Merit Medical Systems, Inc.

Please stand by and welcome to the Merrick Medical Systems' fourth quarter 2024 earnings conference call. At this time, all participants are placed in listen-only mode. Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly. I would now like to turn the call over to Mr. Fred Nampropoulos, Merrick Medical Systems founder, chairman, and chief executive officer. Please go ahead, sir.

Thank you and welcome, everyone.

I am joined on the call today by Raul Parra, our Chief Financial Officer and Treasurer, and Brian Lloyd, our Chief Legal Officer and Corporate Secretary. Brian, would you mind taking us through the Safe Harbor Statements, please?

Thank you, Fred. This presentation contains forward-looking statements that receive Safe Harbor protection under federal securities laws. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to risks and uncertainties. The realization of any of these risks or uncertainties, as well as extraordinary events or transactions impacting our company, could cause actual results to differ materially from the expectations and projections expressed or implied by our forward-looking statements. In addition, any forward-looking statements represent our views only as of today, February 25, 2025. and should not be relied upon as representative of use as of any other date. We specifically disclaim any obligation to update such statements except as required by applicable law. Please refer to the section titled Cautionary Statement Regarding Forward-looking Statements in today's press release and presentation for important information regarding such statements. For discussion of factors that could cause actual results to differ from these forward-looking statements, please also refer to our most recent filings with the SEC, which are available on our website. 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 investor's 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 a summary of our fourth quarter and full year 2024 results. Then Raul will provide a more in-depth review of our quarterly financial results and our financial guidance for 2025, which we introduced in today's press release. Then we will open the call for your questions. Beginning with a review of the fourth quarter results, we reported total revenue of $355.2 million, up 9% year over year on a GAAP basis, and up 10% year over year on a constant currency basis. The constant currency revenue growth we delivered in the fourth quarter exceeded the high end of the range of growth expectations that we outlined in our Q3 earnings call. Specifically, we expected constant currency revenue growth for the fourth quarter in the range of 6% to 9% year over year. The better than expected total constant currency revenue results were driven by strong organic growth with contribution from acquired products coming in largely in line with what our fourth quarter guidance had assumed. With respect to our profitability performance in the fourth quarter, We delivered financial results that significantly exceeded our expectations. We leveraged the stronger than expected revenue results to deliver non-GAAP operating profit growth of 30 percent and a non-GAAP operating margin of 19.6 percent of sales up approximately 305 basis points year over year. We also delivered 26 percent growth in our non-GAAP earnings per share, which exceeded the high end of our expectations as well. We were pleased to deliver strong performance in the fourth quarter, capping off an impressive year of operating and financial performance in 2024, highlighted by more than 8% total constant currency revenue growth, including 6% organic constant currency growth. Significant improvements in our profitability profile with a 51.7% non-GAAP gross margin and a 19% non-GAAP operating margin, both of which are records for merit. And perhaps most importantly, we delivered strong free cash flow generation of more than $185 million, up 67% year over year. This performance was a direct result of our team's continued hard work and commitment to our strategic objectives. We are very proud of the strong execution our team delivered in 2024. We believe our fourth quarter results reflect continued strong momentum in the business, and we are confident in our team's ability to deliver the financial guidance for 2025 we introduced in today's press release and which Raul will review in detail later on in the call. We are focused on delivering continued strong execution, solid constant currency growth, improving profitability, and strong free cash flow in 2025, as well as continued progress in our continued growth initiatives, CGI program, and related financial targets for the three-year period ending December 31st, 2026. Now, with that, let me turn the time over to Raul for an in-depth review of our quarterly financial results and our financial guidance for 2025. Raul. Thank you, Fred.

