Merit Medical Systems, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to MMSI first quarter 2024 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you would need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. please be advised that today's conference is being recorded. I would like now to turn the conference over to Fred Lampropoulos, Chairman and CEO. Please go ahead.

Thank you and welcome everyone to Merit Medical Systems' first quarter of fiscal year 2024 earnings conference call. I am joined on the call today by Rahul Parra, our Chief Financial Officer and Treasurer, Joe Wright, our Chief Commercial Officer, and Brian Lloyd, our Chief Legal Officer and Corporate Secretary. Brian, would you mind taking us through the safe harbor statements, please?

Thank you, Fred. I would like to remind everyone that this presentation contains forward-looking statements that receive safe harbor protection under federal securities laws. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to unknown risks and uncertainties. The realization of any of these risks or uncertainties, as well as extraordinary events or transactions impacting our company, could cause actual results to differ materially from those currently anticipated. In addition, any forward-looking statements represent our views only as of today, April 30, 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 findings with the SEC for a discussion of factors that could cause actual results to differ from these forward-looking statements. Our financial statements are prepared in accordance with accounting principles that 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 tiled 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 financial results and key operating progress areas during the quarter. After my opening remarks, Joe will provide a summary of our revenue results before turning the call over to Raul, who will provide you with a more in-depth review of our quarterly financial results. Then we will open the call for your questions. Now, beginning with a review of our first quarter results. We reported total revenue of $323.5 million in the first quarter, up 8.7% year-over-year on a gap basis, and up 9.3% year-over-year on a constant currency basis. The constant currency revenue growth we delivered in the first quarter was stronger than the high end of the range of growth expectations that we outlined on our fourth quarter earnings call. Specifically, we expected constant currency revenue growth for the first quarter in the range of 6.5% to 7.7% year-over-year. Importantly, the better-than-expected constant currency revenue growth in the first quarter was primarily driven by strong organic growth, as well as contributions from acquired products, which modestly exceeded our expectations as well. With respect to our profitability performance in the first quarter, we leveraged the solid revenue results to deliver non-GAAP gross profit and operating profit growth of 10% and 16% respectively, which resulted in year-over-year margin expansion of approximately 80 basis points and 115 basis points respectively. And we delivered 19% growth in our non-GAAP EPS which exceeded the high end of our expectations as well. We are pleased with a solid start to the fiscal year and remain confident in our team's ability to deliver continued strong execution, stable constant currency growth, improving profitability, and solid free cash flow generation in 2024. Now, before turning the call over to Joe, I would like to share a brief update on several areas of operational progress in recent months. First, with respect to new product introductions, we have had a solid start to 2024 with multiple regulatory clearances and commercial introductions, including in January, we announced FDA 510 clearance for the ScoutMD surgical guidance system. This new guidance system demonstrates merits ongoing leadership in oncology and marks a significant advancement in breast cancer care as it supports implantation of up to four different reflector configurations designed to pinpoint tumor location in multiple dimensions for a more precise excision. This targeted approach can help minimize damage to surrounding healthy tissue, decrease the likelihood of re-excision, and avoid the emotional and physical trauma associated with a second surgery. In March, we announced the commercial release of the MicroACE Advanced MicroAccess System, a complementary solution that expands our portfolio of percutaneous access and closure devices. The MicroACE system represents innovative technology to improve interventional access procedures as it balances stiffness and flexibility to offer twice the resistance to kink and compression over the leading competitor. It also is 9% stiffer than the leading standard micro-introducer. In addition, a unique marker tip design allows for nine times greater visibility under fluoroscopy for accurate positioning needed at the start of a procedure. We developed this system based on feedback from our interventional physician customers and is another example of partnering with our customers to advance vascular access procedures, outcomes, and improve patient care. Second, with respect to our progress in the area of clinical validation in recent months, in January, we announced the successful enrollment of the first patient in our motion study. This study is a multicenter prospective randomized controlled trial comparing genicular artery embolization, or GAE, using marriage embosphere microspheres to corticosteroid injections for the treatment of symptomatic knee osteoarthritis, a condition that impacts more than 650 million adults globally. GAE is a minimally invasive procedure that selectively reduces blood flow to areas of the knee where hypervascularity has been identified, helping to alleviate pain and inflammation associated with knee osteoarthritis. The motion study is designed to enroll up to 264 adults with symptomatic knee osteoarthritis across medical centers in North America, Brazil, Europe, Australia, and New Zealand. The study is structured to evaluate primary safety and effectiveness of the ambiospheres at six months with continued patient follow-up for 24 months. Finally, we are pleased with the progress achieved in recent months for our Rapsody arteriovenous access efficacy or wave pivotal study. We completed collection of safety and efficacy outcomes throughout the study follow-up period and receive primary endpoint data for the last enrolled patient during the first quarter. The team has recently completed the monitoring, data cleaning, and analysis phase, and we remain on track to complete the clinical study report and continue to expect to be in a position to file primary outcomes with the FDA for premarket approval, or PMA, by the end of the second quarter of 2024. Now, with that, let me turn the call over to Joe, who will review the first quarter revenue performance.

