Merit Medical Systems, Inc. (NASDAQ:MMSI) Q4 2023 Earnings Call Transcript
Merit Medical Systems, Inc. (NASDAQ:MMSI) Q4 2023 Earnings Call Transcript February 28, 2024
Merit Medical Systems, Inc. beats earnings expectations. Reported EPS is $0.81, expectations were $0.77. Merit Medical Systems, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Fourth Quarter of Fiscal Year 2023 Earnings Conference Call for Merit Medical Systems, Inc. At this time, all participants have been placed in listen-only mode. Please note that this conference call is being recorded and that the recording will be available on the company’s website for replay shortly. I would now like to turn the call over to Mr. Fred Lampropoulos, Merit Medical Systems Founder, Chairman, and Chief Executive Officer. Please go ahead, sir.
Fred Lampropoulos: Thank you very much, and welcome, everyone, to Merit Medical's fourth quarter of fiscal year 2023 earnings conference call. 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?
Brian Lloyd: Thank you, Fred. I would like to remind everyone that this presentation contains forward-looking statements that receive Safe Harbor protection under federal securities laws. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to unknown risks and uncertainties. The realization of any of these risks or uncertainties as well as extraordinary events or transactions impacting our company could cause actual results to differ materially from those currently anticipated. In addition, any forward-looking statements represent our views only as of today, February 28, 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: Thank you, Brian. Let me start with a brief agenda of what we will cover during our prepared remarks. I will start with an overview of our revenue results for the fourth quarter. I will then discuss our continued growth initiatives program and related financial targets for the three-year period ending December 31, 2026, which we announced in a separate press release this afternoon. After my opening remarks, Raul will provide you with a more in-depth review of our quarterly financial results and the formal financial guidance for 2024, as well as a summary of our balance sheet and financial condition as of December 31, 2023. Then we will open the call for your questions. Beginning with a review of our fourth quarter revenue performance, we reported total revenue of $324.5 million in the fourth quarter, up 10.6% year-over-year on a GAAP basis and up 10.3% year-over-year on a constant currency basis.
The constant currency revenue growth we delivered in the fourth quarter was stronger than the high end of our range of growth expectations that we outlined on our quarter three earnings call, specifically, we expressed constant currency revenue growth in the fourth quarter in a range of five to eight% year-over-year. Importantly, the better than expected constant currency revenue growth in the fourth quarter was driven by a strong organic growth reflecting particular strength versus expectations in our PI, CPS, and OEM product categories, and relatively balanced contributions to the upside in quarter four from both the U.S. and international markets. With respect to our profitability performance in the fourth quarter, we leveraged the strong revenue results to deliver non-GAAP gross profit and operating profit growth of 13% and 13% respectively, which resulted in year-over-year margin expansion of 100 basis points and 40 basis points respectively.
And we delivered non-GAAP net income and earnings per share results that modestly exceeded the high end of our expectations as well. Overall, we believe our performance in the fourth quarter resulted in strong financial results versus our expectations, and more importantly, capped off an impressive year of operating and financial performance in 2023 highlighted by nearly 10% constant currency revenue growth, improvements in our profitability profile with an 18.2% non-GAAP operating margin, a 120 basis point improvement year-over-year, and strong free cash flow generation of more than $110 million. This performance continues to be a direct result of our team's continued hard work and commitment to our strategic objectives, and we're very proud of the strong execution our team delivered in 2023.
Our performance in the fourth quarter of 2023 also marked the completion of the third and final year of our Foundations for Growth program. We are very proud of the team's strong execution and relentless focus on the multi-year strategic endeavor. It is because of their efforts that the FFG program has resulted in a constant currency, organic revenue CAGR of 9.4%, a 440 basis point improvement in our non-GAAP operating margin, and cumulative free cash flow generation of approximately $300 million. Notably, when compared to 2019, we delivered a constant currency revenue CAGR in excess of 6% more than 630 basis points of non-GAAP operating margin expansion and cumulative free cash flow in generation of more than $418 million. As announced in a separate press release this afternoon, we have formally introduced the Continued Growth Initiatives program and related financial targets for the three-year period ending December 31, 2026.
