Earnings Call Transcript - MMSI Q1 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to MMSI First Quarter 2024 Earnings Call. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Fred Lampropoulos, Chairman and CEO. Please go ahead.

Fred Lampropoulos, Chairman and CEO

Thank you, and welcome, everyone, to Merit Medical Systems' First Quarter of Fiscal Year 2024 Earnings Conference Call. I am joined on the call today by Raul Parra, our Chief Financial Officer and Treasurer; Joe Wright, our Chief Commercial Officer; and Brian Lloyd, our Chief Legal Officer and Corporate Secretary. Brian, would you mind taking us through the safe harbor statements, please?

Brian Lloyd, Chief Legal Officer

Thank you, Fred. I would like to remind everyone that this presentation contains forward-looking statements that receive safe harbor protection under federal securities laws. Although we believe these forward-looking statements are based on reasonable assumptions, they are subject to unknown risks and uncertainties. The realization of any of these risks or uncertainties as well as extraordinary events or transactions impacting our company could cause actual results to differ materially from those currently anticipated. In addition, any forward-looking statements represent our views only as of today, April 30, 2024, and should not be relied upon as representing our views as of any other date. We specifically disclaim any obligation to update such statements, except as required by applicable law. Please refer to the sections entitled Cautionary Statement regarding forward-looking statements in today's press release and presentation for important information regarding such statements. Please also refer to our most recent filings with the SEC for a discussion of factors that could cause actual results to differ from these forward-looking statements. Our financial statements are prepared in accordance with accounting principles which are generally accepted in the United States. However, we believe certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of our ongoing operations and can be useful for period-over-period comparisons of such operations. This presentation also contains certain non-GAAP financial measures. A reconciliation of non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in today's press release and presentation furnished to the SEC under Form 8-K. Please refer to the sections of our press release and presentation entitled non-GAAP financial measures for important information regarding non-GAAP financial measures discussed on this call. Readers should consider non-GAAP financial measures in addition to, not as a substitute for, financial reporting measures prepared in accordance with GAAP. Please note that these calculations may not be comparable with similarly titled measures of other companies. Both today's press release and our presentation are available on the Investors page of our website. I will now turn the call back to Fred.

