Merit Medical Systems Inc Q4 FY2024 Earnings Call

Please stand by and welcome to the Merit 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 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 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 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 titled 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.

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 contributions 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% and a non-GAAP operating margin of 19.6% of sales, up approximately 305 basis points year-over-year. We also delivered 26% 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, in 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 31, 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 EP CRM 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% 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 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 the 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 and 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 with 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 with 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 $0.74 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 $0.02 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, and 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 31, 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 assume the following. GAAP 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 a 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 1, 2024 and November 1, 2024, respectively, in the range of $45 million 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 WRAPSODY CIE in the range of $7 million to $9 million. Our full year 2025 U.S. WRAPSODY 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%, up 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 count assumption reflects incremental dilution of approximately 1.8 million shares related to our convertible debt facility. This represents an impact of approximately $0.11 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 million 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 U.S. 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 $0.73 to $0.76 compared to $0.75 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. WRAPSODY CIE program is progressing well, and we are very much looking forward to the presentation of 12-month AVF data from our WRAPSODY WAVE trial at the Society of Interventional Radiology on Sunday, March 30th. That wraps up our prepared remarks. Operator, would you now open the lineup for questions?

Thank you, sir. The operator provided instructions to participants on how to ask a 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 note. 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?

Yes, 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, there's two things that I want everybody to 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 a kind of a large cash balance last year. We did the acquisitions. So, when you think about that, that's roughly about $0.8 of headwind to EPS growth. And then 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 GAAP accounting on how you treat the dilution for the convert. So that is going to be $0.11. There's an incremental 1.8 million shares that we've added that essentially impacts our earnings by $0.11. When you 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 yes, it 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, the business is already looking different today than it was a year ago due to M&A with EGS and Cook. Also, you've got WRAPSODY 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 like the upper end of that range, the midpoint, or better 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. That's all I'll say, but great question.

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

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

Yes, we got you. We got you, Larry.

We got you.

Okay. All right. Where should I start, on OEM, Fred, really strong 22% in Q4. Is that kind of... I imagine these are 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?

Yes, 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. remains strong as we expected. Product on the OEM side outside the U.S. were impacted more by challenging raw material and some supply chain issues, but I think we've discussed that in the past. But the bottom line is we're 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—its reliability and quality. And at the end of the day, that's what carries the day for Merit and always has. So, we were confident in the numbers and I think Mike Black and his team did a really good job. We had to build all this stuff and deliver it, which we did.

Yes, Larry, maybe we don't really guide to the underlying product category growth. But 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, I think everything that we expect out of OEM is baked into our numbers.

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

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

We're just excited about the product. 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 as we hoped it would. We're looking forward to introducing the 12-month data by physicians and a full discussion of that at the SIR meeting. We're confident in the numbers. The first couple months have been very encouraging and it's nice—we invested a lot. We took a lot of time. We're excited about the product and what it means to us in the long run.

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

Thank you. Good evening, guys. Gross margin was a standout in the quarter. I'm 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?

Well, first of all, I'm going to take the time to run around the bases on what was a home run by the team on the gross margin. Steve, you've heard me say this and a lot of our investors have heard me say this along with a lot of our covering analysts: when we go after gross margin, we really kind of throw the kitchen sink at it, knowing that there are things that might not work out in our favor and other things that will. Our approach is to tackle it from pricing to efficiencies to logistics—essentially the kitchen sink. In the fourth quarter, we essentially hit on everything, and that's why you see the execution. A 300 basis point improvement in gross margin is outstanding. The mix was great. OEM was strong. U.S. was strong. Our operations group executed at a really high level. Unit growth was strong. So everything we would have wanted in gross margin really hit in the fourth. As far as the 2025 guidance, we don't give gross margin guidance; we give operating margin guidance. And as you can see, we feel strongly about what we're giving: 40 to 80 basis points in 2025. When we originally launched CGI, we were clear that most of the operating margin accretion, at least on the low end, would come from gross margin. On the high end, there would be a mix of gross margin improvement and OpEx leverage. That plan has not changed.

