Merit Medical Systems, Inc.

Welcome to the third quarter of fiscal year 2023 earnings conference call for Merit Medical Systems, Inc. At this time, all participants have been placed in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly. I would now like to turn the call over to Mr. Fred Lampropoulos, Merit Medical Systems founder, chairman, and chief executive officer. Please go ahead, sir.

Thank you and welcome everyone to Merit Medical Systems' third quarter of fiscal year 2023 earnings conference call. I am joined on the call today by Rawul 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?

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're subject to unknown risks and uncertainties. The realization of any of these risks or uncertainties as well as extraordinary events or transactions impacting our company could cause actual results to differ materially from those currently anticipated. In addition, any forward-looking statements represent our views only as of today, October 26, 2023, 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 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 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.

Thank you, Brian, and thank you for joining us on a very busy reporting day. Let me start with a brief agenda of what we will cover during our prepared remarks. I will start with an overview of our revenue results for the third quarter followed by an update on a few noteworthy operating highlights in recent months. 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 September 30, 2023. We will then open the call for your questions. Now, beginning with a review of our third quarter revenue performance, we reported total gap revenue of $315.2 million in the third quarter, up 10% year over year. Our total gap revenue growth was driven by 14% growth in U.S. sales and 4% growth in international sales. Our total revenue increased 10% year over year in the third quarter on a constant currency basis, excluding the 10 basis point headwind to our gap revenue growth related to changes in exchange rates compared to the prior year period. The constant currency revenue growth we delivered in the third quarter was significantly stronger than the high end of the range of growth expectations that we outlined on our quarter to earnings call. Specifically, we expected constant currency revenue growth in the third quarter in the range of 5 to 7% year-over-year. Importantly, the better-than-expected total constant currency revenue results in the third quarter was driven almost entirely by strong organic growth, reflecting a broad-based strength across each of our primary product categories, particularly in the U.S. Third quarter total revenue results also included $7.3 million of sales from the portfolio of interventional solutions we acquired from Angio Dynamics on June 8, 2023, which notably also came in above the high end of the range we provided on our second quarter earnings call. Let me now provide you with a more detailed review of our revenue results in the third quarter beginning with a sales performance in each of our primary reportable product categories. Note, unless otherwise stated, all growth rates are approximated and presented on a year-over-year and constant currency basis. We've included reconciliations from our GAAP reporter results to the related non-GAAP item in our earnings release and presentation available on our website. Third quarter total revenue growth was driven by 10% growth in our cardiovascular segment and 11% growth in our endoscopy segment. In our cardiovascular segment, constant currency growth exceeded the high end of our expectations for the third quarter, while endoscopy segment sales came in at the high end of expectations. Sales of our peripheral intervention, or PI products, increased 16%. represented the largest driver of total cardiovascular segment growth again this quarter. Excluding sales of acquired products, PI sales increased 9% on an organic constant currency basis. Organic growth in the PI product category was driven by the sales of our radar localization and drainage products, which increased 19 and 15% respectively, and together represented a little more than half of total PI sales growth. And by sales of our delivery systems and angiography products, which increased 19%, and together represented roughly one-third of our total PI growth in quarter three. Sales of our OEM and cardiac intervention products were key contributors to our total cardiovascular segment growth this quarter, increasing 11 and 3%, respectively. Sales of our OEM products exceeded the high end of our growth expectations, which we attribute principally to continued solid demand from larger customers in multiple categories, including angiography, coatings, EPCRM, intervention, and kit products, which together increased 25% in quarter three. Cardiac intervention product sales also exceeded the high end of our growth expectations, driven primarily by strong growth in sales of both our access products, which increased 20%, and our angiography and hemostasis products, which together increased 20%. Sales of our custom procedures solutions, or CPS products, increased 