Fred Lampropoulos, Chairman and CEO

Thank you, Brian. And let me start with a brief agenda of what we will cover during our prepared remarks. I will start with an overview of our financial results and key operating progress areas during the quarter. After my opening remarks, Joe will provide a summary of our revenue results before turning the call over to Raul, who will provide you with a more in-depth review of our quarterly financial results. Then we will open the call for your questions. Now beginning with a review of our first quarter results. We reported total revenue of $323.5 million in the first quarter, up 8.7% year-over-year on a GAAP basis and up 9.3% year-over-year on a constant currency basis. The constant currency revenue growth we delivered in the first quarter was stronger than the high end of the range of growth expectations that we outlined on our fourth quarter earnings call. Specifically, we expected constant currency revenue growth for the first quarter in the range of 6.5% to 7.7% year-over-year. Importantly, the better-than-expected constant currency revenue growth in the first quarter was primarily driven by strong organic growth as well as contributions from acquired products, which modestly exceeded our expectations as well. With respect to our profitability performance in the first quarter, we leveraged the solid revenue results to deliver non-GAAP gross profit and operating profit growth of 10% and 16%, respectively, which resulted in year-over-year margin expansion of approximately 80 basis points and 115 basis points, respectively. And we delivered 19% growth in our non-GAAP EPS, which exceeded the high end of our expectations as well. We are pleased with a solid start to the fiscal year and remain confident in our team's ability to deliver continued strong execution, stable constant currency growth, improving profitability and solid free cash flow generation in 2024. Before handing the call to Joe, I want to provide a brief update on various areas of operational progress over the past few months. First, regarding new product introductions, we have had a strong start to 2024 with several regulatory clearances and commercial launches. In January, we received FDA 510(k) clearance for the SCOUT MD Surgical Guidance System. This system reinforces Merit's leadership in oncology and represents a significant step forward in breast cancer treatment as it allows for the implantation of up to four different reflector configurations that help accurately locate tumors in multiple dimensions for more precise excision. This targeted method can minimize damage to surrounding healthy tissue, reduce the chance of re-excision, and lessen the emotional and physical strain related to a second surgery. In March, we launched the Micro ACE Advanced Micro-Access System, which expands our portfolio of percutaneous access and closure devices. The Micro A System features innovative technology that enhances interventional access procedures by balancing stiffness and flexibility, offering twice the resistance to kink and compression compared to the top competitor. It is also 9% stiffer than the leading standard micro introducer. Additionally, a unique market tip design provides nine times greater visibility under poroscopy for accurate positioning at the start of a procedure. This system was developed based on feedback from our interventional physician customers and exemplifies our commitment to collaborating with customers to enhance vascular access, procedures, outcomes, and patient care. Second, regarding our progress in clinical validation, in January, we announced the successful enrollment of the first patient in our MOTION study. This multicenter, prospective, randomized controlled trial compares genicular artery embolization (GAE) using Merit's Embosphere Microspheres to corticosteroid injections in treating symptomatic knee osteoarthritis, a condition affecting over 650 million adults worldwide. GAE is a minimally invasive procedure that selectively reduces blood flow to hypervascular areas of the knee, helping relieve pain and inflammation associated with knee osteoarthritis. The MOTION study aims to enroll up to 264 adults across medical centers in North America, Brazil, Europe, Australia, and New Zealand. It is designed to assess the primary safety and effectiveness of the Embospheres at six months, with patient follow-up extending for 24 months. Lastly, we are pleased with the progress made recently in our WRAPSODY Arteriovenous Access Efficacy (WAVE) pivotal study, having completed the collection of safety and efficacy outcomes during the follow-up period and receiving primary endpoint data for the final enrolled patient in the first quarter. The team has finished the monitoring, data cleaning, and analysis phase, and we remain on track to finalize the clinical study report, expecting to be ready to file primary outcomes with the FDA for premarket approval by the end of the second quarter of 2024. Now, let me turn the call over to Joe, who will discuss the first quarter revenue performance. Joe?