Joe? Thank you, Fred. I'll start with a detailed review of our revenue results in the first quarter, beginning with the sales performance in each of our primary reportable product categories. Note, unless otherwise stated, all growth rates are approximated and presented on both a year-over-year and constant currency basis. We have included reconciliations from our GAAP reported results to the related non-GAAP item in our earnings release and presentation available on our website. First quarter total revenue growth was driven by 9% growth in our cardiovascular segment and 6% growth in our endoscopy segment. Our cardiovascular segment was the primary driver of the better than expected revenue results versus the high end of constant currency growth expectations again this quarter. However, our endoscopy segment sales did exceed the high end of our expectations as well in Q1. Sales of the peripheral intervention or PI products increased 19%, representing nearly 80% of total cardiovascular segment growth in the period. Excluding sales of acquired products, PI sales increased 13% on an organic constant currency basis. Organic growth in the PI product category was driven by sales of our delivery systems and embolotherapy products increased 41% and 16% respectively, and together represented more than a third of our total PI sales growth. And sales of our drainage and radar localization products were strong contributors to our total PI growth in Q1, increasing in the low double digits year over year. Sales in both our cardiac intervention and CPS product categories were also key contributors to our organic growth in the cardiovascular segment this quarter, each exceeding the high end of our growth expectations in Q1. Cardiac intervention product sales increased 7%, driven primarily by strong sales of intervention products and balanced contributions to growth from access, angiography, EPCRM, and hemostasis products in the period. Sales of our custom procedural solutions, or CPS products, increased 3%, which was notably better than the low single digit decline we expected in Q1, fueled by 8% growth in sales of critical care and kit products, which more than offset year-over-year declines in sales of trays. By way of reminder, the decline in trays is due to the ongoing skew rationalization effort we specifically noted in Q3 earnings call last year. Sales of our OEM products were the only area of our cardio business that came in softer than our growth expectations heading into the quarter. We attribute the mid single digit decline in sales to be a result of order timing and fluctuations in demand trends as our customers work through efforts to optimize inventory levels. OEM product sales to US customers were flat in Q1, with demand from our OUS customers declining year over year. Importantly, we continue to expect solid growth in OEM sales. Lastly, Sales in our endoscopy segment increased 6%, which exceeded the high end of our growth expectations. We are pleased to see continued normalization of growth trends in this business, and our 2024 guidance continues to assume high single-digit growth in our endoscopy segment this year. Turning to a brief summary of our sales performance on a geographic basis, our first quarter sales in the U.S. increased 9% on a constant currency basis and 5.5% on an organic constant currency basis. Sales to U.S. customers came in roughly a point softer than what our guidance had assumed, driven primarily by the softer than expected OEM sales as previously mentioned. Despite a modestly softer than expected growth in Q1, Our U.S. growth trends accelerated on both the two-year and three-year basis in the first quarter, and we continue to expect to deliver the 7.6% growth assumed at the midpoint of our 2024 guidance range. International sales increased 9.5% year-over-year and 9% on an organic constant currency basis, exceeding the high end of our growth expectations by more than 600 basis points in the quarter. The stronger-than-expected organic constant currency growth to customers outside the U.S. was driven primarily by mid-teens growth in APAC. With respect to China specifically, sales increased 22% year-over-year against a softer comp in the prior year period. We continue to see quarter-to-quarter variability in growth trends related to volume-based purchasing tenders as expected. By way of reminder, while we are not providing country-specific growth assumptions in our guidance messaging, the midpoint of our 2024 constant currency growth guidance range continues to assume our total international sales increased 2.3% year-on-year, driven by high single-digit growth in EMEA and ROW regions, partially offset by a 4% decline in the APAC region. The year-over-year decline in APAC is entirely related to China, where we expect to grow sales of units on a year-over-year basis, but we expect total revenue to decline due to continued headwinds related to volume-based purchasing. With that, let me turn the call over to Raoul, who will take you through a detailed review of our first quarter financial results, balance sheet, and financial condition as of March 31st.

