Merit Medical Systems, Inc. Price & Performance (MMSI)

In addition, any forward looking statements represent our views only as of today February 25, 2025, 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 section titled Cautionary Statement Regarding Forward Looking Statements in today's press release and presentation for important information regarding such statements. For a discussion of factors that could cause actual results to differ from these forward looking statements, please also refer to our most recent filings with with the SEC, which are available on our website. 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. A 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 ks. 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 to four 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 Investor page of our website. I will now turn the call back to Fred. Thank you, Brian. Let me start with a brief agenda of what we will cover during our prepared remarks. I will start with a summary of our fourth quarter and full year 2024 results. Then Raul will provide a more in-depth review of our quarterly financial results and our financial guidance for 2025 which we introduced in today's press release. Then we will open the call for your questions. Beginning with a review of the fourth quarter results. We reported total revenue of $355,200,000 up 9% year over year On a GAAP basis and up 10% year over year on a constant currency basis. The constant currency revenue growth we delivered in the fourth quarter exceeded the high end of the range of growth expectations that we outlined in our Q3 earnings call. Specifically we expected constant currency revenue growth for the fourth quarter in the range of 6% to 9% year over year.

The better than expected total constant currency revenue results were driven by strong organic growth with contribution from acquired products coming in largely in line with what our fourth quarter guidance had assumed. With respect to our profitability performance in the fourth quarter, we delivered financial results that significantly exceeded our expectation. We leveraged the stronger than expected revenue results [indiscernible] non GAAP operating profit growth of 30% a non GAAP operating margin of 19.6% of sales up approximately three zero five basis points year over year. We also delivered 26% growth in our non GAAP earnings per share, which exceeded the high end of our expectations as well.

We were pleased to deliver strong performance in the fourth quarter capping off an impressive year of operating and financial performance in 2024 Highlighted by more than 8% total constant currency revenue growth including 6% organic constant currency growth. Significant improvements in our profitability profile with a 51.7% non GAAP gross margin and a 19% non GAAP operating margin both of which are records for Merit, And perhaps most importantly, we delivered strong free cash flow generation of more than $185,000,000 up 67% year over year. This performance was a direct result of our team's continued hard work and commitment to our strategic objectives, We are very proud of the strong execution our team delivered We believe our fourth quarter results reflect continued strong momentum in the business and we are confident in our team's ability to deliver the financial guidance for 2025 we introduced in today's press in which Rob will review in detail later on in the call. We are focused on delivering continued strong execution solid constant currency growth improving profitability and strong free cash flow in 2025 as well as continued progress in our continued growth initiatives CGI program and related financial targets for the three year period ending 12/31/2026.

Now with that, let me turn the time over to Raul an in-depth review of our quarterly financial results and our financial guidance for 2025. [indiscernible] Thank you, Fred. I will start with a detailed review of our revenue results in the fourth quarter.

Beginning with the sales performance in each of our primary reportable product categories.

Note, unless otherwise stated, all growth rates are approximated and presented on both the year over year and constant currency basis. Fourth quarter total revenue growth was driven by 8% growth in our cardiovascular segment and 88% growth in our endoscopy segment.

Cardiovascular segment sales exceeded the high end of expectations outlined on our third quarter call.

Our total revenue results included approximately $7,600,000 of revenue from our acquisition of Endogastric Solutions, and approximately $5,500,000 of revenue from our acquisition of the lead management product portfolio from Cook Medical.

Excluding sales of acquired products, segment revenue growth on an organic constant currency basis was 6.16.5% for our cardiovascular endoscopy segments [indiscernible] Turning to a review of our fourth quarter revenue results. By product category. Sales of our Peripheral Intervention or PI products increased 5.5% and was the largest driver of cardiovascular segment upside versus the high end of our growth expectations for the quarter. Growth in the PI product category was driven by the following factors. Sales of our AXIS and Embolotherapy products increased in the low teens. Delivery Systems product sales increased 28% and radar localization product sales increased 9%.

