Merit Medical Systems Inc Q2 FY2024 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the Merit Medical Systems Second Quarter 2024 Earnings Conference Call. At this time, all participants have been in a listen-only mode. Please note that this conference call is being recorded, and the recording will be available on the Company's website for replay shortly. I would now like to turn the call over to Mr. Fred Lampropoulos, Merit Medical Systems' Founder, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you, and welcome, everyone. I am joined on today's call by Raul Parra, our Chief Financial Officer and Treasurer; Joe Wright, our President; and Brian Lloyd, our Chief Legal Officer and Corporate Secretary. Brian, would you mind reading us through the safe harbor statements, please?

Thanks, 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 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, August 1st, 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 section entitled Cautionary Statement regarding Forward-Looking Statements in today's press release and presentation for important information regarding such statements. For a 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 section of our press release and presentation entitled Non-GAAP Financial Measures for important information regarding non-GAAP financial measures discussed on this call. Readers should consider non-GAAP financial measures in addition to, not as a substitute for financial reporting measures prepared in accordance with GAAP. Please note that these calculations may not be comparable with similarly titled measures of other companies. Both today's press release and our presentation are available on the Investors page of our website. I will now turn the call back to Fred.

Thanks, Brian. I appreciate it very much. Let me start with a brief agenda of what we will cover during our call and prepared remarks today. I will start with an overview of our financial results and key operating progress areas during the second quarter. After my opening remarks, Joe will provide a summary of our revenue results before turning the call over to Raul, who will provide a more in-depth review of our quarterly financial results and our financial guidance for 2024, which we updated in today's press release. Then we will open the call for your questions. Our second quarter results exceeded our expectations. We reported a total revenue of $338 million in the second quarter, up 5.6% year-over-year on a GAAP basis and up 6.6% year-over-year on a constant currency basis. The constant currency revenue growth we delivered in the second quarter was stronger than the high end of the range of growth expectations that we outlined on our quarter one earnings call. Specifically, we expected constant currency revenue growth for the second quarter in the range of 4.7% to 5.8% year-over-year. Importantly, the better-than-expected constant currency revenue growth in the second quarter was primarily driven by strong organic growth and, to a lesser extent, contributions from acquired products, which modestly exceeded the high end of our growth expectations as well. With respect to our profitability performance in the second quarter, we leveraged the solid revenue results to deliver non-GAAP gross profit and operating profit growth of 6% and 11%, respectively, which resulted in year-over-year margin expansion by approximately 15 basis points and 92 basis points, respectively. And we delivered 17% growth in our non-GAAP earnings per share, which exceeded the high end of our expectations as well. Perhaps most notably, we generated nearly $58 million of free cash flow in the quarter, a record for Merit, and we have generated more than $82 million of free cash flow over the first half of 2024, representing a more than fivefold increase year-over-year. We believe our second quarter results reflect continued strong momentum in the business over the first half of 2024, and we are confident in our team's ability to deliver the updated financial guidance that Raul will review later on the call. While we are proud of the results achieved over the first half of the year, we are not resting on our laurels. We are focused on delivering continued strong execution, stable constant currency growth, improving profitability, and solid free cash flow in 2024, as well as continued progress in our continued growth initiative program related to financial targets for the three-year period ending December 31, 2026. I would now like to share a brief update on several areas of operational progress in recent months. First, with respect to new product introductions, we announced multiple regulatory clearances and commercial introductions in the second quarter, including in May, we announced FDA 510(k) clearance for our Siege vascular plug and the commercial launch of our Bearing nsPVA Express prefilled syringe in the United States and Australia. These additions to Merit's embolics portfolio complement a comprehensive offering of microsphere particle and gelatin foam products, supported by a range of micro catheters, guidewires, and other enabling devices. We also announced the U.S. commercial release of the basixSKY inflation device in May. basixSKY is the latest addition to Merit's comprehensive inflation device portfolio, which includes both digital and analog devices. The basixSKY is available as a standalone solution and in kits with Merit angioplasty packs configured to offer complementary AccessPLUS, Honor, and PhD hemostasis valves. Second, with respect to our progress in the area of clinical validation in recent months, we are pleased with the progress