Building upon the notable success achieved in our Foundations for Growth program, the Continued Growth Initiative program reflects our commitment to identifying opportunities to better position the company for long-term, sustainable growth, and enhanced profitability. As discussed on prior calls, we wanted to use the Foundations for Growth program as a vehicle to think holistically and comprehensively across the business to challenge the status quo and to deliver an ambitious improvement in profitability, while preserving our historically market-leading growth profile, our legacy of customer-driven innovation, and the strength of the Merit culture that has served us so well for so many years. We believe we executed well over the last three years, and we're all very proud of the progress we have made with FFG.
Importantly, we're not done. The CGI program represents the next chapter in our company's development and a continuation of the momentum and commitment to improvement that has defined the company in recent years. To that end, the CGI program was established with three clear objectives in mind. First, maintain above-market profitable growth, leveraging our proven ability to innovate together with our customers, and deliver unique, therapeutic-based solutions to the market. Product offering optimization, including further SKU rationalization and advancement of pricing initiatives and prioritizing efficient customer-centric sales and service strategies, including engaging with customers through education. Second, significantly improve our non-GAAP operating margins through ongoing network consolidation, growing sophistication in forecasting, planning, and tracking, and continued focus on lowering costs and increasing efficiency throughout the organization.
And third, to strengthen the Merit way, culture throughout the organization, including targeted programs for enhanced employee engagement, leadership development, and organizational development. We are prioritizing further investment in our people, with clear individual and functional objectives aligned with the company's strategic plan and key business objectives. We believe strong execution towards this goal is integral to best position the company for sustained success in meeting the evolving needs of changing healthcare markets in the years to come. As we formally kick off our continued growth initiatives program, it is important to understand that we have an organization that is fully committed to both the continued execution of foundation for growth activities and the successful execution of the new CGI objectives going forward.
Together, we believe our efforts will result in Merit completing the year ending December 31, 2026, with more than $1.46 billion of revenue and non-GAAP operating margins of at least 20%. We also believe our efforts will drive cumulative free cash flow generation of at least $400 million during the three-year period ending December 31, 2026, which will significantly enhance our balance sheet and financial condition. With that, let me turn the call over to Raul, who will take you through a detailed review of our fourth quarter financial results and our 2024 financial guidance, which we introduce in today's press release, as well as a summary of some of the key drivers of growth, profitability improvement, and cash flow generation. We project as part of our CGI program.
Raul?
Raul Parra: Thank you, Fred. We'll 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. We have included reconciliations from our GAAP report results to the related non-GAAP item in our earnings release and presentation available on our website. Fourth quarter total revenue growth was driven by 10% growth in our cardiovascular segment and 20% 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, while our endoscopy segment sales were in line with expectations.
Sales of our peripheral intervention or PI products increased 19%, representing the largest driver of total cardiovascular segment growth again this quarter. Excluding sales of acquired products, PI sales increased 14% on an organic constant currency basis. Organic growth in the PI product category was driven by sales of our drainage and radar localization products, which increased 19% and 18% respectively, and together represented a little more than 40% of total PI sales growth. And by sales of our access and geography and biopsy products, which together increased 13%, and represented nearly one-third of our total PI growth in Q4. Sales of both our cardiac intervention and OEM products increased 6%, and were also key contributors to our organic growth in the cardiovascular segment this quarter.
Cardiac intervention product sales were at the high end of our growth expectations, driven primarily by strong sales of both our hemostasis and EP and CRM products, which increased 35% and 12% respectively. Sales of our OEM products exceeded the high end of our growth expectations, which we attribute principally to continued solid demand from large customers in multiple categories. With the strongest sales contributions from axis and in geography products, which together increased 29% in Q4. Sales of our custom procedural solutions, or CPS products, increased 1%, which was notably better than the mid-single-digit decline we expected in Q4. CPS sales results benefited from higher demand from customers for certain kit product lines that had been identified for SKU rationalization as part of our Foundations for Growth initiatives.
