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

All right. Hi, everyone. Thanks for joining. I'm Lily Lozada. I'm on the med tech team here at JPMorgan, and I'm happy to have the Merit management team with us here today. I'll pass things over to CEO, Fred Lampropoulos, and then we can jump into some Q&A.

Okay. Thank you very much. Welcome, everybody, and thank you for being here. Let me introduce Raul Parra, my CFO. I also have my boss in the room, which is a member of my Board, which I was not expecting. So please behave yourselves. All right. Let's get going. In our presentation, we're going to talk a little bit about some history, so you have to understand a little bit more about the business. We'll talk about some various products and we'll leave plenty of time to answer questions for you. This is all the fun stuff that you like to hear. Okay. So what about Merit? Merit is a business that basically this year is going to do, as you can see on the screen, just -- I'll round -- I like to round when it's in my favorite, $1.4 billion, $1.356 billion to be exact. You're all familiar, I think, or some of you are familiar with our continued growth initiatives. And I'll hit that by simply saying that 3 or 4 years ago, we started a program that had to do with growth and operating margins and free cash flow. It was so successful that we decided we would go ahead and hang ourselves out there again and step up to the plate, and I think we have. I think it's really good to keep the entire company focused, and we have -- all of our incentives and compensations for every single employee in our company are focused on the goals that we set forth, and we all win what we all lose. And so we've been winning, which is really nice and creates a wonderful environment for employees who know they're in the game and there's a reward for them. We have about 7,000 employees. We have 8 R&D sites, but we have 3 primary sites and a couple of satellite type offices where we have just 2 or 3 people on an acquisition that we made, and they have some really good people and really smart, but they didn't want to come to the beautiful mountains of Utah. And so they stayed in New Jersey. And you can ask me questions about that later on. I'm sure that will be the highlight of our discussion. In terms of products, I think one of the things that has been very helpful for Merit is, we have stayed the course. We have -- we've had a plan from the beginning. We have a lot of products, a broad product line. And those products produce profits and margins that help us to be able to invest in products and pay for them. And that would go for things like the Rhapsody and other products that will be coming in the future on that platform. We have almost 2 million square feet of manufacturing, and we manufacture worldwide, which has both challenges and opportunities. In Europe, we're in Ireland. We're also in France and in the Netherlands, where we have our European headquarters. But we have a facility in Singapore, of course, mother Merit is in Salt Lake City, Houston. We have facilities in Richmond, where we do distribution and so on and so forth. The point is that we have a broad business, a scaled business. And I think that was part of our goal is if you were going to play with the big boys and girls, you needed to make sure that you had a certain amount of critical mass. So as I like to say, and you've all heard this at one time another, Merit is the best -- if we were a baseball player, we'd be in the hall of fame of having the most singles of anybody in the history of baseball. And we've had a lot of singles, and that's helped to build the business, but all with both tactical and strategic reasoning behind them in terms of fitting together a product line and focusing. You can see from the groups -- on this slide, we have our CI group, a lot of emphasis in the last several years on peripheral intervention, and that's because of the fragmentation of the marketplace. In the one, there's 3 or 4 guys on the menu. You all know who they are. But once you get down to the more of the peripheral area, there's a lot of smaller areas. And remember, it's everything but the heart. So we're talking about from your toe to your head. There's a lot of space in between, and we focus on those areas that others might ignore. The custom and procedure pack kits may look boring to you. We have, I think, thinned that out in terms of doing the custom kits, but on specific areas like doing products for drainage or various types of intervention, including pericardiocentesis or thoracentesis or pneumothorax and things like that, we have specific trays instead of building 100, we might build 10,000 of them. And so we get the efficiencies of that operation in our business. And then the endoscopy business. And that's a business that struggled a bit because of some supply chain, but all of those have been solved and the business is growing, and we have a nice pipeline of products. And we've made 3 major acquisitions. We call them major. You guys call them bolt-ons, you call them, whatever. But if you take a look at the Angio deal that we did where we bought their chronic catheters and their acute catheters that fit into a strategy in our renal therapy group, and I'll talk about that a little bit later on. And then we also bought EGS, which fit perfectly into our Endoscopy business because it was a single product company, but one that fit and one that we could train and one that gave both sides products to sell. So we have a much bigger bag in that particular area and a number of products that have been developed internally. We're a bunch of peddlers. We like to sell directly to hospitals, but we have an OEM business. We have some distribution. We have modified direct. So what does that mean? Well, in places like Japan, you almost always use some form of distribution, but you're making both the clinical and you're making the hospital calls and it's the relationship. The rest of it is almost, like I said, a distribution type model. OEM is an interesting business and one in which we've been engaged in for a very, very long time. We produce products that we use in our own development every day, stopcocks, connectors, catheter shafts, guidewires, all of these things, but it's a capacity issue, does absorption. But we never sell something that's essentially going to compete directly with our direct sales force. So we're very cautious. And I think we've navigated this very well over the years. It's a great business. And you can name all the companies. You know them all and every one of them uses a Merit product someplace. It's always fun to go to a trade show, walk down the aisle, and you'll see that there's a Merit product here, there's a Merit product. Some of you wouldn't notice that, but I can tell you Hawkeye here, sees everything, how it's used, how they're using it. It could be a torque device. It could be a stopcock, it could be this. It could be a scalpel. It could be a number of different things, but it uses up our capacity because most of these products are also automated. That tells you about the global reach. It's pretty extensive. There are areas, of course, as I mentioned, in Europe, but also in Central America. In the Middle East, we do a lot of work, but we do a lot of manufacturing in the various locations that I discussed before. Direct markets, if I had my way, we'd all be direct, but there's a certain scale that's required in certain rules of the game. But basically, the business has been built on a direct relationship with a physician, a cath lab technician or that sort of thing aside from the OEM business and others and the distribution. But we are and we enjoy, I think, the opportunities of having that face-to-face dialogue. At the end of the day, and I say this because I remember many years ago, someone said, well, you will fire