Q4 2023 Merit Medical Systems Inc Earnings Call
Participants
Fred Lampropoulos; Chairman of the Board, President, Chief Executive Officer; Merit Medical Systems Inc
Brian Lloyd; Chief Legal Officer, Corporate Secretary; Merit Medical Systems Inc
Raul Parra; Chief Financial Officer & Treasurer; Merit Medical Systems Inc
Jason Bednar; Analyst; Piper Sandler Companies
Steve Lichtman; Analyst; Oppenheimer & Co., Inc.
Jayson Bedford; Analyst; Raymond James
Jon Young; Analyst; Canaccord Genuity
Michael Petusky; Analyst; Barrington Research Associates
Jim Sidoti; Analyst; Sidoti & Company, LLC
Mike Matson; Analyst; Needham & Company Inc.
Presentation
Operator
Welcome to the fourth quarter of fiscal year 2023 earnings conference call for Merit Medical Systems, Inc. (Operator Instructions)
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'm 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 safe 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 28th, 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 forward look 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 or 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. The 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 eight 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 31st, 2026, which we announced in a separate press release this afternoon. After my opening remarks, Rahul were approved 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 Q3 earnings call specifically, we expressed constant currency revenue growth in the fourth quarter in a range of 5% to 8% 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 PICPS. and OEM product categories and relatively balanced contributions to the upside in Q4 from both the U.S. and the international markets.
With respect to our profitability performance in the fourth quarter, we leveraged the strong revenue results, delivered 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 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 where we're very proud of the team's strong execution and relentless focus on the multiyear strategic endeavor. It is because of their efforts that the FFG. program has resulted in a constant currency organic revenue kegger of 9.4%, a 440 point 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 kegger in excess of 6%, more than 630 basis points of non-GAAP operating margin expansion and cumulative free cash flow 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 31st, 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 so that in 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 to merit the merit way culture throughout the organization included 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 interval to best position the Company for sustained excuse me, sustained success in meeting the evolving needs of changing healthcare markets in the years to come as we formally kickoff, our continued growth initiatives program is important to understand that we have an organization that is fully committed to both the continued execution of foundations 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 31st, 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 31st, 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 introduced 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. I'll start with a detailed review of our revenue results in the fourth quarter, beginning with the sales performance in each of our primary 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 items 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 core 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 POS 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 Acsis 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 continued to see improving sales trends in the fourth quarter, and we're pleased to see this business deliver mid 10s 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 US 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 US 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 Prelude, think radio compression, hemostasis device and our splash wire hydrophilic steerable, Guidewire and geography product 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 US 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 A-Pac, 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, we 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 that live on our website.
Gross profit increased approximately 13% year over year. In the fourth quarter, our gross margin was 50.4%, up 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 mix were partially offset by manufacturing variances compared to the prior-year period.
Operating expenses increased 13% from the fourth quarter of 2020 to 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 increase in operating margin was driven by 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 leveraged 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 31st, 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 31st, 2022, our net leverage ratio as of December 31st was 2.5 times on an adjusted basis. The change in total debt obligation was driven by the issuance of convertible notes in December 2023. The notes bear interest at 3% per year payable semi-annually mature February first, 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 had an effective conversion price of $114 per share. Initial use of proceeds was paydown of outstanding debt obligations at higher interest rates, specifically 130 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 2020. 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 we generated more than 110 million of free cash flow in 2023. And as Fred mentioned earlier, we are extremely proud of the significant free cash flow generation we have delivered as part of our FFG. program totaling nearly 300 million in three years in the three years ended December 31st, 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 31st, 2020.
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 compared to the prior year 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 2020. For first, our ongoing FFG. and CGI. initiatives initiatives related to SKU rationalization represent a roughly $50 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 US and 2.3% growth outside the U.S. constant currency growth outside the U.S. is expected to be driven by our high single digit growth in both the EMEA and Rest of World regions, partially offset by a 4% decline in the A-Pac region. The expected year-over-year decline in A-Pac 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 assumed inorganic revenue contributions from the acquisition announced on June eighth, 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%, up 50 to 75 basis points year over year. Non-gaap interest and other expenses 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 to $60 million and free cash flow 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 up approximately 6.5% to 7%, 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 US 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 in organic 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 a range of approximately 16.7% to 17% of 60 to 90 basis points year over year. Finally, we expect non-GAAP EPS in the range of 70 to $0.72.