Cardiac intervention product sales increased 7% slightly above the high end of our growth expectations. Driven primarily by strong sales of EP CRM products and to a lesser extent growth in sales of fluid management products Excluding the contributions from the sale of acquired products, Cardiac Intervention product sales increased approximately 1% on an organic constant currency [indiscernible] Sales of our custom procedural solutions [indiscernible] products increased 3.5% which was in line with our expectations driven by strong sales of critical care products. Sales of our OEM products increased 22% in Q4, well ahead of what our guidance assumed. OEM customers demand in The U. S. Remained strong As expected, product sales to OEM customers outside The U. S. Were impacted by a more challenging raw material supply chain environment as discussed on our Q3 call, but we were encouraged by the better than expected order demand in the quarter. Turning to a brief summary of our sales performance on a geographic basis. Our fourth quarter sales in The U. S. Increased nearly 14% on a constant currency basis and 9% on an organic constant currency basis. Exceeding the high end of our expectations. We were pleased to see continued strong demand from our U. S. Customers in the fourth quarter, International sales increased 5% year over year and increased 2% on an organic constant currency basis.

Sales results in APAC and Rest Of World Exceeded The High End Of Our Expectations, While Sales In The EMEA region were softer than expected. Driven by softness in Russia and distributor markets.

With respect to China specifically, sales increased 4% modestly better than what our guidance had assumed. We continue to see quarter to quarter variability and growth trends related to volume based procurement programs. As expected. That said, we were pleased to see a continuation of the dynamics we have talked about throughout 2024. Specifically we saw better than expected sales of units which offset continued pricing headwinds related to volume based procurement. Turning to a review of our P and L performance. For the avoidance of doubt, unless otherwise noted, commentary will focus on the company's non GAAP results during the fourth quarter of twenty twenty four and all growth rates are approximated and presented on a year over year basis. We have included reconciliations from our GAAP reported results to the related non GAAP item in our press release and presentations available on our website.

Gross profit increased approximately 16% in the fourth quarter The increase in gross margin year over year was driven by a favorable product geographic revenue mix and improvements in pricing, freight and distribution costs. Operating expenses increased 9% from the fourth quarter of twenty twenty three. The increase in operating expenses was driven by a 6% increase in SG and A expense and a 26% increase in R and D expense compared to the prior year period. Total operating income in the fourth quarter increased $15,900,000 or 30% from the fourth quarter of twenty twenty three.

To $69,700,000 Our operating margin was 19.6% compared to 16.6% in the prior year period.

An increase of three zero five basis points year over year.

Fourth quarter other expense net was 1,100,000.0 compared to expense of $2,000,000 last year.

The change in other expense net was driven by higher interest income associated with higher cash offset partially by higher interest expense associated by higher average outstanding debt compared to the prior year period.

Fourth quarter net income was 56,300,000.0 or $0.93 per share, compared to 43,100,000.0 zero point seven four dollars per share in the prior year period.

We are pleased with our profitability performance in the fourth quarter where we leveraged the stronger than expected revenue results to drive significant expansion in operating margin and strong growth in non GAAP diluted earnings per share. Both of which exceeded the high end of our expectations.

Note, our fourth quarter non GAAP EPS results included incremental dilution related to our convertible debt that represented approximately $0.02 to Q4 EPS.

Turning to a review of our balance sheet and financial condition. We generated $65,000,000 of free cash flow in the fourth quarter of twenty twenty four. And generated more than $185,000,000 of free cash flow in fiscal year twenty twenty four. Up 67% from 2023.