I will start with a detailed review of our revenue results in the fourth quarter, beginning with the sales performance in each of our primary reportable product categories. Note, unless otherwise stated, all growth rates are approximated and presented on both a year-over-year and constant currency basis. Fourth quarter total revenue growth was driven by 8% growth in our cardiovascular segment and 88% growth in our endoscopy segment. Cardiovascular segment sales exceeded the high end of expectations we outlined on our third quarter call. Our total revenue results included approximately 7.6 million of revenue from our acquisition of endogastric solutions and approximately 5.5 million of revenue from our acquisition of the lead management product portfolio from Cook Medical. Excluding sales of acquired products, segment revenue growth on an organic constant currency basis was 6.1% and 6.5% for our cardiovascular and endoscopy segments respectively. Turning to a review of our fourth quarter revenue results by product category. Sales of our peripheral intervention or PI products increased 5.5% and was the largest driver of cardiovascular segment upside versus the high end of our growth expectations for the quarter. Growth in the PI product category was driven by the following factors. Sales of our Axis and Embolotherapy products increased in the low teens. Delivery systems product sales increased 28%, and radar localization product sales increased 9%. Cardiac intervention product sales increased 7%, slightly above the high end of our growth expectations, driven primarily by strong sales of EPCRM products, and to a lesser extent, growth in sales of fluid management products. Excluding the contributions from the sale of acquired products, cardiac intervention product sales increased approximately 1% on an organic constant currency basis. Sales of our custom procedural solutions, or CPS, products increased 3.5%, which was in line with our expectations, driven by strong sales of critical care products. Sales of our OEM products increased 22 percent in Q4, well ahead of what our guidance assumed. OEM customers' demand in the U.S. remained strong, as expected. Product sales to OEM customers outside the U.S. were impacted by a more challenging raw material and supply chain environment, as discussed on our Q3 call, but we were encouraged by the better-than-expected order demand in the quarter. Turning to a brief summary of our sales performance on a geographic basis, our fourth quarter sales in the U.S. increased nearly 14% on a constant currency basis and 9% on an organic constant currency basis, exceeding the high end of our expectations. We were pleased to see continued strong demand from our U.S. customers in the fourth quarter. International sales increased 5% year over year and increased 2% on an organic constant currency basis. Sales results in APAC and rest of world exceeded the high end of our expectations, while sales in the EMEA region were softer than expected, driven by softness in Russia and distributor markets. With respect to China specifically, sales increased 4%, modestly better than what our guidance had assumed. We continue to see quarter-to-quarter variability in growth trends related to volume-based procurement programs, as expected. That said, we were pleased to see a continuation of the dynamics we have talked about throughout 2024. Specifically, we saw better than expected sales of units, which offset continued pricing headwinds related to volume-based procurement. Turning to a review of our P&L performance. For the avoidance of doubt, unless otherwise noted, my commentary will focus on the company's non-GAAP results during the fourth quarter of 2024, and all growth rates are approximated and presented on a year-over-year basis. We have included reconciliations from our GAAP-reported results to the related non-GAAP item in our press release and presentations available on our website. Gross profit increased approximately 16% in the fourth quarter. Our gross margin was 53.5%, up 304 basis points. The increase in gross margin year over year was driven by a favorable product, geographic revenue mix, and improvements in pricing, freight, and distribution costs. Operating expenses increased 9% from the fourth quarter of 2023. The increase in operating expenses was driven by a 6% increase in SG&A expense and a 26% increase in R&D expense compared to the prior year period. Total operating income in the fourth quarter increased $15.9 million or 30% from the fourth quarter of 2023 to $69.7 million. Our operating margin was 19.6% compared to 16.6% in the prior year period. an increase of 305 basis points year over year. Fourth quarter other expense net was $1.1 million compared to expense of $2 million last year. The change in other expense net was driven by higher interest income associated with higher cash balances, offset partially by higher interest expense associated by higher average outstanding debt compared to the prior year period. Fourth quarter net income was $56.3 million, or $0.93 per share, compared to 43.1 million or 74 cents per share in the prior year period. We are pleased with our profitability performance in the fourth quarter, where we leveraged the stronger than expected revenue results to drive significant expansion in operating margin and strong growth in non-GAAP diluted earnings per share, both of which exceeded the high end of our expectations. Note, our fourth quarter non-GAAP EPS results included incremental dilution related to our convertible debt that represented approximately two cents to Q4 EPS. Turning to a review of our balance sheet and financial condition, we generated $65 million of free cash flow in the fourth quarter of 2024 and generated more than $185 million of free cash flow in fiscal year 2024, up 67% from 2023. The year-over-year improvement in free cash flow generation was a result of growth in net income and significant improvements in cash used in working capital. particularly in terms of cash used for inventory. We used $23 million of this free cash flow to pay down our term loan in the fourth quarter, bringing our total debt pay down to $99.1 million