That wraps up our prepared remarks. Operator, we would now like to open it up for the line for questions.
Question and Answer Session
Operator
(Operator Instructions) Jason Bednar, Piper Sandler.
Jason Bednar
Good afternoon. Thanks for taking the questions and congrats on a nice finish to the year and appreciate all the 2024 and CGI. guidance color here, and I'll pick up first and CPA. I don't think any of these ranges will surprise investors that are close to your story and that's that's not a criticism or a compliment from the predictability here on the revenue guide here.
Makes sense. I wanted to check to see if there's anything notable to call out as a tailwind or headwind embedded in that 5% to 7% growth outlook on again, the CGI. new products, regulatory elements, pricing, just anything there to be aware of.
And then on the margin side of the equation, I think the math works out to be something like 60 to 100, 20 basis points of annual margin expansion at the operating line, given what we're looking at for 2024, it looks in the out maybe at the lower end of that? Are there benefits here that skew more towards 25 and 26 and sorry to pack a few in here, but and how do we think about the balance between gross margin expansion and OpEx leverage?
Raul Parra
Yes, a lot to unpack there, Jason. So I'm going to trying to hit maybe on the on the revenue side. So if we kind of think on the key drivers, at least on the 5%, right, we always kind of like to start on the low end and then tell you kind of what the upside would be depending on what happens. But and look, I think it's really more of the same when it comes to the 5% right. We product introduction selling the products that we have. We're really kind of hitting on positive figures in each of our reportable product categories, specifically PINCICPSOM. and Endo tech with really the largest contributors coming from PINCIM. and then the international kegger is a little bit less than the U.S. e-com kegger. So it's really kind of really just a follow-on of really what we did with FFG., quite frankly. So that's that's on the revenue side.
As far as on the operating margin. A piece of that is we're really focused on the operating margin. And I would say that on the low end, the primary driver is going to be gross margin. When you get to that the higher end, you're really leveraging up, you're getting more leverage from OpEx and then what we would in the low end. So hopefully, that provides you a little bit of color.
Fred Lampropoulos
And also let me add this to that, that the revenue thing does not include new products that's credit easier existing products and it does include Rhapsody that we're currently selling, but no prognostications or any of the new products that Myriad may release next year. We have a long history of new product releases, but nothing. This is our existing business. And as they release and when they release them, we'll make notice of that.
Raul Parra
Yes, that's a good point. So that so the Rhapsody just for a point of clarity, it's really is the outside of the outside of US sales that we would include in that we included in CGI. where we're already selling Rhapsody US sales where we haven't been approved yet have not been included as one would expect, given that we don't know the exact timing, but we have a we think we know when it's going to happen, but we weren't 100% sure. So we didn't include it.
Jason Bednar
Okay. Very helpful. In your you kind of picked up on what I was hinting at there with Rhapsody. So that sounds like that's entirely upside. Appreciate all the other details there on CGI. Yes, on the guide for here for 2024 and a few different moving parts here. I think your core organic growth would be something like 5% to 6%, if not for that SKU rationalization you mentioned and presumably those that SKU rationalization has some margin benefits. Can you talk about whether you're realizing these margin benefits here in 2024? Are those and the EPS impact? Is that more of like a 2025 dynamic?
Raul Parra
Yes, you know, it's a lot it's very similar to CGI. So so on the low end, you're really talking about gross margin expansion is the main driver of that operating margin expansion as we make some investments in the business, especially as we ramp up for Rhapsody.
And then on the on the on the, um, on the high end, you're getting more operating expense leverage from that. That gets us to the higher end of that, that operating margin range. So hopefully that helps, Jason.
Jason Bednar
Yes, sorry, I was asking like, I think on the SKU rationalization in particular, that is that's going to be a and I guess helping or a benefit in 2024?
Raul Parra
Yes. I mean it helps us out throughout CGI. and that it's things we've been working out throughout the last several years, but it's included in the numbers.
Jason Bednar
Right. Very helpful. Thank you.
Operator
Steve Lichtman, with Oppenheimer.
Steve Lichtman
Thank you.
