Merit Medical Systems, Inc.

Welcome to the fourth 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. 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 very much and welcome everyone to Merit Medical's fourth quarter of fiscal year 2023 earnings conference call. I'm joined on the call today by Rahul 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 safe 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, February 28, 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 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.

Thank you, Brian. 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 fourth quarter. I will then discuss our continued growth initiatives program and related financial targets for the three-year period ending December 31, 2026, which we announced in a separate press release this afternoon. 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 2024, as well as a summary of our balance sheet and financial condition as of December 31, 2023. Then we will open the call for your questions. Beginning with a review of our fourth quarter revenue performance, we reported total revenue of $324.5 million in the fourth quarter, up 10.6% year over year on a gap basis and up 10.3% year over year on a constant currency basis. The constant currency revenue growth we delivered in the fourth quarter was stronger than the high end of our range of growth expectations that we outlined on our quarter three earnings call. Specifically, we expressed constant currency revenue growth in the fourth quarter in a range of 5% to 8% year over year. Importantly, the better than expected constant currency revenue growth in the fourth quarter was driven by a strong organic growth reflecting particular strength versus expectations in our PI, CPS, and OEM product categories, and relatively balanced contributions to the upside in quarter four from both the U.S. and international markets. With respect to our profitability performance in the fourth quarter, We leveraged the strong revenue results to deliver non-GAAP gross profit and operating profit growth of 13% and 13%, respectively, which resulted in year-over-year margin expansion of 100 basis points and 40 basis points, respectively. And we delivered non-GAAP net income and earnings per share results that modestly exceeded the high end of our expectations as well. Overall, we believe our performance in the fourth quarter resulted in strong financial results versus our expectations, and more importantly, capped off an impressive year of operating and financial performance in 2023, highlighted by nearly 10% constant currency revenue growth, improvements in our profitability profile with an 18.2% non-gap operating margin, a 120 basis point improvement year over year, and strong free cash flow generation of more than $110 million. This performance continues to be a direct result of our team's continued hard work and commitment to our strategic objectives, and we're very proud of the strong execution our team delivered in 2023. Our performance in the fourth quarter of 2023 also marked the completion of the third and final year of our Foundations for Growth program. We're very proud of the team's strong execution and relentless focus on the multi-year strategic endeavor. It is because of their efforts that the FFG program has resulted in a constant currency organic revenue CAGR of 9.4%, a 440 basis point improvement in our non-GAAP operating margin and cumulative free cash flow generation of approximately 300 million. Notably, when compared to 2019, we delivered a constant currency revenue CAGR in excess of 6%, more than 630 basis points of non-GAAP operating margin expansion and cumulative free cash flow in generation of more than $418 million. As announced in a separate press release this afternoon, we have formally introduced the Continued Growth Initiatives Program and related financial targets for the three-year period ending December 31, 2026. Building upon the notable success achieved in our Foundations for Growth Program, the Continued Growth Initiative Program reflects our commitment to identifying opportunities to better position the company for long-term sustainable growth, and enhance profitability. As discussed on prior calls, 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. We believe we executed well over the last three years and we're all very proud of the progress we have made with FFG. Importantly, we're not done. The CGI program represents the next chapter in our company's development and a continuation of the momentum and commitment to improvement that has defined the company in recent years. To that end, the CGI program was established with three clear objectives in mind. First, maintain above-market profitable growth, leveraging our proven ability to innovate together with our customers and deliver unique therapeutic-based solutions to the market. Product offering optimization, including further skew rationalization, and advancement of pricing initiatives, and prioritizing efficient, customer-centric sales and service strategies, including engaging with customers through education. Second, significantly improve our non-GAAP operating margins through ongoing network consolidation, growing sophistication in forecasting, planning, and tracking, and continued focus on lowering costs and increasing efficiency throughout the organization. And third, to strengthen to merit the merit way culture throughout the organization included targeted programs for enhanced employee engagement, leadership development, and organizational development. We are prioritizing further investment in our people with clear individual and functional objectives aligned with the company's strategic plan and key business objectives. We believe strong execution towards this goal is integral to best position the company for sustained success in meeting the evolving needs of changing healthcare markets in the years to come. As we formally kick off our continued growth initiatives program, it is important to understand that we have an organization that is fully committed to both the continued execution of foundation for growth activities and the successful execution of the new CGI objectives going forward. Together we believe our efforts will result in Merit completing the year ending December 31, 2026 with more than $1.46 billion of revenue and non-GAAP operating margins of at least 20%. We also believe our efforts will drive cumulative free cash flow generation of at least $400 million during the three-year period ending December 31, 2026, which will significantly enhance our balance sheet and financial condition. With that, let me turn the call over to Raul, who will take you through a detailed review of our fourth quarter financial results and our 2024 financial guidance, which we introduce in today's press release, as well as a summary of some of the key drivers of growth, profitability improvement, and cash flow generation we project as part of our CGI program. Raul.

Thank you, Fred. I'll 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. 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. Fourth quarter total revenue growth was driven by 10% growth in our cardiovascular segment and 20% 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. While our endoscopy segment sales were in line with expectations. Sales of our peripheral intervention or PI products increased 19%, representing the largest driver of total cardiovascular segment growth again this quarter. Excluding sales of acquired products, PI sales increased 14% on an organic constant currency basis. Organic growth in the PI product category was driven by sales of our drainage and radar localization products, which increased 19% and 18% respectively. and together represented a little more than 40% of total PI sales growth. And by sales of our axis and geography and biopsy products, which together increased 13% and represented nearly one-third of our total PI growth in Q4. Sales of both our cardiac intervention and OEM products increased 6%, and were also key contributors to our organic growth in the cardiovascular segment this quarter. Cardiac intervention product sales were at the high end of our growth expectations, driven primarily by strong sales of both our hemostasis and EP and CRM products, which increased 35% and 12% respectively. Sales of our OEM products exceeded the high end of our growth expectations, which we attribute principally to continued solid demand from large customers in multiple categories, with the strongest sales contributions from access and in geography products, which together increased 29% in Q4. Sales of our custom procedural solutions or CPS products increased 1%, which was notably better than the mid single digit decline we expected in Q4. CPS sales results benefited from higher demand from customers for certain product lines that had been identified for skew rationalization as part of our foundations for growth initiatives. Lastly, sales in our endoscopy segment increased 20%, which was in line with the range of growth expectations we outlined on our third quarter call. As expected, we continue to see improving sales trends in the fourth quarter and we're pleased to see this business deliver mid-teens growth in the second half of 2023. Turning to a brief summary of our sales performance on a geographic basis. Our fourth quarter sales in the U.S. increased 13% on a constant currency basis and 9% on an organic constant currency basis, exceeding the high end of our growth expectations by nearly 300 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 fourth quarter, particularly in our direct business, which saw impressive growth in sales of both our prelude sink radial compression hemostasis device and our splash wire hydrophilic steerable guide wire and geography products. International sales increased 7% on an organic constant currency basis, exceeding the high end of our growth expectations by more than 300 basis points in the quarter. The stronger than expected organic constant currency growth to customers outside the U.S. was driven primarily by 7% growth in the EMEA region and to a lesser extent by 30% growth in the rest of the world region and by 4% growth in APEC, which was in line with our expectations compared to growth that exceeded the high end of our expectations in the EMEA and rest of world regions in Q4. With respect to China specifically, sales were essentially flat year over year and were impacted by the headwinds related to volume-based purchasing tenders as expected. Turning to 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 fourth quarter of fiscal year 2023. We have included reconciliations from our 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 fourth quarter. Our gross margin was 50.4% of 96 basis points from the fourth quarter of 2022. The increase in gross margin year-over-year was at the lower end of expectations, as benefits from mix were partially offset by manufacturing variances compared to the prior year period. Operating expenses increased 13% from the fourth quarter of 2022. The year-over-year increase in operating expenses was driven by 11% increase in SG&A expense and a 19% increase in R&D expense compared to the prior year period. Our operating expense performance in Q4 of 2023 reflected higher commissions on the better than expected sales results and prioritization of investments to support our future growth initiatives as expected. Total operating income in the fourth quarter increased 6.7 million or 13% from the fourth quarter of 2022 to 59 million. Our operating margin was 18.2% compared to 17.8% in the prior year period. The 40 basis point increase in operating margin was driven by a 96 basis point increase in our non-GAAP gross margin, offset partially by a 60 basis point increase in our non-GAAP OPEX compared to the prior year period. Fourth quarter other expense net was 2 million compared to 0.1 million in the fourth quarter of 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, as well as lower income associated with realized and unrealized foreign currency losses compared to the prior year period, partially offset by an increase in interest income associated with our higher cash balances. Fourth quarter net income was $47.2 million, or $0.81 per share, compared to $46 million, or $0.79 per share, in the prior year period. We are pleased with our profitability performance in the fourth quarter, where we leveraged our stronger than expected revenue results to drive expansion in our gross and 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 December 31st, 2023, we had cash and cash equivalents of $587 million, total debt obligations of $846.6 million, and available borrowing capacity of approximately $626 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 December 31st was two and a half times on an adjusted basis. The change in total debt obligation was driven by the issuance of convertible notes in December of 2023. The notes bear interest at 3% per year, payable semi-annually, mature February 1, 2029, and have an initial conversion price of approximately $86.83 per share. Total gross proceeds from the sale of the notes were $747.5 million, and net proceeds were approximately $659 million after deducting offering and issuance costs and the cost of a related cap call transaction, which has an effective conversion price of $114 per share. Initial use of proceeds was pay down of outstanding debt obligations at higher interest rates, specifically $138 million of revolver borrowings and $50 million of term debt. We generated $55.1 million of free cash flow in the fourth quarter, up 255 percent from the fourth quarter of 2022 and up 30 percent from the third quarter of 2023. The improvement in free cash flow generation in the fourth quarter was primarily a result of significant improvements in cash used in working capital specifically in the areas of inventory and accounts payable. We generated more than $110 million of free cash flow in 2023, and as Fred mentioned earlier, are extremely proud of the significant free cash flow generation we have delivered as part of our FFG program, totaling nearly $300 million in the three years ended December 31, 2023. Importantly, not only do we expect strong free cash flow generation to continue, we expect enhanced free cash flow generation over the next three years. Specifically, we believe our CGI program will generate more than $400 million of free cash flow in the three-year period ending December 31st, 2026. Turning to a review of our fiscal year 2024 financial guidance, which we introduced in today's press release. 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. We expect GAAP revenue growth of 4.3% to 5.4% year-over-year. The GAAP net revenue guidance range assumes net revenue growth of approximately 4% to 5% in our cardiovascular segment and net revenue growth of approximately 8% to 9% in our endoscopy segment and a headwind from change in foreign currency exchange rates of approximately 5.9 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 4.8% to 5.9% in 2024. There are two items to consider when evaluating our constant currency revenue growth of 4.8% to 5.9% for 2024. First, our ongoing FFG and CGI initiatives related to skew rationalization. represent a roughly $15 million headwind to revenue in EMEA and to a lesser extent in the U.S. in 2024, representing roughly 120 basis point impact on our constant currency growth year over year. Second, the midpoint of our total constant currency growth range assumes 7.6% growth in the U.S. and 2.3% growth outside the U.S. Constant currency growth outside the U.S. is expected to be driven by our high single-digit growth in both the EMEA and rest of world regions, partially offset by a 4% decline in the APAC region. The expected year-over-year decline in APAC sales is substantially 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. Finally, our total net revenue guidance for fiscal year 2024 also assumes inorganic revenue contributions from the acquisition announced on June 8, 2023, in the range of 10 to 11 million in the aggregate. Excluding this inorganic revenue, our guidance reflects total net revenue growth on a constant currency organic basis in the range of approximately 4 to 5% year over year. With respect to profitability guidance for 2024, we expect non-GAAP diluted earnings per share in the range of $3.28 to $3.35, representing an increase of 9% to 11% year over year. For modeling purposes, our fiscal year 2024 financial guidance assumes non-GAAP operating margins in the range of approximately 18.65% to 18.9% of 50 to 75 basis points year over year. Non-GAAP interest and other expenses net of approximately 1 million compared to 10.7 million last year. Non-GAAP tax rate of approximately 21% and diluted shares outstanding of approximately 58.8 million. Finally, we expect capex in the range of $50 to $60 million and free cash flow of at least $115 million. Lastly, we would like to provide additional transparency related to our growth and profitability expectations for the first quarter of 2024. Specifically, we expect our total revenue to increase in the range of approximately 5.6% to 6.8% year-over-year on a GAAP basis and approximately 6.5% to 7% 7.7% year-over-year on a constant currency basis. The midpoint of our first quarter constant currency sales growth expectations assumes approximately 10% growth year-over-year in the U.S. and approximately 3% growth year-over-year in international markets. Note, the midpoint of our first quarter constant currency sales growth expectations also includes approximately 6 million of inorganic revenue. Excluding these inorganic contributions, our first quarter revenue is expected to increase approximately 5% year-over-year. With respect to our profitability expectations for the first quarter of 2024, we expect non-GAAP operating margins in the range of approximately 16.7 to 17% up 60 to 90 basis points year-over-year. Finally, we expect non-GAAP EPS in the range of 70 to 72 cents. That wraps up our prepared remarks. Operator, we would now like to open up the line for questions.

