately 7 to 9 percent in our cardiovascular segment and net revenue growth of approximately 36 percent to 40 percent in our endoscopy segment and a headwind from changes in foreign currency exchange rates of approximately 3 million or approximately 20 basis points to growth year-over-year.
Raul Parra: Excluding the impact of changes in foreign currency exchange rates, we expect total net revenue growth on a constant currency basis in the range of 8.6 to 10.1 percent in 2025.
Raul Parra: Among other factors to consider when evaluating our projected constant currency revenue growth range for 2025 are the following items. First, the midpoint of our total constant currency growth range assumes 10.6 percent growth in the U.S.
and 7.5% growth outside the U.S.
Raul Parra: Constant currency growth outside the U.S. at the midpoint is expected to be driven by low double-digit growth in the EMEA, high teens growth in the rest of the world region, and approximately 1% growth in the APEC region.
Raul Parra: The modest growth we expect in APAC sales is substantially related to China, where we project growth in unit sales on a year-over-year basis, but we expect total revenue to face continued headwinds related to volume-based procurement.
Raul Parra: Second, our total net revenue guidance for fiscal year 2025 also assumes inorganic revenue contributions from the acquisitions of assets from endogastric solutions and from Cook Medical closed on July 1st, 2024 and November 1st, 2024, respectively.
Raul Parra: in the range of $45 to $47 million in the aggregate.
Raul Parra: Excluding this inorganic revenue, our guidance reflects total net revenue growth on a constant currency organic basis in the range of approximately 5.3% to 6.6% year-over-year.
Third, for the full year 2025 period.
Raul Parra: We continue to forecast U.S. revenue from the sales of Rhapsody CIE
Raul Parra: With respect to profitability guidance for 2025, we expect non-GAAP diluted earnings per share in the range of $3.58 to $3.70, representing an increase of 4% to 7% year-over-year.
Raul Parra: Note, our financial guidance for 2025 does not factor in the anticipated impact of any new tariffs or modified tariffs that could be imposed by the government of the U.S. or any other jurisdiction.
Raul Parra: The tariff situation and potential retaliatory measures by other countries remain unclear. The ultimate impact of any changes in tariffs on our business will depend on the timing, amount, scope, and nature of such tariffs, among other factors, most of which are currently unknown.
Raul Parra: Our 2025 financial guidance assumes that the 2025 tariff structure will remain substantially unchanged during 2025. Additional tariffs or retaliatory actions or changes to currently announced tariffs could change the anticipated impact to our business.
Raul Parra: This is a rapidly changing situation, which we are monitoring carefully.
Raul Parra: Given the frequency of recent changes in tariff policy, we do not intend to provide interim updates in response to each news item or related rumor. Rather, we will provide updates as we deem appropriate on our quarterly earnings calls or in other public formats as we gain further visibility and certainty regarding the situation.
For modeling purposes, our fiscal year 2025 financial guidance assumes.
Raul Parra: non-GAAP operating margins in a range of approximately 19.4% to 19.7% up 40 basis points to 80 basis points year-over-year.
Raul Parra: non-GAAP interest and other expenses net of approximately $5 million compared to non-GAAP income of $1.1 million last year.
Raul Parra: non-GAAP tax rate of approximately 21% and diluted shares outstanding of approximately 61.7 million.
Raul Parra: Note, our weighted average share account assumption reflects incremental dilution of approximately 1.8 million shares related to our convertible debt facility. This represents an impact of approximately 11 cents to our non-GAAP EPS in 2025.
Raul Parra: Finally, we expect to generate free cash flow of at least $150 million in 2025, inclusive of the expectation that we invest approximately $90 to $100 million in capital expenditures this year. The step-up in CapEx investment this year is directly related to a new distribution center in South Jordan, Utah.
Raul Parra: We would also like to provide additional transparency related to our growth and profitability expectations for the first quarter of 2025.
