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

Hi, everyone. Thanks for joining. I'm Jill Hall, Head of Small and Mid-Cap Strategy and BofA Global Research. So welcome to first session of two of our virtual SMID Cap event. Happy you could join us. If you need the schedule for the rest of today, I want to say that for any additional sessions, feel free to reach out to me or to you're actually in corporate access. But great to be hosting Day 2. We have over the course of the 2 days, about 20 small and mid-cap companies joining us, our analysts have really great breadth of coverage in SMID space. They cover about 1,000 small and mid-caps in the U.S. So feel free to reach out to me or any of the analysts if we can get you subscribed to any research or do any follow-up. But with that, I wanted to pass it over to Travis.

All right. Great. Good everybody. Thanks for joining. Welcome to have Raul Parra, CFO at Merit Medical, joining us for a fireside chat this morning. If there's anything I'm not covering you want to make sure you ask just pin me on Bloomberg and also screening questions that way. But otherwise, we'll kick it off here.

Raul, maybe just to kick off for investors who were newer to the Merit story. How would you describe the business in kind of simple terms and kind of what makes Merit different from other med tech companies?

Yes. No, great question. I think first of all, we play in the -- mostly in the interventional radiologist space. cardiac so in oncology, specifically kind of breast. I think Merit has a long history of growth Travis. I think one thing that is hard to understand is the merit story and how we consistently grow mid- to high sent,and we really changed our reporting. So hopefully, we can help you guys better understand that. But I think. Merit wins in multiple ways. It pays attention to its customers, introduce products that really do help them. we acquire products that we can bring in and that supplement the products that we deliver to our customers. We're vertically integrated in everything we do. And we have a global footprint that allows us to deliver product to our customers. That's really kind of the short answer and then we take a lot of pride in our quality, right? And so you combine all of those and we can really deliver value to our customers.

Makes sense. Merit has an interesting point in its history in transition from a founder CEO to kind of nearing the end of your LRP building next strategic plan. As you step back and look at the company today, what has changed the most over the last year and kind of what remains left to do here? .

Yes. I mean, look, I think the change really started really around foundations for growth, right? It's a 5.5 years ago. As we knew Fred would be retiring we really started setting up processes and getting the right people in the right place in order for that transition to happen and maybe smooth. Now that we have Martha here, we've really kind of dive into kind of the platforms as we've -- if you look at our revenue reporting, you'll notice we have 8 platforms. And really, that's how we're going to start running the business. And we set those up early on in foundations for growth. and have been increasingly giving people responsibility. And I think here now with Martha and now it's about accountability and making sure that people follow through and everything they're doing for their platform. And Martha has been a great cultural fit. And I think she's asking other right of questions, looking at all the right places. And we're not deep in strategic planning right now, and we'll get something out here, hopefully, for LRP sometime probably maybe with the fourth quarter call or maybe earlier, we're still kind of trying to pencil that out, but look forward for more information, and we're off to the races right now, just kind of doing a deep dive in the business.

So when you think about putting the new LRP together, anything that we should think about differently versus kind of the last LRP?

It's a good question, right? I mean I think those are the questions we're asking ourselves right now, Travis. So I'm not sure that I have a good answer for you guys. I think what we've done has really worked right? So the revenue -- the metrics we've really kind of focused on have been revenue, operating margin expansion. Free cash flow, obviously, earnings is the fallout of those. But and we've really expanded -- I mean, through December 2025, we've expanded our operating margin of about 850 basis points since December of 2019. And then if we hit the high end of our CGI goals at the end of 2026, you're looking at somewhere around 900 basis points. So those metrics have been working, but when you're not deep in strategic planning, it's a good time to ask the other questions, right? Leaves no stone unturn, you know, are these the right metrics going forward. So we'll continue to look at them, and we'll see where we end up.

Okay. Makes sense. There's been some notable board changes as well. Just kind of maybe think about what that brings to Merit and what does it say about where the company is at today, given some of the seasoned industry leadership you're bringing on the board. .