all your sales guys because there's not going to be any need for that. That's heresy. Someone said to me one time that truth always begins as heresy. In this particular case, it was just not correct. It's still -- we like to buy from people that we like. We like to buy things for people who back us up. We like to buy things from people that will assist us in almost any aspect of our business and realize that that's a critical part of business. But we've built that over many, many years. Successful M&A. Again, people from time to time will ask, well, why are you doing and why you're doing that? It all has both tactical effect and a long-term part of our strategic plan. I think they've worked out generally very well. Not everything works, but I would say generally, most have, particularly the last 3 that we've done seem to be working out just fine. They're either all transferred into our Mexico facility or they're being built in Salt Lake City. And in one case, another one is being built and transferred to Ireland. So we're taking them in many -- some cases, from contract manufacturers, but Merit builds things. Merit is vertically integrated. Merit does a lot of things, and I think we're doing pretty well. You can all read. I have a little struggle with things from time to time, but I think we'll just go past that line. We have a great business. We have a unique business. We have a business that is built on reliability. One of the things that's really helped us with both our direct customers and our OEM and other parts of our business is people rely on us. They know that we have quality. They know that we'll deliver on time. They know that we're well financed. That's a big deal. Supply chain management, aside from all of the horror stories that you've heard over the last several years is an ongoing never-ending issue. And I think that's something that's important to our customers. It's important to us, and it speaks, I think, volumes to the success that we've seen. I've got one of the great CFOs in the game. This guy, look how nice he is. Look how pleasant he is. But boy, I got to just tell you, when those teeth come out, there's a movie right now. I think it's called Wolfman or something like that. And this guy over here and this guy right here, I have people who have been a tremendous help to me into this business over many, many years. And when you start a business with one person and you have over 7,000, that takes a lot of work and a lot of people and a lot of input. I will say that my expertise is in selling and in marketing and identifying things because everything you look at essentially has been my work. But then on the other side of it, both in operations and finance. And the one thing that I really appreciate about Raul is his ability to figure out how to deliver the message. Think about this or have you considered that? Let me show you this. And the same with Travis. And I also have one of the great transfer guys in the room. He sits in the back. We never mentioned his name because you all want to hire him. But let me just show you the execution of getting a product and moving it from one point to another, not missing a beat and maintaining and keeping those revenues is really important, as you can all imagine. And I think we've done a great -- his name is Greg Fredde, if you -- we have security guys here that will arrest you if you try to talk to him. So please be wise about that. Rhapsody. Why Rhapsody? Well, we had, I think, for years and years, built a business that was -- I don't like the word commodity, but I will say that they were reasonable tech. We have some really high-tech stuff and technology, a portfolio of patents, hundreds and hundreds. But it was time for us to start to move on to something, and we identified a couple of areas that we felt really needed significant investment and time. But -- and we had the resources, we had the sales force, we had manufacturing integration. And the Rhapsody, I'm pleased to say, is something that was totally developed in Salt Lake City. We did it there. We build it there, including our own PTFE, the stents. We build the shafts and things of our facility, catheter facility in Houston. But it's something that I'm very, very proud of that we were able to bring from start to finish during a pandemic, try to go out and do a study in the middle of the pandemic and get 400-plus patients enrolled globally. It's really trying. And yet as we submitted modularly our plan, our IDE, I think we did it with great effectiveness. And we were able to hit all of the time frames. And on December 23, without any delays, any 483s after the BMOs, after audits of all of the -- not all of them, but a number of our facilities, our vendors and everything else, we were cleared by the FDA for the U.S., which is the major market. So let me hit that by saying that on the 28th of this month, we will have essentially an Analyst Day, Investor Day in which we will discuss our view of the opportunity, the challenges, the platforms, a whole bunch of issues that you want to know reimbursement, pricing, all of those will be issues that we'll talk about on that call. We've been asked a few questions today is why so late or why the 28th? Well, that's because we're really busy. We just got approval 3.5 weeks ago. And we just want to make sure that we have everything buttoned down. So on the 28th, we're looking forward to that call that you can all participate. But maybe more importantly, we have something that nobody else has. We have data that supports not a small improvement, but a dramatic improvement in performance over anybody else. You can look at the data, you can come to your own assessment. We have the first in human, then we have the 6 months. We've released that data and the full year data will be available soon. And I have not seen that data yet. I have a little birds of whisper, but shoe fly. And when we get that and we nail all that down, then we'll talk about that. Will it be on the 28th? Somebody asked me that question. If it's ready, we'll release it. If it's not, we won't. We have a bunch of symposia coming up. We have a number of meetings like the meetings in Great Britain. There's the Link meeting and others. But at the appropriate time and when we have it, we will show that information. This is a little schedule that I just really addressed. I'm proud of the team. I'm proud of the professionals that Merit hired, put into place, our Chief Medical Affairs Officer, people who have done this before, did a really good job. And we've been also training our sales force. I'm going to talk a little bit about RTG because I think it's important in this scheme. RTG was an idea, as I mentioned, Merit has many, many products. But focus on almost anything you do requires time and effort. And so we started looking at the portfolio and came up with a concept of saying we want to be at the same point of sale, and we have a number of products, and we filled in a few more there along came Angio, and it didn't come along, we sought it out. It wasn't from a banker. We said this will fit. This is something that we can go and put together and have this force. But we wanted to be able to pay for the commercial side of this with a portfolio where people could take 10 products that they could focus on. So peritoneal, acute, chronic, surfacer, hero, Rhapsody and then all the access products. And this is something that isn't talked about much, but as part of our overall growth aspect. please be reminded that Merit are the access guys, we're going to get you in there, whether it be a needle, a guidewire, a sheath, closure, all of those other pieces that you need to do Merit already has. And so we have a sales force that's engaged, educated, and we are now off in the U.S., which is, as I mentioned, the big plum and the big opportunity for the company. Raul, go get them.