Raul Parra: Specifically, we expect our total revenue to increase in the range of approximately 8.2% to 9.7% on a gap basis, and up approximately 8.8% to 10.3% on a constant currency basis.
Raul Parra: The midpoint of our first quarter constant currency sales growth expectations assumes approximately 13% growth in the U.S. and 5% growth in international markets.
Raul Parra: Note, our first quarter constant currency sales growth expectations include inorganic revenue in the range of $16 million to $17 million. Excluding inorganic contributions, our first quarter total revenue is expected to increase in the range of approximately 4% to 5% on an organic constant currency basis.
Raul Parra: With respect to our profitability expectations for the first quarter of 2025, we expect
Raul Parra: non-GAAP operating margins in the range of approximately 16.7% to 17.1%.
Raul Parra: compared to 17% last year and we expect non-GAP EPS in the range of 73 to 76 cents compared to 75 cents last year.
Fred Lampropoulos: I will now turn the call back to Fred for closing comments. Fred?
Fred Lampropoulos: Thank you, Raul. Before we open the call for questions, I just wanted to add that the U.S. Rhapsody CIE program is progressing well.
Fred Lampropoulos: And we're very much looking forward to the presentation of 12-month AVF data from our Rhapsody wave trial at the Society of Interventional Radiology on Sunday, March 30.
Fred Lampropoulos: That wraps up our prepared remarks. Operator, would you now open the lineup for questions?
Speaker Change: Thank you, sir. If you'd like to ask a question, please signal by pressing star one one on your telephone keypad. If using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.
Speaker Change: We do ask that you limit yourself to one question and one follow-up.
Speaker Change: If you'd like to ask additional questions, we invite you to add yourself back to the queue by pressing star 11 again.
And one moment while we wait for the first question.
Speaker Change: And the first question today will be coming from the line of Jason Bettner of Piper Sandler. Your line is open.
Thank you very much.
Speaker Change: Good afternoon. Congrats on a nice finish to the year here, guys.
Speaker Change: Raul, I want to start with the EPS guidance. I've gotten a few questions here. I think it's the one thing that maybe surprised folks, just given how strong the business has been.
Speaker Change: because it's a little bit lighter than the street. It seems like maybe some of that's coming from the accounting on the convertible note. But are there any other factors that you'd identify as maybe influencing the conservative EPS guide or things that we should be thinking about that maybe weren't in street models before today?
Speaker Change: Yeah, no, look, it's a great question. Obviously, super excited about the year that we're putting together.
Speaker Change: Super excited about the performance for 2024. I think it was probably one of the best, if not the best, financial performance we've ever put together. Just a solid.
Strong beat all around
Speaker Change: But, you know, organic constant currency on the revenue side, you know, 5.3 to 6.6.
Speaker Change: 40 to 80 basis points on the operating margin. As far as the EPS growth, you know, there's two things that I want everybody to kind of consider. The first one is we've got an additional $5 million of interest.
Speaker Change: expense versus the interest income of 1 million last year. Recall, we had a kind of a large cash balance last year. We did the acquisitions. So when you think about that, that's roughly about 8 cents of headwind to EPS growth.
Speaker Change: And then the second one, which is, you know, probably more important, I want to make sure I highlight it because there's
Speaker Change: There's a disconnect between the hedge that we bought and the gap accounting that you know on how you treat the dilution for the convert So that you know, that's going to be 11 cents. There's an incremental 1.8 million shares that we've added
Speaker Change: that essentially impacts our earnings by 11 cents. When you kind of factor those two things in.
Speaker Change: We end up somewhere around, you know, 9% to 12%, you know, growth, you know, if you exclude those items.
Speaker Change: So, I think that's probably more in line with what everybody was expecting, but the dilution on the convert does have a significant impact. And again, we have a hedge in place that covers us up until we get above $114.
Speaker Change: And so there is a disconnect between the economic benefit of that hedge versus how we treat it from a gap standpoint, which is a little disappointing, but that's just the way a gap works. And that's how we're going to account for it.