for the full year 2024 period. As of December 31, 2024, Merit had cash and cash equivalents of $376.7 million, total debt obligations of $747.5 million, an outstanding letter of credit guarantees of $2.9 million, with additional available borrowing capacity of approximately 697 million. Compared to cash and cash equivalents of 587 million, total debt obligations of 846.6 million and outstanding letter of credit guarantees of 2.7 million with additional available borrowing capacity of approximately 626 million as of December 31st, 2023. Our net leverage ratio as of December 31st was 1.9 times on an adjusted basis. Turning to a review of our fiscal year 2025 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 compare to the prior year period. Our 2025 guidance ranges assumes the following. Gap net revenue growth of 8% to 10% year over year, which we expect to result from net revenue growth of approximately 7% to 9% in our cardiovascular segment, and net revenue growth of approximately 36% to 40% in our endoscopy segment, and a headwind from changes in foreign currency exchange rates of approximately 3 million, or approximately 20 basis points to growth year over year. Excluding the impact of changes in foreign currency exchange rates, we expect total net revenue growth on a constant currency basis in the range of 8.6 to 10.1% in 2025. Among other factors to consider when evaluating our projected constant currency revenue growth range for 2025 are the following items. First, the midpoint of our total constant currency growth range assumes 10.6% growth in the U.S. and 7.5% growth outside the U.S. Constant currency growth outside the U.S. at the midpoint is expected to be driven by low double digit growth in EMEA high teens growth in the rest of the world region, and approximately 1% growth in the APAC region. The modest growth we expect in APAC sales is substantially related to China, where we project growth in unit sales on a year-over-year basis, but we expect total revenue to face continued headwinds related to volume-based procurement. Second, our total net revenue guidance for fiscal year 2025 also assumes inorganic revenue contributions from the acquisitions of assets from endogastric solutions and from Cook Medical closed on July 1st, 2024 and November 1st, 2024, respectively, in the range of 45 to 47 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 5.3% to 6.6% year over year. Third, for the full year 2025 period, we continue to forecast U.S. revenue from the sales of Rhapsody CIE in the range of $7 million to $9 million. Our full-year 2025 U.S. Rhapsody CIE revenue range continues to assume a larger weighting of revenue in the second half of 2025 versus the first half and a larger weighting of revenue in the fourth quarter versus the third quarter. With respect to profitability guidance for 2025, we expect non-GAAP diluted earnings per share in the range of $3.58 to $3.70, representing an increase of 4% to 7% year over year. Note, our financial guidance for 2025 does not factor in the anticipated impact of any new tariffs or modified tariffs that could be imposed by the government of the U.S. or any other jurisdiction. The tariff situation and potential retaliatory measures by other countries remain unclear. The ultimate impact of any changes in tariffs on our business will depend on the timing, amount, scope, and nature of such tariffs. Among other factors, most of which are currently unknown, our 2025 financial guidance assumes that the 2025 tariff structure will remain substantially unchanged during 2025. Additional tariffs or retaliatory actions or changes to currently announced tariffs could change the anticipated impact to our business. This is a rapidly changing situation, which we are monitoring carefully. Given the frequency of recent changes in tariff policy, we do not intend to provide interim updates in response to each news item or related rumor. Rather, we will provide updates as we deem appropriate on our quarterly earnings calls or in other public formats as we gain further visibility and certainty regarding the situation. For modeling purposes, our fiscal year 2025 financial guidance assumes Non-GAAP operating margins in a range of approximately 19.4% to 19.7%, 40 basis points to 80 basis points year over year. Non-GAAP interest and other expenses net of approximately 5 million compared to non-GAAP income of 1.1 million last year. Non-GAAP tax rate of approximately 21% and diluted shares outstanding of approximately 61.7 million. Note, our weighted average share account assumption reflects incremental dilution of approximately 1.8 million shares related to our convertible debt facility. This represents an impact of approximately 11 cents to our non-GAAP EPS in 2025. Finally, we expect to generate free cash flow of at least 150 million in 2025, inclusive of the expectation that we invest approximately 90 to 100 million in capital expenditures this year. The step-up in CAPEX investment this year is directly related to a new distribution center in South Jordan, Utah. We would also like to provide additional transparency related to our growth and profitability expectations for the first quarter of 2025. Specifically, we expect our total revenue to increase in the range of approximately 8.2% to 9.7% on a GAAP basis and up approximately 8.8% to 10.3% on a constant currency basis. The midpoint of our first quarter constant currency sales growth expectations assumes approximately 13% growth in the US and 5% growth in international markets. Note, our first quarter constant currency sales growth expectations include inorganic revenue in the range of $16 million to $17 million. Excluding inorganic contributions, our first quarter total revenue is expected to increase in the range of approximately 4% to 5% on an organic constant currency basis. With respect to our profitability expectations for the first quarter of 2025, we expect non-GAAP operating margins in the range of approximately 16.7% to 17.1% compared to 17% last year. And we expect non-GAAP EPS in the range of 73 to 76 cents compared to 75 cents last year. I will now turn the call back to Fred for closing comments. Fred?