Thank you, sir. If you'd 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 1-1. And our first question comes from Jason Bednar with Piper Sandler. Your line's now open.

Hey, good afternoon. Thanks for taking the questions.

Congrats on a nice finish to the year and appreciate all the 2024 and CGI guidance color here. I'll pick up first on CGI. I don't think any of these ranges will really surprise investors that are close to your story, and that's not a criticism or a compliment to the predictability here. The revenue guide here makes sense. I wanted to check to see if there's anything notable to call out as a tailwind or headwind embedded in that 5% to 7% growth outlook on, again, in the CGI, new products, regulatory elements, pricing, just anything there to be aware of. And then on the margin side of the equation, I think the math works out to be something like 60 to 120 basis points of annual margin expansion at the operating line. Given what we're looking at for 2024, it looks maybe at the lower end of that. Are there benefits here that skew more towards 25 and 26? And sorry to pack a few in here, but how do we think about the balance between gross margin expansion and OPEX leverage?

Yeah, a lot to unpack there, Jason. So I'm going to try and hit maybe on the revenue side. So if we kind of think on the key drivers, at least on the 5%, right? We always kind of like to start on the low end and then tell you kind of what the upside would be, you know, depending on what happens. But, look, I think it's really more of the same when it comes to the 5%, right? You know, product introduction, you know, selling the products that we have. We're really kind of, you know, hitting on, you know, positive CAGRs in each of our reportable product categories, specifically PI and CI. CPS, OEM, and Endotech, with really the largest contributors coming from PI and CI. And then, you know, international CAGR, you know, is a little bit less than the U.S. CAGR. So it's really kind of really just a follow-on of really what we did with FFG, quite frankly. So that's on the revenue side. As far as on the operating margin piece, we really focused on the operating margin. And I would say that on the low end, the primary driver is going to be gross margin. When you get to the higher end, you're getting more leverage from OpEx than what we would in the low end. So hopefully that provides you a little bit of color.

And also, let me add this to that, that the revenue thing does not include new products.

That's correct.

These are existing products. It does include Rapsody that we're currently selling, but no prognostications or any of the new products that Marriott may release next year. We have a long history of new product releases, but nothing. This is our existing business. And as they release and when they release, then we'll make notice of that.

Yeah, that's a good point. So the Rhapsody, just for a point of clarity, it's really the outside of U.S. sales that we would include in CGI. Rhapsody U.S. sales, where we haven't been approved yet, have not been included as one would expect, given that we don't know the exact timing, but we have a we think we know when it's going to happen, but we weren't a hundred percent sure. So we didn't include it.

Okay. All right. Very helpful. And yeah, you're, you kind of picked up on what I was hinting at there with RAP city. So that sounds like that's entirely upside and appreciate all the, all the details there on, on CGI. Yeah. On the, the guide for here for 2024, you know, A few different moving parts here. I think, you know, core organic growth would be something like 5 to 6%, if not for that skew rationalization you mentioned. You know, presumably that skew rationalization has some margin benefits. Can you talk about whether you're realizing these margin benefits here in 2024? Are those and the EPS impact, is that more of like a 2025 dynamic?

Yeah, you know, it's very similar to CGI. So on the low end, you're really talking about gross margin expansion is the main driver of that operating margin expansion as we make some investments in the business, especially as we ramp up for, you know, Rhapsody. And then on the high end, you're getting more operating expense leverage, you know, that gets us to the higher end of that operating margin range. So hopefully that helps, Jason.

Yeah, sorry, I was asking, I think on the skew rationalization in particular, that's going to be a, I guess, helping or a benefit in 2024? Yeah.

I mean, it helps us out, you know, throughout CGI. And it's things we've been working out throughout, you know, the last several years. But it's included in the numbers.

All right. Very helpful. Thank you. Yep.

Thank you. One moment for our next question. Our next question comes from Steve Ligman with Oppenheimer. Your line's now open.

Thank you. Evening, guys, and congratulations on the quarter. I guess a couple on cash. Is your higher free cash flow outlook, as you look at over the next few years versus the last three, based solely on higher operating income that you're forecasting or they're working capital levers too that you see playing out? And it looks like for 24, there's a step up in CapEx. Anything to call out specifically on what that spend is directed for?

Yeah. So, on the CapEx, you know, specifically around free cash flow. So, obviously, we're going to have, you know, higher earnings, you know, throughout the CGI program. So, we expect that, obviously, to flow through. Now, as far as, you know, the cash flow generation, I mean, it'll come from working capital. We do expect CAPEX to be somewhere in the 4% to 4.5% of sales, you know, over the next several years. We do have, you know, within the CGI three-year program, we will be making a couple of investments that I think we want to highlight just so we don't surprise anybody. One is there will be a little bit of work that we'll do in our Mexican facility this year as we were able to obtain the other half of the building that we're currently in. So now we have the two full buildings. And, you know, we did that because, you know, it was advantageous, it was available, and we wanted the space. It's, you know, it's a lot easier to take it when it's available than when you need it. Well, and we don't want to have to be driving across town to do that.

Exactly.

So we just were able to... So it'll be a nominal investment there as we build that out for whatever we need it. There's no immediate plans for it, but we have the space and we'll do a little bit of work on it. The bigger one would be a distribution center that we're planning on doing... here in Salt Lake. That'll be about a $50 million spend. That is included in our free cash flow numbers, but I just want to call it out that it is something that we plan on doing. We could get started as early as this year in the fourth quarter, but more than likely we'll get pushed into next year. So just a couple call-outs. But a lot of the drivers is increased profitability and working capital.