Speaker Change: Okay, very helpful and yeah, it makes a lot of sense.
Speaker Change: I want to take a stab at something here. I know just if we take a step back and think about the 26 margin targets that you had out there.
Speaker Change: You know, the business is already looking different today than it did a year ago due to M&A with EGS and Cook.
Speaker Change: Also, you've got Rhapsody in there. I guess, is the 20 to 22 percent margin target still the right range to use? Or maybe I should ask, you know, do you feel better at like the upper end of that range, the midpoint, or better of that range in light of the benefits that you're seeing from some of these factors?
Speaker Change: Thanks for that question, Jason. I think you probably already know how I'm going to answer it, but look, we're committed to a minimum of 5% organic constant currency, and we're committed to a minimum of 20% operating margins and a minimum of $400 million in free cash flow.
We're confident, obviously, in the LRP.
Speaker Change: Like I just said, we're super excited about year one of CGI and how 2024 played out.
Speaker Change: Right now we're just hyper focused on making sure that we execute in 2025 And yeah, that's that's that's all I'll say but you know great question. Amen Yeah, all right. Appreciate it. Thanks guys. Congrats again. Yep
Thank you. One moment for the next question, please.
Lawrence Beagleson: And the next question will be coming from the line of Lawrence Beagleson of Wells Fargo. Your line is open.
Speaker Change: I heard Wells Fargo, Larry Beacleston. I didn't hear my name. I assume, can you hear me okay, Fred and Raul? Yeah, we got you. We got you, Larry.
Lawrence Beagleson: Okay, where should I start? On OEM, Fred really strong 22% in Q4.
Speaker Change: I imagine these are long-term contracts, Fred, so how should we think about OEM growth in 2025? Is that a good jumping off point? In other words, is that 22% for the next few quarters until it laps in Q4?
Speaker Change: Yeah, well, let me let me just say that, first of all, is well ahead of what you know, our guidance assumed in the third quarter call. Our OEM customer demand, Larry, in the US remains strong, as we expected. Products on the OEM side outside the US.
Speaker Change: We're impacted more by challenging raw material and some supply chain things, but I think we've discussed that in the past.
Speaker Change: You know, the bottom line is, is we're just getting better than expected order demand. We do have some contracts, but again, it goes back to what's always been the hallmark of Merit's OEM business, it's reliability and quality.
Speaker Change: And at the end of the day, that's what carries the day for merit and always has.
You know, I...
Speaker Change: We were confident in the numbers, and I think Mike Black and his team did a really good job.
Speaker Change: and we had to build all this stuff and deliver it, which we did.
Speaker Change: Yeah, I mean, Larry, I mean, you know, maybe, you know, we don't really guide to the underlying product, you know, category growth, but, you know, obviously, we have a high level of confidence in OEM and their execution and what they've been able to do over the last several years.
Speaker Change: So, you know, I think, you know, everything that we expect out of OEM is baked into our into our numbers.
Speaker Change: What a Rhapsody multi-part here. So just early feedback, Fred, on Rhapsody. I think, Raul, you said you'd give us sales by quarter. And just lastly, Raul, the
Speaker Change: You know, you said the 5% minimum organic. I seem to recall that doesn't include Rapsody in the US. So Rapsody contributes about 60 basis points this year. Is that the right way to think about it? Thanks for taking the question.
Speaker Change: Yeah, so obviously we gave the yearly guidance on Rhapsody, $7 to $9 million. We did not say that we were going to provide actual revenues by quarter, but CGI is organic constant currency growth, Larry, and we did not include the U.S. launch of the Rhapsody if that's what you were asking.
Any early feedback, Fred?
We're just excited about the product.
and all of us. Thank you. Thank you.
You know...
Speaker Change: The initial market response is great. I think the RTG group, the renal therapy group, and those products and that whole program we put together is performing.