Thank you, Joe. Beginning with the review of our P&L performance, for the avoidance of doubt, unless otherwise noted, my commentary will focus on the company's non-GAAP results during the first quarter of fiscal year 2024. We have included reconciliations from our GAAP reported results to the related non-GAAP items in our press release and presentation available on our website. Gross profit increased approximately 10% year over year in the first quarter. Our gross margin was 50.9% up 79 basis points year-over-year. The increase in gross margin year-over-year was driven by favorable revenue mix, pricing uplift, and improvements in freight and distribution costs, offset partially by manufacturing variances compared to the Friday year period. Operating expenses increased 8 percent from the first quarter of 2023. The year-over-year increase in operating expenses was driven by a 7 percent increase in SG&A expense and a 9 percent increase in R&D expense. compared to the prior year period. Total operating income in the first quarter increased $7.9 million, or 16% from the first quarter of 2023 to $56 million. Our operating margin was 17.3% compared to 16.1% in the prior year period. The 115 basis point increase in operating margin was driven by a 79 basis point increase in our non-GAAP gross margin and by a 36 basis point decrease in our non-GAAP OPEX margin compared to the prior year period. First quarter other expense net was 0.1 million compared to 0.7 million last year. The change in other expense net was driven by an increase in net interest expense associated with increased borrowings and rising interest rates, partially offset by an increase in interest income associated with our higher cash balances. First quarter net income was $44.8 million or $0.77 per share compared to $37.5 million or $0.64 per share in the prior year period. We are pleased with our profitability performance in the first quarter where we leveraged stronger than expected revenue results to drive both expansion 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 March 31, 2024, we had cash and cash equivalents of $581.9 million, total debt obligations of $822.5 million, and available borrowing capacity of approximately $657 million. Compared to cash and cash equivalents of $587 million, total debt obligations of $846.6 million, and available borrowing capacity of approximately $626 million as of December 31, 2023. Our net leverage ratio as of March 31st was 2.4 times on an adjusted basis. We generated $24.5 million of free cash flow in the first quarter compared to $1.8 million last year. The year-over-year improvement in free cash flow generation was primarily a result of significant improvements in cash used in working capital, specifically in the reduction of dollars invested in inventory compared to the prior year period. We expect strong free cash flow generation again in 2024 and continue to believe our CGI program will generate more than 400 million of free cash flow in the three-year period ending December 31st, 2026. For reference, we have included a table in our earnings press release which details each of our formal financial guidance items and how those ranges compared to the prior year period. However, it is important to highlight that all guidance expectations remain unchanged versus what we introduced in our fourth quarter earnings press release. Further, we have not changed the underlying assumptions discussed in our prepared remarks last quarter as well. Lastly, we would like to provide additional transparency related to our growth and profitability expectations for the second quarter of 2024. Specifically, we expect our total revenue to increase in the range of approximately four to 5% year over year on a gap basis end up approximately 4.7% to 5.8% year-over-year on a constant currency basis. The midpoint of our second quarter constant currency sales growth expectations assumes approximately 10% growth year-over-year in the US and a 1% decline year-over-year in international markets. Note, the midpoint of our second quarter constant currency sales growth expectations also includes approximately 4.5 million of inorganic revenue. Excluding these inorganic contributions, Our second quarter total revenue is expected to increase approximately 3.8% year-over-year on a constant currency basis. With respect to our profitability expectations for the second quarter of 2024, we expect non-GAAP operating margins in the range of approximately 19.6% to 19.9%, and we expect non-GAAP EPS in the range of 87 to 90 cents. That wraps up our prepared remarks. Operator, we would now like to open up the line for questions.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. The first question comes from Larry Bigelson with Wells Fargo. Your line is open.

Hi, good afternoon. This is Simran on for Larry. Thanks for taking the questions. Maybe just to start off, hey, maybe just to start off on the Q2 guidance, you know, can you just walk me through some of the assumptions that get you to the low end and the high end of the range? You know, it seems like the EPS guide is ahead of what we're modeling. So maybe just what are some of the key leverage points in the quarter that you're kind of assuming? And should we consider the phasing of revenues for the remainder of the year to be, you know, steady through Q3 and Q4 or more so Q4 weighted? And then I have a follow-up.

Long question. I'm going to let Raul pick that one. Raul?

Yeah, so, and this is specific to the second quarter, right? So, I'll start there and just say, you know, as far as the revenue, 4 to 5%, you know, year over year on a GAAP basis, you know, approximately 4.7 to 5.8 year over year on a constant currency basis. The midpoint for the second quarter on constant currency growth expectation also includes approximately 4.3 million in organic revenue. related to the acquisition for the angio products. Excluding those inorganic items, our growth is around 3.8%. As far as the EPS, actually maybe I'll talk about the revenue kind of cadence for the rest of the year since we're there. You can kind of think about this as more of a kind of regular seasonality. So we're getting back to that normalized seasonality levels where our Q1 and Q3 are softer quarters, and Q2 and Q4 are stronger ones. So I think we feel pretty comfortable that it's kind of back to that historical kind of cadence, with the exception that you have to think about the skew rationalization items that we've talked about that will impact us Um, and then also the China impact, which we expect kind of in the back half of the year. So a couple of things to consider, but essentially normalized. And then, um, go ahead.