Great. Thanks. And then just as a follow-up, given that free cash flow outlook and your you know, solid balance sheet. Can you, you know, provide just your latest thoughts on M&A, your sort of appetite to do deals? You know, are you seeing opportunities out there? Any thoughts on that would be helpful. Thanks, Rick.

Yeah, listen, I think we'll continue to identify opportunities. You know, we look at them all the time. They have to fit and not frustrate. I think if we go back and look at the last three years, In our opinion, the things that we did were things that we felt that would enhance the business, and that's the same attitude. There's no money burning a hole in our pocket. We will spend it when it's right. It's consistent with our sales objectives, our sales force, and it's consistent with our plan. So, and we see things, but that's it. I mean, we're just going to keep the same discipline, the same approach. that we've done in the past. But we have the cash to do it. And we won't be hesitant if we find the right things. But it's just an ongoing process. That is business. I don't want to call it business as usual. But for lack of a better word, that's exactly what we've been doing. And even to this point, it's been a couple of months, we didn't have something that we're going to go, you know, do right away, we're looking and we'll be very patient and find the right things.

And also, just as a reminder, the CGI program does not contemplate any M&A activity.

That's a good point. Yeah, got it. Thanks, Rob and Fred. Thanks. You bet.

Thank you.

One moment for our next question. Our next question comes from Jason Bedford with Raymond James.

Your line's now open.

Good afternoon. It looks like the cumulative free cash flow goal came in 600 grand shy of the goal. I'm not sure if you guys are fans of the movie Glen Barry, Glen Ross, but I really hope that Roel didn't get a set of steak knives instead of the kind of like El Dorado that he deserves.

No, they were actually plastic and wrapped in a wrapper.

Just a reminder, Jason, remember we had that $12 million that had to be treated slightly different from a contingent payment standpoint because of the estimated fair value that we made four years ago or whenever it was. But yeah, you're right. We were just a hair short. But honestly, I think after what we've been through and all companies have been through from a supply chain standpoint and everything that happened with COVID and whatnot, I think we're pretty proud of the team of what we were able to accomplish, to be honest, and to be within a rounding error of that I think is a great example of kind of the commitment that we've made as an executive team and also our employees for, you know, toying the line on everything.

Yep, yep, no doubt. You should be proud. So that wasn't my question. That was just a comment. So just two quick ones here. It looks like the implied organic and cardio is about 4%. guessing it's disproportionately impacted by the skew rationalization, but that's the skew dynamic. In which segment do you expect to see a bit of a slowdown? You kind of called out TI and CI as the drivers. Where are you going to see the anticipated slowdown in 24?

Well, a lot of the rationalization comes from our kits and packs, so that's where we'll see most of the impact. But other than that, I mean, I think, you know, there is a little bit of MDR-related stuff, some of the spine business and whatnot. But really, I think most of our growth is going to be coming from the U.S., you know, at almost, you know, over 7%, 7.6% growth year over year, and then about 2.3% growth, you know, outside of the U.S. So hopefully that helps.

Okay. Okay. Maybe just broadening it out a bit. Revenue growth. I think implied in this CGI, there's basically an acceleration in 25 and 26. Is the upper end all due to the potential success of Rhapsody? And just remind us on the anticipated timing there in the U.S.?

Yeah, Jason, Fred, look, it is weighted on the back end in almost all programs you see that are three years. It's a little bit slower in the front. It depends on when we get...

approval on that thing remember that that revenue is not in the plan other than the existing but to say it's back weighted or in 25 and 26 is fair yeah and remember we you know as we talked about we we'd have with some skew rationalization that's happening this year about 15 million that's 120 basis points for this year so you know as we get that behind us then then you start to accelerate you know back to kind of what the um you know to get us back into that five to seven percent that you guys are used to so Again, I think it's really just a timing thing, at least from a CAGR standpoint.

And another thing to just recall, we have existing products we're selling in the U.S. that because of the MDR and approaching the finish line for merit, we will now start applying for those products. They're not in the numbers, but there are other things of these new products that we are selling in the U.S. that we haven't been selling so we could get MDR completed. So, I mean, we feel comfortable with this. I mean, I think you can tell that. We feel comfortable with our sales guidance.

Yeah, again, I think just I can't highlight enough the 120 basis points where, you know, that's a headwind related to skew rationalization, which, again, I think everybody should be, you know, happy about that we're, you know, going through the process of doing that because at the end of the day, it just leads to higher profits.

Okay, thank you.

Thank you.

One moment for our next question.

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

Hi, good evening, and thanks for taking the questions. I think we're on a strong end of the year here. Maybe just to circle back to Rhapsody's follow-up to that question, I believe that you're supposed to complete the, you know, final patient follow-up in February of the 28th. So, just wondering if that was done, and will the final module still be submitted in Q2? And can you characterize interactions with the FDA so far on it? Thanks.

Yeah, listen, we have filed the first three modules, and the final one is the data which is now being reviewed and populated and making sure that we have it all tidied up the way that the FDA requires it. And we're still on schedule to submit that, you know, per our previous calls, which is I think in April or May. But yeah, we're on schedule for everything. And then at that point, John, it's in the hands of the FDA.

Yeah. Okay, great, Fred. And then just when I think of the 2024 growth projections, you know, how should we think about pricing power as a function of that growth? Maybe any color on just contracts we expect to come out for renegotiation this year or just how the skew rationalization could help push to, you know, higher price products here. Thanks again.

Yeah, thanks, John. As you know, we don't disclose our pricing versus volume, but just to give you guys some general context, I mean, I think that, you know, the pricing initiatives that we've set out, we started under Foundations for Growth. they'll continue into CGI and they're just part of the initiatives that we're working on. And so, you know, we do expect it to be a tailwind for us, but we don't disclose the amount. It is one of the initiatives that we're working on among several others that we have going to get the CGI goals of at least or a minimum of, you know, 5%, you know, revenue CAGR and a minimum of 20% operating margins.

And John, I think just maybe just a little bit of color on that is we have made it, I think, very clear that going forward, that the things that we learned from foundations for growth are not things that are forgotten. They are ongoing. We have contracts that are coming due for renegotiation, this, that, and the other. So all of those things will come into play. And although we won't go through all the specific numbers, the concept of attention to contracts, pricing, engagement, and all those things are still part of our program that we work on every single day. We have our chief commercial officer in the room, and I'm looking over at him, and he's just nodding his head. So that's his commitment. You can't see it, but I can, and now he has his thumbs up. So there you go. Thanks, Joe. I appreciate that.

Great.

Thanks again.

You bet.

Thank you. One moment for our next question. And our next question comes from Michael Patusky with Barrington Research. Your line's now open.

Hey, good evening, guys. Congrats. So a couple of my questions were asked and answered, but let me ask a couple more. In terms of... in terms of sort of the wage pressure that's going on in Mexico. I was just wondering if you could comment on that. I mean, is that something that, you know, should be weighed, or is that sort of immaterial as you sort of think about it?

No, I think that's a great question, Mike. And I would say, generally speaking, that the wage pressures are, I would call them global, quite frankly. We've been pretty open about that, you know, throughout the last couple years about, you know, some of the wage pressures that we're seeing globally. And the belief around at least this table is that we don't think those go away, right? I mean, I think it's something that people are going to have to deal with. We're dealing with the wage pressures in Mexico. It's something that we've been able to overcome. I think we have a good program in our Mexican facility on how we deal with our employees. And it's something that we've been working on to make sure that they're paid properly. tend to be at the higher end of things. And so I think the impact is less so than it would be for other companies. But yeah, it's something we're dealing with, along with the Mexican peso, like everybody else. But we are hedged, and it does spread over time. But I think we're well aware of it, and it's included in the numbers that we gave for CGI.

And I think that's the important part. Some of this, by the way, in Mexico is mandated. So I mean, everybody has to deal with it. We have to follow the law, and we do. And I think the next part of it is, as Raul said, it's in the numbers. We've accounted in our costs those particulars in our best guesstimate of what those numbers would be. And so we've built numbers and increases and things into our models.

I guess, Fred, when you guys did the convert notes, a few months ago. I think probably a few people, I'll wrap myself out as one of those people, probably suspected, well, these guys probably have some things teed up in terms of external growth opportunities. You know, obviously, without getting into any specifics, I mean, did you guys possibly have a couple things that you thought were more front burner that now aren't, you know, maybe in that position?

Yeah, Mike, you know, we would never comment on that. I will say that As an ongoing everyday issue, there are things that come across our desk and into our business development people every day. We look at them. We look initially. So it's ongoing. Some have particular interests that fit. I would say 80% of them, you know, just thank you very much. We just, this is not where we sell. This is not where we operate. So there are a lot of things that come into place for those things. So there's no burning holes. It has to fit the strategy, the financial profile, you know, it has to be prudent and a prudent allocation and be disciplined like we've done in the past. Again, I will defend, you know, everything we did during foundations of growth, I think was well thought out and well executed. And I think even the integration parts of that were done well. So it's just, you know, the way that we do things, we just thought it would be good to be ready. We didn't know what was going to happen with inflation. So we think that we did the right thing and that we continue to do our day-to-day work. And when something fits, we'll move. But remember, we're competing in most cases with other people. We don't have control of all of that.

Yeah, and I think also just to highlight a couple of things, right? I think a little bit of the flack that we got too was, hey, look, interest rates are going to be dropping. And we were actually believers that those wouldn't, happen as fast as people were thinking and come to find out it's looking that way. Now, you know, we're not going to run a victory lap yet, but it looks like things are going to be slower than people anticipated. You know, so I think that's really it. I mean, at the end of the day, I think, you know, we did the right thing. We were able to leverage up and get low cost of capital, you know, essentially leverage up, you know, hang some cash on the balance sheet. We're earning a higher interest rate than we're paying. And it's EPS accretive.