The year over year improvement in free cash flow generation was a result of growth in net income, and significant improvements in cash used in working capital. Particularly in terms of cash used for inventory. We used $23,000,000 of this free cash flow to pay down our term loan the fourth quarter, bringing our total debt pay down to $99,100,000 dollars for the full year 2024 period. As of 12/31/2024, Merit had cash and cash equivalents of $376,700,000 total debt obligations of $747,500,000 and outstanding letter of credit guarantees of $2,900,000 with additional available borrowing capacity of approximately $697,000,000 Compared to cash and cash equivalents of $587,000,000 total debt obligations of $846,600,000 and outstanding letter of credit guarantees of $2,700,000 with additional available borrowing capacity of approximately $626,000,000 as of 12/31/2023. Our net leverage ratio as of December 31, was 1.9x on an adjusted basis. Turning to a review of our fiscal year 2025 financial which we introduced in today's press release.

For reference, have included a table in our earnings press release which details each of our formal financial guidance items and how those ranges compare to the prior year period. Our 2025 guidance ranges assumes the following: GAAP net revenue growth of 8% to 10% Year over year, revenue growth of approximately 7% to 9% in our Cardiovascular segment and net revenue growth of approximately 36% to 40% in our Endoscopy segment. And a headwind from changes in foreign currency exchange rates of approximately $3,000,000 or approximately 20 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 the range of 8.6% to 10.1% in 2025.

Among other factors to consider when evaluating our projected constant currency revenue growth range for 2025, are the following items First, the midpoint of our total constant currency growth range assumes 10.6% growth in The U. S. And 7.5% growth outside The U. S. Constant currency growth outside The U. S. At the midpoint is expected to be driven by low double digit growth in EMEA, high teens growth in the rest of the world region and approximately 1% growth in the APAC region. The modest growth we expect in APAC sales is substantially related to China.

Where we project growth in unit sales on a year over year basis but we expect total revenue to face continued headwinds related to volume based procurement. Second, our total net revenue guidance for fiscal year twenty twenty five also assumes inorganic revenue contributions from the acquisitions of assets from Endogastric Solutions and from Cook Medical closed on 07/01/2024, and 11/01/2024, respectively.

In the range of $45,000,000 to 47,000,000 the aggregate.

Excluding this inorganic revenue, our guidance reflects total net revenue growth on a constant currency organic basis in the range of approximately 5.3% to 6.6% year over year. Third, for the full year 2025 period, we continue to forecast U. S. Revenue from the sales of Rhapsody CIE the range of $7,000,000 to $9,000,000 Our full year 2025 U. S. Rhapsody CIE revenue range continues to assume a larger weighting of revenue in the second half of twenty twenty five versus the first half, and a larger weighting of revenue in the fourth quarter versus the third quarter. With respect to profitability guidance for 2025, we expect non GAAP diluted earnings per share in the range of $3.58 representing an increase of 4% to 7% year over year.

Note, our financial guidance for 2025 does not factor in the anticipated impact of any new tariffs or modified tariffs that could be imposed by the government of the U. S. Or any other jurisdiction. The tariff situation and potential retaliatory measures by other countries The ultimate impact of any changes in tariffs on our business will depend on the timing, amount, scope and nature of such tariffs.

Among other factors, most of which are currently unknown, Our 2025 financial guidance assumes that the 2025 tariff structure will remain substantially unchanged during 2025.

Additional tariffs or retaliatory actions or changes to currently announced tariffs could change the anticipated impact to our business. This is a rapidly changing situation Given the frequency of recent changes in tariff policy, we do not intend to provide interim updates in response to each news item related rumor. Rather, we will provide updates as we deem appropriate on our quarterly earnings calls or in other public formats as we gain further visibility and certainty regarding the situation. For modeling purposes, our fiscal year twenty twenty five financial guidance [indiscernible] non GAAP operating margins in a range of approximately 19.4% to 19.7%. 40 basis points to 80 basis points year over year.

Non GAAP interest and other expenses net of approximately 5,000,000 compared to non GAAP income of $1,100,000 last year. Non GAAP tax rate of approximately 21% and diluted shares outstanding of approximately $61,700,000 Note related to our convertible debt facility. This represents an impact of approximately $0.11 to our non GAAP EPS in 2025. Finally, we expect to generate free cash flow of at least $150,000,000 in 2020 inclusive of the expectation that we invest approximately $90,000,000 to $100,000,000 in capital expenditures this year.