6%, which was notably better than the low single-digit decline we expected in quarter three. Sales results benefited from higher demand from our customers outside the U.S. for certain kit product lines that we have been identified for skew rationalization as part of our foundations for growth initiatives. We expect CPS sales to decline in the fourth quarter on a year-over-year basis as demand trends for these kit products lines normalize. But our guidance continues to assume that CPS product category delivers roughly flattish growth over the second half of 2023 compared to the prior year period. Lastly, sales in our endoscopy segment increased 11%, which was at the high end of the growth range we assumed in our third quarter guidance. As expected, we continued to see improving sales trends in the third quarter, and we continued to expect mid-teens growth in our endoscopy business in the second half of 2023. Now turning to a brief summary of our sales performance on a geographic basis. Our third quarter sales in the U.S. increased 14% on a constant currency basis and 10% on an organic constant currency basis, exceeding the high end of our growth expectations by more than 400 basis points in the period. Our U.S. growth performance reflects continued strong execution and overall improving trends in the U.S. market during the third quarter, particularly in our direct business, which continues to see impressive volume growth in sales of our vascular products. International sales increased 3.5% on a constant currency basis and increased 2.9% on an organic constant currency basis, modestly exceeding the high end of our expectations in the quarter. Organic constant currency growth to customers outside the U.S. was driven by low single-digit growth in APAC and high teens growth in the rest of the world region, while growth in the EMEA region was flat year over year. Growth in the APAC region was at the lower end of our expectations in quarter three. EMEA was in line with expectations and the rest of the world region was modestly ahead of our growth expectations. With respect to China specifically, sales were flat year over year and were impacted by the headwinds related to volume-based purchasing tenders discussed on our quarter two call as expected. With respect to our profitability performance in the third quarter, we leveraged the strong revenue results in the third quarter to deliver non-GAAP growth profit and operating profit growth of 13 and 25% respectively, and we delivered non-GAAP net income and EPS growth of 18% and 16% respectively as well. We believe our third quarter financial results demonstrate that the team's continued hard work and commitment to our Foundations for Growth program are paying off. We remain focused and confident in our team's ability to deliver our financial guidance for the fiscal year 2023, driving continued progress and year three of our Foundations for Growth program and the related financial targets for the three-year period ended and ending December 31, 2023. Now, before turning over the call to Raul, I would like to share a brief update on several areas of operational progress in recent months. On August 3rd, we announced the completion of enrollment in the Rhapsody Arteriovenous Access Efficiency or WAVE pivotal study. The WAVE study is a prospective randomized controlled multicenter study comparing the merit rhapsody cell impermeable endoprosthesis to percutaneous transluminal angioplasty for treatment of stenosis occlusion in the venous outflow circuit in patients undergoing hemodialysis. The WAVE study enrolled 244 patients with arteriovenous fistulas in 113 patients with arteriovenous grafts across sites in Brazil, Canada, the United Kingdom, and the United States. We are collecting safety and efficacy outcomes throughout the study follow-up period and expect to have primary endpoint data for the last enrolled patient in February of 2024. We currently expect that the monitoring, data cleaning, and analysis phase will be completed early in the second quarter of 2024. We plan to complete the clinical study report and 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. With respect to the two acquisitions we announced in early June, we have made significant progress in integrating their operations. During the third quarter, we completed sales training and customer KOL engagement efforts. We are transitioning product SKUs to merit-branded packaging, along with launching all related marketing materials and sales tools under the merit brand. We look forward to continuing engagement with existing customers and to leveraging the opportunity to raise awareness among potential new customers at industry events, including the Controversies in Dialysis Access, or CETA, and the Beef Symposium. These are exciting times for Merit's Renal Therapies business. We have a clear strategy to leverage our established position in the dialysis and biopsy markets, built on a differentiated commercialized products like the HeroGraft and the Surfacer Inside-Out Access Catheter System, and of course, our Rhapsody Cell and Permeable Endoprosthesis, amongst others. Together with the recently acquired dialysis