Thank you, Raul. Before we open the call for questions, I just wanted to add that the U.S. Rhapsody CIE program is progressing well. And we're very much looking forward to the presentation of 12-month AVF data from our Rhapsody wave trial at the Society of Interventional Radiology on Sunday, March 30th. That wraps up our prepared remarks.

Operator, would you now open the line up for questions?

Thank you, sir. If you'd like to ask a question, please signal by pressing star 11 on your telephone keypad. If using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We do ask that you limit yourself to one question and one follow-up. If you'd like to ask additional questions, we invite you to add yourself back to the queue by pressing star 11 again. And one moment while we wait for the first question. And the first question today will be coming from the line of Jason Bednar of Piper Sandler. Your line is open.

Hey, good afternoon. Congrats on a nice finish to the year here, guys. Raul, I want to start with the EPS guidance. I've gotten a few questions here. I think it's the one thing that maybe surprised folks, just given how strong the business has been, because it's a little bit lighter than the street. It seems like maybe some of that's coming from the accounting on the convertible node. But are there any other factors that you'd identify as maybe influencing the conservative EPS guide or things that we should be thinking about that maybe weren't in street models before today?

Yeah, no, look, it's a great question. Obviously, super excited about the year that we're putting together. Super excited about the performance for 2024. I think it was probably one of the best, if not the best, financial performance we've ever put together. Just a solid, strong beat all around. But organic constant currency on the revenue side, 5.3 to 6.6, 40 to 80 basis points on the operating margin. As far as the EPS growth, You know, there's two things that I want everybody to kind of consider. The first one is we've got an additional $5 million of interest expense versus the interest income of $1 million last year. Recall, we had kind of a large cash balance last year. We did the acquisitions. So when you think about that, that's roughly about $0.08 of headwind to EPS growth. The second one, which is probably more important, I want to make sure I highlight it because there's a disconnect between the hedge that we bought and the gap accounting on how you treat the dilution for the convert. So that's going to be 11 cents. There's an incremental 1.8 million shares that we've added that essentially impacts our earnings by 11 cents. When you kind of factor those two things in, we end up somewhere around 9% to 12% growth if you exclude those items. So I think that's probably more in line with what everybody was expecting, but the dilution on the convert does have a significant impact. And again, we have a hedge in place that covers us up until we get above $114. And so there is a disconnect between the economic benefit of that hedge versus how we treat it from a GAAP standpoint, which is a little disappointing, but that's just the way GAAP works, and that's how we're going to account for it.

Okay. Very helpful, and, yeah, that makes a lot of sense. I want to take a stab at something here. I know just if we take a step back and think about the 26 margin targets that you had out there, you know, the business is already looking different today than it did a year ago due to M&A with EGS and Cook. Also, you've got Rhapsody in there. I guess, is the 20% to 22% margin target still the right range to use? Or maybe I should ask, do you feel better at the upper end of that range, the midpoint, or better at that range in light of the benefits that you're seeing from some of these factors?

Thanks for that question, Jason. I think you probably already know how I'm going to answer it. But look, we're committed to a minimum of 5% organic constant currency. And we're committed to a minimum of 20% operating margins and a minimum of $400 million in free cash flow. We're confident, obviously, in the LRP. Like I just said, we're super excited about year one of CGI and how 2024 played out. Right now, we're just hyper-focused on making sure that we execute in 2025. And yeah, that's all I'll say. But great question. Amen.

Yeah. All right. Appreciate it. Thanks, guys. Congrats again. Yep.

Thank you. One moment for the next question, please. And the next question will be coming from the line of Lawrence Beagleson of Wells Fargo. Your line is open.

I heard Wells Fargo. It's Larry Beagleson. I didn't hear my name. Can you hear me okay, Fred and Raul?

Yeah, we got you. We got you, Larry. We got you.

Okay. Okay. All right, where should I start? On OEM, Fred, really strong, 22% in Q4. I imagine these are like long-term contracts, Fred. So how should we think about OEM growth in 2025? Is that a good jumping off point? In other words, that 22% for the next few quarters until it lapsed in Q4?

Yeah, well, let me just say that, first of all, it was well ahead of what our guidance assumed in the third quarter call. Our OEM customer demand, Larry, in the U.S. remained strong, as we expected. Products on the OEM side outside the U.S. were impacted more by challenging raw material and some supply chain things, but I think we've discussed that in the past. But You know, the bottom line is we're just getting better than expected order demand. We do have some contracts, but, again, it goes back to what's always been the hallmark of Merit's OEM business. It's reliability and quality. And at the end of the day, that's what carries the day for Merit and always has. So, you know, we were confident in the numbers, and I think – Mike Black and his team did a really good job. And we had to build all this stuff and deliver it, which we did.

Yeah, I mean, Larry, I mean, you know, maybe we don't really guide to the underlying product, you know, category growth. But, you know, obviously we have a high level of confidence in OEM and their execution and what they've been able to do over the last several years. So, you know, I think, you know, everything that we expect out of OEM is baked into our numbers. Yeah.