Joseph Wright, Chief Commercial Officer

Thank you, Fred. I'll start with a detailed review of our revenue results in the first quarter, beginning with the sales performance in each of our primary reportable product categories. Note unless otherwise stated, all growth rates are approximated and presented on both a year-over-year and constant currency basis. We have included reconciliations from our GAAP reported results to the related non-GAAP item in our earnings release and presentation available on our website. First quarter total revenue growth was driven by 9% growth in our Cardiovascular segment and 6% growth in our Endoscopy segment. Our Cardiovascular segment was the primary driver of the better-than-expected revenue results versus the high end of constant currency growth expectations again this quarter. However, our Endoscopy segment sales did exceed the high end of our expectations as well in Q1. Sales of the peripheral intervention or PI products increased 19%, representing nearly 80% of total cardiovascular segment growth in the period. Excluding sales of acquired products, PI sales increased 13% on an organic constant currency basis. Organic growth in the PI product category was driven by sales of our delivery systems and embolotherapy products increasing 41% and 16%, respectively, and together represented more than one-third of our total PI sales growth. Sales of our drainage and radar localization products were strong contributors to our total PI growth in Q1, increasing in the low double digits year-over-year. Sales in both our cardiac intervention and CPS product categories were also key contributors to our organic growth in the Cardiovascular segment this quarter, each exceeding the high end of our growth expectations in Q1. Cardiac intervention product sales increased 7%, driven primarily by strong sales of intervention products with balanced contributions to growth from access, angiography, EP/CRM and hemostasis products in the period. Sales of our Custom Procedural Solutions or CPS products increased 3%, which was notably better than the low single-digit decline we expected in Q1, fueled by 8% growth in sales of critical care and kit products, which more than offset year-over-year declines in sales of trays. By way of reminder, the decline in tray sales is due to the ongoing SKU rationalization effort we specifically noted in our Q3 earnings call last year. Sales of our OEM products were the only area of our cardio business that came in softer than our growth expectations heading into the quarter. We attribute the mid-single-digit decline in sales to be a result of order timing and fluctuations in demand trends as our customers work through efforts to optimize inventory levels. OEM product sales to U.S. customers were flat in Q1, with demand from our OUS customers declining year-over-year. Importantly, we continue to expect solid growth in OEM sales. Lastly, sales in our Endoscopy segment increased 6%, which exceeded the high end of our growth expectations. We are pleased to see continued normalization of growth trends in this business, and our 2024 guidance continues to assume high single-digit growth in our Endoscopy segment this year. Turning to a brief summary of our sales performance on a geographic basis. Our first quarter sales in the U.S. increased 9% on a constant currency basis and 5.5% on an organic constant currency basis. Sales to U.S. customers came in roughly 1 point softer than what our guidance had assumed driven primarily by the softer-than-expected OEM sales, as previously mentioned. Despite a modestly softer than expected growth in Q1, our U.S. growth trends accelerated on both a 2-year and 3-year basis in the first quarter, and we continue to expect to deliver the 7.6% growth assumed at the midpoint of our 2024 guidance range. International sales increased 9.5% year-over-year and 9% on an organic constant currency basis, exceeding the high end of our growth expectations by more than 600 basis points in the quarter. The stronger-than-expected organic constant currency growth to customers outside the U.S. was driven primarily by mid-teens growth in APAC. With respect to China specifically, sales increased 22% year-over-year against a softer comp in the prior year period. We continue to see quarter-to-quarter variability in growth trends related to volume-based purchasing tenders as expected. By way of reminder, while we are not providing country-specific growth assumptions in our guidance messaging, the midpoint of our 2024 constant currency growth guidance range continues to assume our total international sales increased 2.3% year-on-year, driven by high single-digit growth in EMEA and ROW regions, partially offset by a 4% decline in the APAC region. The year-over-year decline in APAC is entirely related to China, where we expect to grow sales of units on a year-over-year basis, but we expect total revenue to decline due to continued headwinds related to volume-based purchasing. With that, let me turn the call over to Raul, who will take you through a detailed review of our first quarter financial results, balance sheet and financial condition as of March 31.

Raul Parra, Chief Financial Officer

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 first quarter of fiscal year 2024. We have included reconciliations from our GAAP reported results to the related non-GAAP items in our press release and presentation available on our website. Gross profit increased approximately 10% year-over-year in the first quarter. Our gross margin was 50.9%, up 79 basis points year-over-year. The increase in gross margin year-over-year was driven by favorable revenue mix, pricing uplift and improvements in freight and distribution costs, offset partially by manufacturing variances compared to the prior year period. Operating expenses increased 8% from the first quarter of 2023. The year-over-year increase in operating expenses was driven by a 7% increase in SG&A expense and a 9% increase in R&D expense compared to the prior year period. Total operating income in the first quarter increased $7.9 million or 16% from the first quarter of 2023 to $56 million. Our operating margin was 17.3% compared to 16.1% in the prior year period. The 115 basis point increase in operating margin was driven by a 79 basis point increase in our non-GAAP gross margin and by a 36 basis point decrease in our non-GAAP OpEx margin compared to the prior year period. First quarter other expense net was $0.1 million compared to $0.7 million last year. The change in other expense net was driven by an increase in net interest expense associated with increased borrowings and rising interest rates, partially offset by an increase in interest income associated with our higher cash balances. First quarter net income was $44.8 million or $0.77 per share compared to $37.5 million or $0.64 per share in the prior year period. We are pleased with our profitability performance in the first quarter, where we leveraged stronger-than-expected revenue results to drive both expansion 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 March 31, 2024, we had cash and cash equivalents of $581.9 million, total debt obligations of $822.5 million and available borrowing capacity of approximately $657 million compared to cash and cash equivalents of $587 million, total debt obligations of $846.6 million and available borrowing capacity of approximately $626 million as of December 31, 2023. Our net leverage ratio as of March 31 was 2.4x on an adjusted basis. We generated $24.5 million of free cash flow in the first quarter compared to $1.8 million last year. The year-over-year improvement in free cash flow generation was primarily a result of significant improvements in cash used in working capital, specifically in the reduction of dollars invested in inventory compared to the prior year period. We expect strong free cash flow generation again in 2024 and continue to believe our CGI program will generate more than $400 million of free cash flow in the three-year period ending December 31, 2026. For reference, we have included a table in our earnings press release, which details each of our formal financial guidance items and how those ranges compared to the prior year period. However, it is important to highlight that all guidance expectations remain unchanged versus what we introduced in our fourth quarter earnings press release. Further, we have not changed the underlying assumptions discussed in our prepared remarks last quarter as well. Lastly, we would like to provide additional transparency related to our growth and profitability expectations for the second quarter of 2024. Specifically, we expect our total revenue to increase in the range of approximately 4% to 5% year-over-year on a GAAP basis and up approximately 4.7% to 5.8% year-over-year on a constant currency basis. The midpoint of our second quarter constant currency sales growth expectations assumes approximately 10% growth year-over-year in the U.S. and a 1% decline year-over-year in international markets. Note, the midpoint of our second quarter constant currency sales growth expectations also includes approximately $4.5 million of inorganic revenue. Excluding these inorganic contributions, our second quarter total revenue is expected to increase approximately 3.8% year-over-year on a constant currency basis. With respect to our profitability expectations for the second quarter of 2024, we expect non-GAAP operating margins in the range of approximately 19.6% to 19.9%, and we expect non-GAAP EPS in the range of $0.87 to $0.90. That wraps up our prepared remarks. We would now like to open up the line for questions.