catheter portfolio, including the innovative BioFlow Duramax dialysis catheter with Indexo technology, the Surfacer inside-out access system, and the BioSentry biopsy tract sealant system, we have an extremely compelling foundation of growing interventional solutions that will allow us to leverage our physician relationships and the commercial infrastructure to serve more patients in the multi-billion dollar dialysis and biopsy markets. Finally, I wanted to share a few thoughts on two items that we know are key focus areas for investors evaluating the intermediate to longer-term investment opportunity in Merit Medical. Specifically, executive leadership and financial targets beyond fiscal year 2023. With respect to executive leadership, succession planning is something our board takes very seriously. and a formal process was initiated in recent months. Importantly, this is a process that I am not directly involved in. Our lead independent director and compensation and talent development committee of the board are leading this initiative with the active involvement of all of our independent directors. The board continues to target having a formal announcement to share with the investment community by the end of 2023. I continue to be fully engaged in the business, and I serve at the pleasure of the board on behalf of our shareholders. With respect to longer-term financial targets, as we approach the end of the final year of our transformational company-wide program to evaluate all aspects of our business to better position the company for long-term, sustainable growth and enhanced profitability, I would like to reflect on what the team has accomplished in this important Foundations for Growth program. From the outset, we wanted to use the Foundations for Growth program as a vehicle to think holistically and comprehensively across the business to challenge the status quo and to deliver an ambitious improvement in profitability while preserving our historically market-leading growth profile, our legacy of customer-driven innovation, and the strength of the merit culture that has served us so well for so many years. By the way of reminder, the Foundation's growth program was established with three clear objectives in mind. First, to main growth above market, designed to preserve our proven ability to innovate together with our customers and deliver unique solutions to the market that fuel our top-line growth. Second, to significantly improve our non-GAAP operating margins with operations designed to exploit scale where it exists while preserving autonomy and flexibility where it matters. And to build a foundation for sustained success, we will continue to invest in our people and we will build new capabilities to meet the evolving needs of our changing healthcare markets. As discussed on each of our earnings calls since the program was formally announced in November of 2020, We expect that our team's strong execution of this program would result in significant financial results as outlined by our formal financial targets, including at least a 5% organic constant currency revenue CAGR and more than 400 basis points of non-GAAP operating margin expansion, ending in 2023 with more than $1.1 billion of revenues and non-GAAP operating margins of at least 18%. We also expected our efforts to drive significant improvements in our balance sheet and the financial condition as we targeted cumulative free cash flow generation of more than $300 million during the three-year fiscal years ending December 31, 2023. We believe the team has executed exceptionally well in the face of many headwinds that were not contemplated when the program was announced in November of 2020, and we are extremely proud that we continue to expect to deliver or exceed the formal growth and profitability targets in our Foundations for Growth program. With respect to cumulative free cash flow target, we have generated $244 million since the end of 2020, not including the $119 million that we generated in fiscal year 2020, and we continue to target generating more than $300 million of cumulative free cash flow by year end, as we discussed on our quarter two call, certain working capital items may push the achievement of this target an additional quarter. Importantly, as we have said throughout the Foundations for Growth program, our efforts to continue to enhance Merit's foundation for long-term sustainable growth and improving profitability will not end on December 31st, 2023. We continue to believe there are opportunities for further improvement in years to come. Accordingly, on our fourth quarter earnings call in February, we plan to introduce new formal financial targets for the three-year period ending December 31, 2026. In the interim, we remain exclusively focused on delivering the current targets for our Foundations for Growth program and look forward to discussing future goals, opportunities, and financial targets on our call early next year. With that said, let me turn the call over to Raul, who will take you through a detailed review of our third quarter financial results and our 2023 financial guidance, which we updated in today's press release. Mr. Parra.