Well, and you know, Mike, I was listening to the radio this morning. You know, the initial, I think, projection for people would see seven rate decreases this year. I heard one this morning now is one or two. And inflation, I mean, I'm not an economist, but inflation almost always has two or three legs to it. So all that being said, That was a judgment at the time based on our feelings about things. And as it all works out, uh, we were, we had that, I will call a little bit of a headwind, you know, because it wasn't, you know, someone could have questioned it, but first of all, thank you for your candor. And I'll accept your apology.

Well, I think I all want to, Raul, because I may have technically won the bet about them. You guys are not quite getting to $300 million, but I think he won the spirit of the bet because you were there.

We're usually apologizing to you, so we're happy to accept one on the other side. Thank you.

Hey, so I just want to clarify one issue, and maybe everybody else gets this, but I want to make sure that I get it. Have you guys now seen all the sort of primary endpoint data that you needed to see in terms of Rhapsody and in terms of moving forward? Are you still waiting for some of that data to come back?

All of the patient data is in. It is being... organized properly for presentation. So that's as much as I can say about it. But all of the data from all of the the patients is in. And so that's good. That's good news for us. And now it's the process of going through organizing it, looking at all the various issues to make sure the protocol was follow all of those things that you have to do now, because once it goes in, to the FDA, you've got to have it right.

It's got to be locked and everything.

And it's got to be locked. And I think that's the process we're into right now.

I think at the end of the day, we remain on track, Mike, for everything that we've disclosed so far.

Last one, and I'll get off. I didn't catch it if you made any comment around Russia in the fourth quarter. I think maybe on the Q3 call, you had suggested maybe we'll get a little incremental revenue there. But I know that's still a mess over there. Just any comment there? Thanks.

You know, I think Russia, based on everything that's going on, just came in in line with kind of our updated, I guess, expectations. You know, we were able to get the licenses required to do business in Russia. You know, I think within the second hurdle, not only just getting the licenses, you also have to make sure that you're able to get paid. You know, so we have a good banking partner that, you know, allowed us to make sure that we were able to receive money in the proper way. In U.S. dollars? In U.S. dollars. And so I think, you know, everything worked out, I'd say, the best it could under the circumstances that, you know, that are happening there, Mike. But I think we were happy with how it all turned out.

Excellent. Thanks, guys. A great year. Thanks.

Thank you, Mike. Thank you. One moment for our next question. Our next question comes from Jim Sidoti with Sidoti & Co. Your line is now open.

Hi, good afternoon. Thanks for taking the question.

Now that you're close to the finish line with Rhapsody and you finished at least enrollment with the WAVE trial, how should we think of R&D for 2024 and 2025? Are there other projects that will fill in or will you see that number start to come down a little?

Now, you know, listen, on R&D, it's been a hallmark of Merit's history to continue to invest in projects and opportunities that we see within the budgets that we have allocated. So I'm going to say it's business as usual. Some products are more complicated. Some are product line extensions. Some are improvements. So there's a lot of those sorts of things out there. Jim, but we're still committed to R&D. It's always been a hallmark of our success.

Yeah, I think too, Jim, just to add, similar to what we did with Foundations for Growth, we were able to strategically reinvest some of the efficiencies that we found back into the business. And look, I think we want to do more of the same. As Fred mentioned, there's going to be more therapeutic products, and so we want to make sure that we are able to fund those to continue to deliver the growth that you guys are all used to and we've been able to deliver. So I think we're trying to find a balanced approach to that reinvestment and, you know, higher costs really when it comes to therapeutic products. But I think we've done a great job of managing through that and we'll continue to do so under CGI.

So it sounds like you think it'll remain around that, you know, 60% of revenue. I think it's fair. Yeah. All right, and then in terms of the Angio Dynamics acquisition, I think you had one product line moved over last quarter and another one was still yet to be moved over. Has that been completed at this point?

Yeah, everything is in place in our Mexico facility to produce our products there. So it's all been moved from Angio and all in place. And I think going back to giving credit, it's one of the things that... Greg Freedy, who did our Becton Dickinson transfer, and you know the story there. It was done with absolute precision, and I think we've seen the same things in this integration. We actually very candidly do it pretty well, Jim.

All right. Well, there wasn't too much else to pick on, so I think that's it for me.

Thanks, Jim. Thank you.

One moment for our next question.

And our next question comes from Mike Mattson with Needham & Company. Your line's now open.

Yeah, thanks for putting me in. I guess just with regard to the CGI program, I apologize if I missed it, but I think you said some operating margin targets, but I didn't see anything in there about gross margins, and maybe that was deliberate on your part, but I just wanted to get your thoughts on kind of you know, how the margin expansion should kind of break up between gross and, you know, operating leverage.

Yeah. So, you know, similar to what we did with FFG, you know, Mike, we really only focused on a revenue CAGR of at least 5%, you know, operating margins of, you know, 20 to 22%, and then the minimum free cash flow of 400. But we didn't actually, you know, give guidance for gross margin and FFG. We did get some modeling considerations. And then I think people tried to turn that into guidance. So I think this time around, I think we've hopefully built up enough credibility that we're going to get it from wherever we get it, right? I mean, I think gross margin, like I said earlier, the low end of our operating margin, it really comes from gross margin. The high end, the 22%, would really come from not only delivering on the gross margin, but also on operating expense leverage. But at the end of the day, I think we've shown that we can get it from either operating expense leverage and or gross margin, and we'll adjust as necessary. What we don't want to do, similar to what we did with FFG, is get ahead of ourselves and think that we're going to be covered with just gross margin expansion to hit those levers. We'll leverage operating expenses if we need to, but our preference is to really reinvest those dollars into the business and get it from gross margin. So that's really our focus.

Well, and three years ago, we said we were going to fine-tune every aspect of our income statement and our balance sheet. That's right. And I think that's what we've done. Yep. So it's not one or the other, it's all of them.

Yeah. But just to give you a little bit of color, I mean, it's more of the same. We're going to have network consolidation We've got lean manufacturing initiatives. We've got better human resource efficiency, sharper on materials, logistics, and everything else that we can throw at gross margin because that's what it takes.

Okay. All right. And then just my only other question really just being around kind of the guidance for 24 as well as the CGI, the longer-term guidance, just for folks. particularly for revenue growth, I mean, if I look at, you know, what you've done over the past few years, you've kind of been more high single digits organically, and this guidance is kind of more mid-single digits. And so, I mean, I understand you're probably trying to be somewhat conservative, but is there, and I saw the call out about the skew rationalization, but I mean, is there anything else that you would would point to in terms of things that you know have maybe changed or something that would prevent you from being able to grow high single digits potentially i mean i'm not asking you to guide there but just wondering if there's you know there's other headwinds i guess that you're baking in or something there well look i think look i i think when we threw out you know foundations for growth i mean i think none of us anticipated all the headwinds we would have seen right i think

I think everything in the kitchen sink was thrown in there from, you know, what everybody saw and everybody had to experience. But look, we feel really confident in that low-end, you know, CAGR of 5%. I think, you know, we think it's realistic and achievable, and it allows us to say no to certain things, quite frankly. And so I think we feel comfortable with the numbers at 5% to 7%, and I will just leave it at that. You know, I think we always aspire to do better, but Five, you know, a minimum of five is what we're committing to.

Okay, I understand. Thank you.

Yeah.

Thank you. One moment for our next question. Our next question comes from Jason Bednar with Piper Sandler. Your line is now open.

Hey, guys, thanks for taking the follow up. Just one quick one. And you've obviously trained us all well, since I don't think anybody's asked on China here. So I'll do it for the group. You know, the guidance here for 2024, you're saying China revenue down due to VBP, just more of a fact check or clarification. Is this simply an extension of the VBP that we've all talked about from 2023, the second half of 2023? or is it something new that is now developing and hitting here in 2024?

Yeah, so, I mean, we're not going to give additional color, but I think you're on the right track there, Jason. Again, we're not going to provide country-specific, you know, growth rates. I think we called out, you know, the 4% decline in the APAC region, of which, you know, most of it is related to, actually all of it is related to China. But I will say that, you know, we continue to expect a volume to grow on a year-over-year basis. But obviously, we are seeing a decline due to the continued headwinds related to volume-based purchasing. And it's just something that we've been managing through over the last several years, and it's baked into our 5% to 7%. Okay. Perfect.

Thank you.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Fred Lampropoulos for closing remarks.

Well, again, to everybody, thank you for joining us today. It was a long call with a lot to cover. We appreciate the questions and the opportunity to present to you. Just in closing, a reminder that we put our shoulders to the wheel. We worked hard. We had every single employee in this company aligned with the company objectives, department objectives, and individual objectives. So we are all aligned as a company, and we expect to be able to deliver exactly what we said over our next three-year program, which we didn't have to do. We felt it actually helped us. We believe being on the line and being accountable is the right thing to do, and we'll look forward to reporting to you in the future. So best wishes from Salt Lake City. Just a quick reminder, the SUR meeting starts in late March. It's being held in Salt Lake City this year. It's Merritt's biggest show. We hope you get a chance to get out here and take a look at Salt Lake, the SUR meeting, and even maybe an opportunity to come to Merritt. So best wishes and good night from Salt Lake City.