Lastly, sales in our endoscopy segment increased 20%, which was in line with the range of growth expectations we outlined on our third quarter call. As expected, we continue to see improving sales trends in the fourth quarter, and we're pleased to see this business deliver mid-teens growth in the second half of 2023. Turning to a brief summary of our sales performance on a geographic basis, our fourth quarter sales in the U.S. increased 13% on a constant currency basis and 9% on an organic constant currency basis, exceeding the high end of our growth expectations by nearly 300 basis points in the period. Our U.S. growth performance reflects continued strong execution and overall improving trends in the U.S. market during the fourth quarter, particularly in our direct business, which saw impressive growth in sales of both our PreludeSYNC Radial Compression hemostasis device and our SplashWire Hydrophilic Steerable Guide Wire and geography products.
International sales increased 7% on an organic constant currency basis, exceeding the high end of our growth expectations by more than 300 basis points in the quarter. The stronger than expected organic constant currency growth to customers outside the U.S. was driven primarily by 7% growth in the EMEA region and to a lesser extent by 30% growth in the rest of the world region, and by 4% growth in APAC, which was in line with our expectations, compared to growth that exceeded the high end of our expectations in the EMEA and rest of world regions in Q4. With respect to China specifically, sales were essentially flat year-over-year and were impacted by the headwinds related to volume-based purchasing tenders as expected. Turning to a review of our financial performance across the rest of the P&L.
For the avoidance of doubt, unless otherwise noted, my commentary will focus on the company's non-GAAP results during the fourth quarter of fiscal year 2023. 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 13% year-over-year in the fourth quarter. Our gross margin was 50.4%, of 96 basis points from the fourth quarter of 2022. The increase in gross margin year-over-year was at the lower end of expectations as benefits from mixed were partially offset by manufacturing variances compared to the prior year period. Operating expenses increased 13% from the fourth quarter of 2022. The year-over-year increase in operating expenses was driven by 11% increase in SG&A expense and a 19% increase in R&D expense compared to the prior year period.
Our operating expense performance in Q4 of 2023 reflected higher commissions on the better than expected sales results and prioritization of investments to support our future growth initiatives as expected. Total operating income in the fourth quarter increased $6.7 million or 13% from the fourth quarter of 2022 to $59 million. Our operating margin was 18.2% compared to 17.8% in the prior year period. The 40 basis point increased in operating margin was driven by a 96 basis point increase in our non-GAAP gross margin offset partially by a 60 basis point increase in our non-GAAP OpEx compared to the prior year period. Fourth quarter other expense net was $2 million compared to $0.1 million in the fourth quarter of 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 as well as lower income associated with realized and unrealized foreign currency losses compared to the prior year period, partially offset by an increase in interest income associated with our higher cash balances.
Fourth quarter net income was $47.2 million or $0.81 per share compared to $46 million or $0.79 per share in the prior year period. We are pleased with our profitability performance in the fourth quarter where we leverage our stronger than expected revenue results to drive expansion in our gross and operating margins and non-GAAP diluted earnings per share that exceeded the high end of our expectations. Turning to a review of our balance sheet and financial condition. As of December 31, 2023, we had cash and cash equivalents of $587 million, total debt obligations of $846.6 million, and available borrowing capacity of approximately $626 million compared to cash and cash equivalents of $58.4 million, total debt obligations of $198.2 million, and available borrowing capacity of approximately $523 million as of December 31, 2022.
Our net leverage ratio as of December 31 was 2.5 times on an adjusted basis. The change in total debt obligation was driven by the issuance of convertible notes in December of 2023. The notes bear interest at 3% per year, payable semi-annually, mature February 1, 2029, and have an initial conversion price of approximately $86.83 per share. Total gross proceeds from the sale of the notes were $747.5 million, and net proceeds were approximately $659 million after deducting offering and issuance costs, and the cost of a related cap call transaction, which has an effective conversion price of $114 per share. Initial use of proceeds was paid down about standing debt obligations at higher interest rates, specifically $138 million of revolver borrowings, and $50 million of term debt.