Thank you, Fred. Given Fred's detailed discussion of our revenue results, I will begin with a review of our financial performance across the rest of the P&L. For the avoidance of doubt, unless otherwise noted, my commentary will focus on the company's non-GAAP results during the third 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 in the third quarter. Our gross margin for the third quarter was 49.8%, up 140 basis points year-over-year. The increase in gross margin year-over-year was lower than expected due primarily to revenue mix by product and by geography. Operating expenses increased 7% year-over-year in the third quarter. The year-over-year increase in operating expenses was driven by a 6% increase in SG&A expense and a 12% increase in R&D expense compared to the prior year period. Our operating expense performance in Q3 was better than expected and reflects strong operational leverage principally due to our continued focus on expense management and prioritization of investments to support our future growth initiatives. Total operating income in the third quarter increased 11.5 million or 25% year over year to 57.7 million. Our operating margin for Q3 was 18.3% compared to 16.1% in the prior year period. The 220 basis point increase in operating margin was driven by 140 basis point increase in our non-GAAP gross margin and by an 80 basis point decrease in our non-GAAP OPEX margin compared to the prior year period. Third quarter other expense net was $4.5 million compared to $0.8 million last year. The change in other expense net was primarily related to an increase in interest expense associated with increased borrowings and rising interest rates, as well as expense associated with realized and unrealized foreign currency losses compared to income in the prior year period. Third quarter net income was $43.5 million or $0.75 per share compared to $37 million or $0.64 per share in the prior year period. We are pleased with our profitability performance in the third quarter. where we delivered 18% growth in non-GAAP net income and 16% growth in non-GAAP diluted earnings per share, exceeding the high end of our expectations. Turning to a review of our balance sheet and financial condition, as of September 30, 2023, we had cash and cash equivalents of $58.7 million, total debt obligations of $287.1 million, and available borrowing capacity of approximately $558 million. compared to cash and cash equivalents of $58.4 million, total debt obligations of $198.2 million, and available borrowing capacity of approximately $523 million as of December 31st, 2022. Our net leverage ratio as of September 30th was one times on an adjusted basis. We generated $42.5 million of free cash flow in the third quarter, up 115% year-over-year and up nearly fourfold on a quarter-over-quarter basis. The sequential improvement in free cash flow generation in the third quarter was primarily a result of significant improvements in cash used in working capital, specifically in the areas of inventory and accrued expenses, offset partially by an uptick in payable stays. We continue to expect to generate strong free cash flow generation in 2023. Turning to a review of our fiscal year 2023 financial guidance, which we updated in today's press release, We have included a table in our earnings press release which details the updated ratings for each of our formal financial guidance items and how those ranges compared to the prior year period. We now expect GAAP net revenue growth of approximately 8 to 9% year over year. The GAAP net revenue guidance range now assumes net revenue growth of approximately 8 to 9% in our cardiovascular segment, net revenue growth of approximately 13% in our endoscopy segment, and a headwind from the change in foreign currency exchange rates of approximately 5.4 million or approximately 50 basis points to growth year over year. Excluding the impact of changes in foreign currency exchange rates, we expect total net revenue growth on a constant currency basis in a range of 8.4 to 9.1% in 2023. Note the midpoint of this range now assumes approximately 11% growth year over year in the U.S. and approximately 6% growth year-over-year in international markets, compared to 9% and 6%, respectively, assumed in the guidance provided on our second quarter earnings call. The higher U.S. constant currency growth expectation versus prior guidance reflects the stronger than expected third quarter results and the anticipated contributions from our acquisition, which we now estimate in the range of approximately 14.4 to 15.4 million of revenue in fiscal 2023 compared to a range of $13 to $15 million assumed in our prior guidance. Excluding revenue from these acquisitions, our guidance reflects total net revenue growth on a constant currency organic basis in the range of approximately 7 to 8 percent compared to the 6 to 7 percent range assumed in our prior guidance. With respect to profitability guidance for 2023, we have updated our gap net income and diluted earnings per share ranges driven primarily by the better than expected financial results in the third quarter to $89 million to $92 million and $1.52 to $1.58 compared to $76 million to $81 million and $1.30 to $1.39 for diluted share previously. We have updated our non-GAAP net income and diluted earnings per share ranges driven primarily by the better than expected financial results in the third quarter to $171 million to $174 million and 293 to 299 compared to $164 million to 170 million and $2.81 to $2.92 per dilute share previously. For modeling purposes, our fiscal year 2023 financial guidance now assumes non-GAAP gross margins in the range of approximately 50.5% to 50.7% up 170 to 190 basis points year over year. Non-GAAP operating margins in the range of approximately 18.1 to 18.3% of 120 to 140 basis points year over year. GAAP other expenses of approximately 14 million compared to 13 million previously. And non-GAAP other expense of approximately 12.7 million compared to a range of 11 to 12 million previously. The increase in both ranges is primarily related to higher interest expense on outstanding borrowings. non-GAAP tax rate of approximately 19.4% compared to a range of 21 to 22% previously, and diluted shares outstanding of approximately 58.4 million. Lastly, we would like to provide additional transparency related to our growth and profitability expectations for the fourth quarter of 2023. Specifically, we expect our total revenue to increase in the range of approximately 5.5% to 8.3% year over year on a GAAP basis and up approximately 5% to 8% year-over-year on a constant currency basis. The midpoint of our fourth quarter constant currency sales growth expectations assumes approximately 9% growth year-over-year in the U.S., including approximately $6.6 million of acquired revenue and approximately 2% growth year-over-year in international markets. Note the revenue growth ranges for the fourth quarter of 2023 implied by our updated full-year 2023 guidance are essentially unchanged versus what our prior guidance for 2023 assumed. With respect to our profitability expectations for the fourth quarter, we expect non-GAAP gross margins in the range of approximately 50.5% to 51.3%, up 100 to 180 basis points year over year, and non-GAAP operating margins in the range of approximately 18.1 to 18.8, up 25 to 100 basis points year over year. These updated margin expectations are expected to drive a non-GAAP EPS in the range of 73 to 78 cents, roughly one cent lower than what our prior guidance range assumed. That wraps up our prepared remarks. Operator, we would now like to open up the line for questions.