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

I think it comes down to training and education, reimbursement work including NTAP and TPT, trade shows, and visibility for the product. The registry is also very important—we're almost at 420 of the planned 500 patients and people look at that. Those items are important. The investments we've made continue. Maybe most importantly is the psychology of the sales force. Raul and I just left our U.S. sales meeting, and there's a high level of enthusiasm for the business and the role that the sales team plays. It's nice to know that the sales force feels they can win with the product across the board.

Thank you. One moment please. Our next question's coming from the line of David Rescott of Baird. Your line is open.

Congrats on the strong finish here to the year. Two questions from us and I'll ask both of them upfront. First on WRAPSODY, I want to make sure I heard it clearly. You have the guide for revenue set this year that you laid out today and that $7 million to $9 million would be incremental on top of that from WRAPSODY. 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, it seemed maybe 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.

On the WRAPSODY piece, to be clear, the $7 million to $9 million forecast for 2025 is included in the guidance we already gave you; it was not included in the original CGI goals. So that $7 million to $9 million is part of the 2025 guidance. As far as EndoGastric Solutions and Endoscopy, we feel pretty strongly about the guide we've put out. We have an integration of two sales forces going on. Last year they were operating as two separate sales forces while training on the different products. January 1st, that changed and there's now a combined sales force. We gave a measured and realistic guidance for that group, acknowledging the complications of integrating two sales forces. We're excited about the products and the team, but there is a learning curve and we guided accordingly.

And David, you'll be aware we fully integrated the product into our operations in Salt Lake City. All the TSAs are closed and we did that ahead of time. We did a strong job of training and transferring. That part's complete as well.

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

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've seen companies talking about 1% to 2% headwinds in '24. Can you maybe talk about whether you're doing any kind of hedging on the revenue level or something?

We do have a hedging program; it's a rolling program designed to minimize the impact from FX. We think we're on the right track and feel good about the number. Also, our U.S. sales as a percentage of revenue has climbed and we're more U.S.-centric than historically—around 55% U.S. and 45% international—so that helps. The hedging program helps minimize some of the impact.

It's consistent year-over-year. We don't time markets or speculate. Our approach to hedging has been consistent for many years.

And then on WRAPSODY, I know you've given guidance for the U.S. and you're probably not going to give any numbers for outside the U.S. But has the data from the total trial in the U.S. helped at all outside the U.S.? And 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 an obstacle in some of those more price-sensitive markets.

I'll simply say that price has not been an obstacle. We left the European sales meeting with encouragement from the sales force on the product. Even though we don't have an RTG Group there in the same structure, the clinical data and registry work help internationally. We're pleased with the initial response to WRAPSODY and continue to receive strong, positive feedback. We're looking forward to events like the SIR meeting where physicians will present and discuss the results.

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

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

No, it was really strong execution by our team across pricing, mix, and operations.

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

EGS is fully integrated. Last year we operated EGS and our Endoscopy sales group as two separate sales forces while training on the different product sets. Starting January 1st, they are a combined sales force. So other than that, everything's already done with EGS; manufacturing and operations are integrated. On the Cook side, we're still working under a transitional services agreement for order-to-cash and there are a few countries not yet onboard, but substantial order-to-cash is complete. Manufacturing continues to be done by Cook and we're looking to integrate that sometime this year or early next year. Everything continues on pace and in some situations ahead.

And just lastly, I know you've called out SKU rationalization last year. Is there anything notable around SKU rationalization in 2025?

We continuously evaluate product lifecycle and SKU rationalization as part of CGI. We look to move customers to more efficient SKUs and reduce low-volume items. It's an ongoing program that fits our internal objectives.

We continue to work on product lifecycle management. To the scale of what you saw last year with the PAC business, we don't have a material one-off this year. But SKU rationalization remains part of our ongoing activities.