Speaker Change: you know, as we hoped it would. And we're looking forward to introducing the 12-month data by physicians and a full discussion of that at the CIR meeting. And we're confident in the numbers. The first couple of months have been very encouraging.
Speaker Change: It's nice, you know, we invested a lot, we took a lot of time.
Speaker Change: We're excited about the product and what it means to us, Larry, in the long run.
Thanks for taking the questions, guys. Thank you.
Thank you. One moment for the next question.
Speaker Change: And the next question will be coming from the line of Steve Lichtman of Oppenheimer. Your line is open.
Steve Lichtman: Thank you. Evening, guys. Gross margin was a standout in the quarter. Wondering, Raul, what gross margin is implied in the 2025 operating margin guidance, and if you could talk about some of the drivers you're seeing on the gross margin line.
Steve Lichtman: Yeah, well first of all I'm going to take the time to run around the bases, you know, on what was a home run hit on the gross margin, to be honest with you. You know, Steve, you've heard me say this that, and a lot of our investors have heard me say this, along with a lot of our, you know, covering analysts,
Steve Lichtman: When we go after gross margin, we really kind of throw the kitchen sink at it, you know, and with knowing that there's going to be things that are not going to work out in our favor, and there's going to be other things that are going to be better, and it's just, you know, our approach is just to tackle it from, you know, from pricing to efficiencies to logistics.
essentially the kitchen sink and
Steve Lichtman: What happened, you know, in the fourth quarter is we essentially kind of, you know, hit on everything and that's what you see, the execution there. I mean, a 300 basis point improvement in the gross margins is just outstanding.
The mix was great.
Steve Lichtman: OEM was strong, U.S. was strong, our mix was strong, our operations group I just had to call out because they executed at a really high level.
Steve Lichtman: And unit growth was strong, so everything that we would have wanted in gross margin really hit in the fourth. Now, as far as the 2025 guidance, as you know, we don't give gross margin guidance. We do give operating margin guidance.
Steve Lichtman: And as you can see, you know, we feel really strongly about what we're giving. We're going to give 40 to 80 basis points.
you know, in 2025.
Steve Lichtman: When we originally launched CGI, I think we were pretty clear that, you know, we would most of the operating margin accretion, at least on the low end, would be coming from gross margin. And on the high end, there would be a mix of gross margin improvement and OpEx leverage. And so I'll just leave it at that, that I think, you know, that plan has not changed.
Speaker Change: And I guess just building on that for the second question, what are the types of investments that you are making in Rhapsody this year? I know you talked about training seminars. Can you talk about, just qualitatively, I guess, some of the things that you're doing to lay the groundwork?
Yeah, I think...
Speaker Change: Steve, it comes down to training, understanding, going through the exercise of the appropriate reimbursement.
Speaker Change: exercises and the sort of things that we've talked about with NTAP and TPT.
Speaker Change: and I'm going to the trade shows, highlighting the project, meeting, you know, the things you, you know, that we're not running away from it, we're running.
Speaker Change: with it, and a lot of people, the registry, we're almost, I think we're on
Raul Parra: you know 420 or so out of the 500 and you know people look at that and those are important important things so the investments we've made we continue on and maybe most importantly is the psychology of the sales force you know Raul and I just left
Raul Parra: are U.S. and, you know, I was also at the European, but just in the U.S., just a high level of enthusiasm for the business and what we're doing and the role that they play. So it's nice, you know, it's nice to know that you can win, and that's how our people feel just across the board with all of our products.
Yeah. Great.
Thank you. One moment, please.
Raul Parra: Our next question is coming from the line of David Rescott of Beard. Your line is open.
David Rescott: Can you guys hear me all right? We got you, David.
David Rescott: Yeah, great. Thanks for taking the questions and congrats on the strong finish year to the year. Two questions from us and I'll ask both of them up front. First on Rhapsody, I want to make sure I heard it.
David Rescott: Clearly, you have the guide for revenue set this year and the, that you laid out today, and the seven to nine would be incremental on top of that from Rhapsody, if that is the case.