Thank you, sir. If you would like to ask a question, please signal by pressing star 11 on your telephone keypad. 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 additional questions, we invite you to add yourself to the queue again by pressing star 11. One moment for our first question.

Our first question comes from Jason Bednar with Piper Sandler. Your line is open.

Jason, please ensure your line is open.

Okay, let's come back then. We'll go to our next caller, if you wouldn't mind, please.

One moment for our next question.

Our first question comes from the line of Michael Petusky with Barrington Research. Your line is open.

Hey, good afternoon, guys. Really, really impressive quarter and a lot of a lot of across a lot of different aspects. Congratulations. I guess just real quick on China was with that performance. You know, VBP has been talked about to death, but I'm just curious, was that performance about what you guys had anticipated for Q3? Is that sort of shaping up in the second half the way you anticipated, a little better, a little worse? Can you just comment on that?

Yeah, I think it was about what we expected. It was baked into our numbers. It's baked into our year-end numbers. You know, again, as we've talked about many times, Mike, You've talked with Raul about this. And that is, that's today's, I don't, you know, it changes, but right now it's in our numbers based on our best estimates of we think what China will do.

I feel like this is almost the obligatory question in Q3, but Fred, do you have any thoughts on sort of the weight loss drugs, the GLP-1s, and possible longer-term impact on Merit Medical and the space you guys serve?

Yeah, and I appreciate the question. Listen, we take all of these issues very seriously, and we don't just think they're passing. You know, if you go back and we talked about things like China, we talked about MDR, we like to stay out in front of these things. In fact, Raul and I yesterday were talking to several advisor physicians who are in our market areas. In fact, one of them was actually taking the drug. So, you know, there was a number of issues that came up in terms of the effect that they thought it would have long term. I think they all somewhat indicated that It will be 10 years before you see that, that pricing is going to be one of the things that, but in terms of elderly or hypertensive patients for at least, and these are people who are doing interventional nephrology types of procedures. And in fact, one of the comments they made was that 20% of the people that work in the lab were on the drug. There were a bunch of different things that they talked about in terms of if you take the drug and some of the effects. But the bottom line was is that they didn't see an immediate effect. It's there. They're using it. There are some complication issues. But I think all in all, It was something we didn't feel that was immediate, but something that we will continue to do panels. We will go out and meet with our customers, and we think that's the best source of information. So that's a long response to the question, Raul. Do you want to add anything to that?

No, I mean, I guess two things that I would add, right? You know, obviously type 1 diabetes is not going to be, you know, impacted. You know, these are, you know, individuals that are born with the disease, and so, you know, you won't get to the kind of the renal, you know, We won't have a renal stage impact, I guess we'll say, which would impact our business. So you're really talking about the type 2 diabetes patients that would be impacted. And, you know, that's really out in kind of, you know, 10 years is kind of what several doctors kind of threw out as kind of an example of, you know, when they would think they would see an impact if they did see an impact. But to Fred's point, you know, we always try and stay ahead of these things. We're very aware of risk, and we're very good at pivoting and adjusting as needed. So we'll keep an eye on it. But for now, our business is not being impacted by it. You know, these drugs, some of these drugs have been in the market since, you know, 17. So they're not new. I think they are getting, you know, a lot more news now. But we'll keep an eye on it, and we'll adjust as necessary.

And I think if I could just, Mike, just say having that ability to talk to physicians who are doing the procedures, who are seeing various patients, looking at pricing and reimbursement, all those things, I think gives us a relatively unique look at all the factors that go into, that affect our business. These are our customers and our advisors. So we'll stay on top of it.

Yep. Right. And let me just confirm, to me it sounds like the commentary around the acquired businesses, particularly NGO, it sounds like you've integrated well and it sounds like you're running maybe a little bit ahead of plan in terms of revenue generation. Is that a fair sort of summary of what you guys tried to communicate there?