We generated $55.1 million of free cash flow in the fourth quarter, up 255% from the fourth quarter of 2022, and up 30% from the third quarter of 2023. The improvement in free cash flow generation in the fourth quarter was primarily a result of significant improvements in cash used in working capital, specifically in the areas of inventory and accounts payable. We generated more than $110 million of free cash flow in 2023, and as Fred mentioned earlier, are extremely proud of the significant free cash flow generation we have delivered as part of our FFG program, totally nearly $300 million in the three years ended December 31, 2023. Importantly, not only do we expect strong free cash flow generation to continue, we expect enhanced free cash flow generation over the next three years.
Specifically, we believe our CGI program will generate more than $400 million of free cash flow in the three year period ending December 31, 2026. Turning to a review of our fiscal year 2024 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 period. We expect GAAP revenue growth of 4.3% to 5.4% year-over-year. The GAAP net revenue guidance range assumes net revenue growth of approximately 4% to 5% in our cardiovascular segment and net revenue growth of approximately 8% to 9% in our endoscopy segment, and a headwind from change in foreign currency exchange rates of approximately $5.9 million or approximately 50 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 4.8% to 5.9% in 2024. There are two items to consider when evaluating our constant currency revenue growth of 4.8% to 5.9% for 2024. First, our ongoing FFG and CGI initiatives related to SKU rationalization represent a roughly $15 million headwind to revenue in EMEA and to a lesser extent in the U.S. in 2024, representing roughly 120 basis point impact on our constant currency growth year-over-year. Second, the midpoint of our total constant currency growth range assumes 7.6% growth in the U.S. and 2.3% growth outside the U.S. Constant currency growth outside the U.S. is expected to be driven by a high single digit growth in both the EMEA and rest of world regions, partially offset by a 4% decline in the APAC region.
The expected year-over-year decline in APAC sales is substantially 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. Finally, our total net revenue guidance for fiscal year 2024 also assumes inorganic revenue contributions from the acquisition announced on June 8, 2023, in the range of 10 to 11 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 4% to 5% year-over-year. With respect to profitability guidance for 2024, we expect non-GAAP diluted earnings per share in the range of $3.28 to $3.35, representing an increase of 9% to 11% year-over-year.
For modeling purposes, our fiscal year 2024 financial guidance assumes non-GAAP operating margins in the range of approximately 18.65% to 18.9% of 50 to 75 basis points year-over-year. Non-GAAP interest in other expenses in net of approximately $1 million compared to $10.7 million last year. Non-GAAP tax rate of approximately 21% and diluted shares outstanding of approximately $58.8 million. Finally, we expect CapEx in the range of $50 million to $60 million and free cash row of at least $115 million. Lastly, we would like to provide additional transparency related to our growth and profitability expectations for the first quarter of 2024. Specifically, we expect our total revenue to increase in the range of approximately 5.6% to 6.8% year-over-year on a GAAP basis and approximately 6.5% to 7.7% year-over-year on a constant currency basis.
The midpoint of our first quarter constant currency sales growth expectations assumes approximately 10% growth year-over-year in the U.S. and approximately 3% growth year-over-year in international markets. Note, the midpoint of our first quarter constant currency sales growth expectations also includes approximately $6 million of inorganic revenue. Excluding these inorganic contributions, our first quarter revenue is expected to increase approximately 5% year-over-year. With respect to our profitability expectations for the first quarter of 2024, we expect non-GAAP operating margins in the range of approximately 16.7% to 17% up 60 to 90 basis points year-over-year. Finally, we expect non-GAAP EPS in the range of $0.70 to $0.72. That wraps up our prepared remarks.
Operator, we would now like to open up for the line for questions.
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