David Rescott: would it be fair to assume that any incremental kind of margin benefit that you could have from that would also be upside to the EPS guide that you set for the full year and then on
David Rescott: The endoscopy segment for the guide for the full year, I'd say, you know, maybe it was a little, a touch lower than what we were kind of assuming, so I'm wondering if there's anything you can talk about on endoscopy either as it relates to the underlying business.
David Rescott: or the EGS deal and how that's being integrated when you thought about setting out the guide for a dossier this year. Thank you.
Yeah, so...
Speaker Change: On the Rapsody piece, just to be clear, and sorry if I confused you, you know, when I meant, you know, the 7 and 9 was not included in the original CGI goals, David, so just to be clear, right? Obviously, clearly, the 7 and 9 that we've already disclosed
David Rescott: in 2025 as far as our yearly revenue target for Rhapsody is included in the guidance we already gave you. So, you know, Zach.
Yes, yes, yeah, yeah, okay. That makes sense. Sorry.
David Rescott: And as far as, you know, Endotech, you know, I think, you know, we feel pretty strongly about the guide that we've got out there. If you remember, we've got an integration of two sales forces going on. I think, you know, what we've done here is just, you know, done a measured, you know, guidance for that group. You know, knowing the complications of integrating two sales forces.
David Rescott: We are super excited about, you know, the products. I know I was, you know, Fred just mentioned we were at the U.S. sales force.
David Rescott: I talked to a lot of our endoscopy, you know, sales, you know,
David Rescott: Sales Team, and they're excited about having the new products, but there is a learning curve, and I think we've tried to, as you know, we guide, you know, with a realistic and achievable guidance. So I would say there's, you know, really nothing to see here other than.
That's what we've done.
Speaker Change: and David. So you'll be aware, and we may have discussed this in the past, but the product is fully integrated into our operations in Salt Lake City. All the TSAs are closed, and we did that ahead of time, and I think we did a magnificent job of training and transferring. So that part's all been completed.
as well, yep.
All right, perfect, thank you.
Thank you. One moment, please, for the next question.
Speaker Change: And the next question is coming from the line of Mike Matson of Needleman Company. Your line is open.
Speaker Change: Yeah, thanks. I guess I want to start with the currency impact. You're expecting total revenue this year, I think you said 20 basis points.
Yeah, I mean, we do do hedging, you know, and
If you can imagine, you know...
Speaker Change: Our hedging program is kind of is a rolling program. We try and minimize the impact from FX.
Speaker Change: You know, we think we're on the right track here and, you know, feel good about the number. Remember, our U.S. sales number has also, you know, kind of, you know, as a percentage of revenue has also climbed, so.
Speaker Change: You know, we're more heavy or U.S. centric than we have been historically, you know, before we were more 50-50. Now we're kind of, you know, sitting closer to 55, you know, 45, you know, in that range, Mike. So I think it, you know, that obviously helps, but we do have a hedging program in place.
Speaker Change: And, you know, that helps minimize some of the impact. Can I just add that it's it's consistent, Mike. We don't change it. We don't horse around. We don't time markets. We don't speculate. It's been consistent year over year for many, many years.
Okay, understand.
Speaker Change: And then just one on RAPCITY, I know you've given guidance for the U.S. but, and I know you're probably not going to give any numbers for OUS, but what I am wondering is, you know, has the data from the PIVL trial in the U.S.
Speaker Change: helped at all outside the U.S. and you know what just how well is the product doing international markets I know it's kind of a pricey product I don't know if that's kind of an obstacle in some of those more price sensitive markets but
Well, I'll just simply say that, um...
Speaker Change: It has not been an obstacle and we have, you know, we left the European sales meeting with encouragement of the sales force on the product. And even though we don't have an RTG group there, because of the different geographies, I think that RTG group is carrying that and other products. And we're quite pleased, as we have said, with the...