Operator, Operator

The first question comes from Larry Biegelsen with Wells Fargo.

Gursimran Kaur, Analyst

This is Simran on behalf of Larry. To begin, could you explain some of the assumptions that lead to both the low and high ends of the Q2 guidance? The EPS guidance appears to exceed our models. What are the main leverage points for the quarter that you are considering? Should we expect the revenue phasing for the rest of the year to be consistent through Q3 and Q4, or more concentrated in Q4? I have a follow-up after that.

Fred Lampropoulos, Chairman and CEO

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

Raul Parra, Chief Financial Officer

Yes, this is specific to the second quarter. I'll start by saying that for revenue, we expect a 4% to 5% year-over-year increase on a GAAP basis, approximately 4.7% to 5.8% year-over-year on a constant currency basis. The midpoint for the second quarter's constant currency growth expectation includes about $4.3 million in organic revenue from the acquisition of Angio products. Excluding those inorganic items, our growth is around 3.8%. Regarding EPS, I want to discuss the revenue trends for the rest of the year. You can think of this as returning to typical seasonal patterns, where Q1 and Q3 are usually softer quarters, while Q2 and Q4 are stronger. We feel confident that we're returning to those historical trends. However, we do need to consider the SKU rationalization impacts and the anticipated effects from China in the latter half of the year. So, while there are a few factors to keep in mind, we are essentially looking at a normalized outlook. Please go ahead.

Gursimran Kaur, Analyst

I wanted to clarify the impact of SKU rationalization in Q1 and how we should consider its effects for the rest of the year.

Raul Parra, Chief Financial Officer

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

Gursimran Kaur, Analyst

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

Fred Lampropoulos, Chairman and CEO

Well, I think nothing has changed regarding timing. Everything is right on schedule as we indicated. We expect to file in the second quarter, and then it will be with the FDA. I don’t believe we stated that we would have this in the fourth quarter. It depends on the FDA's regulatory process at that point. However, we will have submitted all the modules and data by the end of this quarter.

Raul Parra, Chief Financial Officer

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

Operator, Operator

The next question comes from Craig Bijou with Bank of America Securities.

Craig Bijou, Analyst

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

Raul Parra, Chief Financial Officer

Thanks for the question, Craig. We're really excited about our results for Q1, but it's important to remember that it's just the first quarter and we have three quarters left. We typically don't adjust our guidance after the first quarter, so we'll reassess after Q2 and gain better insights into factors like the situation in China and volume-based purchasing. We believe the business is performing well, but we're keeping our guidance unchanged for now. Regarding OEM, we anticipate solid growth, although we did notice that companies have been managing their inventory levels since last year's fourth quarter. This trend seems widespread across the industry, including us. We're actively managing our inventory, and as reflected in our financials, our inventory levels for Q1 were essentially flat. This management allowed us to generate about $24 million in free cash flow compared to $1.8 million last year, primarily due to effective inventory control. We remain optimistic about strong growth in our OEM business.