As Fred mentioned earlier in the presentation, we kicked off our 3-year plan, CGI after we launched Foundations for Growth, which was a really successful plan. And you can see the performance under that plan there at the bottom of the page. But just to highlight, under continued growth initiatives, it's really more of the same, continue to deliver and apply everything that we learned under Foundations for Growth to the next 3 years. I think we've had a successful first year. Now we'll talk about that in about a month or so when we do our earnings call. We released revenue last night. So we're well within the range that we outlined under CGI. We are right at the midpoint on a constant currency basis of the 5% to 7% that we've promised to deliver over the 3-year period. Operating margins, we're going to shoot for 20% to 22% and a minimum of $400 million in free cash flow. Again, I think once we get our earnings call, you'll get a better appreciation of how we performed in the first year, which I think sets us up well for the next 2 years and pretty excited about what we can do there.

Yes. All these things have been helpful. One other thing, too, and it's not because one of my directors is in the room. But I think, as I mentioned earlier on, the people that help you, a team of people who are focused on issues and experienced, I think our Board is an extraordinary Board of finance, of people with experience in health care in large hospital groups and so on and so forth. So the Board I think, has been very helpful. And it was actually a recommendation from a shareholder, you ought to look at this and you ought to see what you can do to strengthen this. And I think that it's functional. Everybody speaks their mind, and they're tough. Lonny Carpenter, who was CFO or COO over at Stryker for many years and David Floyd, these are people that have a lot of experience, Mike McDonnell, Laura Kaiser. There are other people who have a lot of medical experience and others who have other practical experience in other areas. So I want to really say that all of these things, you can have ideas, but bringing them across the finish line, executing at the end of the day is the game. And you can have all the great ideas and many of them have dust on them that are sitting on the shelf some place with no money or without a strategy and so on and so forth. And I think that's something that Merit has done extraordinarily well.

