Merit Medical Systems, Inc. ($MMSI)

We're time here, so we'll go ahead and get started. Very pleased to welcome out [ Rule Par ], Chief Financial Officer of Merit Medical. I have a bunch of questions, happy to open it up to the audience if there are questions as well.

So I was hoping to sort of start a little bit higher level and then go into some of the details. I mean you've thought in a lot of different settings about this. Founder-led to [ outer ] Inspire, you just did this resegmentation, difference in reporting structure, change in the way you're running the business? Like it seems like a lot of stuff. Everything at once. How are you keeping it all straight, like where are you in this transition? And how should we just think about the operating dynamics going forward?

I think that's a great question, right? And internally, from our perspective, it doesn't feel like a lot, right? And so obviously, ever since kind of foundations for growth, which was our previous LRP, we were preparing for a CEO transition, right? It was very clear that was [ Fred ] was [ hiring ]. We were setting up some foundational stuff under foundation growth. And obviously, that accelerated and continued growth initiatives as we knew kind of -- the reporting changes, quite frankly, I've been wanting to do for a while. It's just -- what you guys don't see is that the business internally talks how we currently -- the new reporting style, right? And so there was this reconciliation process that kind of went in between the finance guys and the rest of the business as we reported out. And so when [ Martha ] came on, like their first question she asked me, she's like, hey, Raul, like help me make sense of this, right? Like we've got the internal reporting that says this, we've got our 10-K that says this, and we're telling investors this, like, how do I reconcile it? And I basically looked at her and said, like don't, right? Like we've got a few options for you. We've been waiting for the CEO transition. Give us a week or 2, we'll present them to you and then you kind of pick what feels kind of natural to you. And that's what she did, [ Ashish ] went with the foundational therapeutic, which I thought was a great call. And it just makes it significantly easier for us as we kind of run the business, one of the things that you guys haven't seen is internally, we -- under foundations for growth, we have set up these platforms. And so now we can hold the platforms more accountable. We're all kind of talking the same numbers and language and just [ tie ]

And one of [ the ] themes that we've seen across the whole industry has been -- there's a lot of changes in reporting structure. We've all seen a lot of changes in the way companies are running with -- you [ hear ] about verticalizing businesses, getting closer to the customer? Can you do that on this platform strategy is there's a lot of products within each of these segments like does the structure allow you to have same customer centricity as our competitor?

Yes. And again, it's not new, right? We've been running it essentially, I'll call it, kind of baby stepping through it, right, since foundations for growth. So 5 years. It's not something we turned on last month when the reporting change. It's been -- we've been gradually giving them more responsibility. And we're a vertically integrated [ already ] -- we're very close to the customer already. All these things just come naturally to us. It's really just the alignment of how the business [ front ]. And I think Martha has given more responsibility to those platforms now, just given that you do the business. And obviously, I don't know what Fred could do given the build place by brick, it's different than what Martha can do expected so there's more responsibility to those platforms. I think the big change kind of this year is that our margin and R&D head are very kind of tied at the hip. And each of the platforms has a marketing and an R&D person that's tied to it. So we're really focused on making sure that we deliver products to our sales force that they can sell in the spaces that they want to sell and the customers want. So I think there's greater alignment from that standpoint. It's actually going to get us closer [ to ]

And each of these platforms kind of operate as their own? Is it similar like you have a product like you have a product owner or what's sort of the autonomy of each of the platforms and they just roll up into these operating segments? Like how does it actually work on a day-to-day basis?

Yes. Well, they're not business unit, right? I mean we're not at scale to have business units. And so there is shared resources in certain cases. But yes, I mean, they basically they're in charge of their products within their platforms.

Okay. And I know you gave multiple years of disclosures on an annual basis when you provided this updated outlook. As you go into each of those, there were a few that kind of stood out as OEM in the past couple of years kind of flattish. Other businesses seeing bigger growth. As you look forward, which of those platforms do you expect to lead total company growth?