I was just going to say, uh, to clarify on the skew rationalization, um, what was the impact in Q1? And, um, you know, how do we think about the impact of the skew, like throughout the remainder of the year?

So we talked about it being about $15 million for the year. And, you know, I'd say the substantial part of the impact will be essentially kind of evenly weighted for the most part, with the exception that, you know, it'll taper off towards the fourth quarter as we started to, you know, decelerate from those products. So, Q1, Q2, and Q3 will be a little bit heavier than the fourth quarter.

Okay. And, sorry, just one more follow-up on Rhapsody. Just to put a finer point on timing, I think the last call you said you expected to submit the final module of the PMA in April or May. I think if I heard correctly, you're saying end of Q2 now. So should we interpret any wiggle to timing? And more importantly, are you still tracking to a fourth quarter approval and launch? Or should we think of this as more of a 2025 event?

Well, I think nothing has changed with respect to timing. So everything is right on schedule per our representations. I mean, everything is gone. We expect in the second quarter we'll file that, and then it's up and it's into the hands of the FDA. So I don't know, I don't believe that we've said that we would have this in the fourth quarter. It's up to the FDA at that point. and their regulatory process. But we will have submitted all the modules and all the data will be in their hands by the end of this quarter.

Yeah, I think our messaging has been pretty clear, you know, that, you know, we would expect it to be submitted by the end of the second quarter. And then the FDA obviously has 180 days, but it's FDA days. So, you know, we'll be at their mercy. But we're ready to answer any questions and make sure we address any other questions.

Perfect. Thank you.

Thank you.

One moment for the next question. The next question comes from Craig Bejew with Bank of America Securities. Your line is open.

Good afternoon, guys. Thanks for taking the questions. I wanted to follow up on the Q2 guidance. Raul, appreciate the color that you gave. But, you know, you guys obviously had a strong start to the year, strong growth. And, you know, you're looking for a little bit of a step down. So I wanted to kind of dig into maybe some of the other factors and how to think about the growth through the rest of the year. And I guess one segment that I'm looking at is kind of the OEM that you guys said came in a So maybe just how to think about OEM for the rest of the year and, you know, anything else that kind of impacts, you know, the growth that looks like it's slowing a little bit throughout the year.

Yeah, Craig, you know, thanks for the question. First of all, I think we're super excited about our results for Q1. But it's just that, right? It's Q1. There's three quarters left. It's, you know, it's not our practice to raise guidance. after the first quarter. I think we'll review things after the second quarter, see how things look. It'll also give us a little bit better visibility on some of the things surrounding China and the volume-based purchasing, so it'll give us a little bit more clarity there. And so, again, I think we're really excited about how the business did, but we did leave our guidance unchanged just because it is the first quarter of the year. But we do see a you know, the business doing well. As far as OEM, I think we've talked, you know, we continue to expect solid growth in our OEM business. The reality is we did start talking about kind of, you know, people kind of managing their inventory levels, I think in the fourth quarter last year. And then obviously, you know, if you met with me, you know, during any investor conferences, I've talked about it pretty openly. We're seeing the same thing that all other, other OEM companies are dealing with, and that's people holding back on their inventory purchases. And it's not just, it's essentially, I think most of the industry is doing it. I know we're doing it. I'll say that I think that'd be better. I'm not going to surmise what everybody else is doing, but we are managing our inventory levels. I think you saw our free cash flow number. Our inventory for this quarter or Q1 was essentially flat. That's why we were able to deliver about $24 million of free cash flow. compared to the 1.8 million from last year. And all of that was really just managing our inventory. So again, we continue to expect strong growth out of our OEM business.

Got it. Thanks. That's a helpful role. And maybe just a couple quick follow-ups on Rhapsody. So we'd love to hear, Fred, if you guys have had any more conversations in between getting the data on the last patient with the FDA as as you're working to submit the filing. And I'll throw this in, too. I'm not optimistic on you giving me a good answer, Fred, but, you know, any color on how to think about the potential opportunity for Rhapsody yet? I know you wanted to wait, but figured I'd throw the question out there.

Well, listen, we've completed the collection of the safety and the efficacy outcomes throughout the study. in the follow-up period. We received primary endpoint data for the last enrolled patient. We recently completed the monitoring, the data cleaning, and analysis phase, and we remain on track to complete the clinical study and report. And we continue to expect to be in a position to file primary outcomes, as I've said, by the end of the quarter, of the second quarter. So we've made a lot of progress, and we've done exactly what we said we're going to do. And I think after that, then as we move down the road, we'll see where we are. And when appropriate, we will then take a look at the opportunities in the U.S. commercial strategy. But these are at a time when it's appropriate to do so. You know, it's really important that we do this correctly and that we do it in a manner that's befitting for all of you for our customers, for the FDA. I mean, I could go on and on, but this really has to be disciplined. And that's what we are. So that's the best way I can answer it, because that's what we're doing. So.

