Merit Medical Systems, Inc. (NASDAQ:MMSI) Q1 2024 Earnings Call Transcript

Merit Medical Systems, Inc. (NASDAQ:MMSI) Q1 2024 Earnings Call Transcript April 30, 2024

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Operator: Ladies and gentlemen, thank you for standing by. Welcome to the MMSI First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to turn the call over to Mr. Fred Lampropoulos, Chairman and CEO. Please go ahead.

Fred Lampropoulos: Thank you and welcome everyone to Merit Medical System's first quarter of fiscal year 2024 earnings conference call. I am joined on the call today by Raul Parra, our Chief Financial Officer and Treasurer; and Joe Wright, Chief Commercial Officer; and Brian Lloyd, our Chief Legal Officer and Corporate Secretary. Brian, would you mind taking us through the Safe Harbor statements, please?

Brian Lloyd: 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. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to unknown risks and uncertainties. The realization of any of these risks or uncertainties as well as extraordinary events or transactions impacting our company could cause actual results to differ materially from those currently anticipated. In addition, any forward-looking statements represent our views only as of today, April 30th, 2024, and should not be relied upon as representing our views as of any other date. We specifically disclaim any obligation to update such statements, except as required by applicable law.

Please refer to the sections entitled Cautionary Statement regarding forward-looking statements in today’s press release and presentation for important information regarding such statements. Please also refer to our most recent filings with the SEC for a discussion of factors that could cause actual results to differ from these forward-looking statements. Our financial statements are prepared in accordance with accounting principles, which are generally accepted in the United States. However, we believe certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of our ongoing operations and can be useful for period-over-period comparisons of such operations. This presentation also contains certain non-GAAP financial measures.

A reconciliation of non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in today’s press release and presentation furnished to the SEC under Form 8-K. Please refer to the sections of our press release and presentation entitled non-GAAP Financial Measures for important information regarding non-GAAP financial measures discussed on this call. Readers should consider non-GAAP financial measures in addition to, not as a substitute for, financial reporting measures prepared in accordance with GAAP. Please note that these calculations may not be comparable with similarly titled measures of other companies. 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. And let me start with a brief agenda of what we will cover during our prepared remarks. I will start with an overview of our financial results and key operating progress areas during the quarter. After my opening remarks, Joe will provide a summary of our revenue results before turning the call over to Raul, who will provide you with a more in-depth review of our quarterly financial results. Then we will open the call for your questions. Now, beginning with a review of our first quarter results. We reported total revenue of $323.5 million in the first quarter, up 8.7% year-over-year on a GAAP basis and up 9.3% year-over-year on a constant currency basis. The constant currency revenue growth we delivered in the first quarter was stronger than the high end of the range of growth expectations that we outlined on our fourth quarter earnings call.

Specifically, we expected constant currency revenue growth for the first quarter in the range of 6.5% to 7.7% year-over-year. Importantly, the better-than-expected constant currency revenue growth in the first quarter was primarily driven by strong organic growth as well as contributions from acquired products, which modestly exceeded our expectations as well. With respect to our profitability performance in the first quarter, we leveraged the solid revenue results to deliver non-GAAP gross profit and operating profit growth of 10% and 16%, respectively, which resulted in year-over-year margin expansion of approximately 80 basis points and 115 basis points, respectively. And we delivered 19% growth in our non-GAAP EPS, which exceeded the high end of our expectations as well.

We are pleased with a solid start to the fiscal year and remain confident in our team's ability to deliver continued strong execution, stable constant currency growth, improving profitability, and solid free cash flow generation in 2024. Now, before turning the call over to Joe, I would like to share a brief update on several areas of operational progress in recent months. First, with respect to new product introductions, we have had a solid start to 2024 with multiple regulatory clearances and commercial introductions, including in January, we announced FDA 510(k) clearance for the Scout MD Surgical Guidance System. This new guidance system demonstrates Merit's ongoing leadership in oncology and marks a significant advancement in breast cancer care as it supports implantation of up to four different reflector configurations designed to pinpoint tumor location in multiple dimensions for a more precise excision.

This targeted approach can help minimize damage to surrounding healthy tissue, decrease the likelihood of rescission and avoid the emotional and physical trauma associated with a second surgery. In March, we announced the commercial release of the Micro ACE, Advanced Micro-Access System, a complementary solution that expands our portfolio, our percutaneous access, and closure devices. The Micro-A System represents innovative technology to improve interventional access procedures as it balances stiffness and flexibility to offer twice the resistance to kink and compression over the leading competitor. It also is 9% stiffer than the leading standard micro introducer. In addition, a unique marker tip design allows for 9 times greater visibility under poroscopy for accurate positioning needed at the start of a procedure.