Yes. I mean -- I think that's the nice thing about the portfolio. I mean, we generally think that it can all deliver, right? So when you look at kind of the foundational side of things, the 3-year CAGR on that was [ 6 ] If you look at the therapeutic that was 11%. Kind of start to kind of dig down and you look at -- let's just talk about OEM. I think we're very confident that mid- to high single digits is kind of where that business will run on a year-over-year basis. The nature of OEM is that it will ebb and flow. It can be choppy business. I remember a couple of years ago, when they were growing at 15%, 20% everybody would ask me, hey, is this a new normal [ rebel ]? And I would say absolutely not pump the brakes, please put your model around 15% to mid- to high single digits. That's really what you should think about it. This business will slow down eventually. I was wrong for about 3 years in a row. And then finally, they kind of came back into that mid- to high single digits we kind of expect them to be. But if you look at the rest of the therapeutic platforms. I mean, we just did an acquisition for our Endoscopy segment, right? So I think they've got additional products to sell. We feel really optimistic about that. You look at our oncology platform, again, we just did an acquisition there with Viewpoint. Scott was doing great already. [ You ] tack on viewpoint, we're expecting growth out of there. Our cardiac platform has been doing really good. Those guys have some new products coming in the pipeline, we feel good about that. Obviously, OEM bouncing back will also help. You look at [ our ] vascular bag, again, doing very well. So I think -- and the foundational products are really just enablers for those therapeutic kind of -- so we feel overall pretty positive about the portfolio.

And how do you think about sort of framing growth? I think 1 of the things investors always struggle with stories like this is -- there are a lot of them everyone wants to think to like grab on it becomes rapid because it's like a PMA product, it seems to be identifiable, but it's like $7 million, like, okay, fine, whatever. Like how do you think about [ exit ] the business and like forcing it from, we're just a utilization exposed company so we have a more discrete growth driver?

Well, I think that's why we're excited about the reporting. I think over time, you guys will start to see what procedures we play in and what areas we're in. And so I think it will make it easier for you guys to generally have a better understanding of where that growth is going. Because I think in our historical reporting, quite frankly, it was very hard to kind of understand, [ where ] the hell are you guys play in there like and people really struggled, which is why kind of I think [ wraps ] was such a highlighted product, right, because it was easy for people to say, "Well, I know how many procedures are there. I know what the ASP is, and I can really kind of assign value to that. What we're trying to do with the new reporting is hopefully give you guys a little bit more color as to what [ hopefully ], that may value.

And as you maybe deconstruct the growth a little bit further, how should we think about just pure volume growth, poor price, innovation-driven mix? Like how do you kind of break apart [ GI ] and maybe just the business going forward?

Well, most of our growth continues to be from volume. Pricing has helped over the last few years, and I it will continue to help. But volume is the primary growth driver at Merit. And obviously, we're very consistent in launch of products, which also helps.

And as you kind of described the market day, when I look at the business, it seems like you're playing sort of in the periphery of a lot of attractive categories. You're sort of -- you're hanging around the hoop. You're not going to go head-to-head with super large well resource [ betters ] and sort of in -- on the playing field. Like how do you think about just the strategy and how you select what markets to play in and what products to go after?

Yes. I mean, I think it all starts with our foundational products, right? I mean, I think when you look at kind of the therapeutic procedures that are out there, there's not much you can do without an access, a delivery device and closure, right? And those are all kind of the foundational products of the business. And so when we look at it, we feel like we've we're in a really good spot where -- yes, we get to play with some of the big guys, but we're not actually kind of competing directly.

And then as you think about the portfolio, when I listen to kind of the narrative around viewpoint that Martha described, I think one of the things you talked about is you have mammograms and biopsies in the biopsy population, sort of have your super high-end products and then you sort of saw demand for, I don't want to call it down trading or...

Yes, we coldest, right.

Good and best guess, I know it's early, but maybe give us some sense of how that's playing out. And then maybe as a [ corollary ] are there other pieces of your portfolio where you're selling best, but good might be acceptable?