Raul Parra
Good evening, guys, and congratulations on a quarter Hung, I guess a couple on cash on your higher free cash flow outlook as you look out over the next few years versus the last three are based solely on higher operating income that you're forecasting or other working capital levers to that you see playing out and it looks like for 24, there's a step-up in CapEx. Anything to call out specifically on what that spend is directed towards?
Yes. So on the CapEx, you know, specifically around free cash flow. So obviously, we're going to have higher earnings throughout the CGI. program. So we expect that obviously to flow through now as far as the cash flow generation and I mean, it will come from working capital. We do expect CapEx to be somewhere in the 4% to 4.5% of sales. As you know, over the next several years, we do have within the CGI. three year program, we will be making a couple of investments that I think we want to highlight just so we don't surprise anybody on. One is there will be a little bit of work that we'll do in our Mexican facility this year as we were able to obtain from the other half of the building that we're currently in. So now we have the two full buildings. And we did that because it was advantageous. It was available and we wanted this space. It's a lot easier to take it when it's available than when you need it well.
Fred Lampropoulos
And we don't want to have to be driving across town to do that.
So we just we're able to still be a nominal investment there as we build that out for whatever we need it. And there's no immediate plans for it. But we have the space and we'll do a little bit of work on it.
The bigger one would be a distribution center that we're planning on doing here in Salt Lake. That will be about a $50 million spend that is included in our free cash flow numbers, but I just want to call it out, and that is something that we plan on doing. We could get started as early as this year in the fourth quarter but more than likely will get pushed into next year. So just a couple of call-outs, but a lot of the drivers is increased profitability and working capital.
Great.
Steve Lichtman
Thanks. And then just as a follow-up for you. Given that free cash flow outlook and your solid balance sheet, can you provide just your latest thoughts on M&A, your sort of appetite to do deals? Are you seeing opportunities out there? Any thoughts on that would be helpful.
Fred Lampropoulos
Thanks. Yes, listen, I think we'll continue to identify opportunities. We look at them all the time. They have to fit and not frustrate. I think if we go back and look at the last three years in our opinion, the things that we did were things that were we felt that would enhance the business. And that's the same additive. There's no money burning a hole in our pocket. We will spend it when it's right. It's consistent with our sales objectives, our sales force and it's consistent with our plan. So and we see things, but that's it. I mean, we're just going to keep the same discipline. The same approach that we've done in the past, but we have the cash to do it and and we won't be hesitant if we find the right things, but them it's just an ongoing process it is business. I don't want to call it business as usual. But for lack of a better word, that's exactly what we've been doing. And even to this point has been a couple of months. We didn't have something that we're going to go. We'll do right away. We're looking and we'll be very patient and find the right things here.
Raul Parra
And also just as a reminder, the CGI. program does not contemplate any M&A activity. That's a good point in trying to capture a growing threat. Thanks, Hubert.
Operator
Jayson Bedford with Raymond James.
Jayson Bedford
Good afternoon. Tom, it looks like the OR cumulative free cash flow goal came in 600 grand shy of the goal.
I'm not sure if you guys are fans of the movie going vary, Glen, Ross, but I really hope that rule didn't get a set of steak knives and instead of their Cadillac Eldorado that he deserves, I know they were they were actually plastic and rapid in a wrapper.
Raul Parra
So I had just a reminder Jason, remember, we had that 12 million that had to be treated slightly different. And from a contingent payment standpoint, because of the estimated fair value that we made, the you know, four years ago or whenever it was. But yes, you're right, we were just a hair short. But honestly, I think after what we've been through in all all companies have been through from a supply chain standpoint from everything that happened with COVID and whatnot. I think we're pretty proud of the team of what we were able to accomplish, to be honest, and to be within a rounding error of that, I think is a great example of kind of the commitment that freight that we've made as an executive team and also our employees for towing the line on everything.
Jayson Bedford
Yes. Yes, no doubt you should be proud. So that wasn't my question was just a comment.
So just two quick ones here. It looks like the implied organic in cardio is about 4%. I'm guessing it's disproportionately impacted by the SKU rationalization, but at the skew dynamic in which segment do you expect to see a little bit of a slowdown.