Okay, thanks, Fred. I thought that was a really good answer, by the way. I agree, Fred. I had to try. Thanks. Okay, all right.

One moment for the next question. The next question comes from Jason Bednar with Piper Sandler. Your line is open.

Hey there. Good afternoon. Can you hear me okay?

Yeah, we got you, Jason.

Great. Thanks for the questions and a nice start to the year here, guys. If I could maybe start on gross margin strength. The trend line here has been pretty darn solid. I think probably an underappreciated part of the story right now. I know gross margin improvements are a key element of the new CGI plan you spoke to in the last call, but you talk about the confidence you have in sustaining year over year improvements in gross margin over the balance of the year, you know, where do additional improvements come from and maybe remind us how much of a contributor here, if you can bucket it or allocate it, you know, on things such as price and mix versus, you know, actions you're taking like transfers to Mexico and the ski rationalization.

Yeah, look, I think it's, You know, Jason, as you know, we've worked really hard to make improvements in the business, you know, specifically around gross margin. And I think the improvement in Q1 kind of amplifies what we've been working on for the last years. And I think it'll be more of the same, right? So favorable revenue mix, pricing uplift. You know, we're talking about, you know, efficiencies within our product lines and product line transfers. And so I think when you look at our 2024 guidance, you know, we didn't really guide on gross margin. We guided on operating margin, you know, 18.65 or 18, you know, roughly 18.7 to 18.9, so up 50 to 75 basis points for the year. And we said the majority or the primary, you know, driver that would be gross margin with also some OPEX leverage. And I think if you look at what we did, you know, this year, or sorry, for Q1 in the P&L, it's exactly that. You know, we grew the top line, you know, almost, you know, 9%. Gross margin expanded by about 80 basis points. Our OpEx margin expanded by about 40 basis points, which led to an operating margin expansion of 115 basis points. I mean, that's, you know, in my eyes, that's a perfect way to leverage the P&L. Strong progression, you know, from every line item. So, you know, I'll just say that our guidance still kind of holds. We continue to expect our operating margin expansion to be primarily driven from gross margin with some leverage from OPEX. So hopefully that helps.

Yeah, no, it does. Couldn't agree more either on all the levers you got going there. Maybe two others, I'll ask them. They're unrelated here, though. First, just on Yeah, I guess how do we reconcile the expectation of sales, still the decline in China, even though you posted 20% growth here in the first quarter? I guess outside of VBP, is there anything else you should be considering for our models or that you're factoring in there that would get reversed or work against that nice performance here we had in the first quarter? And then the unrelated item, I'll take a swing on a Rhapsody question, but I guess are there any investments or pre-launch costs, educational efforts, things like that, that we should be thinking about later this year, or is that also going to be more of a 2025 item?

Yeah, this is Joe. Thanks for the question. I'll take the one on China. So our international sales were up 9.5% year on year. So that definitely exceeded the high end of our growth expectations by, as I said, more than 600 basis points. That was primarily driven by strength in APAC, as you point out, and China was particularly strong with a 22% year-over-year. We did have a softer comp, just so you know there. But as far as VBP, we continue to see quarter-to-quarter variability in growth trends related to that, which we expected. We feel good about the guidance we've given on APAC in particular, so no update there, and no other real factors we're dealing with presently.

And if you want to repeat the second half of your question, Jason, because I... Yeah, sure, Rob.

Well, yeah, just on RAPCity is... if there's any investments or pre-launch costs or educational efforts that we should be thinking about as we work some of those investments or costs into our model later this year, or is that more of a 2025 item?

No, Jason. So whatever investments we think we needed to make are included in our guidance already. So there isn't any surprises coming your way from an investment standpoint. I think the biggest investment that we we needed to make outside of kind of the normal clinical studies and things like that were the salespeople that we brought on. But as you guys, I think most of you guys know, part of the reason we did the Angio acquisition last year was to cover the expenses for those additional heads. And so again, we've hired those people. We continue to be excited about how the Angio products are doing. And any expenses are already included in our guidance, so you shouldn't expect anything outside of that. Okay.

Perfect. Thanks so much.

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

Hi. Good afternoon. Maybe just a couple follow-ups here. Just on the gross margin, clearly a nice step up quarter over quarter, year over year. You covered the drivers. I guess my question is, revenue is expected to trend higher throughout the year. Is 1Q kind of the low point for gross margin for the year?

Yeah, Jason, that's a great question. I don't know that we're going to get into the cadence of that. I mean, I think we gave our guidance on operating margin. We talked about the primary drivers of what that operating margin expansion would be. And I think we'll leave it at that. I think we're happy with what, you know, the results for Q1, but our guidance still stands. And, you know, I don't know that I have, you know, additional color for you.