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

Thank you music music

Welcome to the fourth 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. 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 very much and welcome everyone to Merit Medical's fourth quarter of fiscal year 2023 earnings conference call. I'm joined on the call today by Rahul 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 safe 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, February 28, 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 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.

Thank you, Brian. 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 fourth quarter. I will then discuss our continued growth initiatives program and related financial targets for the three-year period ending December 31, 2026, which we announced in a separate press release this afternoon. 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 2024 as well as a summary of our balance sheet and financial condition as of December 31, 2023. Then we will open the call for your questions. Beginning with a review of our fourth quarter revenue performance, we reported total revenue of $324.5 million in the fourth quarter, up 10.6% year over year on a gap basis and up 10.3% year over year on a constant currency basis. The constant currency revenue growth we delivered in the fourth quarter was stronger than the high end of our range of growth expectations that we outlined on our quarter three earnings call. Specifically, we expressed constant currency revenue growth in the fourth quarter in a range of 5% to 8% year over year. Importantly, the better than expected constant currency revenue growth in the fourth quarter was driven by a strong organic growth reflecting particular strength versus expectations in our PI, CPS, and OEM product categories, and relatively balanced contributions to the upside in quarter four from both the U.S. and international markets. With respect to our profitability performance in the fourth quarter, We leveraged the strong revenue results to deliver non-GAAP gross profit and operating profit growth of 13% and 13%, respectively, which resulted in year-over-year margin expansion of 100 basis points and 40 basis points, respectively. And we delivered non-GAAP net income and earnings per share results that modestly exceeded the high end of our expectations as well. overall we believe our performance in the fourth quarter resulted in strong financial results versus our expectations and more importantly capped off an impressive year of operating and financial performance in 2023 highlighted by nearly 10 constant currency revenue growth improvements in our profitability profile with an 18.2 percent non-gap operating margin a 120 basis point improvement year over year, and strong free cash flow generation of more than $110 million. This performance continues to be a direct result of our team's continued hard work and commitment to our strategic objectives, and we're very proud of the strong execution our team delivered in 2023. Our performance in the fourth quarter of 2023 also marked the completion of the third and final year of our Foundations for Growth program. We're very proud of the team's strong execution and relentless focus on the multi-year strategic endeavor. It is because of their efforts that the FFG program has resulted in a constant currency organic revenue CAGR of 9.4%, a 440 basis point improvement in our non-GAAP operating margin and cumulative free cash flow generation of approximately 300 million. Notably, when compared to 2019, we delivered a constant currency revenue CAGR in excess of 6%, more than 630 basis points of non-GAAP operating margin expansion and cumulative free cash flow in generation of more than $418 million. As announced in a separate press release this afternoon, we have formally introduced the Continued Growth Initiatives Program and related financial targets for the three-year period ending December 31, 2026. Building upon the notable success achieved in our Foundations for Growth Program, the Continued Growth Initiative Program reflects our commitment to identifying opportunities to better position the company for long-term sustainable growth, and enhance profitability. As discussed on prior calls, 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. We believe we executed well over the last three years and we're all very proud of the progress we have made with FFG. Importantly, we're not done. The CGI program represents the next chapter in our company's development and a continuation of the momentum and commitment to improvement that has defined the company in recent years. To that end, the CGI program was established with three clear objectives in mind. First, maintain above-market profitable growth, leveraging our proven ability to innovate together with our customers and deliver unique therapeutic-based solutions to the market. Product offering optimization, including further skew rationalization, and advancement of pricing initiatives, and prioritizing efficient, customer-centric sales and service strategies, including engaging with customers through education. Second, significantly improve our non-GAAP operating margins through ongoing network consolidation, growing sophistication in forecasting, planning, and tracking, and continued focus on lowering costs and increasing efficiency throughout the organization. And third, to strengthen to merit the merit way culture throughout the organization included targeted programs for enhanced employee engagement, leadership development, and organizational development. We are prioritizing further investment in our people with clear individual and functional objectives aligned with the company's strategic plan and key business objectives. We believe strong execution towards this goal is integral to best position the company for sustained success in meeting the evolving needs of changing healthcare markets in the years to come. As we formally kick off our continued growth initiatives program, it is important to understand that we have an organization that is fully committed to both the continued execution of foundation for growth activities and the successful execution of the new CGI objectives going forward. Together, we believe our efforts will result in MERIT completing the year ending December 31, 2026 with more than $1.46 billion of revenue and non-GAAP operating margins of at least 20%. We also believe our efforts will drive cumulative free cash flow generation of at least $400 million during the three-year period ending December 31, 2026, which will significantly enhance our balance sheet and financial condition. With that, let me turn the call over to Raul, who will take you through a detailed review of our fourth quarter financial results and our 2024 financial guidance, which we introduce in today's press release, as well as a summary of some of the key drivers of growth Profitability improvement and cash flow generation we project as part of our CGI program. Raul.

Thank you, Fred. I'll 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. 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. Fourth quarter total revenue growth was driven by 10% growth in our cardiovascular segment and 20% 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. While our endoscopy segment sales were in line with expectations. Sales of our peripheral intervention or PI products increased 19%, representing the largest driver of total cardiovascular segment growth again this quarter. Excluding sales of acquired products, PI sales increased 14% on an organic constant currency basis. Organic growth in the PI product category was driven by sales of our drainage and radar localization products, which increased 19% and 18% respectively. and together represented a little more than 40% of total PI sales growth. And by sales of our axis and geography and biopsy products, which together increased 13% and represented nearly one-third of our total PI growth in Q4. Sales of both our cardiac intervention and OEM products increased 6%, and were also key contributors to our organic growth in the cardiovascular segment this quarter. Cardiac intervention product sales were at the high end of our growth expectations, driven primarily by strong sales of both our hemostasis and EP and CRM products, which increased 35 percent and 12 percent, respectively. Sales of our OEM products exceeded the high end of our growth expectations, which we attribute principally to continued solid demand from large customers in multiple categories, with the strongest sales contributions from access and in geography products, which together increased 29 percent in Q4. Sales of our custom procedural solutions, or CPS products, increased 1%, which was notably better than the mid-single-digit decline we expected in Q4. CPS sales results benefited from higher demand from customers for certain product lines that had been identified for skew rationalization as part of our Foundations for Growth initiatives. Lastly, sales in our endoscopy segment increased 20%, which was in line with the range of growth expectations we outlined on our third quarter call. As expected, we continue to see improving sales trends in the fourth quarter, and we're pleased to see this business deliver mid-teens growth in the second half of 2023. Turning to a brief summary of our sales performance on a geographic basis, our fourth quarter sales in the U.S. increased 13% on a constant currency basis and 9% on an organic constant currency basis, exceeding the high end of our growth expectations by nearly 300 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 fourth quarter, particularly in our direct business, which saw impressive growth in sales of both our prelude sink radial compression hemostasis device and our splash wire hydrophilic steerable guide wire and geography products. International sales increased 7% on an organic constant currency basis, exceeding the high end of our growth expectations by more than 300 basis points in the quarter. The stronger than expected organic constant currency growth to customers outside the US was driven primarily by 7% growth in the EMEA region, and to a lesser extent by 30% growth in the rest of the world region, and by 4% growth in APAC, which was in line with our expectations, compared to growth that exceeded the high end of our expectations in the EMEA and rest of world regions in Q4. With respect to China specifically, sales were essentially flat year over year and were impacted by the headwinds related to volume-based purchasing tenders, as expected. Turning to 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 fourth quarter of fiscal year 2023. We have included reconciliations from our 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 fourth quarter. Our gross margin was 50.4% of 96 basis points from the fourth quarter of 2022. The increase in gross margin year-over-year was at the lower end of expectations as benefits from mix were partially offset by manufacturing variances compared to the prior year period. Operating expenses increased 13% from the fourth quarter of 2022. The year-over-year increase in operating expenses was driven by 11% increase in SG&A expense and a 19% increase in R&D expense compared to the prior year period. Our operating expense performance in Q4 of 2023 reflected higher commissions on the better than expected sales results and prioritization of investments to support our future growth initiatives as expected. Total operating income in the fourth quarter increased 6.7 million or 13% from the fourth quarter of 2022 to 59 million. Our operating margin was 18.2% compared to 17.8% in the prior year period. The 40 basis point increase in operating margin was driven by a 96 basis point increase in our non-GAAP gross margin, offset partially by a 60 basis point increase in our non-GAAP OPEX compared to the prior year period. Fourth quarter other expense net was 2 million compared to 0.1 million in the fourth quarter of 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, as well as lower income associated with realized and unrealized foreign currency losses compared to the prior year period, partially offset by an increase in interest income associated with our higher cash balances. Fourth quarter net income was $47.2 million, or $0.81 per share, compared to $46 million, or $0.79 per share, in the prior year period. We are pleased with our profitability performance in the fourth quarter, where we leveraged our stronger than expected revenue results to drive expansion in our gross and 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 December 31st, 2023, we had cash and cash equivalents of $587 million, total debt obligations of $846.6 million, and available borrowing capacity of approximately $626 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 December 31st was two and a half times on an adjusted basis. The change in total debt obligation was driven by the issuance of convertible notes in December of 2023. The notes bear interest at 3% per year, payable semi-annually, mature February 1, 2029, and have an initial conversion price of approximately $86.83 per share. Total gross proceeds from the sale of the notes were $747.5 million, and net proceeds were approximately $659 million after deducting offering and issuance costs and the cost of a related cap call transaction, which has an effective conversion price of $114 per share. Initial use of proceeds was pay down of outstanding debt obligations at higher interest rates, specifically $138 million of revolver borrowings and $50 million of term debt. We generated $55.1 million of free cash flow in the fourth quarter, up 255% from the fourth quarter of 2022, and up 30% from the third quarter of 2023. The improvement in free cash flow generation in the fourth quarter was primarily a result of significant improvements in cash used in working capital, specifically in the areas of inventory and accounts payable. We generated more than $110 million of free cash flow in 2023, and as Fred mentioned earlier, are extremely proud of the significant free cash flow generation we have delivered as part of our FFG program, totaling nearly $300 million in the three years ended December 31, 2023. Importantly, not only do we expect strong free cash flow generation to continue, we expect enhanced free cash flow generation over the next three years. Specifically, we believe our CGI program will generate more than $400 million of free cash flow in the three-year period ending December 31, 2026. Turning to a review of our fiscal year 2024 financial guidance, which we introduced in today's press release. 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. We expect GAAP revenue growth of 4.3 percent to 5.4 percent year over year. The GAAP net revenue guidance range assumes net revenue growth of approximately 4 percent to 5 percent in our cardiovascular segment, and net revenue growth of approximately 8 to 9 percent in our endoscopy segment, and a headwind from change in foreign currency exchange rates of approximately 5.9 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 4.8% to 5.9% in 2024. There are two items to consider when evaluating our constant currency revenue growth of 4.8% to 5.9% for 2024. First, our ongoing FFG and CGI initiatives related to skew rationalization. represent a roughly $15 million headwind to revenue in EMEA and to a lesser extent in the U.S. in 2024, representing roughly 120 basis point impact on our constant currency growth year over year. Second, the midpoint of our total constant currency growth range assumes 7.6% growth in the U.S. and 2.3% growth outside the U.S. Constant currency growth outside the U.S. is expected to be driven by our high single-digit growth in both the EMEA and rest of world regions, partially offset by a 4% decline in the APAC region. The expected year-over-year decline in APAC sales is substantially 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. Finally, our total net revenue guidance for fiscal year 2024 also assumes inorganic revenue contributions from the acquisition announced on June 8, 2023, in the range of 10 to 11 million in the aggregate. Excluding this inorganic revenue, our guidance reflects total net revenue growth on a constant currency organic basis in the range of approximately 4 to 5% year over year. With respect to profitability guidance for 2024, we expect non-GAAP diluted earnings per share in the range of $3.28 to $3.35, representing an increase of 9% to 11% year over year. For modeling purposes, our fiscal year 2024 financial guidance assumes non-GAAP operating margins in the range of approximately 18.65% to 18.9% of 50 to 75 basis points year over year. Non-GAAP interest and other expenses net of approximately 1 million compared to 10.7 million last year. Non-GAAP tax rate of approximately 21% and diluted shares outstanding of approximately 58.8 million. Finally, we expect capex in the range of $50 to $60 million and free cash flow of at least $115 million. Lastly, we would like to provide additional transparency related to our growth and profitability expectations for the first quarter of 2024. Specifically, we expect our total revenue to increase in the range of approximately 5.6% to 6.8% year-over-year on a GAAP basis and up approximately 6.5% to 7% 7.7% year-over-year on a constant currency basis. The midpoint of our first quarter constant currency sales growth expectations assumes approximately 10% growth year-over-year in the U.S. and approximately 3% growth year-over-year in international markets. Note, the midpoint of our first quarter constant currency sales growth expectations also includes approximately 6 million of inorganic revenue. Excluding these inorganic contributions, our first quarter revenue is expected to increase approximately 5% year-over-year. With respect to our profitability expectations for the first quarter of 2024, we expect non-GAAP operating margins in a range of approximately 16.7 to 17% up 60 to 90 basis points year-over-year. Finally, we expect non-GAAP EPS in the range of 70 to 72 cents. That wraps up our prepared remarks. Operator, we would now like to open it up for the line for questions.