Raul Parra
You kind of called out PINCI. is the drivers where you're going to see the anticipated slowdown in 24 while a lot of the rationalization comes from market impacts, um, so so that's where we'll see most of the impact from. But other than that, I mean, I think, you know, there is a little bit of MDR related stuff, some of the spine business and whatnot. But really, I think most of our growth is going to be coming from the US, you know, it almost over seven 7%, 7.6 growth year over year and then about 2.3% growth, you know, outside of the U.S. So hopefully that helps.
Fred Lampropoulos
Okay. Okay.
Jayson Bedford
Maybe just broadening it out a bit.
Revenue growth, I think implied in this CGI. there's basically an acceleration in 25 and 26 is the upper end all due to the success or potential success of Rhapsody in this remind us on the anticipated timing there in the US?
Fred Lampropoulos
Yes, Jason, Fred and log. It is weighted on the back end. And almost all program can see that the three years until was slower in the front, it depends on when we get approval on that thing. Remember that that revenue is not in the plan other than the existing, but to say it's back-weighted are in 25 and 26 is fair.
Raul Parra
Yes. And remember, we as we talked about, we do have some SKU rationalization that's happening this year, about 50 million. That's 100, 20 basis points for this year. So as we get that behind us, then you start to accelerate back to kind of what the and to get us back into that 5% to 7% that you guys are used to?
Fred Lampropoulos
So again, I think it's really just a timing thing on from a at least from a carrier standpoint and other things of this recall and we have existing products we're selling in the US that because of the MDR and approaching the finish line for Merit. We will now start applying for those products. They're not in the numbers, but there are other things of these new products that we are selling in the US that we haven't been selling. So we could get MDR completed yet. So that I mean, we feel comfortable with this.
Raul Parra
I mean, I think you can tell that we feel comfortable with our sales guidance yet again, I think the just I can't highlight enough the 100, 20 basis points, we're that's a headwind related to SKU rationalization which, again, I think everybody should be happy about that where we are going through the process of doing that because at the end of the day, it just leads to higher profits.
Jayson Bedford
Yes. Okay. Thank you.
Operator
Jon Young with Canaccord Genuity. Your line is now.
Jon Young
Hi, good evening and thanks for taking my questions and congrats on a strong end of the year here. Maybe just to circle back to Rhapsody's, Paul, for that question. I believe that you're exposed to completing the final patient patient follow-up in February. Obviously, you have a 28 for just wondering if that was done and what the final modules will be submitted in Q2. Can you characterize the interactions with the FDA so far on?
Fred Lampropoulos
Yes. Listen, we have filed the first three modules and the final one is the data which is now being reviewed and populated and on and making sure that we have it all tidied up the way that the FDA requires it. And we're still on schedule have to submit that per our previous calls which is, I think, in April or May. But yes, we're on schedule for everything. And then then at that point, John, it's in the hands of the FDA.
Jon Young
Okay, great. And then just in light of the 2024 growth projection, how should we think about pricing power as assumption of that growth? And maybe any color on just contracts you expect to come up for renegotiation this year? Or just how the SKU rationalization could help push them to a higher price product here? Thanks again.
Raul Parra
Yes, thanks, John. As you know, we don't disclose our pricing versus volume. But just to give you guys some general context, I mean, I think that, you know, the pricing initiatives that we've set out, we started under foundations for growth. They'll continue into CGI. and they're just part of the initiatives that we're working on and so on. We do expect it to be a tailwind for us, but we don't disclose the amount of it is one of the initiatives that we're working on among several others that we have going to get the CGI. goals of at least or a minimum of 5% revenue kegger and a minimum of 20% operating margins.
Fred Lampropoulos
And John, I think just to maybe just a little bit of color on that is we have made it, I think very clear that going forward, that the things that we learned from foundations for growth are not things that are forgotten. They are ongoing. We have contracts that are coming due for renegotiation, this that and the other. So all of those things will come into play. And although we won't go for all the specific numbers, the concept of attention to contracts, pricing, engagement and all those things are still part of our program that we work on every single day. We have our Chief Commercial Officer in the room, and I'm looking over at him. He's just nodding his head. So that's his commitment. You can't say it, but I can. And now we have this sums up, so there you go.
Thanks, Joe.
Jon Young
I appreciate that.
Fred Lampropoulos
You bet.
Operator
Michael Petusky, with Barrington Research.