I mean, look, I think there is a little bit of cannibalization that we baked into our modeling. Just naturally. But there is -- when there is a high risk kind of outcome that the doctor is seen, they're going to use Scout. I mean they're not going [ to ] I think what we've seen is that maybe the cases that aren't as risky, there was hesitation from the dog or saying, "Well, man, this is pretty expensive to use on something that could or could not be an issue. And so that's the market that we get -- really get to fill with viewpoint. And it takes it essentially kind of triples kind of the TAM for us. It gets it to [ 1.1 billion ]. So I mean, I think when you look at that, then it starts to make sense. And I think our sales force is really excited about it. I think it's a little early to tell. There is a capital component, right? That takes time to kind of ramp that up and get through all the committees that you have to, which is kind of why you see the ramp from $2 million to $4 million this year, then $15 million at the midpoint next year. So as we work through that process, we'll start to get more. I think there'll be kind of more momentum that. But our sales force was really excited about it. It's something that they really wanted. And so we're happy we were able [ to ]

And what does the M&A pipeline look like?

Look, I think -- look, I think it's been pretty active the last couple of years there's just a lot of things out there. I mean, I think the nice thing about us is that we don't have to do anything if we don't want to. I think if you look at the acquisitions that we've done over the last few years, it gives you kind of a sense of what we're looking for, right? We want to get [ deeper ] in the areas that we're already playing in as opposed to getting wider. And so I think we've done a really good job of buying areas like our specific call points that our sales force is already there and getting them the products that they really want. So I think you'll probably see more of that. It is a very active market. There's also a lot of bad assets out there, so you got to be careful. So we're not in a situation where we feel like we have to do something.

So you wouldn't want investors interpreting you're at the last year your CGI, growth is slower. M&A needs to pick up to pad the next CGI?

No, I'm not -- we're not thinking about that. We're not doing acquisitions to hide any growth efficiency at all. I mean I think we've been very consistent in our acquisitions and acquisitions over the years, but it's definitely not something --

And maybe it's a good transition to talk a little bit about the LRP. I mean you're assuming even a variances to the guidance that you provided, you will achieve your 3-year plan, I think, probably putting you in a small list of companies, they're LRPs. So that would be a good thing. But as you round out the CGI period and kind of reflect and get ready to said another one. What are some of the things that are kind of on your minds as you exit this 3-year plan that are -- that might be different just from an operating environment perspective or competitive dynamic standpoint as you look forward?

It's a great question, and that's the type of questions that we're asking ourselves right now, right? So I think one of the nice things of how the slow transition happened is that I think the Board was very thoughtful on how it kind of all worked. So CGI runs, which is our current LRP for those -- [ about ] acronym for that growth in the it ends at the end of 2026. Obviously, the CEO transition happened in October. That gives Martha really kind of 1.5 years to kind of dig in and look at the business and one of the things that we are doing right now is asking those same questions. And saying, hey, what do we -- where do we have the right to win, what makes sense in the portfolio? Where do we want to go? We're spending the next year kind of just hyper-focused on the portfolio. What we think we can do. And once we understand that, I think we'll have to make a decision on what we do with whether we put another LRP out. I know generally, we do pretty good on them. I think people like them. I like them, but a decision hasn't been made one way or the other. And that's, by the way, very consistent LRPs. I'll take a minute here to plug that we also hit our foundations for growth targets. And it looks like we -- I'm not going to knock on wood, it looks like we will be also hitting our CGI targets, which will be two LRPs in a row that that we execute on that. So I think we're being very thoughtful right now. Hey, can we keep that going? And do we want to put another LRP up?

And maybe it's a good segue to dive into some of the operating dynamics specific to 2026, and I'm sure this is not an especially novel question, but one that you get a lot is just about the ramp through the rest of the year. You started below your full year guidance. I believe the second quarter, you're targeting a number sort of midpoint at the low end of your full year guidance, like what -- maybe just recontextualized for people now. Q1 and what you were seeing in the business when you gave the guidance and may I guess? And how we should think about the rest of the year?