achieved in recent months for our WRAPSODY arteriovenous access efficiency or WAVE pivotal study. We completed the clinical study report and filed the final module with the FDA for premarket approval or PMA by the end of the second quarter of 2024 as expected. We look forward to engaging with the FDA to review our PMA application for this innovative technology. The WRAPSODY Cell-Impermeable Endoprosthesis is built to combat the challenges dialysis patients can often experience due to stenosis and occlusions in the dialysis outflow circuit. We believe this technology can extend long-term vessel patency rates and reduce the complications associated with existing treatment options on the market today, including the need for repeated interventions, frequent trips to the hospital, and inadequate dialysis treatments. Importantly, we are excited to announce the clinical results from our WRAPSODY studies will be featured in scientific sessions at key medical meetings this fall, including at the Cardiovascular and Interventional Radiology Society of Europe, or CIRSE, Annual Congress on September 14th in Lisbon, Portugal, and at the Controversies in Dialysis Access or CiDA meeting in Washington, D.C. on October 5th. Third, we announced important enhancements to both our executive leadership team and our Board of Directors. In May, we announced the appointment of Joe Wright as President. Joe now oversees Merit's global commercial, marketing, and operations teams with more than 19 years of experience with Merit serving in a variety of leadership roles and in multiple geographic regions. I believe he is the ideal leader for this important position. Joe has been central to executing our strategic plan and positioning the Company for continued success, including spearheading our commercialization efforts and overseeing significant international expansion, engineering the advanced capabilities of our renal therapies group, including the integration of the business and assets we acquired from AngioDynamics in 2023, and directing the development of our commercial excellence initiatives globally. I look forward to continuing to work closely with Joe going forward. We also enhanced our Board of Directors with the selection of Silvia M. Perez as a new Director at Merit's Annual Meeting of Shareholders on May 15th, 2024. Silvia is President of the Commercial Branding and Transportation Division at 3M Company. Her expertise and proven track record of leadership success will provide valuable industry and organizational perspective to both the Board and our management team as we pursue our continued growth initiatives program. Now before turning the call over to Joe, I would just like to take a few minutes to discuss the strategic acquisition we announced on July 1st. We announced the acquisition of assets from EndoGastric Solutions Incorporated for a total cash consideration of approximately $105 million and the assumption of certain liabilities. We believe this acquisition represents multiple strategic and financial positives. Importantly, this acquisition is consistent with and will not distract us from our continued growth initiatives program. Strategically, this acquisition enhances our endoscopy product portfolio in existing clinical specialties while expanding our global footprint in the gastrointestinal market. This acquisition adds an innovative solution for patients suffering from chronic gastroesophageal reflux disease, or GERD, which is a significant annual addressable market opportunity estimated at $2 billion annually. GERD is a digestive disorder that occurs when the lower esophageal sphincter doesn't tighten correctly, allowing acid from the stomach to enter the esophagus. When this occurs chronically, it can result in serious health conditions such as esophageal damage and cancer. The EsophyX Z+ treats GERD by restoring the body's reflux barrier. By restoring the body's reflux barrier, the EsophyX Z+ device is designed to provide relief of GERD symptoms and reduce acid reflux that can cause long-term complications and risks. This is accomplished under endoscopic visualization during a minimally invasive procedure called transoral incisionless fundoplication, or TIF 2.0. Recently, the American Gastroenterology Association released a clinical practice update on the evaluation and management of GERD and listed TIF 2.0 as an effective endoscopic option in carefully selected patients. We estimate that there are more than 5 million patients in the U.S. alone currently using pharmaceutical treatment options for refractory GERD that represent potential candidates for the TIF 2.0 with EsophyX Z+ procedure each year. The EsophyX Z+ device is supported by economically favorable reimbursement, level 1 clinical evidence, and strong advocacy from medical societies. We believe this device is highly complementary with our existing portfolio and customer base while expanding access into interventional gastroenterologists and surgeons in the endoscopy unit and in the operating room. In addition to the strong strategic rationale, we believe the financial profile of this acquisition is extremely compelling. Now Raul will give you some additional color on the favorable financial profile of this acquisition later on the call. In the interim, I will share with you that we expect sales contribution in the range of $13 million to $15 million over the second half of 2024, and we expect this acquisition to be accretive to our multiyear total company growth profile on an annualized basis going forward. Now with that, let me turn the call over to Joe, who will review second quarter revenue performance.