What a Rhapsody multi-part here. So just early feedback, Fred, on Rhapsody. I think, Raul, you said you'd give us sales by quarter. And just lastly, Raul, you said the 5% minimum organic. I seem to recall that doesn't include Rhapsody in the U.S. So Rhapsody contributes about 60 basis points this year. Is that the right way to think about it? Thanks for taking the question.

Yeah, so obviously we gave the yearly guidance on Rhapsody, $7 to $9 million. We did not say that we were going to provide actual revenues by quarter. But CGI is organic constant currency growth, Larry, and we did not include the US launch of the Rhapsody, if that's what you were asking.

Any early feedback, Fred?

We're just excited about the product. We, you know, the initial market response is great. I think the RTG group, the renal therapy group, and those products and that whole program we put together is performing, you know, as we hoped it would. And we're looking forward to introducing the 12-month data by physicians and a full discussion of that at the SIR meeting. And we're confident in the numbers. First couple months have been very encouraging. And it's nice, you know, we invested a lot. We took a lot of time. We're excited about the product and what it means to us, Larry, in the long run. All right. Thanks for taking the questions, guys. Thank you.

Thank you. One moment for the next question. And the next question will be coming from the line of Steve Lichtenman of Oppenheimer. Your line is open. Thank you.

Evening, guys. Gross margin was a standout in the quarter. Wondering, Raul, what gross margin is implied in the 2025 operating margin guidance? And if you could talk about some of the drivers you're seeing on the gross margin line.

Yeah. Well, first of all, I'm going to take the time to run around the bases, you know, on what was a home run hit on the gross margin, to be honest with you. You know, Steve, you've heard me say this, that a lot of our investors have heard me say this, along with a lot of our, you know, covering analysts. When we go after gross margin, we really kind of throw the kitchen sink at it, you know, and with knowing that there's going to be things that are not going to work out in our favor, and there's going to be other things that are going to be better. And it's just, you know, our approach is just to tackle it from, you know, from pricing to efficiencies to logistics, essentially the kitchen sink. And What happened in the fourth quarter is we essentially kind of hit on everything, and that's what you see, the execution there. I mean, a 300 basis point improvement in the gross margin is just outstanding. The mix was great. OEM was strong. U.S. was strong. Our mix was strong. Our operations group, I just have to call out because they executed at a really high level. Unit growth? Yeah, unit growth was strong. So everything that we would have wanted in gross margin really hit in the fourth. Now, as far as the 2025 guidance, as you know, we don't give gross margin guidance. We do give operating margin guidance. And as you can see, we feel really strongly about what we're giving. We're going to give 40 to 80 basis points in 2025. When we originally launched CGI, I think we were pretty clear that we would, most of the operating margin accretion, at least on the low end, would be coming from gross margin. And on the high end, there would be a mix of gross margin improvement and OpEx leverage. And so I'll just leave it at that, that I think that plan has not changed.

Great. And I guess just building on that for the second question, what are the types of investments that you're making in Rhapsody this year? I know you talked about training seminars. Can you talk about, just qualitatively, I guess, some of the things that you're doing to lay the groundwork?

Yeah, I think... Steve, it comes down to training, understanding, going through the exercise of the appropriate reimbursement exercises and the sort of things that we've talked about with NTEP and TPT, and going to the trade shows, highlighting the project, meeting. You know, the things you know that we're not running away from it. you know, with it and a lot of people registry, you know, registry that we have the registry, you know, we're, you know, almost, I think we're on, you know, 420 or so out of the 500. And you know, people look at that, and those are important, important things. So the investments we've made, we continue on and maybe most importantly, is the psychology of the Salesforce, you know, Raul and I just left Our U.S. and, you know, I was also at the European, but just in the U.S., just a high level of enthusiasm for the business and what we're doing and the role that they play. So it's nice to know that you can win, and that's how our people feel just across the board with all of our products. Great.

Thanks, guys.

Thank you. One moment, please. Our next question is coming from the line of David Rescott of Beard. Your line is open.

Can you guys hear me all right? We got you, David. Great. Thanks for taking the questions, and congrats on the strong finish here to the year. Two questions from us, and I'll ask both of them up front. First, on Rhapsody, I want to make sure I heard it. Clearly, you have the guide for revenue set this year that you laid out today, and the seven to nine would be incremental on top of that from Rhapsody. If that is the case, would it be fair to assume that any incremental kind of margin benefit that you could have from that would also be upside to the EPS guide that you set for the full year? And then on The endoscopy segment for the guide for the full year, I'd say maybe it was a little a touch lower than what we were kind of assuming. So I'm wondering if there's anything you can talk about on endoscopy, either as it relates to the underlying business or the EGS deal and how that's being integrated when you thought about setting out the guide for endoscopy this year. Thank you.