I think really what I saw, and I generally believe that we don't -- that our guidance is significantly different than how we've guided before, right? There is a couple of things that are kind of creating a little bit of noise, and I want to talk about those because I think once you look at the underlying business, I truly believe it's doing well, right? And the issues that we're having, I think are addressable and things that we have somewhat visibility to that we believe kind of come back and help us reach our guidance. So if you look at kind of the foundational kind of side of the business and you strip out the dual cap divestiture and the OEM impact, that business has grown. It grew at 5.5% on an organic constant currency basis in first quarter, which is essentially in line with the 6% 3-year CAGR. Similarly, if you look at therapeutic and you adjust for OEM, again, which is kind of in both buckets and then you adjust for the recall that we think we can be done with here by the end of the second quarter and start to see some -- [ some ] of that business back. That business grew at 12% in the first quarter on an organic constant currency basis as opposed to the 11% 3-year CAGR, right? So when you look at kind of the underlying business outside of those kind of items we've called out, it's actually doing pretty well. And so as OEM comes back, we think it's going to do at least mid-single digits this quarter. And you get the recalls behind you. Obviously, dual cap divestiture, you'll have to adjust for that all year long. We think the business is doing great or just fine and doesn't seem overwhelming hit our numbers.

And just to be clear, the dual cap divestiture is excluded from the $4.5 billion to $6 in or include

It's excluded. Right? So you have to adjust for it. Yes.

All right. And any other the normalization a study out, but OEM normalization sounds like a big thing that bridges us through the balance of the year. How about kind of the overall operating environment. I'm sure you get a ton of questions on this, really not. And the data points are super mixed -- like you have the hospitals weak Q1 but said it's all going to be fine. The managed care companies are saying, don't now it's all going to be fine for us. Most recently, we had Medtronic, obviously, reported said everything is fine. What's your protective on kind of the operating environment?

I mean I would agree with Medtronic, right? I mean we're not seeing anything that would give us pause. The environment seems healthy. Yes. I don't have anything else other to that. And I think obviously, been an eye on things, but generally, the environment feels good.

And maybe this is not an update that you provide, but maybe you sort of give your stance on this, that one of the things that came out in first quarter earnings and I think subsequently for a lot of companies and different surveys and other things that this year did start at a disproportionately sharp step down from the fourth quarter weather or seasonality or deductible resets, whatever the dynamics might have been, but it does seem like the most recent set of investors are generally living with is that things have progressively gotten better throughout 2026. So what have you seen in your business?

Honestly, it's why I kind of highlighted the growth, excluding kind of those I don't want to call them one-timers, right, but those issues that we kind of talked about on both foundational and therapeutic was because I think when you put that back, the business did great. Had it not been for those couple of things, I think we would have been just kind of back to our kind of normal sales. And I don't think anybody would have had any questions. Unfortunately, I think we've caught up in that noise, right? Where, hey, there was other companies that were a little bit slower. Merit was a little bit slower than normal. Once I get out there and kind of start helping people kind of understand the online business and I think [ get ] it. But yes, I mean, I think the business has been doing great. Our sales force is out there and doing what they're good at and hopefully, that can continue.

Okay. Are there any other areas that you want to call out that you feel like people aren't paying attention to like the OEM dynamic or [ a ] or is in the teens or like guys is going to be 5 to 7 or like, oh no, they're just sandbagging. Like are there other areas that are seeing a sort of outsized growth or even under represented growth right now that you don't know that people are fully digesting?

I mean look, I think it was unfortunate that our OEM business happened to have issues at the same time as everybody else's OEM business, which means we got caught up and kind of everybody thinking that we all have the same issue. I think for us, it was very unique to us. Again, we're not a contract manufacturer. I think most of you know that. We sell our OEM customers, products that we sell every day to our own customers. It's just products that -- it's areas that we don't directly -- as long as they don't directly compete with our sales force and/or they're not strategic in nature. The best way I kind of can explain is we essentially sell capacity, right? And so we had made some product line transfers to [ Tijuana ]. Customers stocked up on inventories. Some customers got acquired, so then they had inventory policy changes or people started looking at their working capital and saying, "Hey, I can probably use a little bit less inventory. And they just take a little bit longer for them to burn through that inventory that they had. But again, heading into the first quarter and into the second quarter, I've been pretty vocal that the orders are back. We have good visibility. We feel pretty comfortable that we can hit at least that mid-single digit in second quarter.