We developed this system based on feedback from our interventional physician customers and is another example of partnering with our customers to advance vascular access, procedures, outcomes, and improve patient care. Second, with respect to our progress in the area of clinical validation in recent months, in January, we announced the successful enrollment of the first patient in our MOTION study. This study is a multicenter, prospective, randomized-controlled trial comparing genicular artery embolization or GAE using Merit's Embosphere microspheres to corticosteroid injections for the treatment of symptomatic knee osteoarthritis, a condition that impacts more than 650 million adults globally. GAE is a minimally-invasive procedure that selectively reduces blood flow to areas of the knee, where hypervascularity has been identified, helping to alleviate pain and information associated with knee osteoarthritis.

The MOTION study is designed to enroll up to 264 adults with symptomatic knee osteoarthritis across medical centers in North America, Brazil, Europe, Australia, and New Zealand. The study is structured to evaluate primary safety and effectiveness of the Embospheres at six months with continued patients follow up for 24 months. Finally, we are pleased with the progress achieved in recent months for our Wrapsody Arteriovenous Access Efficacy or WAVE pivotal study. We completed collection of safety and efficacy outcomes throughout the study follow-up period and receive primary endpoint data for the last enrolled patient during the first quarter. The team has recently completed the monitoring, data cleaning, and analysis phase, and we remain on track to complete the clinical study report and continue to expect to be in a position to file primary outcomes with the FDA for premarket approval or PMA by the end of the second quarter of 2024.

Now, with that, let me turn the call over to Joe, who will review the first quarter revenue performance. Joe?

Joe Wright: Thank you, Fred. I'll start with a detailed review of our revenue results in the first quarter, beginning with the sales performance in each of our primary reportable product categories. Note unless otherwise stated, all growth rates are approximated and presented on both a year-over-year and constant currency basis. We have included reconciliations from our GAAP reported results to the related non-GAAP item in our earnings release and presentation available on our website. First quarter total revenue growth was driven by 9% growth in our cardiovascular segment and 6% growth in our endoscopy segment. Our cardiovascular segment was the primary driver of the better-than-expected revenue results versus the high end of constant currency growth expectations again this quarter.

However, our endoscopy segment sales did exceed the high end of our expectations as well in Q1. Sales of the peripheral intervention or PI products increased 19%, representing nearly 80% of total Cardiovascular segment growth in the period. Excluding sales of acquired products, PI sales increased 13% on an organic constant currency basis. Organic growth in the PI product category was driven by sales of our delivery systems and [Indiscernible] therapy products increased 41% and 16%, respectively, and together represented more than a third of our total PI sales growth. And sales of our drainage and radar localization products were strong contributors to our total PI growth in Q1, increasing in the low double-digits year-over-year. Sales in both our cardiac intervention and CPS product categories were also key contributors to our organic growth in the cardiovascular segment this quarter, each exceeding the high end of our growth expectations in Q1.

Cardiac intervention product sales increased 7%, driven primarily by strong sales of intervention products and balanced contributions to growth from access, angiography, EP/CRM and hemostasis products in the period. Sales of our custom procedural solutions, or CPS products increased 3%, which was notably better than the low single-digit decline we expected in Q1, fueled by 8% growth in sales of critical care and kit products, which more than offset year-over-year declines in sales of trades. By way of reminder, the decline in trade is due to the ongoing SKU rationalization effort we specifically noted in Q3 earnings call last year. Sales of our OEM products were the only area of our cardio business that came in softer than our growth expectations heading into the quarter.

We attribute the mid-single-digit decline in sales to be a result of order timing and fluctuations in demand trends as our customers work through efforts to optimize inventory levels. OEM product sales to U.S. customers were flat in Q1, with demand from our OUS customers declining year-over-year. Importantly, we continue to expect solid growth in OEM sales. Lastly, sales in our endoscopy segment increased 6%, which exceeded the high end of our growth expectations. We are pleased to see continued normalization of growth trends in this business and our 2024 guidance continues to assume high single-digit growth in our endoscopy segment this year. Turning to a brief summary of our sales performance on a geographic basis. Our first quarter sales in the U.S. increased 9% on a constant currency basis and 5.5% on an organic constant currency basis.