Michael Petusky
Your line is now open is so a couple of my questions were, but what mean in terms of sort of the way pressure that is should should should should be weighed or or is that sort of immaterial sort of think about?
Raul Parra
Yes, no, I think that's a great question, Mike. And I would say generally speaking that the wage pressures are, I would call them global. And quite frankly, we've been pretty open about that. You know, throughout the throughout the last couple of years about some of the wage pressures that we're seeing globally and the belief around at least this table is that we don't think those go away, right? I mean, I think it's something that people are going to have to deal with and we're dealing with the wage pressures in Mexico. It's something that we've we've been able to overcome. I think we have a good program in our Mexican facility on how we deal with our employees. And it's something that we've been working on to make sure that they're paid properly, and we tend to be at the higher end of things. And so I think the impact is less so than it would be for for other companies. But yes, it's something we're dealing with along with the Mexican peso like everybody else. But we are hedged and it does spread over time. But I think we're we're well aware of it, and that's included in the numbers that we gave for CGI. and I think that's important because some of this, by the way in Mexico was mandated.
Fred Lampropoulos
So that means everybody has to deal with and that's what we have to follow along. We do yes, I think the next part of it is, as Robert said, it's in the numbers we've accounted in our costs. Those particular is our best guesstimate of some of what those numbers would be. And we've so we built numbers and increases and things into our models there.
Michael Petusky
I guess, Fred, when you guys did that few months ago, I think probably a few people. I'll wrap myself out as one of those people probably suspect that you guys probably have some things teed up external growth opportunities. And, you know, obviously about getting at is there any specific I mean, did you guys possibly have a couple of things that you thought were more front burner that now maybe in that position?
Fred Lampropoulos
Yes, Mike, you know, we would never comment on that. I will say that as an ongoing everyday issue, there are things that come across our desk and into our business development people every day we look at them, we look initially. So it's ongoing. Some have particular interests that fit. I would say 80% of them are just Thank you very much.
We just this is not where we sell. This is not where we operate. So there are a lot of things that come into place for those things. So there's no burning holes. It has to fit the strategy. The financial profile has to be prudent on a prudent allocation and be disciplined like we've done in the past. And again, I will defend and everything we did during foundations of growth, I think was well thought out and well executed. And I think, yes, even the integration parts of that were done well. So it's just still the way that we do things, we just thought it would be good to be ready. We didn't know what was going to happen with inflation. So we think that we did the right thing and that we continue to do our day-to-day work. And when something fits, we'll have, we'll move. But remember, we're competing in most cases with other people. We don't have control of that yet.
Raul Parra
And I think also just to highlight a couple of things, right, I think a little bit of the fact that we got to was, hey, look, interest rates are going to be dropping and we were actually believers that those wouldn't it happened as fast as people we're thinking in and come to find out. And it's looking that way for now, we're not going to run a victory lap yet, but it looks like things are going to be slower than people anticipated. So I think that's that's that's really it I mean, at the end of the day, I think you know, we did the right thing. We were able to leverage up and get low cost of capital. You know, essentially leverage up. Hang some cash on the balance sheet were earning a higher interest rate than we're paying on and it's EPS accretive.
Fred Lampropoulos
But, you know, Mike, I was listening to the radio this morning that the initial, I think our projections for people to achieve seven rate decreases this year. We have hired one this morning now as one or two, yes, some inflation on I mean, I'm not an economist, but inflation almost always has two or three legs to it. So all that being said, that was a judgment at the time based on our feelings about things. And if it all works out, we regret that I will call a little bit of a headwind, but because it wasn't someone could have questioned it but yes, first of all, thank you for your candor on and I'll accept your apology substitutes.
Michael Petusky
And I think I want to roll it because I mean, technically won the bet about them, not you guys not quite getting to 300 million, but I think he won the spirit of the best for you.
Fred Lampropoulos
We're using apologizing to yourselves. We're happy to that up to 100 million size.
Michael Petusky
So I just want to clarify one issue and maybe everybody else gets this, but I want to make sure I get it. Have you guys now seen all the sort of primary endpoint data that you needed to see in terms of Rhapsody?