Speaker Change: with the Rhapsody and we continue to receive a strong positive response.
on the product and
Speaker Change: So we're looking forward to some of the events coming up like the
Speaker Change: and others that will discuss the detail by the professionals that can interpret it and give you their impression, not a bunch of manufacturing folks and that sort of thing. So we're quite excited about that.
okay got it thank you you bet thank you
Thank you. One moment, please.
Thank you.
Speaker Change: And the next question will be coming from the line of Elaine Hu of Raymond James. Your line is open.
Speaker Change: It's Jason. Hi guys. A couple questions here. Was there anything anomalous or one time in the very strong fourth quarter gross margin number?
Speaker Change: Now, I mean, just again, it was just really strong execution by our team.
Speaker Change: Okay, what's left to do from an operational standpoint to integrate Coq and EGS?
Speaker Change: So EGS is fully integrated. The only thing that, you know, this year is the first year, Jason, as you know,
where we have a combined sales force.
Speaker Change: So as you know, last year we did leave EGS and our endoscopy sales group as two separate sales forces.
Speaker Change: as they were training on how to sell, you know, the products, the different products.
Speaker Change: January 1st that went away and there's there's a combined sales force now. So other than that everything's already done with EGS and fully integrated. We're manufacturing the products and everything.
Speaker Change: On the Cook side, we continue to work under a TSA. Order to cash, for the most part, is done. There is a few countries.
some of the major, you know, European or
Speaker Change: APEC countries that are not, you know, on board yet, but, you know, we have a substantial amount of order cash done. Manufacturing continues to be done by Cook. We're looking to, you know, obviously integrate that, you know, sometime this year, if not early part of next year.
Speaker Change: But yeah, everything continues to be on pace, if not ahead in certain situations.
Speaker Change: Listen, I think what we did before, we had, you know, a PAC business and those sorts of things.
but there's always a continuous part of our CGI.
Speaker Change: to take a look at things that, you know, the smaller amounts of products and moving customers over to something where we build.
Speaker Change: 5,000 a month instead of 50 or 500. That's an ongoing program.
that fits into the objectives we have internally.
Speaker Change: Yeah, I mean, we continue to work on, as Fred mentioned, product life cycle management. To the scale of what you saw last year as far as the PAC business that Fred was talking about, we don't have any material impact, you know, this year.
But...
Speaker Change: Obviously, clearly, skew rationalization is just part of what we're doing going forward.
Thank you.
Thank you. One moment, please.
Speaker Change: And our next question will be coming from the line of John Young of Cannon Court. Your line is open.
Speaker Change: Hi, Fred and Raul. Congratulations on a strong end of the year. I just want to first start on Rhapsody. Did you guys get the TPT application in before the March 1st deadline yet? Yeah, I'm sorry. I kind of jumped on that.
Speaker Change: Yes, the NTAP and the TPT were filed on time, both of them are in.
Speaker Change: Okay, great. And then, you know, the supply chain challenge you highlight on the OEM OUS business obviously did not really materialize. Should we still expect any impact going forward in 2025 of any supply chain challenges?
Speaker Change: Yeah, I think there's two components to the supply chain, you know, issues that we were having last, you know, last year. And if you remember, one of them was
Speaker Change: being able to get sufficient raw materials, you know, for one of our products and then the secondary one was can we ramp up production fast enough.
for one of the products that had a strong demand.
Speaker Change: I think we've, for the most part, you know, have solved, you know, those issues. I would say that we can continue, we continue to keep an eye on them. But I think we're, our level of confidence is significantly higher than it was, say in the, you know, during our third quarter call.
Speaker Change: Okay, great. And America is sneaking us a third. You were pretty crystal clear on the tariff impacts are not included in the guidance today, or you're not really going to quantify anything today. But, you know, more high level, just the ability to move manufacturing for you guys from Mexico to other facilities like Ireland or Utah. You know, what is the ability to do that for merit? And maybe, have you taken any near term mitigation or hedging efforts at this point? Thanks again.