Thank you, sir. If you'd 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 1-1. And our first question comes from Jason Bednar with Piper Sandler. Your line's now open.

Hey, good afternoon. Thanks for taking the questions.

Congrats on a nice finish to the year and appreciate all the 2024 and CGI guidance color here. I'll pick up first on CGI. I don't think any of these ranges will really surprise investors that are close to your story, and that's not a criticism or a compliment to the predictability here. The revenue guide here makes sense. Wanted to check to see if there's anything notable to call out as a tailwind or headwind embedded in that 5% to 7% growth outlook on, again, in the CGI, new products, regulatory elements, pricing, just anything there to be aware of. And then on the margin side of the equation, I think the math works out to be something like 60 to 120 basis points of annual margin expansion at the operating line. Given what we're looking at for 2024, it looks maybe at the lower end of that. Are there benefits here that skew more towards 25 and 26? And sorry to pack a few in here, but how do we think about the balance between gross margin expansion and OPEX leverage?

Yeah, a lot to unpack there, Jason. So I'm going to try and hit maybe on the revenue side. So if we kind of think on the key drivers, at least on the 5%, right? We always kind of like to start on the low end and then tell you kind of what the upside would be, you know, depending on what happens. But look, I think it's really more of the same when it comes to the 5%, right? You know, product introduction, you know, selling the products that we have. We're really kind of, you know, hitting on, you know, positive CAGRs in each of our reportable product categories, specifically PI and CI. CPS, OEM, and Endotech, with really the largest contributors coming from PI and CI. And then, you know, international CAGR, you know, is a little bit less than the U.S. CAGR. So it's really kind of really just a follow-on of really what we did with FFG, quite frankly. So that's on the revenue side. As far as on the operating margin piece, we really focused on the operating margin. And I would say that on the low end, the primary driver is going to be gross margin. When you get to the higher end, you're getting more leverage from OpEx than what we would in the low end. So hopefully that provides you a little bit of color.

And also let me add this to that, uh, that the revenue thing does not include new products.

That's correct.

These are existing products. Um, it does include Rapsody that we're currently selling, but no prognostications or any of the new products, um, that Marriott may release next year. And we have a long history of new product releases, but nothing, this is our existing business. And as they release and when they release, then we'll make notice of that.

Yeah, that's a good point. So the Rhapsody, just for a point of clarity, it's really the outside of U.S. sales that we would include in CGI. Rhapsody U.S. sales, where we haven't been approved yet, have not been included as one would expect, given that we don't know the exact timing, but we have a

we we think we know when it's going to happen but we weren't 100 sure so we didn't include it okay all right very helpful and yeah you're you kind of picked up on what i was uh hinting that there with rap city so that sounds like that's entirely upside and uh appreciate all the all the details there on on cgi um yeah on the the guide for here for 2024 um you know few different moving parts here. I think, you know, core organic growth would be something like 5 to 6%, if not for that skew rationalization you mentioned. You know, presumably that skew rationalization has some margin benefits. Can you talk about whether you're realizing these margin benefits here in 2024? Are those and the EPS impact, is that more of like a 2025 dynamic?

Yeah, you know, it's very similar to CGI. So on the low end, you're really talking about gross margin expansion is the main driver of that operating margin expansion as we make some investments in the business, especially as we ramp up for Rhapsody. And then on the high end, you're getting more operating expense leverage that gets us to the higher end of that operating margin range. So hopefully that helps, Jason.

Yeah, sorry, I was asking, I think on the skew rationalization in particular, that's going to be a I guess, helping or a benefit in 2024? Yeah.

I mean, it helps us out, you know, throughout CGI. And it's things we've been working out throughout, you know, the last several years. But it's included in the numbers.

All right. Very helpful. Thank you. Yep.

Thank you. One moment for our next question. Our next question comes from Steve Ligman with Oppenheimer. Your line's now open.

Thank you. Evening, guys, and congratulations on the quarter. I guess a couple on cash. Is your higher free cash flow outlook, as you look at over the next few years versus the last three, based solely on higher operating income that you're forecasting, or are there working capital levers, too, that you see playing out? And it looks like for 24, there's a step up in CapEx. Anything to call out specifically on what that spend is directed for?

Yeah. So, on the CapEx, you know, specifically around free cash flow. So, obviously, we're going to have, you know, higher earnings, you know, throughout the CGI program. So, we expect that, obviously, to flow through. Now, as far as, you know, the cash flow generation, I mean, it'll come from working capital. We do expect CAPEX to be somewhere in the 4% to 4.5% of sales, you know, over the next several years. We do have, you know, within the CGI three-year program, we will be making a couple of investments that I think we want to highlight just so we don't surprise anybody. One is there will be a little bit of work that we'll do in our Mexican facility this year as we were able to obtain the other half of the building that we're currently in. So now we have the two full buildings. And we did that because it was advantageous, it was available, and we wanted the space. It's a lot easier to take it when it's available than when you need it. Well, and we don't want to have to be driving across town to do that.

Exactly.

So we just were able to... So it'll be a nominal investment there as we build that out for whatever we need it. There's no immediate plans for it, but we have the space and we'll do a little bit of work on it. The bigger one would be a distribution center that we're planning on doing here in Salt Lake. That'll be about a $50 million spend. That is included in our free cash flow numbers, but I just want to call it out that it is something that we plan on doing. We could get started as early as this year in the fourth quarter, but more than likely we'll get pushed into next year. So just a couple call-outs. But a lot of the drivers is increased profitability and working capital.