I think so. And I think a reminder that, remember, a portion of that is biopsy. And I think sometimes everybody thinks of it just being those dialysis catheters. And I think we're doing a very good job of integration. We've actually moved the BioSentry move this week or late last week is actually moving to our Mexico facility. And by the end of this year, maybe early first quarter, we'll have moved the other product and it'll be fully integrated. So I think it's doing just fine. For now, I think there's still upside potential in that business, quite a bit, actually. And I think we're performing better on the financial side of it than we expected. Roland, do you want to add anything to that?

Yeah, no, I mean, I think if you look at our guidance, we brought up the bottom by about a million dollars. You know, so I think we're well within the range that we have given the street. And again, we narrowed at the range and we brought it up. So I think things are on track. And like Fred, integration is going great. Our Mexico team and the Salt Lake City team are doing a great job of integrating that stuff.

Well, and just finally on that, Joe Wright, who's our chief commercial officer, was sitting in the room with us. I think that's been another really important part is the contact with customers. These are existing customers that buy many of the products in our renal therapy group. So I think it wasn't a reach for us in terms of who the customers were. I think it was 98% of the customers already existed for merit. So that was another really important factor that we looked at and considered in terms of the commercial outreach.

All right, guys. Thank you so much. Great job. Thanks.

Thank you, Mike.

One moment for our next question. Our next question comes from Steve Lichtman with Oppenheimer & Co. Your line is open.

Thank you. Congrats on the quarter, guys. Fred, I wanted to ask about Rhapsody. Obviously, we still have a little bit of time here, but with the with the completion of the trial getting closer and closer into view. Can you sort of update us on your thoughts on the market opportunity there, you know, particularly as we get closer to filing here?

Yeah. Listen, we started this project, as you know, a number of years ago. It's a product that's vertically integrated. I think that we are going to, we've closed the enrollment, as you know. The last patient will roll out in February of some time. And we expect that we will then monitor, do the data cleaning and analysis phase early in the second quarter of 2024. And we plan to complete the clinical study report and be in position to file with the FDA, PMA, by the end of the second quarter in 2024. Once we get to that point, then it's up to the FDA to go through their process. I think we can say that we've always been very excited about the product, but I think, again, without trying to void the question, I'd rather wait until we have our update in February to lay it out as we get closer to the data to be able to lay out what we're going to do and what our thoughts are as we present our plan for next year.

Yeah, we're really focused on just making sure that the filing goes, you know, according to plan. I think from a revenue and market opportunity standpoint, we'll talk about that, I think, post-PMA approval. But I'm super excited about that and super excited about the quarter just in general.

Yeah, yeah. Great. And then just secondly, you talked about your bullishness on continued free cash flow and your net leverage ratios remain low here. Just thinking about M&A looking forward, obviously you were quite acquisitive already year to date. But, you know, given valuations, should we expect a little more additional activity looking ahead at a merit?

Well, listen, I think we all understand that the world has changed. The cost of capital is higher. We see that, I mean, I don't know what the Fed's going to do, but we saw what the economic activity was, which was positive today. Values have come down. I think a lot of the other institutions that would be helpful to startups and companies like that have quite a bit different view than they maybe did a year ago or even two years ago. Values are starting to come into place. As you'll recall, I think we're very disciplined. And in some ways, I don't want to say criticized, but we were very cautious. We didn't want to overpay. Now, all that being said, We're probably seeing as much activity and opportunities. We've just returned from TCT. There are a lot of opportunities out there. But the really important thing is we have a plan. We have requirements that we want to hit. We have a commercial team. And things have to fit for us. We don't need to do anything. We can just do our organic. You know, we have Rhapsody coming. If they're the right products in the right channels of our product and meet the criteria, And there are some that we think they can do that. So there's a lot of stuff out there, and we expect not that necessarily that we're going to be very active and do anything, but that if it meets that and meets the discipline that we require, we'll look at those opportunities, and they will be there. I have no doubt about that.

Appreciate it.

Thanks, guys. You bet.

One moment for our next question. Our next question comes from Jason Bedford with Raymond James. Your line is open.

Hi. Good afternoon, guys. Congrats on the quarter. Nice result. I apologize if I missed some of this. I got on a little late. Was Russia a headwind to growth in 3Q?