Sales to U.S. customers came in roughly 1 point softer than what our guidance had assumed, driven primarily by the softer-than-expected OEM sales, as previously mentioned. Despite a modestly softer-than-expected growth in Q1, our U.S. growth trends accelerated on both a two-year and three-year basis in the first quarter, and we continue to expect to deliver the 7.6% growth assumed at the midpoint of our 2024 guidance range. International sales increased 9.5% year-over-year and 9% on an organic constant currency basis, exceeding the high end of our growth expectations by more than 600 basis points in the quarter. The stronger-than-expected organic constant currency growth to customers outside the U.S. was driven primarily by mid-teens growth in APAC.

With respect to China specifically, sales increased 22% year-over-year against a softer comp in the prior year period. We continue to see quarter-to-quarter variability in growth trends related to volume-based purchasing tenders as expected. By way of reminder, while we are not providing country-specific growth assumptions in our guidance messaging, the midpoint of our 2024 constant currency growth guidance range continues to assume our total international sales increased 2.3% year-on-year, driven by high single-digit growth in EMEA and ROW regions, partially offset by a 4% decline in the APAC region. The year-over-year decline in APAC is entirely related to China, where we expect to grow sales of units on a year-over-year basis, but we expect total revenue to decline due to continued headwinds related to volume-based purchasing.

With that, let me turn the call over to Raul, who will take you through a detailed review of our first quarter financial results, balance sheet, and financial condition as of March 31st.

Raul Parra: Thank you, Joe. Beginning with 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 first quarter of fiscal year 2024. 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 10% year-over-year in the first quarter. Our gross margin was 50.9%, up 79 basis points year-over-year. The increase in gross margin year-over-year was driven by favorable revenue mix, pricing uplift, and improvements in freight and distribution costs, offset partially by manufacturing variances compared to the prior year period.

Operating expenses increased 8% from the first quarter of 2023. The year-over-year increase in operating expenses was driven by a 7% increase in SG&A expense and a 9% increase in R&D expense compared to the prior year period. Total operating income in the first quarter increased $7.9 million or 16% from the first quarter of 2023 to $56 million. Our operating margin was 17.3% compared to 16.1% in the prior year period. The 115 basis point increase in operating margin was driven by a 79 basis point increase in our non-GAAP gross margin and by a 36 basis point decrease in our non-GAAP OpEx margin compared to the prior year period. First quarter other expense net was $0.1 million compared to $0.7 million last year. The change in other expense net was driven by an increase in net interest expense associated with increased borrowings and rising interest rates, partially offset by an increase in interest income associated with our higher cash balances.

First quarter net income was $44.8 million or $0.77 per share compared to $37.5 million or $0.64 per share in the prior year period. We are pleased with our profitability performance in the first quarter, where we leveraged stronger-than-expected revenue results to drive both expansion in operating margins and non-GAAP diluted earnings per share that exceeded the high end of our expectations. Turning to a review of our balance sheet and financial condition. As of March 31st, 2024, we had cash and cash equivalents of $581.9 million, total debt obligations of $822.5 million and available borrowing capacity of approximately $657 million compared to cash and cash equivalents of $587 million, total debt obligations of $846.6 million, and available borrowing capacity of approximately $626 million as of December 31st, 2023.

Our net leverage ratio as of March 31st was 2.4 times on an adjusted basis. We generated $24.5 million of free cash flow in the first quarter compared to $1.8 million last year. The year-over-year improvement in free cash flow generation was primarily a result of significant improvements in cash used in working capital, specifically in the reduction of dollars invested in inventory compared to the prior year period. We expect strong free cash flow generation again in 2024 and continue to believe our CGI program will generate more than $400 million of free cash flow in the three-year period ending December 31st, 2026. 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 compared to the prior year period.

However, it is important to highlight that all guidance expectations remain unchanged versus what we introduced in our fourth quarter earnings press release. Further, we have not changed the underlying assumptions discussed in our prepared remarks last quarter as well. Lastly, we would like to provide additional transparency related to our growth and profitability expectations for the second quarter of 2024. Specifically, we expect our total revenue to increase in the range of approximately 4% to 5% year-over-year on a GAAP basis and up approximately 4.7% to 5.8% year-over-year on a constant currency basis. The midpoint of our second quarter constant currency sales growth expectations assumes approximately 10% growth year-over-year in the U.S. and a 1% decline year-over-year in international markets.

Note, the midpoint of our second quarter constant currency sales growth expectations also includes approximately $4.5 million of inorganic revenue. Excluding these inorganic contributions, our second quarter total revenue is expected to increase approximately 3.8% year-over-year on a constant currency basis. With respect to our profitability expectations for the second quarter of 2024, we expect non-GAAP operating margins in the range of approximately 19.6% to 19.9%, and we expect non-GAAP EPS in the range of $0.87 to $0.90. That wraps up our prepared remarks. Operator, we would now like to open up the line for questions.

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