Thank you, Fred. I'll provide a detailed review of our revenue results in the second 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. Second quarter total revenue growth was driven by 6% growth in our Cardiovascular segment and 16% growth in our Endoscopy segment. Our Cardiovascular segment was the primary driver of the better-than-expected total 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 Q2. Sales of our peripheral intervention or PI products increased 11%, representing nearly 74% of total Cardiovascular segment growth in the period. Excluding sales of acquired products, PI sales increased 7.6% on an organic constant currency basis. Organic growth in the PI product category was driven by sales of our access products and our delivery systems, which increased 22%, and sales of our radar localization products increased 9%, and together represented nearly three-quarters of our total PI organic sales growth in Q2. Sales of our Custom Procedural Solutions, or CPS products increased 3%, which was notably better than the low single-digit decline we expected in Q2. This performance was fueled by strong growth in sales of kit products, which more than offset the expected year-over-year decline in sales of trades resulting from our ongoing SKU rationalization efforts discussed on prior calls. Cardiac intervention product sales increased 1.5%, slightly above the high end of our growth expectations, driven primarily by strong sales of EP and CRM products and, to a lesser extent, growth in sales of fluid management and intervention products. Sales of our OEM products increased 5% year-over-year in Q2. While sales to OEM customers increased in the mid-teens on a sequential basis, 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 continue to believe the softer-than-expected sales trends of our OEM products are a result of order timing and fluctuations in demand, as our customers work through efforts to optimize inventory levels. Demand trends from customers in both the U.S. and OUS regions improved from Q1 as expected. We saw solid growth in product sales to OEM customers outside the U.S., while demand from U.S. customers drove product sales growth of just 3% year-over-year in Q2. Importantly, we continue to expect low double-digit growth in OEM sales for the full year 2024. Lastly, sales in our Endoscopy segment increased 16%, which exceeded the high end of our growth expectations. We continue to see a normalization of growth trends in this business as expected, and our updated 2024 guidance now assumes low double-digit organic growth in our Endoscopy business this year. Turning to a brief summary of our sales performance on a geographic basis. Our second quarter sales in the U.S. increased 8.5% on a constant currency basis and 6% on an organic constant currency basis. Similar to what we experienced in Q1, sales to U.S. customers came in roughly 1 point softer than what our guidance had assumed driven by the softer-than-expected OEM sales, as previously mentioned. We continue to expect to deliver approximately 6% organic growth in the U.S. at the midpoint of our 2024 guidance range. International sales increased 4% year-over-year and 3.8% on an organic constant currency basis, exceeding the high end of our growth expectations by more than 470 basis points in the quarter. The stronger-than-expected organic constant currency growth to customers outside the U.S. was driven primarily by 1% growth in APAC compared to our guidance range, which had assumed a decline in the range of 10% to 11% in Q2. With respect to China specifically, sales decreased 5% year-over-year, better than the low 20% decline our guidance had assumed. We continue to see quarter-to-quarter variability and 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 now assumes our total international sales will increase 4.3% year-over-year driven by 7% to 8% growth in EMEA and 11% to 12% growth in the Rest of World region, partially offset by 0% growth in the APAC region versus the 4% decline assumed in our prior guidance range. The lower headwind from APAC assumed in our updated guidance is driven by better-than-expected results in China over the first half of 2024. Note, regarding our China business in 2024, our guidance continues to assume that we will be able to increase sales of units on a year-over-year basis, but we expect total revenue to decline due to continued pricing headwinds related to volume-based purchasing. With that, let me turn the call over to Raul, who will take you through a detailed review of our second quarter financial results, balance sheet, and financial condition at June 30th.