I think it's made a big difference, right? I mean I think the latest stat is, Scott, he's got a vast background, really, really nice guy, really knowledgeable about the industry. I think we're excited to have them. Obviously, with friendly, he feels, I think, a nice void just with his expertise and the role has done.

Okay. part of the transitions, the reporting framework to foundational therapeutic products and for those new to the story, what does that mean? And kind of what drove the change on the reporting side?

Yes. I think what -- maybe wasn't understood by -- the Street basically because we didn't talk about it. I mean, I think we essentially had a different reporting structure internally, right? So the way we reported prior to the change, there was a lot of confusion not only internally, but externally and how we told the story, and so when Martha came over, one of the first questions she had was, hey, Raul, how do I reconcile what we report externally versus what we give to the Board versus what the internal reporting is, and I said don't bother, right? We've got a few options for you that I think we'll clean it up. And so we gave her a couple of options that we had been kicking around internally and she chose, I think, the one that we were all kind of leaning towards, which is what you guys currently see with the platforms on foundational and therapeutic. . And really, I think at the end of the day, what we're trying to do is better teller merit story, right, and really kind of hopefully be able to tell a story where you guys understand where the growth is coming from, what procedures we play in, what are Caltans are and so you can better assign value to us because I think that's been a messy piece to really understand where the growth is coming from for Merit. And I think over time, we really want to be able to clarify that. And Martha and myself, you'll hear us kind of talk about these platforms and give you a little bit more color. And I think we get even more once we get through our strategic planning because we're asking all the questions about where are we winning how do we win and where do we need to kind of shore things up and what doesn't make sense anymore.

So it's really more about from an investor perspective to try to let the value get reflected in the multiple for what you're doing, right, more of a communication with investors.

Yes. It's really how we're bringing the business too, right? So we have platform needs for each one of those platforms, whether it's axis, OEM, a vascular intervention, cardiac therapies, endoscopy. So really kind of pushing down the accountability to those platforms. And then we're all hearing the same questions. We're all asking the same questions, right? And it makes it a lot easier to run the business.

What are the kind of the key growth drivers in each of those ones?

Well, I mean, I'm not sure how much time we have here, but I think yes, look, I think the nice thing is maybe I'll just start at the high level, right, with foundational and therapeutic I think when you look at the three of your CAGRs that we announced when we made the change, the therapeutic is growing at a nice and you look at the foundational or when you look at foundational, it's growing roughly 6%. And the foundational does make up about 2/3 of our revenue and does have a better gross margin than people would expect. Therapeutics is still growing faster still has a better gross margin, but the separation between the two and as steep as people would think. And I think when you look at the acquisitions and some of the R&D projects that we've come out, we're really kind of investing in all of them, right? We don't necessarily think that the primary focus of the company is going to have, shift to therapeutics. As you know, a lot of our products, especially on the foundational side are really therapeutic enabling devices, right? So we have access products. We have delivery products and we have closure devices. And all of those really kind of helped the therapeutic side of things. It's very hard to do a procedure on the therapeutic side without those products. So, we think we have a really good portfolio that benefits from each other. They play off each other. And so that's what allows us to deliver that consistent kind of growth that people really like. So I would say, look, generally speaking, we've made acquisitions in most of the platforms. I think we're kind of waiting and see and getting some of the fruits of that hard labor. I think you guys have seen the cardiac therapies growth. It's been outstanding. I think we grew at roughly 22% in Q2, you look at endoscopy, that's off to a really great start. That's a combination of not only the new acquisitions, but new product introductions. And then OEM, everybody's favorite topic has bounced back, that business is a little bit -- has a little bit of choppiness. I think we've consistently announced it that way and disclosed it. But we think that OEM can deliver mid- to high single digits, very consistently. I mean then you stood down the list, right, with retinal therapy because you've got the Rap, you've got oncology, which we just acquired the viewpoint and really excited what that can do to a portfolio that was really a single product portfolio. Now they've got 2 products that really complement each other. So a little bit of color there.

