Merit Medical Systems, Inc. (MMSI) Earnings Call Transcript & Summary

Thank you for joining us today. My name is Harry Pearson. I'm a member of J.P. Morgan's Healthcare Investment Banking team. I'm pleased to be with Fred Lampropoulos and Raul Parra, Merit's CEO and Chairman and CFO. They're going to give a short presentation followed by Q&A.

Good afternoon, everybody, and thank you for having us. We're delighted to be here. This is going to be the shortest presentation of the day because kickoff is in five minutes. So I'm going to whip through this pretty quickly and answer whatever questions that you might have briefly. Well, there we are. That's 30 years ago when we were younger. Let's just talk about our business. Merit is a diverse global company with really literally thousands of SKUs that cover the endoscopy business, but primarily interventional cardiology and peripheral medicine. We also have an OEM division, which is about $150 million. We reported this morning our fourth quarter, which I think beat the street estimates by approximately $10 million. You can do the math and take the third quarter, and you can look at where the numbers are. The first thing I'd like to say is that we have, I think, just finished our Foundation for Growth program which was a 3-year program for corporate improvement and profitability. I think we did an extraordinary job. We hit all the goals essentially that we set out to do, which were revenues, operating profit and free cash flow. And we were able to do that despite the challenges that we all saw, of course, with supply, what we saw with COVID, all the things that went on, we were able to hit the bottom end. We did guide initially to the bottom end of our guidance and so that it would have to be priced for perfection. And I think it's fair to say that there was no perfection over the last 3 years, except I think Merit did an extraordinary job of building the business. I'll let you prose these categories, and I'll move on. Merit is located in Salt Lake City. We have global manufacturing in Ireland, Singapore, France, the Netherlands, Mexico and Merit operates their business through a direct sales force. So we have some 500 or 600 people in various aspects of our business throughout the world in which we sell products. We do use some distribution, mostly in Eastern Europe, and we have modified direct models throughout places, particularly in Asia. But the important thing is, is we're very, very close to our customers. I started the company, and I think it's worth saying in 1987, I always like to say that our initial public offering was about $2.4 million. That's what we started with. And I think that is an extraordinary accomplishment to get where the business is today. And I think we've also had 8 or 9 splits along the way. So I think we have done extraordinary work over the years of building out products, almost somewhere around 800 patents. So it's been a lot of fun. I won't forget to say this. We've recently announced a succession plan. I have two years remaining on a contract with Merit. The first contract I've ever had. We've been meeting with investors all day long. We have made some statements recently about the process that we're involved in and what we're going through and how we're going to do it with brief, but we have advisers. We have people on our board with experience in terms of these things in large companies, particularly Lonny Carpenter, who was with Stryker. And we have, I think, an extraordinary Board now. I know probably everybody says that these guys are tough. These women are tough. This is a good functional Board and one that I'm very proud of in all their work. We have a number of products. I think innovation has always been Merit's key point, our ability to come up with at least 10 new products every year internally and then finding the right type of bolt-on acquisitions, and I'll talk a little bit in a minute about one of those acquisitions, which was our most recent to give you a little color on that. On our OEM business, which is about $150 million, that particular business includes almost all the companies that are here at this conference today. So all the device companies, you know who they are, they're all here. They're all of our customers. And what we do there is sell capacity because these are things that we've been building for years. As I mentioned, we're in Salt Lake we're well automated. We're doing our own molding. We're doing our own branding. And I think that was particularly helpful during the last three or four years when there were all the supply chain issues, and we had the opportunity to really take advantage and to build upon our reliability with our customers in building our business. And as many of you know who have looked our OEM business, I think in the last quarter is around 13%, but it ran as high as 18% last year. I think it proves what we're saying about reliability. People needed to know they could get products, and that's something that we do very, very well. We have done a lot of acquisitions. I'm happy to say that in the back of the room, I have two members of my staff, my Chief Commercial Officer and my Head of Business Development. We've been able to move, and as an example, the Bard transaction, Becton Dickinson transaction sold their soft tissue biopsy. It was in three countries, in six different sites. We had to relocate it to our facility in Mexico. We did so on time and on budget and extraordinary effort without missing -- and again I'm sure this is correct as I can say, without missing a single order to a customer. There may have been one for a day or this or that, but it was done to almost perfection. Again, in terms of the things that we look for, they are consistent with our sales force, with our products, our technology, but we're not on the expeditions. We're not looking for some way just to create revenues. As you all know, Merit last year has been, I think we guided for 9.3% to 9.6% or something like that. Raul, you want to just speak to that quickly?