And how do we put together the dynamic of destocking in some of those businesses would seem like you'd only do that if you had an air pocket of demand on the other side. How do we square that with the commentary around the stability of the end markets?

I mean it's a good question. I'm not sure that I have a good answer for you other than I think generally speaking, people look at their working capital and they'll forget hey, what happened in the COVID, like, hey, I maybe should have had more inventory or there was a supply chain issues after COVID where people just were not maybe stocked up on inventory. And I think over time, as you get more comfortable with the supply chain, you say, "Well, maybe I don't have the whole that much. I think those are all things that kind of ebb and flow, which is why our inventory and -- or sometimes the customers just say, "Hey, you know what, I think I can go get the product a little bit cheaper over here. And that it really what happens is we never really lose a customer at Merit. What happens is they go and they try and that other product and they usually boomerang back. And so that's why our business is a little bit choppy. Again, I've been pretty straightforward about that. But consistently, I think if you look at it over time, we're going to be in that [ mid ] to high single-digit [ number ].

I know like many of your peers and other companies you follow, there's a heavy focus on the U.S., but you do have a pretty strong business internationally. And maybe just sort of talk to what you're seeing in markets outside the U.S. And obviously, China always has its own set of specific criteria operating factors like EVP and otherwise. What are you seeing OUS? And how does that factor into your your kind of growth algorithm?

Yes. Again, I think when we look at our international markets, we think they're doing just fine. I mean I think if you look at the European markets, we delivered growth there. Maybe kind of right in line with our guidance. You look at China, that's essentially been a headwind for us the last few years with accretive revenue. It's actually contributing, not much, but it's at least positive. We hope over time and that we're kind of on the path to kind of delivering growth out of there. But I think it's too early to tell, right? I'd kind of like to get this year behind me and specifically in China and see kind of how that market is doing, but it's trending in the right direction, right? It's not holding this back like it did the last few quarters.

And as part of your kind of next round of whether you do an LRP or a strategic plan that Martha really owns, how are you thinking about -- I mean everyone talk about acquisitions, but there's the other side of it, too, portfolio [ pruning ] or are exits is international -- any of the markets outside the U.S. rise to the level of discussion.

Look, I think it's maybe the natural progression for us, right? I mean I think we were very -- or a product life cycle management, quite frankly. It's something we started to pick up under foundations for growth. You guys saw us divest of [ 2 ] pack businesses, one in our European market and the other one in Australia. This year, you saw us divest a dual cap. I mean I think it's just kind of a -- and there was a bunch of SKU rationalization that happened too or more like SKU consolidation that's happened over the years. And so I think it's a natural thing to kind of look at. It's expensive to be in a lot of countries, and there's a lot of regulatory requirements and statutory things that you have to do. And so we'll do like -- like we've done in the last -- every other year, right? And when we're launching [ Phe ], let's look at the markets that we're in, do they make sense financially? Do we think we can get the growth? Or should we be investing dollars in other areas? And same with the portfolio. We'll look at the portfolios. But you also just heard me kind of talk about our therapeutic side of things. We've essentially done acquisitions in just about every single one of them. And we're -- we think we've got the product -- is that something we want to divest. But I think things will fall natural thing that happened. But I am not size or things like that, I don't know yet. That's all the work that we're doing right now. But I consider it more of a product life cycle manage where I do.

Great. Let's maybe turn to the P&L. I mean this is sort of a very -- a lot of moving parts in this year's earnings outlook, but you are stepping over and absorbing a lot of headwinds while still growing earnings this year. I think you have tariffs, you have viewpoint convert dilution, but you're still going to grow earnings slightly faster than what you're planning to grow revenue, you take midpoint to midpoint, I think. So what are some of the puts and takes in the P&L for this year?