Craig Bijou, Analyst

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

Fred Lampropoulos, Chairman and CEO

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

Craig Bijou, Analyst

I agree, Fred. I had to try.

Operator, Operator

The next question comes from Jason Bednar with Piper Sandler.

Jason Bednar, Analyst

Can you hear me okay?

Fred Lampropoulos, Chairman and CEO

Yes. We got you, Jason.

Jason Bednar, Analyst

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

Raul Parra, Chief Financial Officer

Yes. We've been working hard to enhance our business, particularly in terms of gross margin. The improvement we saw in Q1 reflects our efforts over the past year, and we expect this trend to continue. We're experiencing a favorable revenue mix and pricing uplift, along with efficiencies in our product lines and product line transfers. For our 2024 guidance, we focused on operating margin, expecting it to be around 18.7 to 18.9, an increase of 50 to 75 basis points for the year. The main contributor to this is gross margin, along with some operational expense leverage. In Q1, we achieved nearly 9% growth in revenue, and our gross margin expanded by about 80 basis points. Our operational expense margin also increased by about 40 basis points, leading to a total operating margin expansion of 115 basis points. This progression across all line items demonstrates effective P&L management. We still anticipate that our operating margin expansion will be primarily driven by gross margin increases with some assistance from operational expense leverage.

Jason Bednar, Analyst

Yes. No, it does. I couldn't agree more, either on all the levers you got going there. Maybe 2 others. I'll ask them. They're unrelated here, though. First, just on, I guess, how do we reconcile the expectation of sales still the decline in China, even though you posted 20% growth here in the first quarter. I guess outside of volume-based purchasing, is there anything else you should be considering for our models or you're factoring in there that would get reversed or work against that nice performance here we had in the first quarter? And then the unrelated item, I'll take a swing on a WRAPSODY question. But I guess are there any investments or prelaunch costs, educational efforts, things like that, that we should be thinking about later this year? Or is that also going to be more of a 2025 item?

Joseph Wright, Chief Commercial Officer

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

Raul Parra, Chief Financial Officer

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

Jason Bednar, Analyst

Yes, sure, Raul. Yes, just on WRAPSODY, if there's any investments or prelaunch costs or educational efforts that we should be thinking about as we work some of those investments or costs into our model later this year? Or is that more of a 2025 item?

Raul Parra, Chief Financial Officer

No, Jason. All the investments we believe are necessary are already factored into our guidance, so you shouldn't anticipate any surprises regarding investments. The primary investment beyond the usual clinical studies was in hiring additional sales personnel. As many of you know, the reason for the Angio acquisition last year was to offset the costs associated with those hires. We have brought those people on board and are pleased with the performance of the Angio products. All related expenses are accounted for in our guidance, so there shouldn't be any expectations outside of that.

Operator, Operator

The next question comes from Jason Bedford with Raymond James.

Jayson Bedford, Analyst

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

Raul Parra, Chief Financial Officer

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

Jayson Bedford, Analyst

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

Raul Parra, Chief Financial Officer

Yes, I think that's how we've described it. We're excited about the business's performance, Jayson. We've provided our growth expectations for the second quarter. The OEM segment was a bit softer in Q1, but our guidance for Q2 should offer some reassurance. We firmly believe that OEM growth will be strong for the remainder of the year. We'll assess the situation after the second quarter to determine our position.

Jayson Bedford, Analyst

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

Raul Parra, Chief Financial Officer

We've provided our guidance for Q2, and I want to avoid going into details. I will simply state that it is all encompassing, and we are confident that OEM will show strong revenue growth for the full year.

Operator, Operator

The next question comes from Steve Lichtman with Oppenheimer.