Thank you. One moment please. Our next question will be coming from the line of John Young of Canaccord. Your line is open.

Hi, Fred and Raul. Congratulations on a strong end of the year. I just want to first start on WRAPSODY. Did you guys get the TPT application in before the March 1st deadline yet?

Yes, we did. The NTAP and the TPT were filed on time. Both are in.

And then the supply chain challenge you highlighted on the OEM outside the U.S. business obviously did not really materialize. Should we still expect any impact going forward in 2025 of any supply chain challenges?

There were two components to the supply chain issues last year: access to sufficient raw materials for one product and the ability to ramp production quickly for another product with strong demand. We have mostly solved those issues. We continue to monitor them, but our level of confidence is significantly higher than it was at the time of our third quarter call.

And then maybe I can sneak in a third. You were pretty clear that tariff impacts were not included in the guidance today. More high level, what's the ability to move manufacturing from Mexico to other facilities like Ireland or Utah? Have you taken any near-term mitigation or hedging efforts at this point?

We've taken some minimal internal mitigation steps, but things are changing quickly and making investments to move manufacturing doesn't make sense while the situation is so fluid. Some companies retooled in prior administrations and then found those countries were also targeted. For us, it's business as usual: control what we can control, stay focused on 2025 goals, and be nimble to adjust when official changes are announced.

We've survived many administrations and tariff cycles in the history of our company. We've dealt with tariffs before. We don't want to overreact, but we have our thumb on it and are watching and listening. As soon as we get clarity, we'll comment further when appropriate.

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

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 Q4 had a lot to do with WRAPSODY activities. Can you speak to that and whether this is closer to a new normal or if it's likely to back off as we head into the first half of 2025?

I wouldn't say it's a new normal. The gross margin was strong, and we made some short-term R&D investments, including consulting work that we felt was overdue. We took advantage of that in the fourth quarter. We feel comfortable with historical R&D levels. As we focus more on therapeutic products over time, R&D may trend up, but we're not looking to dramatically increase R&D beyond effective, targeted investments.

Sufficient to our plan.

And then the cadence of CapEx, obviously it's a number this year. Do you have any guidance on first half, second half, or where that's likely to come in, since it will matter for free cash flow generation?

I don't have a precise cadence to provide. We're building the distribution facility across the street; normally you wait for spring or summer for some work if the ground freezes, but the weather's been mild here in Utah so the building continues. For planning, we discussed the additional CapEx as part of CGI to build a facility we expect will make us more efficient over time. I'll note the strong free cash flow last year—$186 million, $65 million in Q4—and we're focused on continuing that performance. We'll control CapEx as we've done historically.

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

Good afternoon. Can you hear me?

Yes, we can, Jim. How are you?

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

Yes, I had the bug. I'm fine. Thank you, Jim.

Just following up on that CapEx question, I think I heard you say CapEx is $90 million to $100 million for the year, which is about double what you've done the last couple of years. What do you get from that distribution center? How is that going to help you?

Two main benefits: first, efficiency. Our current distribution system is almost 20 years old and has reached end of life. There are better systems used at our other distribution centers and the new system will make us significantly more efficient. We've squeezed all the juice out of the current system and felt now was the right time to invest given our size. Second, capacity: moving distribution will free up space in our South Jordan site for additional molding machines and capacity. Those of you who visited know we can't add more molding machines at the current main campus; moving distribution across the street opens additional room for molding and future expansion.

Additionally, we currently store some materials offsite; moving them into the new facility will eliminate that expense and provide convenience. It also rebalances distribution so we can better serve customers across the country.

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

We generated $186 million last year. We're targeting a minimum of $400 million under CGI and believe we're well on our way. Our expectation for 2025 is at least $150 million of free cash flow, and we'll continue to put cash on the balance sheet and look for appropriately accretive opportunities.

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 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.