Yeah. So on the Rhapsody piece, just to be clear, and sorry if I confused you, when I meant you know, the 7 and 9 was not included in the original CGI goals, David. So just to be clear, right, obviously, clearly, the 7 and 9 that we've already disclosed in 2025 as far as our yearly revenue target for Rhapsody is included in the guidance we already gave you. So, you know, is that clear?

Yes, yes, yeah, yeah, okay. That makes sense. Sorry. Yeah.

And as far as, you know, endotech, you know, I think, you know, we feel pretty strongly about the guide that we've got out there if you remember, we've got an integration of two sales forces going on. I think, you know, what we've done here is just, you know, done a measured, you know, guidance for that group, you know, knowing the complications of integrating two sales forces. We are super excited about, you know, the products. I know I was, you know, Fred just mentioned we were at the U.S. sales force. I talked to a lot of our endoscopy, you know, sales team, and they're excited about having the new products, but there is a learning curve, and I think we've tried to As you know, we guide with a realistic and achievable guidance. So I would say there's really nothing to see here other than that's what we've done.

And David, so you'll be aware, and we may have discussed this in the past, but the product is fully integrated into our operations in Salt Lake City. All the TSAs are closed. And we did that ahead of time. And I think we did a magnificent job of training and transferring. So that part's all been completed as well. Yep.

All right, perfect. Thank you.

Thank you. One moment, please, for the next question. And the next question is coming from the line of Mike Mattson of Needham & Company. Your line is open.

Yeah, thanks. I guess I want to start with the currency impact you're expecting to revenue this year. I think you said 20 basis points. It seems kind of low relative to some of your peers. I mean, I've seen companies talking about 1% to 2% headwinds in 24. Can you maybe talk about, I don't know if you're doing any kind of hedging on the revenue level or something maybe?

Yeah, I mean, we do do hedging. And as you can imagine, our hedging program is a rolling program. We try and minimize the impact from FX. You know, we think we're on the right track here and, you know, feel good about the number. Remember, our U.S. sales number has also, you know, kind of, you know, as a percentage of revenue has also climbed. So, you know, we're more heavy or U.S.-centric than we have been historically. You know, before we were more 50-50. Now we're kind of, you know, sitting closer to 55, you know, 45, you know, in that range, Mike. So I think, you know, that obviously helps. But we do have a hedging program in place. and that helps minimize some of the impact.

Can I just add that it's consistent, Mike. We don't change it. We don't horse around. We don't time markets. We don't speculate. It's been consistent year over year for many, many years.

Okay, understand. And then just one on Rhapsody. I know you've given guidance for the U.S., and I know you're probably not going to give any numbers for OUS, but what I am wondering is, You know, has the data from the pivotal trial in the U.S. helped at all outside the U.S.? And, you know, just how well is the product doing in international markets? I know it's kind of a pricey product. I don't know if that's kind of an obstacle in some of those more price-sensitive markets.

Well, I'll just simply say that, you know, It has not been an obstacle, and we left the European sales meeting with encouragement of the sales force on the product. And even though we don't have an RTG group there because of the different geographies, I think that RTG group is carrying that and other products. And we're quite pleased, as we have said, with the Rhapsody. And we continue to receive a strong positive response on the product. So we're looking forward to some of the events coming up like the SIR meeting and others that will discuss the detail by the professionals that can interpret it and give you their impression, not a bunch of manufacturing folks and that sort of thing. So we're quite excited about that.

Okay. Got it. Thank you.

You bet. Thank you.

Thank you. One moment, please. And the next question will be coming from the line of Elaine Hugh of Raymond James. Your line is open.

It's Jason. Hi, guys. A couple questions here. Was there anything anomalous or one time in the very strong fourth quarter gross margin number?

No. I mean, just, again, it was just really strong execution by our team.

Okay. Okay. What's left to do from an operational standpoint to integrate Cook and EGS, if anything?

Yeah, so EGS is fully integrated. The only thing that, you know, this year is the first year, Jason, as you know, where we have a combined sales force. So as you know, last year we did leave EGS and our endoscopy sales group, you know, as two separate sales forces as they were training. on how to sell, you know, the products, the different products. January 1st, that went away, and there's a combined sales force now. So other than that, everything's already done with EGS and fully integrated. We're manufacturing the products and everything. On the Cook side, we continue to work under a TSA. Order to cash, for the most part, is done. There is a few countries, some of the major, you know, European or APAC countries, that are not on board yet, but we have a substantial amount of order to cash done. Manufacturing continues to be done by Cook. We're looking to obviously integrate that sometime this year, if not early part of next year. But yeah, everything continues to be on pace, if not ahead in certain situations.