Speaker Change: I mean there's things we've done internally to try and you know mitigate you know the impact. They're minimal quite frankly and if I'm just being honest John, things are changing so drastically and so fast.
Speaker Change: that making any investments and moving manufacturing from one area to another just does not make sense.
Speaker Change: I think you had a lot of people do that in the last Trump administration or, not a lot, but you had some people that did it and now those countries are also included in the target tariffs or could be, because we don't know what's going to happen.
Speaker Change: and so I think you know for us it's it's it's you know business as usual let's control what we can control let's be hyper focused in our 2025 goals let's execute to those
You know, we're very nimble and we'll just adjust.
Speaker Change: the best we can when something is announced that is official.
Speaker Change: Yeah, John, I've always said to the team that we've survived eight American presidents.
Raul Parra: and eight administrations in the history of our company. We've dealt with tariffs before, and the one thing we don't want to ever do is to overreact, but I think we have our thumb on it. We're watching, we're listening, but it's really, as Raul pointed out,
Raul Parra: You know, it changes just during the conversation we've had with you. So as soon as we can get something clear, we'll talk more about it when it's appropriate.
I totally understand. Thank you again.
You're welcome.
Thank you. One moment please for the next question.
Speaker Change: And our next question will be coming from the line of Michael Piotrowski of Barrington Research. Your line is open.
Michael Piotrowski: Hey, good evening. So, Raul, I may have missed this. I was briefly distracted. If you've addressed this, forgive me, but the R&D expense, I'm assuming the POP in that in Q4 had a lot to do with Rhapsody activities, but can you just sort of speak to that and then sort of speak to if this is
Speaker Change: closer to a new normal or if it's likely to back off as we head into the first half of 2025? Yeah, I wouldn't say it's a new normal. Mike, to be honest with you, the gross margin was pretty strong. We felt like we needed to make some short-term investments in R&D. There was some
Speaker Change: Some things we wanted to look at from a consulting standpoint. And so we, you know, we had, we are consultants in and help us Work that that we thought was long overdue. And so we took advantage of that. And, you know, I think we feel comfortable with the historical levels of R&D obviously clearly
Speaker Change: As time progresses and we focus more on therapeutic products, that'll tend to, you know, trend upwards, but I think we don't, you know, we're not looking to, you know, to blow, you know, R&D out of the water either. I think the investment that we've made is effective.
Speaker Change: and we think we're at the right level. Sufficient for our plan. Yeah.
Speaker Change: Okay, all right, great. And then I'm wondering, the cadence of CAPEX, obviously it's a number, it's going to be a number this year. Do you have any guidance, first half, second half, or just where that's likely to sort of...
Speaker Change: come in because it will really matter in terms of free cash generation things.
Speaker Change: You know, Mike, I wish I had a good, you know, response to you. You know, we keep waiting for winter to show up.
and so, you know, continue.
Speaker Change: We continue to build, you know, the facility across the street, you know, we were talking about pouring footings, you know, just, you know, today just today. Yeah.
Speaker Change: Normally the ground freezes and you don't necessarily want to do that or can't do that.
Speaker Change: And so you hold off till spring or summer, right? And so...
Speaker Change: The weather's been pretty mild here in Utah, and so the building continues.
Speaker Change: Now, this is Utah, you know, we could have a snowstorm, you know, four feet of snow here in the next two hours and we don't even know it. But we could have one on May the 25th. We could. We've had one before. So, you know, I'm not going to, you know, provide you with a kind of a cadence other than to say, you know, obviously we clearly talked about, you know, the additional CAPEX that we would do as part of our CGI program because we wanted to build a facility which we'll think will...
Speaker Change: you know, make us more efficient over time, and obviously, you know, I, you know,
Speaker Change: I'd be disappointed if I didn't just didn't highlight the strong free cash flow number that we had for last year. I mean 186 million dollars.
Speaker Change: $66 million in the fourth quarter. I mean, it's just outstanding. We're focused on that number. We'll control CapEx as we've done over the last several years. But yeah, I think that's all I have for you.