Listen, we were able to get our licenses approved in late August and we started making some shipments in September. So we had a small benefit, very small, but really those things are going to roll into this fourth quarter. But the point is we have our licenses, I think somewhere around 90% or 95 of our Russian licenses have been approved by the United States government, you know, and so we will see that those will come back online to some extent. Now, with all the things that are going on, Jason, in Russia and the Middle East, you know, we built all these things into our numbers, but there will be some Russia as we go forward.

Yeah, I think just generally speaking, you know, EMEA was, you know, in line with expectations, you know, Jason, and I think, you know, Even with Russia coming back, you know, we did have some skew rationalization products that sold through in the third quarter, which also helped. We won't have those in the fourth quarter. So, you know, mix should be a little bit better. But yeah, I think generally we came in kind of in line with expectations.

Okay, helpful. Just on gross margin. Did the move from the acquired products moving from upstate New York down to Mexico, did that have an impact on gross margin?

No, those won't have an impact until next year, Jason. You know, as you can imagine, we build bridge inventory just to make sure that things go, you know, accordingly. And as Fred mentioned, we are just in the process of moving things. You know, we had the biopsy device just left, you know, last week on a truck and the rest of the products will continue to move over the next three months over to our Mexican facilities. So really it's a 2024 impact that you'll see. Okay.

And I think you mentioned geography as a bit of a pressure on gross margin. Is that, not much, but is that a dynamic of mix or is that more a comment on the inflationary dynamics in Mexico?

No, it's really product mix. So we had some products, some skew rationalization related to FFG, specifically our PAC business. So you'll see that our CPS products were up. Normally, they're flat. That really related to that business that we're exiting just because the gross margins aren't what we want them to be.

OK. We haven't talked about the move from air to water in a while. Just kind of where are you in that, and is that a bit of a tailwind to margin as we look to 2024?

Yeah, listen, Jason, our team has executed to plan. We still have more to go, but I think it'll be a benefit to us moving forward, and our team has executed well on that.

Yeah, I mean, I'd say they're based on, you know, they're on pace for what we've forecasted. It's included in our numbers.

Okay. That's great. Thank you.

All right.

Thanks, Jason.

One moment for our next question.

Our next question comes from John Young with Canaccord Genuity. Your line is open.

Hi, it's actually one for John today. Thank you for taking my question. Congrats on the quarter. I know you guys talked about the Rhapsody commercial efforts and you're waiting on that a bit, but do you have any insight on what reimbursement could look like or the timing of that with the launch? Just the reimbursement stuff in particular, if there's any color. Thank you.

Yeah, I think the only color is, first of all, we'll talk about that whole program as we get closer and we file. It is a breakthrough product. I'll just leave it at that, but we'll discuss all of this as we get closer to and we actually file the product and then have a, you know, an expectation of a window, you know, because all relying on the FDA. So we'll do a full review of the product and, you know, all the things we've seen globally as we get into next year's plan. Right now, the goal is let's finish this year. Let's finish this foundations for growth. As you all know, we have been just laser focused on this. And I'm proud about the team. But we're not at the finish line. And we still have a couple months to go. And so that's where we're focused. We will, though, I think, discuss in depth Rhapsody at the appropriate time.

Great. Thank you. That was all I had.

All right. Thank you, sir.

One moment for our next question. Our next question comes from Jim Sidoti with Sidoti & Co. Your line is open.

Hi, good afternoon. Thanks for taking the questions. You bet, Jim. You know, overall, you know, really strong quarter. The two things that jumped out to me was One was the SG&A expense. It's down year over year. It's down quarter over quarter. I know you had an insurance payment there, a refund. Was that one of the offsets of SG&A? But even with that, it seemed like it was down pretty significantly. What's driving that, and is it sustainable?

Yeah, just to clarify on that reimbursement, because we had added that back as a non-GAAP item, We actually added it back, so we actually didn't get credit for that reduction, Jim, just on a non-GAAP basis. On a GAAP basis, you're absolutely correct. But just to clarify, look, I think we've been pretty open about making sure that we leverage our operating expenses. We also said that we wouldn't spend ahead of the gross margin not coming in. I think the third quarter for us is always a little tricky because we do see a seasonal decline in the business, you know, sequentially from Q2. And so we're always a little bit more cautious in the spend. And then just making sure that, you know, that we understand kind of what the gross margin is going to do, just giving us, you know, we are deleveraging from a revenue standpoint. So I think we were a little cautious. And, you know, we just continue to exercise that expense management, you know, that we've built up over the last few years. Okay.