Okay. Thanks, Raul. And just lastly, I know You've called out SKU rationalization, I think, last year. Is there anything notable around SKU rationalization in 25?

Listen, I think what we did before, we had, you know, a PAC business and those sorts of things. But there's always a continuous part of our CGI to take a look at things that, you know, the smaller amounts of products and moving customers over to something where we build 5,000 a month instead of 50 or 500. That's an ongoing program that fits into the objectives we have internally.

Yeah, I mean, we continue to work on, as Fred mentioned, product lifecycle management. To the scale of what you saw last year as far as the PAC business that Fred was talking about, we don't have any material impact this year. But obviously, clearly, skew rationalization is just part of what we're doing going forward.

Thank you.

Yeah.

Thank you. One moment, please. And our next question will be coming from the line of John Young of Cannon Court. Your line is open.

Hi, Fred and Raul. Congratulations on a strong end to the year. I just want to first start on Rhapsody. Did you guys get the TPT application in before the March 1st deadline yet? Where you got it? That's it. Yeah. Okay.

Yeah, I'm sorry. I kind of jumped in there. The answer is yes, the NTAP and the TPT were filed on time. Both of them are in.

Okay, great. And then, you know, the supply chain challenge you highlight on the OEM, OUS business obviously did not really materialize. Should we still expect any impact going forward in 2025 of any supply chain challenges?

Yeah, I think there's two components to the supply chain issues that we were having last year. And if you remember, one of them was being able to get sufficient raw materials for one of our products. And then the secondary one was, can we ramp up production fast enough for one of the products that had a strong demand? And so I think we've for the most part, you know, have solved, you know, those issues. I would say that we can continue, we continue to keep an eye on them. But I think our level of confidence is significantly higher than it was, say, in the, you know, during our third quarter call.

Okay, great. And I'm going to sneak in a third. You were pretty crystal clear on the tariff impacts are not included in the guidance today, or you're not really going to quantify anything today. But, you know, more high level, just The ability to move manufacturing for you guys from Mexico to other facilities like Ireland or Utah, what is the ability to do that for merit? And maybe have you taken any near-term mitigation or hedging efforts at this point? Thanks again.

I mean, there's things we've done internally to try and mitigate the impact. They're minimal, quite frankly. And if I'm just being honest, John, things are changing so drastically and so fast. that making any investments and moving, you know, manufacturing from one area to another just does not make sense. I think you had a lot of people do that in the last Trump administration, or not a lot, but you had some people that did it. And now those countries are also included in the target, you know, tariffs, you know, or could be, right, because we don't know what's going to happen. And so I think, you know, for us, it's, you know, business as usual. Let's control what we can control. Let's be hyper-focused in our 2025 goals. Let's execute to those. You know, we're very nimble, and we'll just adjust the best we can when something is announced that is official.

Yeah, John, I've always said to the team that we've survived eight American presidents and eight administrations in the history of our company. We've dealt with tariffs before, and the one thing we don't want to ever do is to overreact, but I think we have our thumb on it. We're watching, we're listening, but it's really, as Raul pointed out, You know, it changes just during the conversation we've had with you. So as soon as we can get something clear, we'll talk more about it when it's appropriate.

Oh, I understand. Thank you again. You're welcome.

Thank you. One moment, please, for the next question. And our next question will be coming from the line of Michael Potusky of Barrington Research. Your line is open.

Hey, good evening. So, Raul, I may have missed this. I was briefly distracted. If you've addressed this, forgive me. But the R&D expense, I'm assuming the pop in that in Q4 had a lot to do with Rhapsody activities. But can you just sort of speak to that and then sort of speak to if this is? closer to a new normal or it's likely to back off as we head into the first half of 25, thanks.

Yeah, I wouldn't say it's a new normal. Look at, you know, Mike, to be honest with you, the gross margin was, you know, pretty strong. We felt like we needed to make some short-term investments in R&D. There was some, you know, kind of some things we wanted to look at from a consulting standpoint. And so, you know, we had our consultants in and help us with some work that we thought was long overdue. And so we took advantage of that. And, you know, I think we feel comfortable with the historical levels of R&D. Obviously, clearly, as time progresses and we focus more on therapeutic products, that'll tend to, you know, trend upwards. But I think we don't, you know, we're not looking to, you know, to blow, you know, R&D out of the water either. I think the investment that we've made is effective, and we think at the right levels. Sufficient for our plan, yeah.