Great. Thanks. And then just as a follow-up, given that free cash flow outlook and your you know, solid balance sheet. Can you, you know, provide just your latest thoughts on M&A, your sort of appetite to do deals? You know, are you seeing opportunities out there? Any thoughts on that would be helpful. Thanks, Brett.

Yeah, listen, I think we'll continue to identify opportunities. You know, we look at them all the time. They have to fit and not frustrate. I think if we go back and look at the last three years, In our opinion, the things that we did were things that we felt that would enhance the business. And that's the same attitude. There's no money burning a hole in our pocket. We will spend it when it's right. It's consistent with our sales objectives, our sales force, and it's consistent with our plan. So, and we see things, but that's it. I mean, we're just going to keep the same discipline, the same approach. that we've done in the past, but we have the cash to do it and we won't be hesitant if we find the right things. But it's just an ongoing process that is business. I don't want to call it business as usual, but for lack of a better word, that's exactly what we've been doing. And even to this point, it's been a couple of months. We didn't have something that we're going to go, you know, do right away. We're looking and we'll be very patient and find the right things.

And also, just as a reminder, the CGI program does not contemplate any M&A activity.

That's a good point. Thanks, Rob and Fred. Thanks. You bet.

Thank you. One moment for our next question. Our next question comes from Jason Bedford with Raymond James.

Your line's now open.

Good afternoon. It looks like the cumulative free cash flow goal came in 600 grand shy of the goal. I'm not sure if you guys are fans of the movie Glenberry Glen Ross, but I really hope that Roel didn't get a set of steak knives instead of the kind like El Dorado that he deserves.

No, they were actually plastic and wrapped in a wrapper.

Just a reminder, Jason, remember we had that $12 million that had to be treated slightly different from a contingent payment standpoint because of the estimated fair value that we made four years ago or whenever it was. But yeah, you're right. We were just a hair short. But honestly, I think after what we've been through and all companies have been through from a supply chain standpoint and everything that happened with COVID and whatnot, I think we're pretty proud of the team of what we were able to accomplish, to be honest. And to be within a rounding error of that I think is a great example of kind of the commitment that we've made as an executive team and also our employees for, you know, toying the line on everything.

Yep, yep, no doubt. You should be proud. So that wasn't my question. That was just a comment. So just two quick ones here. It looks like the implied organic and cardio is about 4%. guessing it's disproportionately impacted by the skew rationalization, but that's the skew dynamic. In which segment do you expect to see a bit of a slowdown? You kind of called out TI and CI as the drivers. Where are you going to see the anticipated slowdown in 24?

Well, a lot of the rationalization comes from our kits and packs, so that's where we'll see most of the impact. But other than that, I mean, I think, you know, there is a little bit of MDR-related stuff, some of the spine business and whatnot. But really, I think most of our growth is going to be coming from the U.S., you know, at almost, you know, over 7%, 7.6% growth year over year, and then about 2.3% growth, you know, outside of the U.S. So hopefully that helps.

Okay. Okay. Maybe just broadening it out a bit. Revenue growth. I think implied in this CGI, there's basically an acceleration in 25 and 26. Is the upper end all due to the success of, potential success of Rhapsody? And just remind us on the anticipated timing there in the US.

Yeah, Jason, Fred. Look, it is weighted on the back end in almost all programs you see that are three years. It's a little bit slower in the front. It depends on when we get,

approval on that thing remember that that revenue is not in the plan other than the existing but to say it's back weighted or in 25 and 26 is fair yeah and remember we you know as we talked about we we'd have with some skew rationalization that's happening this year about 15 million that's 120 basis points for this year so you know as we get that behind us then then you start to accelerate you know back to kind of what the um you know to get us back into that five to seven percent that you guys are used to so Again, I think it's really just a timing thing, at least from a CAGR standpoint.

And another thing to just recall, we have existing products we're selling in the U.S. that because of the MDR and approaching the finish line for merit, we will now start applying for those products. They're not in the numbers, but there are other things of these new products that we are selling in the U.S. that we haven't been selling so we could get MDR completed. So, I mean, we feel comfortable with this. I mean, I think you can tell that we feel comfortable with our sales guidance.

Yeah. Again, I think just I can't highlight enough the 120 basis points where, you know, that's a headwind related to skew rationalization, which, again, I think everybody should be, you know, happy about that we're, you know, going through the process of doing that because at the end of the day, it just leads to higher profits.

Okay, thank you.

Thank you. One moment for our next question.

Our next question comes from John Young with Canaccord Genuity.

Your line is now open.

Hi, good evening, and thanks for taking my questions. I think we're on a strong end of the year here. Maybe just to circle back to Rhapsody's follow-up to that question, I believe that you're supposed to complete the, you know, final patient follow-up in February of the 28th. So, just wondering if that was done, and will the final module still be submitted in Q2? And can you characterize interactions with the FDA so far on it? Thanks.

Yeah. Listen, we have filed the first three modules, and the final one is the data which is now being reviewed and populated and making sure that we have it all tidied up the way that the FDA requires it. And we're still on schedule to submit that, you know, per our previous calls, which is I think in April or May. But yeah, we're on schedule for everything. And then at that point, John, it's in the hands of the FDA.

Yeah. Okay, great, Fred. And then just when I think of the 2024 growth projections, you know, how should we think about pricing power as a function of that growth? Maybe any color on just contracts we expect to come out for renegotiation this year or just how the skew rationalization could help push to, you know, higher price products here. Thanks again.

Yeah, thanks, John. As you know, we don't disclose our pricing versus volume, but just to give you guys some general context, I mean, I think that, you know, the pricing initiatives that we've set out, we started under Foundations for Growth. They'll continue into CGI and they're just part of the initiatives that we're working on. And so, you know, we do expect it to be a tailwind for us, but we don't disclose the amount. It is one of the initiatives that we're working on among several others that we have going to get the CGI goals of at least or a minimum of, you know, 5%, you know, revenue CAGR and a minimum of 20% operating margins.

And John, I think just maybe just a little bit of color on that is we have made it, I think, very clear that going forward, that the things that we learned from foundations for growth are not things that are forgotten. They are ongoing. We have contracts that are coming due for renegotiation, this, that, and the other. So all of those things will come into play. And although we won't go through all the specific numbers, the concept of attention to contracts, pricing, engagement, and all those things are still part of our program that we work on every single day. We have our chief commercial officer in the room, and I'm looking over at him, and he's just nodding his head. So that's his commitment. You can't see it, but I can, and now he has his thumbs up. So there you go. Thanks, Joe. I appreciate that.

Great. Thanks again.

You bet.

Thank you. One moment for our next question. And our next question comes from Michael Patusky with Barrington Research. Your line's now open.

Hey, good evening, guys. Congrats. So a couple of my questions were asked in the answer, but let me ask a couple more. In terms of... in terms of sort of the wage pressure that's going on in Mexico. I was just wondering if you could comment on that. I mean, is that something that, you know, should be weighed or is that sort of immaterial as you sort of think about it?

No, I think that's a great question, Mike. And I would say, generally speaking, that the wage pressures are, I would call them global, quite frankly. We've been pretty open about that, you know, throughout the last couple of years about, you know, some of the wage pressures that we're seeing globally. And the belief around at least this table is that we don't think those go away, right? I mean, I think it's something that people are gonna have to deal with. We're dealing with the wage pressures in Mexico. It's something that we've been able to overcome. I think we have a good program in our Mexican facility on how we deal with our employees. And it's something that we've been working on to make sure that they're paid properly. tend to be at the higher end of things. And so I think the impact is less so than it would be for other companies. But yeah, it's something we're dealing with, along with the Mexican peso, like everybody else. But we are hedged, and it does spread over time. But I think we're well aware of it, and it's included in the numbers that we gave for CGI.

And I think that's the important part. Some of this, by the way, in Mexico is mandated. So I mean, everybody has to deal with it. We have to follow the law, and we do. And I think the next part of it is, as Raul said, it's in the numbers. We've accounted in our costs those particulars in our best guesstimate of what those numbers would be. And so we've built numbers and increases and things into our models.

I guess, Fred, when you guys did the convert notes, a few months ago. I think probably a few people, I'll wrap myself out as one of those people, probably suspected, well, these guys probably have some things teed up in terms of external growth opportunities. You know, obviously, without getting into any specifics, I mean, did you guys possibly have a couple things that you thought were more front burner that now aren't, you know, maybe in that position?

Yeah, Mike, you know, we would never comment on that. I will say that As an ongoing everyday issue, there are things that come across our desk and into our business development people every day. We look at them. We look initially. So it's ongoing. Some have particular interests that fit. I would say 80% of them, you know, just thank you very much. We just, this is not where we sell. This is not where we operate. So there are a lot of things that come into place for those things. So there's no burning holes. It has to fit the strategy, the financial profile, you know, it has to be prudent and a prudent allocation and be disciplined like we've done in the past. Again, I will defend, you know, everything we did during foundations of growth, I think was well thought out and well executed. And I think even the integration parts of that were done well. So it's just, you know, the way that we do things. We just thought it would be good to be ready. We didn't know what was going to happen with inflation. So we think that we did the right thing and that we continue to do our day-to-day work. And when something fits, we'll move. But remember, we're competing in most cases with other people. We don't have control of all of that.

Yeah, and I think also just to highlight a couple of things, right? I think a little bit of the flack that we got too was, hey, look, interest rates are going to be dropping. And we were actually believers that those wouldn't, happen as fast as people were thinking and come to find out it's looking that way. Now, you know, we're not going to run a victory lap yet, but it looks like things are going to be slower than people anticipated. You know, so I think that's really it. I mean, at the end of the day, I think, you know, we did the right thing. We were able to leverage up and get low cost of capital, you know, essentially leverage up, you know, hang some cash on the balance sheet. We're earning a higher interest rate than we're paying. And it's EPS accretive.