Fred Lampropoulos
And in terms of moving forward, are you still waiting for some of that data, all of the patient data is in it is being on organized properly for presentation. So and that's as much as I can say about it. But all of the data from all of the or the patient is in. And so that's good. That's good news for us. And now it's the process of going through organizing it on looking at all the various issues to make sure the protocol was for all of those things you have to do now because once it goes in to the FDA, you got to have it right. It's got to be locked in and it's got to be locked. And I think that's the process we're into right now.
Raul Parra
I think I hope at the end of the day. We remain on track my keynote for everything that we've disclosed so far last one and I'll get off any I didn't catch it if you made any comment or Russia in the fourth quarter, did you did I think it may Q3 call you had suggested maybe we'll get a little incremental revenue there, but I know that's the Okay.
Know I think Russia, based on everything that's going on just came in in line with no, which kind of our updated, I guess, expectations we were able to get on the licenses required to do business in Russia. You know, I think within the second hurdle, not only just getting the licenses, you also have to make sure that you're able to get paid so we have a good banking partner that allowed us to make sure that we were able to receive money in the proper way to USD USD. And so I think you know, everything worked out, I'd say is the best it could under the circumstances that that are happening there, Mike, but I think we were we were happy with how it how it all turned out.
Michael Petusky
Thanks, guys, a great year.
Raul Parra
Thanks.
Fred Lampropoulos
Thank you, Mike.
Operator
Jim Sidoti, Sidoti & Co.
Jim Sidoti
Hi, good afternoon. Thanks for taking the question. And now that you're close to the finish line with Rhapsody and you finished at least enrollment with the wave trial, how should we think of R&D for 2024 and 2025? Are there other projects that you feel fill and you see that number start to come down or now listen on R&D, it's been a hallmark of Merit's history to continue to invest in projects and opportunities that we see within the budgets that we have allocated. So I'm going to say it's business as usual. Some products are more complicated. Some are product line extension center improvements. So there's a lot of those sorts of things out there.
Fred Lampropoulos
Jim but we're still committed to R&D, and it's always been a hallmark of our success.
Raul Parra
Yes, I think, Jim, just to add, you know, I mean, similar to what we did with foundations for growth. I mean we we were able to strategically reinvest, you know, some of the efficiencies that we found back into the business. And look, I think we want to do more of the same. As Fred mentioned, there's going to be more therapeutic products. And so we want to make sure that we are able to fund those and to continue to deliver the growth that you guys are all used to and we've been able to deliver. So I think we're trying to find a balanced approach to that reinvestment and higher costs really when it comes to therapeutic products. But I think we've done a great job of managing through that and we'll continue to do so under CGI. So it sounds like you think it will remain around that six ish percent of revenue?
I think it's fair, yes.
Fred Lampropoulos
But and then in terms of the AngioDynamics acquisition, I think you had one product line moved over last quarter and another one was still yet to be moved over or has that been completed at this point?
Yes, everything is in place in our Mexico facility to produce our products there. So it's all been moved from Angio and all in place. And I think going back to giving credit, it's one of the things that the grade three D arm to Yahoo. Did are Becton, Dickinson and transfer. And you know the story there was done with absolute precision and I think we've seen the same things in this integration, we actually very candidly, do it pretty well, Jim, for sorry, both on.
Jim Sidoti
There wasn't too much else to pick on tumor. I think that's it for me. Thanks. Jeff.
Operator
Mike Matson, with Needham & Co.
Mike Matson
Thanks for putting me in I guess just with regard to the CGI. program, I apologize if I missed it, but I think you said some operating margin targets, but is there anything in there about gross margins and maybe that was deliberate on your part, but I just wanted to get your thoughts on kind of how the margin expansion should kind of break out between gross and operating leverage?
Fred Lampropoulos
Yeah. So similar to what we did with FFG. of, you know, Mike, we really only focused on a revenue kegger of at least 5% operating margins of 20% to 22% and then the minimum free cash flow 400. But we didn't actually give guidance for gross margin in FSG. We did give some modeling considerations. And then I think people tried to turn that into into guidance. So I know I think this time around, I think we've hopefully built up enough credibility that we're going to get it from wherever we get it.