That's helpful. Is there -- when you think about like whether it's M&A or investment or focus between the 2 businesses, anything you'd call out? Or is it kind of equal between the two?

I think it's just depending on what's available out there, right? I mean we did the State deal, which was a foundational product that could really kind of help across almost all platforms. And then you look at the therapeutics side, right, which we just closed the -- obviously, did the Viewpoint deal, that was most an announcement. -- for our oncology group. So look, again, we really do value both the foundation and the therapeutic portfolios Again, they're very complementary to each other, and they want to do a good job of balancing the investments between both. Now obviously, look, therapeutics is growing faster. So over time, it should kind of move closer to kind of the size of foundation, right, just by the nature of the growth profile. But it won't be intentional. I think it's really about finding a real good balance in our portfolio between the two.

Q2 organic growth on the top line as far as the service the company has had, and I think, three years. Is this level of growth sustainable? .

Well, you guys know me, right? I'm more of a conservative type of guy, right? Look, I think Q2 is always a strong quarter for us along with Q4. I do think there's a lot of momentum in the business. We tried to explain that in Q1. I'm not sure that the message came across is as clear as we wanted it to. Q1 was 3.9% -- 3.6% growth and you exclude the OEM kind of issues that we had in Q1 and then the recall in Q1. And the underlying business was doing really good, right? And we tried to kind of explain that to people that as those two things bounce back, you would see some really nice growth. And that's really what happened in Q2. I mean the OEM bounced back. We got the recall kind of under control, found an alternative product for some of our customers, which really helped. And then the base business or the rest of the business continue to do well and we were able to deliver a really strong kind of quarter I think the momentum is still there. Obviously, we bumped up our organic constant currency revenue guide, and now we're looking at roughly 7% for the year kind of at the mid -- a little bit north of that 7.5% at the midpoint. But -- so I think things are looking very, really good. The business feels good. We're not seen any slowdown in procedures like other people maybe have mentioned. We continue to ask our sales force, and they continue to see the momentum. So we're excited to see how the rest of the year plays out. But I think we've got a good guidance for the rest of the year where we feel pretty confident.

Yes. I mean for the full year, you basically just raised the guidance by the amount of the Q2 beat. It's not about trends were improving relative to expectations. So it's just basically being conservative in the second half of the year.

Yes. I mean I think our approach is to set a guidance that's realistic and achievable. And we're not trying to allow anybody with our guidance here. We just want to make sure that we can execute on it. And I think our normal standard operating practice when it comes to guidance is to look at stuff at after the second quarter and see where we're at and then kind of flow through any changes that we see luckily for us, it was a big beat flowed those through for the most part. .

And then I mean your guidance does assume, I think that's second half slowdown. If you look at the way the guiding the implied second half, was there anything in the business slowing down? Or is it just...

Yes, there's a little bit of seasonality in our business that people have to remember right now. I've been around Merit for about 20 years, been employee of Merit for about 16 and most of those quarters, there's typically a step down in the third quarter. Now the last couple of years, I think I've been proven wrong, but I've got more history with the third quarter being down than not. So until I see kind of more consistency in that third quarter, my assumption is that it's going to be down a little bit, and that's what we did essentially but fourth quarter should tell us a and be strong like it historically is. .

Yes. I don't know what kind of vantage point you have, but there's some sort of curiosity, like, hey, is there -- is this year a little more seasonal with procedures, like more back half weighted with procedures versus prior years given higher deductibles and stuff like that. I don't know if any thought on that or kind of where trends are shaping up, if that's -- if you're seeing any evidence of that happening?

Yes, we're not really seeing anything, right? I mean, again, I think it's I'm not sure what you think it trends anymore, right? Post-COVID, I think everybody is still trying to figure out what those trends are. And every time we start to get some level of consistency, we get to own something else, right? I mean, things are starting to look pretty great. And then you get the Middle East conflict, right? That throws everything kind of off and then they're starting to kind of have to deal with that, too. So I don't know. I mean, I think our business is doing well. Our sales force is excited about the kind of the products that they have. and the momentum in the business. We're not seeing any type of slowdown as far as related to procedures, I would just say you are seeing a little bit of a typical kind of summer people taking time off, which is pretty stamp, right? But nothing that I would call out as a concern. Like I said, the momentum continues in our business.