Steven Lichtman, Analyst

Fred, I noticed that you spoke about more specific products during this call, and you've discussed various topics in previous calls, including WRAPSODY. Can you provide an overview of your thoughts on the R&D pipeline? It seems that this quarter you invested a bit more than we anticipated. Could you discuss what's happening internally regarding the focus on new product development? I know you often mention singles and doubles, but you also highlighted several new products here.

Fred Lampropoulos, Chairman and CEO

Yes, we continue to prioritize innovation in our business. Our track record shows we introduce new products every year. While it may sound like business as usual, that's precisely what Merit is doing. We're announcing more product launches than ever before, addressing inquiries about our pipeline. This means we're not sacrificing our earnings for necessary future investments. We believe this approach helps you understand our ongoing rhythm. In some aspects, Merit remains the same, but in others, it's evolving, especially with our growth foundations and CGI. What remains constant is our commitment to understand, innovate, and deliver. These are the three key principles driving Merit, and they guide our daily operations. For instance, if you could see my desk right now, you'd notice the various products we’re developing. We're steadfast in our approach that has brought us success and will propel us into the future, which is our ongoing investment in research and development.

Steven Lichtman, Analyst

Thank you, Fred. I apologize if I missed this, but could you share your current thoughts on mergers and acquisitions, what you’re observing in the market, your interest level, and so forth?

Fred Lampropoulos, Chairman and CEO

Yes. I think it's well known that we have a strong cash position, which allows us to consider various opportunities. We need to be selective, and while we continue exploring options, any potential moves must be aligned with the commitments we've made to our investors. We won't engage in any actions just for the sake of taking action; everything must be consistent with our business strategy and long-term goals, which remains unchanged.

Operator, Operator

The next question comes from Michael Petusky with Barrington Research.

Michael Petusky, Analyst

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

Raul Parra, Chief Financial Officer

Yes, Mike, we are really pleased with how the business performed. We achieved over 9% organic constant currency growth during the year, which is a strong start. However, it's not typical for us to update our guidance after the first quarter. We are generally satisfied with the results of Q1 and will assess everything again after the second quarter, but we are excited about the promising start to the business.

Michael Petusky, Analyst

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

Raul Parra, Chief Financial Officer

I feel more comfortable discussing our revenue and its seasonality. When it comes to free cash flow, there are many timing-related factors that are sometimes beyond our control, so I'm hesitant to provide specific guidance. However, I'm pleased with our start at $24 million and want to give credit to our operations group. Managing inventory is challenging, especially with our global distribution and product range. They have a solid plan this year, and they've made a great start at keeping inventory stable. We are confident in achieving at least $115 million in free cash flow this year and at least $400 million by the end of 2026. Overall, I'm satisfied with our performance in Q1.

Fred Lampropoulos, Chairman and CEO

Yes. I think this is important. We have made a commitment, and we have honored our previous commitments. To me, that's the main point. This is a significant issue, and honestly, everyone in the company is aligned on it. It's not a small issue; it's a major one for Merit.

Michael Petusky, Analyst

Fred, I'd like to ask you one last question. Over the past few decades, you've successfully transitioned many products from development to commercialization. Based on your experience and your perspective on WRAPSODY, do you think there will be significant back-and-forth discussions during the approval process for a product like this? What are your expectations in that regard?

Fred Lampropoulos, Chairman and CEO

Yes. We're focused on our priorities and will respond appropriately, as this is important to the company. While we cannot control the FDA, we can manage our own actions and allocate resources to address questions as they arise. We'll fulfill our responsibilities, Mike.

Operator, Operator

Next question comes from Jim Sidoti with Sidoti & Company.

James Sidoti, Analyst

I understand you might be tired of questions about China, but it's challenging for all of us to grasp the situation. Given that you had such a strong quarter with a 20% increase, why do you anticipate a 4% decline? In previous years, you've expressed concerns about volume price discounts, but as the year progressed, they weren't as pronounced as expected. How confident are you this year that those discounts will materialize in the second half of the year?