Okay. Okay. Just following up on the 2Q revenue guide, are there any changes in the environment that you're expecting? And it sounded like China VBP is more of a second half impact, if I had that right.

Yeah, I think that's the way we've described it. You know, I think, again, we're excited about how the business is doing, Jason, and we've given our growth expectations for the second quarter. You know, OEM, I think, you know, is the one item that I think that was a little bit softer in Q1. But I think, you know, hopefully the reflection of our guidance in the Q2 kind of, you know, gives people kind of some comfort there. And the fact that we continue to remain confident that OEM growth will be strong for the rest of the year. But we'll evaluate things after the second quarter and see where we're at.

Okay. Just on the OEM timing dynamic, did it slip into 2Q or these orders slip into the second half? Do you have visibility on that?

You know, we've given our guidance for Q2, and I don't want to get into that. I'll just say that, you know, it's all included, and we believe that OEM, you know, for the full year will be, you know, a strong revenue growth.

Okay. Fair enough. Thank you.

One moment for the next question. The next question comes from Steve Lichtman with Oppenheimer. Your line is open.

Thank you. Hi, guys. Fred, I noted that you talked about more sort of specific products on this call than I think you talked on in a lot of previous calls, obviously, in addition to Rhapsody. Can you talk from a high level how you're feeling about Your R&D pipeline, it looks like even, again, this quarter you invested a little bit more than we expected. Talk a little bit about what's going on internally there in terms of focus on new product flow. I know you like to talk a lot about singles and doubles, but you highlighted some several new products here.

Yeah, listen, we continue to expect innovation in our business. We have a track record. of what we do every year. We have new product introductions. Steve, I hate to say it's business as usual, but that really is, you know, what Merit is doing. We are announcing more product introductions than we have in the past because to answer these questions about the pipeline. In other words, we're not sacrificing our earnings for the investments we need to make for the future. So we continue to do that. And we think it helps you guys to better understand the cadence. When I say cadence, it's still the same merit in some ways and a different merit in other ways if you look at the Foundations for Growth and CGI. But one thing that hasn't changed is the, you know, understand, innovate, and deliver. Those are the three key words that we use at Merit. That continues to be what we do every single day. In fact, I'm looking at my desk. I wish you could see the products and the various things that are sitting here. You can't see that. But, you know, we continue to do what brought us this far and which will take us into the future, and that is investment in research and development.

Great. Thanks, Fred. And then I apologize if I missed this, but someone else asked, But on the inorganic side, can you talk about your latest views on M&A, what you're seeing out there, your appetite, et cetera?

Yeah, listen, I think it's well known that we have a good cash position. We're in a position we could do things. I think we have to be selective. We continue to look. But it has to be consistent with the investments and the things that we've told you and that we've committed to investors. So we're not just doing or would we do anything just for the sake of doing something. It has to fit with the business. It has to align with our sales forces and our long-term objectives. And it continues to be the same in those aspects.

Great. Thanks so much, Fred.

You bet.

One moment for the next question. The next question comes from Michael Petusky with Barrington Research. Your line is open.

Good evening, guys. I'm wondering, was there any thought to sort of making an adjustment in the guide on APAC for the year, given the strong Q1 organic constant currency growth? I mean, to me, it seems like that's an awfully conservative guide for full year when you start off with maybe 13%, 14%, 15% growth in Q1.

Yeah, look, Mike, I mean, I think when we look at the business, we're super excited how we did. Again, you know, going to repeat, you know, what we did. I mean, you know, over 9%, you know, organic constant currency growth during the year, or constant currency, sorry. You know, when you look at it, you know, it's a really strong start. But it's just not in our nature to, you know, to go out and update guidance, you know, after Q1. And so, you know, I think looking at everything, I think we're really happy how Q1 came out. And, you know, we'll look at things after the second quarter and evaluate there. But excited how the business is off to a really good start.

So I'm just curious if you have any comments. thing you can share on the cadence of free cash. Obviously, last year was an unusual year in that so much of the free cash came in in the second half and particularly the fourth quarter. Obviously, I would suspect based on how you came in this quarter, it's going to be a much more balanced. I mean, is there anything you can say about that? Like, is it 40% of free cash in the first half, 60%? I mean, is that a decent guess? Can you just speak to that?

You know, I Mike, I think on this one, you know, when we talk about revenue and the cadence, you know, seasonality with our, you know, I feel a little more comfortable with that one. I think on free cash flow, there's just so many timing related things that sometimes are just outside of our control. And so I don't feel comfortable giving cadence there. Other than to say that I'm, you know, really happy with the way we started, you know, $24 million. And really, You know, just kind of a thanks over to our operations group because it's really hard to manage inventory, especially when we have a global footprint with global distribution and with the amount of products that we have. And for them to keep it flat, you know, they have a good plan this year to manage inventory, so they're off to a really good start. We still have confidence in delivering at least $115 million of free cash flow this year, and we still have confidence that we'll deliver at least $400 million you know, through the end of 2026. So, you know, other than that, I, you know, feel good about how we did in Q1.