Thank you, Joe. Beginning with a review of our P&L performance, for the avoidance of doubt, unless otherwise noted, my commentary will focus on the Company's non-GAAP results during the second quarter of fiscal year 2024. We have included reconciliations from our GAAP reported related non-GAAP items in our press release and presentation available on our website. Gross profit increased approximately 6% year-over-year in the second quarter. Our gross margin was 51.5%, up 15 basis points year-over-year. The increase in gross margin year-over-year was driven by pricing uplift, favorable product and geography revenue mix, improvements in freight and distribution costs, offset partially by manufacturing variances compared to the prior year period. Operating expenses increased 3% from the second quarter of 2023. The year-over-year increase in operating expenses was driven by a 2% increase in SG&A expense and a 7% increase in R&D expense compared to the prior year period. Total operating income in the second quarter increased $6.5 million or 11% from the second quarter of 2023 to $67.8 million. Our operating margin was 20.1% compared to 19.1% in the prior year period. The 92 basis point increase in operating margin was driven by a 15 basis point increase in our non-GAAP gross margin and by a 76 basis point decrease in our non-GAAP OpEx margin compared to the prior year period. Second quarter other expense net was a benefit of $1.4 million compared to expense of $3.4 million last year. The change in other expense net was driven by an increase in interest income associated with our higher cash balances, partially offset by an increase in net interest expense associated with increased borrowings. Second quarter net income was $53.8 million or $0.92 per share compared to $45.9 million or $0.78 per share in the prior year period. We are pleased with our profitability performance in the second quarter, where we leveraged stronger-than-expected revenue results to drive both expansion in operating margins and non-GAAP diluted earnings per share that exceeded the high end of our expectations. Turning to a review of our balance sheet and financial condition. As of June 30th, 2024, we had cash and cash equivalents of $636.7 million, total debt obligations of $822.5 million, and available borrowing capacity of approximately $680 million compared to cash and cash equivalents of $587 million, total debt obligations of $846.6 million, and available borrowing capacity of approximately $626 million as of December 31st, 2023. Our net leverage ratio, as of June 30th was 2.4x on an adjusted basis. We generated $57.9 million of free cash flow in the second quarter compared to $11.5 million in the prior year period. The year-over-year improvement in free cash flow generation was primarily a result of significant improvements in cash used in working capital compared to the prior year period. We have generated more than $82 million of free cash flow over the first half of 2024. Expect strong free cash flow generation 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 updated formal financial guidance items and how those ranges compared to prior ranges as of July 1st, 2024, when we updated our guidance to reflect the projected impact of our acquisition of the assets of EndoGastric Solutions. Our updated guidance range now assumes the following: GAAP net revenue growth of 6% to 7% year-over-year, net revenue growth of approximately 5% to 6% in our Cardiovascular segment and net revenue growth of approximately 45% to 52% in our Endoscopy segment and a headwind from changes in foreign currency exchange rates of approximately $9.1 million or approximately 70 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 6.9% to 7.7% in 2024. Finally, our total net revenue guidance for fiscal year 2024 now assumes inorganic revenue contributions from the acquisitions announced on June 8th, 2023, and July 1st, 2024, in the range of $24.6 million to $26.6 million in the aggregate. For avoidance of doubt, this aggregate range consists of approximately $11.6 million of inorganic revenue related to our acquisitions of assets from AngioDynamics in Q1 and Q2, plus the contributions from our acquisition of assets from EndoGastric Solutions in Q3 and Q4. Excluding inorganic revenue, our updated guidance reflects total net revenue growth on a constant currency organic basis in the range of approximately 4.9% to 5.6% year-over-year. With respect to our updated profitability guidance for 2024, we now expect non-GAAP diluted earnings per share in the range of $3.27 to $3.35, representing an increase of 15% to 17% year-over-year. Note, this range includes the expected dilution related to our acquisition of assets from EndoGastric Solutions, which as discussed on July 1st, is expected to be in the range of $0.04 to $0.06. As Fred discussed earlier, we believe this acquisition offers a very attractive financial profile. While we believe this acquisition will be modestly dilutive to our full year 2024 non-GAAP profitability given the partial year contribution and the impact of approximately $2.7 million of lower interest income on cash balances used for the total purchase consideration, we expect the acquisition to be accretive to our non-GAAP gross and operating margin, non-GAAP net income, and non-GAAP EPS in the first full year post-closing. For modeling purposes, our updated fiscal year 2024 financial guidance now assumes non-GAAP operating margins in the range of approximately 18.4% to 18.7%, up 120 basis points to 150 basis points year-over-year. Non-GAAP interest and other expense net of approximately $1.5 million compared to $10.6 million last year. Non-GAAP tax rate of approximately 21.5%. Diluted shares outstanding of approximately 58.8 million, and we now expect CapEx in the range of $55 million to $60 million and free cash flow of at least $130 million compared to at least $115 million previously. We would also like to provide additional transparency related to our growth and profitability expectations for the third quarter of 2024. Specifically, we expect our total revenue to increase in the range of approximately 5.7% to 7.1% year-over-year on a GAAP basis and approximately 6.4% to 7.8% year-over-year on a constant currency basis. The midpoint of our third quarter constant currency sales growth expectation assumes approximately 9% growth year-over-year in the U.S. and 5% growth year-over-year in the international markets. Note, the midpoint of our third quarter constant currency sales growth expectations also includes approximately $6.4 million of inorganic revenue. Excluding these inorganic contributions, our third quarter total revenue is expected to increase approximately 5% year-over-year on an organic constant currency basis. With respect to our profitability expectations for the third quarter of 2024, we expect non-GAAP operating margins in the range of approximately 18% to 18.7%, and we expect non-GAAP EPS in the range of $0.77 to $0.82. Finally, I wanted to call out one item for consideration when comparing our updated non-GAAP operating margin assumptions versus our original guidance for 2024 we introduced on our Q4 call and subsequently reaffirmed on our Q1 earnings call on April 30th and again in our EndoGastric Solutions press release of July 1st. As detailed in our earnings press release this afternoon, beginning in the second quarter of 2024, consulting expenses associated with initiatives conducted under our Foundations for Growth program are no longer adjusted, as part of our non-GAAP measures. Non-GAAP financial measures detailed in the reconciliation tables in our earnings press release reflect the removal of the FFG consulting fees for the three- and six-month periods ended June 30th, 2023 and 2024, specifically $4.2 million in the first half of 2023 and $1 million in the first half of 2024. FFG consulting fees totaled approximately $12.3 million pretax for the 12 months ended December 31st, 2023, representing an approximately 100 basis point impact to the previously non-GAAP operating margin for that period. Accordingly, our updated non-GAAP operating margin assumptions for fiscal year 2024, excluding FFG consulting fees, now reflect expected year-over-year expansion in the range of 120 basis points to 150 basis points compared to expected year-over-year expansion in the range of 45 basis points to 70 basis points previously. Importantly, when applying this new treatment for FFG consulting fees throughout the three-year FFG program, our non-GAAP operating margin expansion performance is still extremely strong. Our efforts to improve profitability over this period resulted in a non-GAAP operating margin of 17.2% in fiscal year 2023 compared to 13.2% in fiscal year 2020, an increase of approximately 400 basis points. Further, this new treatment does not impact the cumulative free cash flow we generated over the three years ending December 31st, 2023, which totaled nearly $300 million. By way of reminder, we generated nearly $419 million of free cash flow since the beginning of 2020. Finally, this new treatment does not impact our 2024 guidance nor our CGI financial targets for the three-year period ending December 31st, 2026. That wraps up our prepared remarks. Operator, we would now like to turn the line open for questions.