Joseph Wright, Chief Commercial Officer

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

Raul Parra, Chief Financial Officer

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

Fred Lampropoulos, Chairman and CEO

Jim, this is Fred. Look, we remain confident in our long-term plan in China. And I think that's critical. Merit is in for the long run, and we're confident about the future for Japan and all of APAC. We think it's a big opportunity for the company.

Raul Parra, Chief Financial Officer

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

Operator, Operator

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

Raul Parra, Chief Financial Officer

We have a term loan with an interest rate of about 1.6, which we're currently paying down and expect to eliminate this year. Additionally, there's a convertible loan with a rate of around 3%, introducing some variability. However, our primary focus right now is on paying down the term loan.

Operator, Operator

The next question comes from Mike Matson with Needham & Company.

Michael Matson, Analyst

Yes, thanks. I wanted to start with a question on WRAPSODY. Do you have any plans to apply for new technology add-on payment or transitional pass-through to secure additional reimbursement since it's considered a breakthrough device?

Fred Lampropoulos, Chairman and CEO

Yes, Mike, as we mentioned, as we move through the first six months, we have a lot of plans in place regarding the timing of data release and public announcements. All these elements are currently being addressed. We've been engaged in this strategy for quite some time, so I want to assure you that we are ready. We have been preparing for this, and none of these steps are new to us. At the appropriate time, we will undertake actions that will be most advantageous for our shareholders and the company.

Michael Matson, Analyst

Okay. There was news earlier this week about Hologic acquiring Endomagnetics, which I believe competes with your SCOUT product. I assume you've already been competing with them in the market, but Hologic is a well-known brand in the breast area. Should we be concerned about this? Also, can you remind us how large the total addressable market is? I believe there's probably enough space for multiple players, but...

Joseph Wright, Chief Commercial Officer

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

Fred Lampropoulos, Chairman and CEO

Especially from a technology point of view, we won't get into that. But I think our technology is not just we're the market leader might, but we're the technology leader.

Operator, Operator

The next question comes from John Young with Canaccord.

John Young, Analyst

Congrats on the quarter. I just want to ask about WRAPSODY. Is there any estimate on when we could see the data and any medical meetings you are considering for releasing this information to the scientific community, Fred?

Fred Lampropoulos, Chairman and CEO

Yes, the general answer is no. However, I should clarify that there are many factors involved regarding the value being created, such as the right timing. We want to approach this correctly to fully capitalize on the opportunity. While there may be pressure to rush things, we will not do so, as that would not benefit our shareholders' value. It's essential for you to understand that we are taking a disciplined approach, which we believe maximizes value for both shareholders and the medical community. This is serious work involving important issues, and we will release all relevant information at the appropriate time for public and physician assessment.

John Young, Analyst

Okay. And then just maybe moving to SIR. You guys had a very large showing there, too. Now how much of the new Bluegrass and Angio products helped grab attention from the interventional radiology call point? And how large is that sales force now? I remember you previously said is up 6 to 8 reps for the renal care call point. Are you continuing to scale that as those revenues grow?

Fred Lampropoulos, Chairman and CEO

We believe that Merit had a strong performance not only at the recent event but also at our facility with over 150 physicians. This is part of our renal therapy group, and we think our strategy is solid. We are seeing it execute as we expected and are in the process of scaling. While we do not disclose specific numbers, we view it as a successful program and remain confident in its future success. Joe, would you like to share your thoughts on the launch? It's your program.

Joseph Wright, Chief Commercial Officer

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

John Young, Analyst

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

Fred Lampropoulos, Chairman and CEO

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

Raul Parra, Chief Financial Officer

Yes, John, I mean, obviously, we'll be excited about the product, but we'll talk about the U.S. commercial strategy, reimbursement strategy, all those things, as Fred mentioned, when appropriate.

Fred Lampropoulos, Chairman and CEO

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

Operator, Operator

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

Fred Lampropoulos, Chairman and CEO

Ladies and gentlemen, it's the top of the hour. We've got everything done in 1 hour. We appreciate. We know there are a lot of other calls going on. Raul and I and Joe will be available to discuss with you one-on-one. And we thank you very much for your consideration, your time. We wish you all the very best. Signing off from Salt Lake City. Good evening.

Operator, Operator

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