Yeah, I think, Mike, this is Fred. I think the important thing is the focus that we have on this. It's out there. We've made the commitment. We kept our past commitments. And I think that's really the headline, if it were me. It's just, this is a big deal. And very candidly, we're all compensated. The entire company is aligned on this. It's not a small deal. It's a big deal to merit.

Hey, Fred, so let me just ask a last one to you. You brought a lot of, in the last several decades, brought a lot of products from development into commercialization. Based on your experience, based on your sense of I mean, and Raul's comments I think were important, 180 days for FDA is sort of like watching the last four minutes of a football game. It's not really four minutes. I'm just curious, do you think there's going to be a lot of stops and starts, sort of Q&A back and forth on a product like this? Do you have any sort of expectation around that based on your experience? Thanks.

Yeah, listen, only from the standpoint that we're focused on what we need to do. will respond appropriately, and this is important to the company. So, you know, we can't control the FDA. We can control us, and we can direct our resources to answer the questions as they come. So it's really just we'll do our part, Mike.

Okay, fair enough. Thanks, guys. Appreciate it.

One moment for the next question. Next question comes from Jim Sidoti with Sidoti & Company. Your line's open.

Hi, good afternoon. Thanks for taking the question. You know, I know you're probably sick of questions on China, but I think it's difficult for all of us to get our arms around it, you know, when you had such a strong quarter up 20% this quarter, why do you expect a 4% decline? You know, and I know in past years you've been concerned about the volume price discounts, and then as the year ended up, it wasn't quite as significant as you thought. I mean, how confident are you this year that those are going to kick in in the second half of the year?

Hi, Jim. This is Joe. I can take that one. As you know, there's a lot of quarter-to-quarter variability with BVP in China. So you're right in a sense that it's been difficult to project really when that impact will come. We are continually updating our our models and trying to determine when that impact will come. But we feel pretty good about the full year guidance. And keep in mind, APAC incorporates more than just China. There's Japan, which is a significant revenue driver for us, and Southeast Asia, Korea. So, yeah, all I can say is we're confident with the number we projected for the year, fully realizing that there will be some you know, some variability along the way.

So, I mean, potentially you could see more of an impact maybe in the last quarter, maybe into the first quarter of 2025.

Yeah, I don't think we'll get to that point there, you know, Jim, you know, but look, we're trying to be as transparent as possible on this. You know, we've detailed kind of the headwinds out in advance in our, you know, in our guidance. You know, I know it can be frustrating to investors. Quite frankly, it's frustrating to us, too. But there is variability. I think we've managed it accordingly. You know, we haven't given you any surprises, you know, negatively, I should say, when it comes to China. And, you know, we are seeing the impacts. And I know that's hard to see because of the results that we're delivering. Joe and I looked at a report the other day, and we are seeing price pressure on some of our products. And so this isn't something that's made up, that we're just kind of making up. It's real, and it's impacting the business. But I think we've tried to manage it appropriately. But Jim, this is Fred.

Look, we remain confident in our long-term plan in China. And I think that's critical. Merit is in for the long run. And we're confident about the future for Japan and all of APAC.

We think it's a big opportunity for the company.

Yeah.

And just as a reminder, I think the whole goal was to kind of de-risk the China component from our guidance, right? I think we were pretty clear on our call that a portion of it was actual, you know, tangible things that we knew are happening in the business that's in our guidance, and a portion was things that we think could be coming on in the third and fourth quarter that we, you know, that our group, you know, thinks that we're going to have an impact. Now, whether those come to fruition or not, we'll wait and see. But, you know, we'll have better visibility as we exit, you know, kind of the second quarter, and then hopefully we can provide you guys an update then. Okay.

All right. And then the last one for me. It looks like you paid down about $24 million of debt in the quarter. I assume that was on the line. Can you just remind me, what's the interest rate on that debt that you paid down?

It's about, well, yeah, I mean, I think, so when you're looking at the, I guess there's a couple of components and I'll try and break it down. Sorry. So we have a, you know, the, a term loan that we have that, that is at about 1.6 or something like that. We're paying that down and we'll have that paid off this year. Then there's obviously the convert that has a rate of around, you know, 3%. And so, you know, the, there's a little bit of variability there, but for the most part, that's what we're paying down is the term loan right now, Jim.

Okay. All right, thank you.

One moment for the next question. The next question comes from Mike Mattson with Needleman Company. Your line is open.