Yes, we guided to 8% to 9% reported growth. You'll see the results here in a minute, but just to highlight, we hit 9.3% to 9.6%.

This talks a little bit about the various acquisitions. But I could go on to Cianna, which is in our women's health. I'll talk in a moment about the AngioDynamics. In fact, I think it's probably a good time to talk about it right now. With the AngioDynamics deal, it was a deal in which we had identified an area in a product area that fit into our strategy that has to do with Rhapsody. I'll come back to Rhapsody. What it's including was our peritoneal dialysis, acute dialysis, chronic dialysis, the Surfacer, the HeRO, these are all products that are treating end-stage renal disease. And then we have a new product, which we have been selling in Europe for the last couple of years. We launched it right in the middle of COVID, in which we have fully enrolled our study in about 30 days or less, we will have the data in. We will review it, organize it properly. We've already submitted to the FDA on a modular basis. This is a big deal. It was all developed, conceived and built includes PTFE. And again, back with our OEM strategy, we build all the component tree. We build our own stents. We build our own catheters. And again, something that I'm very, very proud of in our business. It's operating and has been transferred by Mr. [ Freddy ] and is currently residing in our facility in Mexico and meeting or exceeding our expectations. I'm not going to spend a whole lot of time here. Recent performance role, I'm going to let you do this.

As I highlighted earlier, through Q3 year-to-date, we grew at 9.6% on an organic constant currency basis. I think we were probably one of the few companies that had gross margin expansion at almost 190 basis points. As Fred mentioned earlier, the last year of our Foundations for Growth program, which called for 5% to 7% CAGR on revenue, 18% to 21% operating margins and a minimum of $300 million in free cash flow. So a really nice strong finish to that program. Operating margin expanding at almost 140 basis points. And then also having that flow to earnings with net income or earnings per share growing at almost 15%. A guide, I talked a little bit about this, just real brief, 8% to 9% growth is what we had projected. This morning, we pre-released our earnings and we ended up doing 9.4 is the range that we guided to. Constant currency revenue was 9.6% to 9.9%. So really strong finish to the year an outstanding growth, which is something that we're known for.

And Raul, let me just say that it was not our earnings. It was our revenues, and we will report the earnings as well as our new 3-year plan on March 28th. So we'll give the final audited numbers and then we'll report out to shareholders our new growth program for the next three years. So we have been, I think, successful. All of our employees are engaged. They're all incentivized every single employee by our program. And I think the thing we've learned that we actually already know in this room, everybody knows that if you align those incentives and people feel like they're part of the process, they're going to perform. And we know that to be a fact because that's exactly what we did, and we have every single employee from production all the way to our offices in which everybody is incentivized and knows how the company is performing. We do quarterly and sometimes there's monthly company meetings globally to let people know how we're doing. And we have found that, that communication, which we enjoy doing has really been helpful to let people be engaged in the business. Summary, listen, you already know about our top line growth. We have a very good track record. We made a few mistakes over the years, a few. But as long as it goes to few many dimension. That's not always true with shareholders. We had a couple of things. We stubbed our toe in 2019. We recovered everything within two quarters, and we haven't missed anything since. And then we put our Foundations for Growth. Incidentally, before we announced that the year before, we already had our own growth program that Raul and I developed. And I have to give Raul a lot of credit. He's the CFO that everybody wants to have. He drives me nuts. He drives me crazy, gives me data. He says, "What do you think about this? What do you think about that? Why aren't you doing this?" And I think we have that kind of relationship that we can bounce things off. He's not always right. He's not always wrong. And so I think we have that rub -- and what's the thing we've tried to yell each other at least three times a day?

Yes, three fights a day, we're not doing our job. So far, we've met that every day.

And we're being a little facetious, of course, but there's a lot of truth to what we're saying, too. Listen, the rest of it is just numbers and you guys know how to read all this stuff. Do you want to comment on any of this?

No, it's all the legal requirements. So you can read those on your own time.

Okay. So we've got a lot of time left. I said I'd get to the football game, but we can take a couple of questions, and we'll be on our way.