Our first question will come from Jason Bednar from Piper Sandler.

Congrats on another solid quarter here. I wanted to start first with guidance. It looks like you're flowing through mostly that 2Q overage here. Not much change in here with the implied outlook for the second half of the year. I think this is within how you typically manage your guide or your outlook, but I wanted to check to see if there's any incremental caution you have with respect to pieces of your business that just, as you think of the momentum from the first half of the year, doesn't continue in the back half. It doesn't sound like that, but really wanted to check in on that. And then within that conversation, maybe discuss a little more specifically your China assumptions within your overall guidance range. It doesn't look as onerous, but I don't think I heard exactly what you're assuming now for China this year.

Yes. So yes, you're right, Jason. This is how we typically do it, right? So we're flowing through that first half increase. As you know, we beat by about $7 million on the high end of our guidance. And so, we're flowing that through. Obviously, you have the dynamics of EGS that were also that we've also included in that, which we did earlier this month when we did the acquisition. So I think, generally speaking, we're super optimistic about how the business is doing. The U.S. growth was outstanding again. International growth was great. So we're feeling pretty optimistic. And I think I'm sure we'll get some questions on China. China did better than anticipated, and we continue to see that. So generally speaking, I think we're pretty excited about how the first half went and how the back half is looking. And I think ultimately, we're putting in a pretty strong year together.

Can you clarify what the updated guidance for China is compared to the previous figures? It seems less concerning now. Additionally, I wanted to follow up on the gross margin, which performed well again this quarter despite the challenging year-over-year comparisons. Looking ahead, do you anticipate that margin comparisons will be easier for the remainder of the year? I'm curious about your outlook for the gross margin trend from this point on. Should we expect a seasonal decline in the third quarter, or is the 51% range sustainable as we look to the future?

Yes. I'll let Joe kind of hit on the international piece here first and China, and then I'll answer the gross margin.

Yes. Hi, Jason. This is Joe. Our international sales increased by 4% year-on-year and 3.8% when adjusted for constant currency. This performance exceeded our growth expectations by about 470 basis points for the quarter. The better-than-anticipated international results were mainly influenced by a 1% growth in constant currency or a decline in the Asia-Pacific region in the second quarter. Our earlier guidance had predicted a decline of between 10% and 11% in this region. Specifically, sales in China fell by 5% compared to last year, which was an improvement over our guidance that anticipated a decline of low 20%. We continue to observe fluctuations in growth trends related to volume-based purchasing tenders, which aligns with our expectations.

Yes. Regarding the gross margin, we typically do not provide comments on it. However, at the start of the year, we indicated that improvements in the operating margin would primarily arise from the gross margin. Additionally, we may leverage operating expenses on the higher end. Overall, we are very pleased with the performance of the gross margin. We've been satisfied with its performance over the past three years and remain excited about its progress this year. It's currently aligning with our expectations.

And our next question coming from the line of Mike Matson from Needham.

I guess, just one on the EndoGastric deal, so I imagine this is going into the Endoscopy business. So are you going to be combining the sales teams and having kind of both groups of people selling all the endoscopy products? Or will you maintain a kind of a specialist sales force to sell the EsophyX Z+ product?

Yes, Mike, this is Fred. Thank you for your question. We have been searching for assets in the GI business for a long time, and it has been quite challenging. With this product, we found an opportunity that allows us to integrate our sales forces. For the remainder of this year, we will focus on training, and we have retained the sales team along with some technical and clinical staff. We will combine them with our existing products in Endotek. As we have a strong product pipeline, we believe this integration will be beneficial and more efficient. While our sales force has performed well, we needed to improve utilization. This integration allows for a cohesive product team that aligns well with our business. We’ve had all the sales teams meet in Salt Lake, and I am pleased with the progress of the integration. Joe, do you have anything to add?

Yes, as you mentioned, Fred, we've been looking for something in this space for a long time. The great thing about this opportunity was just the financial profile. It's very rare that you find something that's going to be accretive to not just our growth profile, but also our gross margin and overall profitability in the first full year. So that was very attractive, and it's our existing call point. So we are basically able to increase our footprint in a very attractive market here. So yes, we're excited about the combination, and we expect to train cross-train all of the EGS salespeople that we hired and also our current Endotek sales force. So both will be able to sell both product lines. So we do expect some cross-selling opportunities as we move forward.