Yeah, thanks. So just wanted to start with the one on Rhapsody. Do you have any plans to apply for new technology add-on payment and or transitional pass-through to get some additional reimbursement, given that it's a breakthrough device?

Yeah, I think, Mike, as we pointed out, as we get through this first six months, then that's really, we're planning on a lot of different things, the right time for release of data, the right time for release to the public. All of these things are all things that are all being worked on. And at the appropriate time, we've been involved in this and this strategy for a long time. So I will just tell you simply to capitalize it all, we're prepared. We've been working on it. None of these are new to us. And at the right time, we will do all these things that were most beneficial to our shareholders and the company.

Okay, thanks. And then there was some news earlier this week that Hologic's buying Endomagnetics. I believe that product competes with your Scout product. So I assume you've already been competing with them in the marketplace, but Hologic's kind of a well-known brand in the breast area. you know, is there any reason to be concerned about this? And can you maybe tell, you know, just remind us what, you know, how big the TAM is here? I've seen there's probably enough room for multiple players, but.

Yeah. Hi, Mike. This is Joe. Uh, I think I can take that one. Uh, you're right. We have been competing against the endomag product for many years now in the market. Uh, As you probably know, we remain the market leader in this space. We're very excited about the prospects for growth here. We continue to invest in market leading innovations. We mentioned the Scout MD, which recently was approved. So our goal is simply to continue to focus on maintaining that market lead and delivering innovation to the market. I won't get into the total addressable market, but I think our expectation is and what our belief is that the market will, over time, go completely wire-free, and that's what we're working to achieve. Again, we've competed against magnetic technologies in the past, including endomag, and we're confident in our ability to compete favorably against all the technologies out there.

Especially from a technology point of view. We won't get into that, but... I think our technology is not just that we're the market leader, Mike, but we're the technology leader. Yeah, got it. Thank you.

One moment for the next question. The next question comes from John Young with Canaccord. Your line is open.

Good evening. Thanks for taking the questions and congrats on the quarter. I just want to, it sounds like you won't give this, but on Rhapsody, you know, is there any estimates of when we could see the data and where, you know, any medical meetings that you're looking at to release this to the scientific community? Fred?

Yeah, so the general answer is no. Now, maybe a little more specific. Let us get it filed. There are a lot of factors here, John, that that talk about the value that's being created, issues like when the right timing is. There's a lot of factors that go into this. We just want to do it correctly to maximize the opportunity. So we could get in a hurry, we could get pushed, but if we do, and first of all, we won't, but it doesn't help the value to our shareholders. So I think that's important for you to understand that we're doing things in a disciplined manner that we believe and have been counseled that in looking at these things, this is what maximizes value for shareholders and equally important, the physician community. And that's what we have to remember. This is serious stuff we're talking about. These are important issues. And at the appropriate time, we will release all of this information for the assessment of the public and physicians at the appropriate time. Okay, thanks.

And then just me moving to SIR. You guys, you know, had a very large showing there, too. Now, how much of the new Bluegrass and Angio products helped grab attention from the interventional radiology call point? And how large is that sales force now? I remember you previously ended up six to eight reps for the renal care call point. Are you continuing to scale that as those revenues grow? Thanks again.

Look, we think first of all, as you know, because you've heard, Merritt had a very good showing not only there, but here at our facility with over 150 physicians. It's part of our renal therapy group. I think that strategy is sound. We're seeing it execute the way we had anticipated, and we are scaling. We don't give out specific numbers, but it is a successful program, and we continue to believe it will be. Joe, do you want to come in on this, though? It's your program.

Yeah, we decided we have enough scale in that product portfolio to break out a dedicated sales group. So to your point, that's what we've done. And we're fully confident in our ability to scale that over time and be fully prepared for the launch of Rhapsody whenever that may come.

Okay, great. And then just a quick follow-up. What scale do you think is needed to support Rhapsody at launch?

You know, we don't talk about those things because we don't want to give that information to our competitors, and it's not generally what we talk about. We will, at the appropriate time, release data and information on TAM and all the numbers, all these things. You'll have all of these answered in due time.

Yeah, John, I mean, obviously, she's going to be excited about the product, but, you know, we'll talk about the U.S. commercial strategy, reimbursement strategy, all those things, you know, as Fred mentioned, you know, when appropriate.

And let me just say one other thing. We are extraordinarily excited about this project coming down the road. Yeah. Very excited. So just for the record. Got it. Thanks again.

I show no further questions at this time. I would like to turn the call back to Fred for closing remarks.

Ladies and gentlemen, it's the top of the hour. We've got everything done in one hour. We appreciate it. We know there are a lot of other calls going on. Raul and I and Joe will be available to discuss with you one-on-ones, and we thank you very much for your consideration, your time. We wish you all the very best. Signing off from Salt Lake City, good evening.

This concludes today's conference call. Thank you for your participation. You may now disconnect.