I think we can skip this one and the next one for Fred. But here, I think I'll just highlight the results, at least on the revenue side for this year. Obviously, unaudited estimate, but beat our own expectations and Street expectations on what we thought we could do for the fourth quarter and ultimately for the year. And again, I think it's a really strong start to our CGI program in year 1.

So one of the signals that I do when I don't want to say anything more is give them some water. So there's your -- No, actually, that can get ready for questions. Listen, I think that pretty well wraps up. All of these investment highlights you're all aware of or you wouldn't be sitting here. This is an important conference. We all understand that. And there you go. So with that being said, we've got about 18 or 20 minutes of questions. And I'll be delighted either from our analysts or our host or any of you to answer those questions.

You preannounced fourth quarter, as you mentioned. So maybe we could start there. Can you talk us through in some more detail some of the trends that you saw in the quarter and how things looked by segment across both cardiovascular and endoscopy?

Yes. Look, I think the overall results, I think, were really good, right? I think everything that we expected or wanted happened. One of the key questions people had was around OEM and whether we'd get the growth that was expected. We were looking at somewhere around north of 20% growth for that fourth quarter. And happy to say that it rebounded just as we expected. China did a little bit better than anticipated. U.S. was strong. EMEA was strong. Really, I would say, across the board, we did really well, and we're excited about how the business performed. It was a strong finish to the end of the year.

Realizing it's still early, but as you look ahead to 2025, any high-level thoughts that you can share on how you're thinking about growth for this year? And qualitatively, any headwinds or tailwinds that we should be keeping in mind as we model the year?

Yes. We, of course, we'll talk about that on our call and talk about how we see '25 in our forecast and all this sort of thing on the 25th of February. So I think one of the other things we've done is I would love to spend hours telling you about all the wonderful things that we're doing. But I have a little thing that they hit and it gives me a little joke.

Just like he hands me water. I have a buzzer.

I get a buzzer. I give him the water. So works out just great. On the 25th, we'll talk about that.

Understandable. Maybe moving on to some of the specific products and segments. You ended the year on a high note with FDA approval of Rhapsody. So could you share some comments on the early feedback and receptivity that you've gotten from the field since approval and the readout of data last year?

Yes. Let me just -- in terms of the sales force, I think what we tried to do and we were successful in doing is that we started training early on but without building expense that we couldn't pay for. I think that's one of the things that was important to us was not to see your expenses really go off the chart. Someone criticized, well, that's an optimistic thing you're doing when you do this, Fred, so don't do that. So I'm going to put my hands like this, like this young man here. I think that the sales force is trained. They have experience. They have a portfolio of products. Everybody is enthused. I think the data is important. I think the 1-year data is also equally, if not more important to show the long-term patency issues. So I think we've done this at the advice and counsel of people who have done it before. And I don't know what else we can do. Now we'll look at things like reimbursement. We'll look at expanding further as the business allows us to. So we're not going to go out and spend a whole bunch of money and have to pull it back. We'll just pace this along, and it will be consistent with the goals that we've set forth.

Yes. I mean I would say the reception has been, I would say, positive, right? So we got purchase orders. We had our first sales. We've had our first cases, all that have come out great. And so I think we're excited about this product launch. It's a big product launch for Merit. Fred mentioned that we hit a lot of singles and doubles. I think for us, as we look at this, this is bigger than that, right? This is a kind of home run type product is what we hope it to be. So...

I know you're saving a lot of the commentary for your event later this month. But could you share some early thoughts on how we should be thinking about the revenue opportunity and ramp this year? And how meaningful of a contributor do you think it could be in 2025?

Yes. No, I mean, we can't, right? I mean I'd love to. But again, we've been very metered in how we talk about Rhapsody and setting expectations. I think we would be doing it in justice if I just were to answer that here. And so I think we'll set the stage on the 28th. We'll give you our guidance on the 25th of February, as Fred mentioned, and I think that will kind of level set everybody's expectations on where we're going to be at.