Right. Yes. I think people usually take vacations every summer, right, as you see that every year. it's probably not that big of a difference in terms of...

Yes, Exactly.

Okay. Excluding the tariff refund, the Q2 margin came in above expectations. How are you cautioning about the drivers of that price mix, productivity, timing on spending, whatever?

Yes. Look, I mean, I think the gross margin has been outstanding. Expansion has been outstanding this year. I mean, I think our sales force has done a really job of just really being hyper focused on mix. And our pricing team has been great about holding beatable to the pricing targets that we've set. Our acquisitions are for the most part, ahead of target, specifically around the gross margin. They're doing much better than we anticipated. And not only from also the revenue side of things, they're either at or above our expectations. And as a matter of fact, I think we bumped up our inorganic revenue slightly for this year. But so things are going well on the revenue side. And operationally, I think we were all anticipating some level of price increases. When the conflict in the Middle East came out. We haven't seen anything yet other than the freight, which is pretty standard, quite frankly. I think we deal with that just about every year. And so our operations group is doing everything they can to kind of hold the reins on the expense side of things to be more efficient just with all the movie powers that they have and we've really focused on shifting more product to the water or ocean versus air, which also helps. So I mean we're really looking at everything. And I know people are getting sick saying that we're throwing the kitchen sink at the gross margin, but that's the reality, right? I mean I just -- I don't know how -- if somebody has find their way for me to explain it. I'll take it. But we really are focused on the entire thing. Now obviously, there's levers that are bigger and whatnot. But look, if you don't focus on all a little bit, you don't get the results that we've had over the last 5.5 years as far as that gross margin expand, especially gross margin expansion this year.

So it sounds like nothing onetime in the Q2 margin, except for the tariff refund really.

Yes. Other than the tariff, you're right. And again, I think we flowed most of that through. We did keep some of it to reinvest in the business because obviously, when those hit last year, they were unexpected for everybody. We pulled back on a few things at as that money came back, we thought we'd bring some of those opportunities forward.

I mean we talked about some of the margin expansion that you guys have driven over the last few years earlier, 400 basis points of gross margin, 300 basis points of op margin between 23% and 26%, maybe help us understand like how you've been able to get that much margin out of this business?

Yes. Look, I mean I think maybe stepping back historically, right? I mean I think Merit was always well known for being a great top line grower, right, and expanding on the revenue side. I think 1 of the knocks on merit pre kind of foundations for growth was really like, okay, you guys are great at growing the business, but it's like a continuum of investment, right? Like we never get to see kind of the earnings growth or match that we get to see the earnings kind of match the revenue side of things. And so when we launched foundations for growth, we set out to really kind of change how we ran the business, setting out processes and programs in place to make sure that we could not only grow the top line, but also just start to focus on free cash flow and also expanding the operating margin. And so the focus quite frankly, and we were very clear from foundations for growth through CGI was, look, to the extent we can grow gross margin and really focus on it, we will expand our operating margins through that. To the extent we can't get the gross margin to where we want to, we will also focus on operating expenses and then leaning that thing out. And so look, over time, specifically through CGI, I think we've done a little bit of both -- we've -- the gross margin has really kind of come through, and we've really been able to invest in the business, continue the growth that the people like. We're also expanding the operating margins given that, that gross margin has really kind of come through and expanded. So I think we've expanded our operating margins, as you said, quite a bit. But we still think there's more to be had. And obviously, we're neck deep in that work right now. I'm not trying to figure out exactly what -- how much we can do what's achievable for next LRP.

I mean is there a lot of low-hanging fruit already over with? Is it common sense that hey, maybe the next years is probably a little less opportunity than the last three years?