And Joe, I'd like to add one more thing. Mike, another point is about the territories and our ability to focus more, allowing us to get deeper into the accounts instead of having people travel long distances with these additional team members. Additionally, every account that Merit has aligns perfectly with their existing customer base. These are not new customers; they are all familiar with us, so we’re not introducing new people into the lab. This situation has many features that Joe and I have referred to, and we believe it creates a dynamic team. I also received several notes from the sales force after spending a couple of days together, expressing their excitement about this opportunity, and every person we offered a position to in the sales force accepted. It's noteworthy that they all came together, and that team will operate under the leadership of Niki Kennedy, who heads the Endotek division. We’re very excited about this opportunity and recognize that while there’s a lot of work ahead, our enthusiasm for it remains high.

Yes. It sounds great. And then just on the cardiac business, have you seen any kind of impact there, positive or negative from the rapid uptake we're seeing of PFA ablation?

No. We have not seen that at all. We haven't seen anything that's taken away. Joe, anything that you've seen?

No. We have devices that enable ablation procedures. So regardless if it's RF ablation or PFA, our tools are generally applicable to both procedures. So it hasn't been an impact for us.

Access to those tools ensures they can deliver our products, including HeartSpan, steerable sheath, and splittable products, which complement rather than detract from our offerings.

And our next question coming from the line of Larry Biegelsen from Wells Fargo.

It's Larry. Fred, I wanted to ask you, too, on WRAPSODY. First, a big picture one and then a little bit more detailed one. And by the way, congrats on the nice quarter here, especially on the margins. Fred, how do you expect to compete with Gore and BD in the stent graft space? We've heard that price is a key component when physicians choose a stent graft. What's your view? And I had one follow-up.

Yes, we issued a press release earlier about the data that will be presented at the upcoming CIRSE meeting, which is scheduled for either August 14th or September. Overall, I believe we have developed superior technology. This has been our goal from the start and we believe it’s a great product. We've been actively selling it and have seen a positive response. We are very optimistic about the long-term prospects. Our performance in those markets continues to track well, and commissions remain favorable. We are eager to discuss the opportunities in the addressable market soon. While we aren't going to dive into those details right now, I want to assure you that there is no doubt among us regarding the viability and performance capabilities of this technology. We will provide more specific updates in the near future.

I wanted to push my luck and ask you one follow-up. How are you thinking about the likelihood you can obtain a transitional pass-through payment or TPT payment? And if you believe you can get a TPT because you have breakthrough status, does this mean you're going to have to price it at a significant premium when you come out of the gate so you can meet the PPT criteria?

Yes. We do have breakthrough status on this product that addresses that concern. At the right time, as we mentioned, all of this will be disclosed. In the very near future, we will provide all the details. Our main focus right now is that the PMA has been filed and accepted. Let's complete that process, and then we'll address the other aspects once we have a clearer understanding. It will be available; we just need a bit more patience, and I appreciate your willingness to inquire further.

And our next question coming from the line of Steve Lichtman from Oppenheimer.

And congrats on the quarter. I wanted to ask again about EndoGastric Solutions. Can you talk a little bit more about what the revenue growth profile is of the products? I appreciate the base of revenue that's being built in here? And sort of do you see opportunities in the near term to accelerate that with some potential cross-sell from your current business?

Yes. Great question, Steve. As you're aware, we disclosed that for this year, we're going to be in the $13 million to $15 million range for the back half of the year. And we also announced that it would be accretive to revenue, gross margin, and operating margin in the first full year of integration. So other than that, I don't think we're going to get into the details of it. We'll give you obviously our guidance for 2025 in February. But I can tell you that the endoscopy team and both teams are excited about the products that we have and the scale that we think we can get there with the cross-selling. So we'll leave it at that, but continue to be excited about that asset.

Okay. And then, obviously, you were acquisitive this quarter. Free cash flow coming in stronger, though. How should we be thinking about sort of where you're headed at in terms of use of free cash looking forward here in the near term?

Yes. First of all, I want to acknowledge our operations team for effectively managing inventory growth, which has significantly benefited our free cash flow this year. We are ahead of our growth plan, as they have successfully kept inventory steady while meeting customer demand. We expect to maintain strong free cash flow generation in the second half of the year and believe we are well-positioned to achieve our CGI program target of a minimum of $400 million in free cash flow. Additionally, we have raised our minimum free cash flow target for 2024 from $115 million to $130 million, indicating robust generation for the quarter, and I am very excited about that.

Thank you. And our next question is coming from the line of David Rescott from Baird.