Raul Parra
Right. I mean, I think, you know, gross margin, like I said earlier, the low end of our operating margin, it really comes from from gross margin. The high end at 22% would really come from not only delivering on the gross margin, but also on operating expense leverage. But at the end of the day, I think we've shown that we can we can get it from either operating expense leverage and or gross margin, and we'll adjust as necessary what we don't want to do similar to what we did with FFG. is get ahead of ourselves and think that we're going to be covered with just gross margin expansion to get those levels hit those levers. And so we'll leverage operating expenses if we need to. But our preference is to is to really reinvest those dollars into into the business and get it from gross margin. So that's really our focus.
Fred Lampropoulos
While three years ago we said we were going to fine tune every aspect of our income statement and our balance sheet. And I think that's we've done. Yes. As I said, it's not one or the other. It's all of them.
Yes.
Raul Parra
But just to give you a little bit of color, I mean, it's more of the same, Mike, we're going to have network consolidation. We've got lean manufacturing initiatives. We've got a better human resources efficiency, sharper on materials, logistics and everything else that we can throw at gross margin because that's what it takes.
Mike Matson
Okay. All right. And then just my only other question really just be around kind of the guidance for 24 as well as the CGI. The longer-term guidance is for particularly for revenue growth. I mean, if I look at what you've done over the past few years is kind of in more high single digits organically. And this guidance is kind of more mid mid single digits. And so I mean, I understand you're probably trying to be somewhat conservative, but is there and I saw the call out about the SKU rationalization, but I mean, is there anything else that you would you would point to in terms of things that have maybe changed or something that would prevent you from being able to grow high single digits potentially. I mean, I'm not asking you to guide there, but just wondering if there's you know, there's other headwinds, I guess that you're baking in or something there?
Raul Parra
Well, look, I think, look, I think when we threw out your foundations for growth, I mean, I think none of us anticipated all the headwinds we would have seen right ahead. I think I think everything in the kitchen sink was thrown in there from what everybody saw and everybody had to experience. But look, we feel really confident in that low end, you know, a kegger of 5%. I think we have we think it's realistic and achievable, and it allows us to say no to certain things, quite frankly. And so I think we feel comfortable with the numbers at 5% to 7%. And I will just leave it at that you know, I think we always aspire to do better, but five minimum of five is what we're committing to.
Mike Matson
Okay. I understand. Thank you.
Operator
Jason Bednar, Piper Sandler.
Jason Bednar
Hey, guys. Thanks for taking the follow-up. I'm just one quick one, and you've obviously trained us all Well, since I don't think anybody's asked on China here, so I'll do it for the Group.
On the guidance here for 2024, you're saying China revenue down due to VVP. I just more of a fact checker clarification. Is this simply an extension of the VVP. that we've all talked about from 2020 through the second half of 23? Or is it something new that is now developing them hitting here in 2024?
Raul Parra
Yes. So I mean, we're not going to give additional color, but I think you're on the right track there, Jason, again, we're not going to provide country specific growth rates. I think we called out the 4% decline in the A-Pac region, of which most of it is related to actually all of it is related to China, but I will say that we continue to expect of volume to grow on a year-over-year basis. But obviously, we are seeing a decline due to the continued headwinds related to volume-based purchasing. And it's just something that we've been managing through over the last several years and it's a it's baked into our are 5% to 7%.
Jason Bednar
Okay, perfect. Thank you.
Operator
I'm showing no further questions at this time. I would now like to turn it back to Fred Lampropoulos for closing remarks.
Fred Lampropoulos
Well, again, everybody, thank you for joining us. Today was a long call, have a lot to cover. We appreciate the questions and the opportunity to present to you.
Just in closing, a reminder that we put our shoulders to the wheel, we work hard. We had every single employee in this company aligned with the company objective department objectives and individual objectives. So we are all aligned as a company, and we expect to be able to deliver exactly what we said and over our next three year program, which we didn't have to do. We felt that actually helped us, we believe, being on the line and being accountable is the right thing to do and we'll look forward to reporting to you in the future. So best wishes from Salt Lake City.
Just a quick reminder. The SIR meeting starts in late March is being held in Salt Lake City this year. It's marriage figures show. We hope you had a chance to go out here and take a look at Salt Lake, the SIR meeting and and even maybe an opportunity to come to merit. So best wishes and good night from Salt Lake City.
Operator
That does conclude our conference call for today. Thank you for your participation.