Yes, I'll take the easy one first. Obviously, the convert dilution is probably not going to happen, right? I mean, just given where the stock price is. But look, I think tariffs is a tricky one. I think everybody, at least I felt like it was probably prepared to book some sort of receivable based on the tariff [ refine ] obviously, over the last days, the government DOJ has decided that they're going to challenge what people can get. I will say that we have started to get some reimbursement, not a material amount, but some -- and so I think that will be the kind of one thing that we'll kind of look at and obviously, the historical tariffs that we paid, right? Do we get a credit for that or not? That would a onetime benefit and then there's the tariffs that are ongoing this year. Obviously, I think we think those will start to get better than what we initially guided to. I think how much better, I think we'll adjust everything after our second quarter numbers as we finalize the quarter, we'll take a deep dive at the tariffs and what makes sense adjusting. But I think we have a pretty good game plan to overcome the things that are happening. I mean, luckily, we haven't seen any significant input costs increases. We're seeing fuel start charges. We're pretty used to those. I think I kind of feel like those happen every year. But yes, we're keeping an eye on things. And I think our guidance is not a significant jump from our operating margin, right, from last year. I think we tried to be realistic. And again, our guidance is usually set to be kind of realistic and achievable. We'll check it out into the second quarter and see where we're at and adjusted if necessary.

Sometimes I feel like when companies experienced these headwinds they're all going to go away next to you. You're going to have this giant out they never seem to always other stuff that comes into the mix of capital variances or flow through timing of inventory or cost increases, like how are you kind of framing normalized EPS growth with these headwinds? Or do you not kind of want people doing this at a warrant for the $0.12 of headwind, earnings would have grown this amount, so it should just grow low [ teens ] next year.

Yes. I mean honestly, I think it's obviously -- that's why we set the LRP. I think that hopefully gives people some visibility. Obviously, we don't call it EPS out, but we do call out operating margin. That hopefully gives you guys a sense of where we [ will ] end up at least for this year. And we'll decide what we on a go-forward basis. But yes, no, I mean, I think, look, there's always something every year that I feel you've got to overcome. I mean that's just the nature of the business. That's what the executive team gets paid to do as whatever challenge comes our way, we've better figure out how we're going to make the commitments that we made. I think that also helps from a guidance perspective, people sometimes you don't want to call me a sandbagger. I'll take it all day because I know what the alternative is. I lived it and don't want to go back to that. I think what we try and do is set realistic and achievable guidance. We're not going to [ train ] while you with some guidance that we think is unrealistic, like that's not our nature. So that, I think, helps too. So nothing has changed from that perspective.

And I was trying to sort of obviously as always, to read through Martha's comments at BofA around kind of forward margin trajectory. But if you look at your, like, I don't know, call it, low to mid-50s gross margin business, like low 20s operating margin is like pretty good. If you look across the peer set, you don't see companies do materially better than that at those types of gross margins. I was sounded like the forward trajectory of margin was probably a little more balanced, and you were sort of a trade-off discussion to have between margin expansion and growth investment.

I don't think so, right. Like, I mean, I think we think we can continue to drive profitability and continue to expand our operating margin. I will be very transparent. I don't expect what we've done in the last 5 years. I mean, we did almost 700, 800 basis point improvement, just that's just not doable. But we do think that we can find leverage in the business. We think we can continue to expand gross margins albeit a little bit slower, right? But hopefully, we're going to go through our strategic planning. Hopefully, we'll give you guys some good color on what we think we can hit and get you guys comfortable, but I think generally, there's nobody in merit think we expand our operating margins.

Maybe just in the brief time we've lost I'll turn it back to you just to closing remarks. Saw the start to the year that in volatile like how -- what do you want people to walk away from this presentation, those on the webcast and also from your one of more meetings? Like how do you want to be able to leave this conference is like probably your last public appearance before Q2?

No, I mean, look, I think we're feeling pretty confident. I think maybe the one thing we haven't really discussed is kind of the CEO change, right, with Martha coming on. I feel like she is a great cultural fit. I think she's doing all the right things. There hasn't been any significant changes in the executive team. Actually none really other than a couple of people that we brought on for some holes that we wanted to fill. But yes, I think we're doing all the right things this year, I think, as we kind of look forward to the next few years. And so my confidence level is pretty positive. And I think it seems like a very challenging environment out there, but the business continues to do well. So it all shakes that.

Excellent. Well, thank you, appreciate you making... Thank you for having us. I look forward to the next update. Great.

Thank you.