Great. Congrats on the strong quarter here. My first question is more around the WAVE results looking forward to seeing that. I don't think I've definitely haven't attended the CiDA, the CIRSE conference in the past. So I'm just wondering if you could give us a sense for maybe what to look for there. And then at least in your view, maybe how data is presented at these two conferences tends to flow into the clinical practice?

Yes. First of all, this will be presented by physicians as part of the scientific sessions, not by Merit. This is the six-month follow-up results on patients from the randomized arm of the study, known as the ABF cohort, which includes data on target lesion primary patency, access circuit primary patency, and safety events. This part of the study will be presented from the podium during the scientific sessions. For specific data, please come to Lisbon or tune in, as we can't discuss it until that date, but we will ensure the physicians talk about the results and their perspectives. We are all excited and will be present at that meeting in Lisbon, Portugal.

I don't think I'll make it to Lisbon this year. My second question is about China and the APAC region, which appears to be a stronger growth driver than expected based on previous comments. Could you help us understand some aspects of how your business model operates in that market and how much visibility you have regarding growth for the next few quarters? It seems like the medtech sector is experiencing a generally weaker macro environment, yet your performance has been better than anticipated. I'm curious if your insights into these markets differ from those of other medtech competitors.

Yes. Joe is going to take the China question. But David, just as a point here. I believe that the CIRSE will be able to webcast that information. So if you can't make it there, I think a pass will get you a webcast. I don't know all the details yet. We're trying to find that out, but our understanding is that there is a webcast available for that. So for those of you that can't make it.

Yes. Thanks, Raul. On China, just as a way of reminder, we don't provide country-specific growth assumptions, but we did have better-than-expected results from China in the first half of 2024. We, like all the other medtech companies are affected by volume-based purchasing, and there is some variability to that. But we still look at China as a very strong demographic strong growth market for us. The key for us is just getting through this year and perhaps next year, and then we reset our growth based on a new baseline, and we still expect great things from China in the future.

Yes. And I think one thing to highlight, too, that we're excited about is that even though we did have a total revenue decline, we did see sales volume growth year-over-year. So I think that's important because as Joe mentioned, once we reset that, then I think we can get back to normalized levels of growth in China.

Thank you. And our next question coming from the line of Jayson Bedford from Raymond James.

Can you hear me, okay?

Yes. We got you, Jayson.

All right. So a few questions. Following up on WRAPSODY, I apologize if I missed this, but did you provide an update on expected timing around FDA approval?

No. It's in there. It's in their hands. We'll go through all the steps. We're prepared for it. We're prepared for the various aspects of a PMA, but it's in their hands now. We've completed the submission, as we said we would on time. And now we just sit back, and we respond and when they're done, they're done. So we haven't spoken to it because it's in their hands, Jayson.

Got it. That's fair. OEM is flat year-to-date, but I think I heard you say that you're still expecting double-digit growth for the year. Could you confirm that? I don't mean to be overly obvious with the question, but do you have strong visibility? It suggests a significant ramp in the second half to achieve double-digit growth, if that's indeed the guidance.

Yes, Jayson. First of all, I want to emphasize that our U.S. sales growth has been outstanding and continues to improve. The OEM segment contributed positively in the second quarter, growing about 5% on a constant currency basis, which is a rebound compared to a decline of approximately 5% in Q1. We haven't adjusted our guidance for OEM because we believe we have enough visibility for a stronger second half of the year. The numbers indicate that we are expecting a solid second half, and we are confident in our guidance. We're very pleased with the recovery and the strong demand we're witnessing. Additionally, there was a deal announced with Medtronic regarding their Spine business, which our OEM division is involved in, further demonstrating robust demand.

The pipeline is filling back up, Jayson. We now have better visibility on upcoming orders. These orders are starting to come in, and behaviors are returning to what we've typically seen following the fluctuations and adjustments from COVID, leading back to a state of normalization.

Yes. And we have seen in the past 20% plus growth quarters from OEM. So while we're not necessarily saying when that will happen, it's not out of the ordinary for the sales division.

The business clearly has strong visibility. Regarding the EGS deal and its improving growth profile, is there an international aspect to the strategy, or is it primarily focused on the U.S.?

It is primarily driven by the U.S., but they do have sales coming from Europe and the Middle East, which they didn't fully tap into. We believe there are opportunities for growth in those regions, and we will pursue those opportunities carefully and systematically.

Thank you. And our next question coming from the line of Craig Bijou from Bank of America Securities.

Thank you for taking my questions, and congratulations on a strong quarter. I have a couple of quick follow-ups regarding China and the better-than-expected results in Q2. I'm curious if the results were affected by VBPs not coming through on certain products you anticipated or if the pricing impact from the VBP was less significant than you expected. Alternatively, did the underlying markets improve a bit? Additionally, I would like to know how conservative you believe you are regarding the VBP for the rest of the year. This has been touched on in other questions, but I would appreciate any insights on the growth of the underlying China medical device market, particularly as it seems you still anticipate volume growth. Any broader thoughts on the underlying market would be appreciated.