Okay. All right, great. And then I'm wondering, the cadence of CapEx, obviously it's a number. It's going to be a number this year. Do you have any guidance, first half, second half, or just where that's likely to sort of come in? Because it will really matter in terms of free cash generation things.

You know, Mike, I wish I had a good response to you. You know, we keep waiting for winter to show up. And so we continue to build the facility across the street. We were talking about pouring footings just today. Normally the ground freezes and you don't necessarily want to do that or can't do that. And so you hold off till spring or summer. And so the weather's been pretty mild here in Utah. And so the building continues. This is Utah. We could have a snowstorm, four feet of snow here in the next two hours, and we don't even know it. We could have one on May the 25th. We could. We've had one before. So I'm not going to provide you with a kind of a cadence other than to say, obviously, we clearly talked about the additional CAPEX that we would do as part of our CGI program because we wanted to build a facility which we'll think will make us more efficient over time. And obviously, you know, I'd be disappointed if I just didn't highlight the strong free cash flow number that we had for last year. I mean, $186 million, $66 million in the fourth quarter. I mean, it's just outstanding. We're focused on that number. We'll control CapEx as we've done over the last several years. But yeah, I think that's all I have for you. We're just going to keep executing is the goal.

Okay. Well, congratulations. It really was a fantastic year. Thanks. And a fantastic fourth quarter. Thanks.

Thank you. Thank you. One moment for the next question. And our next question will be coming from the line of Jim Sedoti of Sedoti & Company. Your line is open.

Good afternoon. Can you hear me?

Yeah, we can, Jim. How are you?

Good, good. Fred, you sound much better than you did last time. I hope you're feeling better.

Yeah, I had the bug. I'm fine. But, yeah, thank you, Jim.

All right. Just following up on that CapEx question, because I think I heard you say CapEx is $90 to $100 million for the year, which is about double, a little more than double what you've done the last couple years. You know, what do you get from that distribution center? How is that going to help you?

Well, we've essentially in two ways. The first one is just from an efficiency standpoint. The system we currently have, Jim, is almost 20 years old. So it's essentially kind of met its end of life. There's a lot better systems out there that we're using at two of our other distribution centers. And we think we can just be significantly more efficient with a new system. And so we've squeezed all the juice that we can out of the current system. And we postponed it, I think, sufficiently. We've been talking about this for probably five years, and we finally felt like we were at the right kind of size to make sure that we did what we needed to do from a distribution standpoint.

Well, I was going to say, Jim, the other side of it is we are spending a lot of money to have stuff like resins and things stored offsite. They'll be in this building that eliminate that expense. and the convenience of having to go pick it up downtown and bring it back out. So there's that efficiency. But I think the biggest one, too, is that we have Richmond for the East Coast, and it keeps creeping to the West. And we need to get it back so there's an equilibrium so we can serve our customers as well. So there's all the reasons we've discussed here.

And the second would be capacity. Those of you who have visited our South Jordan site have seen the molding machines. You know, as – yeah, we can't add any more molding machines there. Luckily, we have additional capacity in Mexico. But, yeah, as we look to expand and need additional capacity for our molding, we will have additional room that is opened up by moving our distribution that currently sits on the main cap in Sierra right across the street. So that's the goal.

All right. It sounds like you're still going to generate – some pretty good strong free cash flow even with this increased CapEx.

Would you look at those numbers again? We hit $186 million. Thank you for the opening there, Jim. We'll do a minimum of $400 million under CGI. I think we're well on our way with the $186 million we just did. We think we can do somewhere at least $150 million. I think we're feeling pretty confident there.

So, you know, the last couple of years, a large part of that's gone to debt pay down. Will that be the case again in 2025?

We'll continue to, you know, to, you know, put cash on our balance sheet, you know, Jim, and wait for opportunities that make sense for us. You know, we've obviously got a clear strategy on the M&A front. I think you guys have started to see that. You know, we're finding assets that are margin accretive that can help us with, you know, our... adding additional growth and also are at call points that we feel really comfortable with and allow us to get deeper in the bag.

Okay. All right. Thank you.

Thanks, Jim. Thank you. That does conclude the Q&A session for today. And I would like to turn the call back over to Fred Lampropoulos for close remarks. Please go ahead, sir.

Well, ladies and gentlemen, thank you. I know it's a very busy time during the earnings season. We appreciate your interest, and we'll look forward to reporting events as necessary. Best wishes to all. Signing off from Salt Lake City, good evening.

Thank you for participating in today's program. This does conclude today's conference call. You may all disconnect.