And then the other thing that stood out was the cash flow generation and the fact that you put a lot of that towards debt pay down. Can you tell, you know, which debt did you pay down and what's the blended rate now for the debt?

Yeah, look, we continue to pay down our debt, you know, from any free cash flow that we generate. You know, that's been the goal. You know, we did talk about, you know, having a pretty strong free cash flow for the, you know, back half of the year, just given what our goal is for foundations for growth at 300, you know, the minimum of $300 million. I can tell you that I'm, you know, coming out of the second quarter, given the amount of free cash flow we had generated, you know, my confidence was a little low. And now, you know, heading into the third quarter with this, you know, huge, you know, free cash flow number of 42.5, my confidence is a little bit higher. But we've still got some work to do here for the next little bit of time. And, you know, we'll go ahead and continue to pay down our debt. Our blended rates are somewhere around 5.5 on the debt.

All right. And then the last thing can be, you know, the industry business has been a bit of a headwind the past few quarters. It sounds like, you know, this quarter was a good quarter. Are you past the supply chain issues for that business?

Yeah, Jim, we're on the final part. There's still a small part of it. So we still have a back order. Remember, the issue was we had a vendor that just stopped doing the work that we needed on the coatings. We shifted, which I think was the right thing to do, clearly, to a U.S. company. And they're in the final qualification of the final product. So we're coming down the back stretch on that one. And then I think there's a lot of other products in that portfolio, like our balloons and other things that have helped that. So we expect to see that business continue to grow very nicely going forward.

Great. All right. That was it for me. Thank you, guys. Okay. Thanks, Jim.

Thank you. As a reminder, if you'd like to ask a question, please signal by pressing star 1-1 on your telephone keypad. One moment for our next question. Our next question comes from Mike Mattson with Needham & Company. Your line is open.

Yeah, thanks for taking my questions. I did join the call a little late. I apologize if you've already addressed this, but I did want to ask one about China. Just given the salt floor growth in the third quarter, what are you assuming for the fourth quarter? And then I know you're not giving guidance overall for 24 yet, but just your general thoughts on the outlook there. Can you get back to decent growth next year in that market? Or is there going to continue to be headwinds, do you think?

Yeah, so I'll start with the last part of the question. But 2024, you're right, Mike. We're not going to talk about that. We'll give you our thoughts when we give our guidance sometime in February. And so I'll kind of take that one off the table. But as far as China, that came in within the expectations of what we thought. Obviously, we'll still have some sort of impact in the fourth quarter. We talked about that, and so I'd say generally China came in at expectations.

Okay, got it. And then just with the update or the extension, I guess, of the foundation for growth targets, I know you're not going to say what that is right now, but just in terms of the framework, in terms of giving guidance around sort of revenue growth, margin targets, and cash flow targets, I mean, is that – kind of, it should look similar to what you gave before, just with sort of newer numbers, essentially.

Well, look, I appreciate the question.

Here's where we're at, you know, and I'm just going to use a football analogy here. We are at a full sprint right now. You know, we've got 15 yards, you know, to score a touchdown and we are just not going to drop the ball, right? We do not want to drop the ball. And so we're going to, We're going to punt on that, you know, response, you know, to the next quarter when we give you our updated guidance for 2024. But look, we'll talk about the framework and what we're thinking there. Right now, we're just, you know, really focused on finishing FFG. Look, we're just super excited about how the business is done. I think you look at this quarter, we had almost 10% organic constant currency growth. We had strong gross margin expansion. We leveraged operating expenses. It was just honestly a really perfect P&L and with really strong free cash flow. So we're just going to continue to stay focused on the fourth quarter and finish off FFG. And then we're excited to talk about what comes next.

Okay. I understand. Thank you. All right, Mike.

Thank you. That concludes the question and answer session. At this time, I would like to turn the call back to Mr. Fred Lampropoulos for closing remarks.

Well, listen, it's a busy day. Everybody's very busy. A lot of stuff going on with trade shows and a lot of people reporting. We appreciate you taking the time. Raul and I will be available for the next several hours to talk to you and clarify issues that you have interest in. We appreciate it. Thank you very much. And best wishes from snow in the mountains and colder temperatures in Salt Lake City, Utah. Good evening.

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