And you know, Mike, I was listening to the radio this morning. The initial, I think, projection for people would see seven rate decreases this year. I heard one this morning now is one or two. And inflation, I mean, I'm not an economist, but inflation almost always has two or three legs to it. So all that being said, That was a judgment at the time based on our feelings about things. And as it all works out, uh, we were, we had that, I will call it a little bit of a headwind, you know, because it wasn't, you know, someone could have questioned it, but first of all, thank you for your candor. And I'll accept your apology.

Well, I think I all want to, Raul, because I may have technically won the bet about them. You guys are not quite getting to $300 million, but I think he won the spirit of the bet because you were there.

We're usually apologizing to you, so we're happy to accept one on the other side. Thank you.

Hey, so I just want to clarify one issue, and maybe everybody else gets this, but I want to make sure that I get it. Have you guys now seen all the sort of primary endpoint data that you needed to see in terms of Rhapsody and in terms of moving forward? Are you still waiting for some of that data to come back?

All of the patient data is in. It is being organized properly for presentation. So that's as much as I can say about it. But all of the data from all of the patients is in. And so that's good news for us. And now it's the process of going through, organizing it, looking at all the various issues to make sure the protocol was followed, all of those things that you have to do now. Because once it goes in to the FDA, you've got to have it right.

It's got to be locked and everything.

And it's got to be locked. And I think that's the process we're into right now.

I think at the end of the day, we remain on track, Mike, for everything that we've disclosed so far.

Last one and I'll get off. I didn't catch it if you made any comment around Russia in the fourth quarter. I think maybe on the Q3 call you had suggested maybe we'll get a little incremental revenue there, but I know that's still a mess over there. Just any comment there?

Thanks. I think Russia, based on everything that's going on, just came in in line with kind of our updated, I guess, expectations. We were able to get the licenses required to do business in Russia and I think within the second hurdle, not only just getting the licenses, you also have to make sure that you're able to get paid. So we have a good banking partner that allowed us to make sure that we were able to receive money in the proper way. In U.S. dollars? In U.S. dollars. And so I think everything worked out, I'd say, the best it could under the circumstances that are happening there, Mike. But I think we were happy with how it all turned out.

Excellent. Thanks, guys. A great year. Thanks.

Thank you, Mike. Thank you. One moment for our next question. Our next question comes from Jim Sidoti with Sidoti & Co. Your line is now open.

Hi. Good afternoon. Thanks for taking the question. Again.

You know, now that you're close to the finish line with Rhapsody and you finished, you know, at least enrollment with the WAVE trial, How should we think of R&D for 2024 and 2025? Are there other projects that will fill in, or will you see that number start to come down a little?

Listen, on R&D, it's been a hallmark of Merit's history to continue to invest in projects and opportunities that we see within the budgets that we have allocated. So I'm going to say it's business as usual. Some products are more complicated. Some are product line extensions. Some are improvements. So there's a lot of those sorts of things out there, Jim. But we're still committed to R&D. It's always been a hallmark of our success.

Yeah, I think, too, Jim, just to add, similar to what we did with Foundations for Growth, we were able to strategically reinvest some of the efficiencies that we found back into the business. And look, I think we want to do more of the same. As Fred mentioned, there's going to be more therapeutic products. And so we want to make sure that we are able to fund those to continue to deliver the growth that you guys are all used to and we've been able to deliver. So I think we're trying to find a balanced approach to that reinvestment and higher costs, really, when it comes to therapeutic products. But I think we've done a great job of managing through that. And we'll continue to do so under CGI.

So it sounds like you think it will remain around that, you know, 60% of revenues. I think it's fair.

Yeah.

All right. And then in terms of the engine dynamics acquisition, I think you had one product line moved over last quarter and another one was still yet to be moved over. Has that been completed at this point?

Yeah, everything is in place in our Mexico facility to produce our products there. So it's all been moved. from angio and all in place and i think going back to giving credit um it's one of the things that uh greg friede um who you know who did our beckton dickinson um transfer and you know the story there it was done with absolute precision and i think we've seen the same things uh in this integration we actually very candidly do it pretty well jim all right well um

There wasn't too much else to pick on, so I think that's it for me.

Thank you, Jim. Thank you.

One moment for our next question.

And our next question comes from Mike Mattson with Needham & Company. Your line's now open.

Yeah, thanks for putting me in. I guess just with regard to the CGI program, I apologize if I missed it, but I think you set some operating margin targets, but I didn't see anything in there about gross margins, and maybe that was deliberate on your part, but I just wanted to get your thoughts on kind of how the margin expansion should kind of break up between gross and operating leverage.

Yeah, so, you know, similar to what we did with FFG, you know, Mike, we really only focused on a revenue CAGR of at least 5%, you know, operating margins of, you know, 20% to 22%, and then the minimum free cash flow of 400. But we didn't actually, you know, give guidance, you know, for gross margin in FFG. We did give some modeling considerations, and then I think people tried to turn that into guidance. hopefully built up enough credibility that we're going to get it from wherever we get it, right? I mean, I think gross margin, like I said earlier, the low end of our operating margin, it really comes from gross margin. The high end, the 22%, would really come from not only delivering on the gross margin, but also on operating expense leverage. But at the end of the day, I think we've shown that we can get it from either operating expense leverage and or gross margin, and we'll adjust as necessary. What we don't want to do, similar to what we did with FFG, is get ahead of ourselves and think that we're going to be, you know, covered with just gross margin expansion to get those, you know, hit those levers. And so we'll leverage operating expenses if we need to, but our preference is to really reinvest those dollars into the business and get it from gross margin. So that's really our focus.

Well, in three years ago, we said we were going to fine tune every aspect of our income statement and our balance sheet. That's right. I think that's what we've done. Yep. So it's, you know, it's not one or the other, it's all of them.

Yeah. But just to give you a little bit of color, I mean, it's more of the same, you know, my, you know, we're going to have network consolidation. We've got lean manufacturing initiatives. We've got, you know, better human resources efficiency, you know, sharper on materials, logistics. and everything else that we can throw at gross margin because that's what it takes. Okay.

All right. And then just my only other question really just be around kind of the guidance for 24 as well as the CGI, the longer-term guidance, just for particularly for revenue growth. I mean, if I look at, you know, what you've done over the past few years, you've kind of been more high single digits organically. and this guidance is kind of more mid-single digits. And so, I mean, I understand you're probably trying to be somewhat conservative, but is there, and I saw the call out about the skew rationalization, but I mean, is there anything else that you would point to in terms of things that, you know, have maybe changed or something that would prevent you from being able to grow high single digits potentially? I mean, I'm not asking you to guide there, but just wondering if there's, you know, there's other headwinds, I guess, that you're baking in or something there.

Well, look, I think, look, I think when we threw out, you know, foundations for growth, I mean, I think none of us anticipated all the headwinds we would have seen, right? I think, I think everything in the kitchen sink was thrown in there from, you know, what everybody saw and everybody had to experience. But look, we feel really confident in that low end, you know, a CAGR of 5%. I think, you know, we have, we think it's realistic and achievable and And it allows us to say no to certain things, quite frankly. And so I think we feel comfortable with the numbers at 5% to 7%. And I will just leave it at that. You know, I think we always aspire to do better. But five, you know, a minimum of five is what we're committing to.

Okay, I understand. Thank you. Yeah.

Thank you. One moment for our next question.

What do you think?

Our next question comes from Jason Bednar with Piper Sandler. Your line's now open.

Hey, guys. Thanks for taking the follow-up. Just one quick one, and you've obviously trained us all well since I don't think anybody's asked on China here, so I'll do it for the group. You know, the guidance here for 2024, you're saying China revenue down due to VVP. Just more of a fact check or clarification. Is this simply an extension of the VBP that we've all talked about from 2023, the second half of 2023, or is it something new that is now developing and hitting here in 2024?

Yeah, so, I mean, we're not going to give additional color, but I think you're on the right track there, Jason. Again, we're not going to provide country-specific, you know, growth rates. I think we called out, you know, the 4% decline in the APAC region, of which, you know, most of it related to actually all of it is related to China but I will say that you know we continue to expect a volume to grow on a year-over-year basis but obviously we are seeing a decline due to the continued headwinds related to volume based purchasing and it's just something that we've been managing through over the last several years and it's you know it's it's it's baked into our our five to seven percent okay

Perfect. Thank you.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Fred Lampropoulos for closing remarks.

Well, again, to everybody, thank you for joining us today. It was a long call with a lot to cover. We appreciate, you know, the questions and the opportunity to present to you. Just in closing, a reminder that we put our shoulders to the wheel. We worked hard. We had every single employee in this company aligned with the company objective, department objectives, and individual objectives. So we are all aligned as a company, and we expect to be able to deliver exactly what we said over our next three-year program, which we didn't have to do. We felt it actually helped us. We believe being on the line and being accountable is the right thing to do, and we'll look forward to reporting to you in the future. So best wishes from Salt Lake City. Just a quick reminder, the SUR meeting starts in late March. It's being held in Salt Lake City this year. It's Merritt's biggest show. We hope you get a chance to get out here and take a look at Salt Lake, the SUR meeting, and even maybe an opportunity to come to Merritt. So best wishes and good night from Salt Lake City.

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