Yes. And so, I'll let Joe kind of tackle the market and what he sees there. But first of all, we haven't changed our second half VBP headwind assumptions; those are going to stay. I will say that during the first half of the year, obviously, we've done better than expected, clearly, as we talked about. And I think the one thing that I do want to highlight, which I think is really important, is that we continue to grow sales of units on a year-over-year basis, which I think is really important because we're able to overcome some of that volume-based purchasing impact. So we're definitely seeing it in our P&L. We're definitely getting hit with VBP. But our team is doing an excellent job of continuing to grow units, which is giving us a little bit of upside. So optimistic about China. Joe, what do you think?

Yes, I believe the overall unit growth demonstrates that procedural growth in China remains strong. Although we are facing challenges from volume-based purchasing, the first half's performance was generally aligned with our expectations. Therefore, there is no significant change to our guidance for the second half. We still anticipate it will follow our current plan.

Thank you. And our next question coming from the line of John Young from Canaccord.

Thanks for squeezing in here. First, I just want to touch on WRAPSODY, too. A lot of questions have been asked on it. But maybe just going back here, what is the commercial infrastructure for the product today, Fred and how you think about building it up to the PMA approvals that you're ready at launch?

Well, we put together a renal therapy group that we put together last year that had a number of products that this product will fall into. They include things like the Surfacer and our hemodialysis products because they call on the same physician and the same point of sale. So part of that has been under development getting ready for this for some time. So Joe, do you want to comment any further on that?

Yes. As Fred mentioned, we established a renal therapy sales group, and we've been adding to that this year in preparation for WRAPSODY. The good thing for us is, as Fred mentioned, we have other renal therapies products that were, frankly, under-focused previously. So when we broke out this team, they've been able to focus on these products that we already have, grow that business while at the same time, we've been spending a lot of time training them up on WRAPSODY, letting them hear physician experiences in other approved markets outside of the United States. So we feel like we're doing all we can. We expect to add to that team over time, but we're going to be judicious in how we do that.

The other thing to add, too, John, is that you can clearly see that that team is performing well, right? They have the Angio products, which are slightly ahead of where we anticipated they would be. And so clearly, they're doing a good job in the integration part of things.

Let me add to that. I think the ability for our team to concentrate on six to eight products at the point of sale is very important. As Joe mentioned, we've observed that performance, and we are being mindful of staying within our budgets while ensuring that our team is trained. This way, when we launch, we won’t have excess inventory, which is another crucial aspect. Training and focus are essential because of the wide range of products Merit offers. It's a challenge to manage. We believe this was the right decision, developed about 18 months ago, and we are currently working it through. Once we receive approval, we will be ready with knowledgeable staff and complementary products to market alongside it.

Thank you. And our next question coming from the line of Jim Sidoti from Sidoti & Company.

On WRAPSODY, do you think that presenting the data in Spain will have any impact on your international sales of the product? And do you think that there is an international market for the product?

Well, first of all, Jim, we're already selling it internationally, and data is the name of the game to physicians. That is the name of the game. We hear it over and over every day. Where is the data, where is this? Where is that on a lot of products? And if you don't have it, how do you prove that it's efficacious? So data is important. It will have an impact. And we're very excited to be able to deliver this in at CIRSE.

Okay. And then can you just give us some sense on the impact of the acquisition on the sales team? How big was the EndoGastric sales team that you brought in compared to what you had with your existing sales force?

Yes. So it was about 50% of the size of our Endotek sales force. So we could have taken more, but we decided to selectively hire those we thought were in strategic areas and where we had opportunities. So it will grow that overall force by about 50%.

I'm sorry, was that 15% or 50%?

50%.

50%. Okay. And then also, I'm sure that there was a lot of customer overlap, but are there new customers that you'll be calling on now for your core products?

Well, the bottom line is, every customer there is a customer of ours already.

Maybe two new customers.

One of the great aspects of this situation, Jim, is that the people involved are familiar to us, even if we may not have direct knowledge of them. When we reach out to a lab, they recognize us, and we recognize them. It's quite unique that every account on our list is also on theirs, and they have something to contribute. Conversely, every account they have is an account we are already engaging with.

Thank you. And I'm showing no further questions in the queue at this time. I will now turn the call back over to Mr. Fred Lampropoulos for any closing remarks.

Ladies and gentlemen, we appreciate your patience during this lengthy call. There was a lot to discuss. Raul, Joe, and I will be available for the next couple of hours to address any specific questions you may have. Thank you for your interest, and I thought the questions were excellent. We wish you all the best from the 100-degree heat in the mountain land of Salt Lake City, Utah. Good evening and best wishes.

This concludes our conference call for today. Thank you all for your participation. You may now disconnect.