Speaker Change: We're just going to keep executing, you know, that's the goal.
Speaker Change: Well, congratulations. It really was a fantastic year, thanks, and a fantastic fourth quarter. Thanks.
Thank you Mike.
Thank you. One moment for the next question.
Thank you.
Speaker Change: And our next question will be coming from the line of Jim Sedoti of Sedoti and Company. Your line is open.
Jim Sedoti: Good afternoon. Can you hear me? Yeah, we can, Jim. How are you?
Jim Sedoti: Good, good. Fred, you sound much better than you did last time. I hope you're feeling better. Yeah, I was. I had the bug. I'm fine, but yeah. Thank you, Jim.
Jim Sedoti: All right, just following up on that CapEx question, because I think I heard you say CapEx at 90 to 100 million for the year, which is about, you know, double, a little more than double what you've done the last couple years. You know, what do you get from that distribution center? How is that going to help you?
Jim Sedoti: Well, we've we've essentially in two ways the first one is just from an efficiency standpoint the system We currently have Jim is almost 20 years old
Jim Sedoti: You know, so it's essentially kind of met its end of, you know, end of life.
Jim Sedoti: There's a lot better systems out there that that we're using at two of our other distribution centers.
Jim Sedoti: And we think we can just be significantly more efficient with the new system. And so, you know, we've squeezed all the juice that we can out of the current system, and we postponed it, I think, you know, sufficiently. You know, we've been talking about this for probably five years, and we finally felt like we were at the right place.
Jim Sedoti: you know, kind of size to make sure that we did what we needed to do from a distribution standpoint, but
Speaker Change: Well, I was going to say, Jim, the other side of it is we have...
Jim Sedoti: that are spending, you know, a lot of money to have stuff like resins and...
Jim Sedoti: things stored off-site they'll be in this building and that'll eliminate that expense and the convenience of having to go pick it up you know downtown and bring it back out so there's that efficiency but I think the biggest one too is that you know we have Richmond for the East Coast yeah and it keeps creeping to the West
Jim Sedoti: And we need to get it back so there's an equilibrium so we can serve our customers as well. So there's all the reasons we've discussed here. And the second would be capacity, right? I mean, those of you who have visited our South Jordan site have seen the molding machines.
Jim Sedoti: We can't add any more molding machines there, luckily we have additional capacity in Mexico.
Jim Sedoti: But yeah, as we look to expand and need additional capacity for our molding, we will have additional room that is opened up by moving our distribution that currently sits on the main cap in Sierra City right across the street. So that's the goal.
Jim Sedoti: We'll do a minimum of $400 million under CGI, I think we're well on our way, you know, with the $186 million we just did.
Jim Sedoti: You know, we think we can do somewhere, you know, at least 150 million, you know, but yeah, I think we're feeling pretty confident there.
Speaker Change: So, you know, the last couple of years, a large part of that has gone to debt pay down. Will that be the case again in 2025?
Jim Sedoti: We'll continue to put cash on our balance sheet, Jim, and wait for opportunities that make sense for us. We've obviously got a clear strategy on the M&A front.
Speaker Change: I think you guys have started to see that, you know, we're finding assets that are margin accretive that can help us with, you know, with adding additional growth and also are at call points that we feel really comfortable with and allow us to get deeper in the bag.
Okay, all right. Thank you
Thank you, Jim.
Thank you.
Unidentified Moderator: Thank you. That does conclude the Q&A session for today and I would like to turn the call back over to Fred Lampropoulos for close remarks. Please go ahead sir.
Fred Lampropoulos: Well, ladies and gentlemen, thank you. I know it's a very busy time during the earnings season We appreciate your interest and we'll look forward to reporting Events as necessary best wishes to all signing off from Salt Lake City. Good evening
Fred Lampropoulos: Thank you for participating in today's program. This does conclude today's conference call. You may all disconnect.