The step up in CapEx investment this year is directly related to a new distribution center in South Jordan, Utah. We would also like to provide additional transparency related to our growth and profitability expectations for the first quarter of twenty twenty five.

Specifically, we expect our total revenue to increase in the range of approximately 8.2% to 9.7% on a GAAP basis. And up approximately 8.8% to 10.3% on a constant currency basis. The midpoint of our first quarter constant currency sales growth expectations assumes approximately 13% growth in The U. S. And 5% growth in international markets. [indiscernible] our first quarter constant currency sales growth expectations include inorganic revenue in the range of $60,000,000 to $17,000,000 Excluding inorganic contributions, our first quarter total revenue is expected to increase in the range of approximately 4% to 5% on an organic constant currency basis. With respect to our profitability, expectations for the first quarter of twenty twenty five, we expect non GAAP operating margins in the range of approximately 16.7% to 17.1%. Compared to 17% last year. And we expect non GAAP EPS in the range of $0.73 to $0.76 compared to $0.75 last year.

I will now turn the call back to Fred for closing comments. [indiscernible] Thank you, Raul. Before we open the call for questions, I just wanted to add that The U. S. Rhapsody CIE program is progressing well And we are very much looking forward to the presentation of twelve month ABF data from our Rhapsody WAV trial at the Society of Interventional Radiology on Sunday, March 30. That wraps up our prepared remarks.

Operator?

Would you now open the line up for questions?

Thank you, sir. And the first question today will be coming from the line of Jason Begner of Piper Sandler. Your line is open.

Hey, good afternoon. Congrats on a nice finish to the year here guys. Rahul, I want to start with the EPS guidance.

Gotten a few questions here. I think it's the one thing that may be surprised folks just given how strong the business has been, because it's a little bit lighter than street. It seems like maybe some of that coming from the accounting on the convertible note. But are there any other factors that you'd identify as maybe influencing the conservative EPS guide or things that we should be thinking about that maybe weren't in street models Yes. No, look, it's a great question.

Obviously, super excited about the year that we're putting together. Super excited about the performance for 2024. I think it was probably one of the best, if not the best financial performance we've ever put together, just a solid [indiscernible] strong beat all around. But organic constant currency on the revenue side, 5.3% to 6.6 to 80 basis points on the operating margin As far as the EPS growth, there's two things that I want everybody kind of consider.

The first one is, we've got an additional $5,000,000 of [indiscernible] expense versus the interest income of of $1,000,000 last year. Recall, we had a kind of a large cash balance last year. We did the acquisitions So when you think about that, that's roughly about $0.08 of of headwind to EPS growth. And then the second one, which is probably more important, I want to make sure I highlight that there's a disconnect between the hedge that we bought and the GAAP accounting that you on how you treat So that's going to be $0.11 There's an incremental 1,800,000.0 shares that we've added that essentially impacts our earnings by $0.11 you kind of factor those two things in, we end up somewhere around 9% to 12% growth.

If you exclude those items. So I think that's probably more in line with what everybody was was expecting, but that the dilution on the convert does have a significant impact. And again, we have a hedge in place that covers us up until 100 we get above $114 And so there is a disconnect between the economic benefit of that hedge versus how we treat it from a GAAP standpoint, which is little disappointing, but that's just the way GAAP works and that's how we're going to account Okay.

Very helpful. And yes, it makes a lot of sense. I want to take a stab at something here. I know just if we take a step back and think about the 26 margin targets that you had out there, The business is already looking different today than it did a year ago due to M and A with EGS and Cook. Also, you've got wrap in there. I guess, is the 20% to 22% margin target still the right range to use Or maybe I should ask, do you feel better at like the upper end of that range, the midpoint or better of that range in light of the benefits that you're seeing from some of these factors?

Thanks for that question, Jason.

I think you already know how I'm going to answer it. But look, we're committed to a minimum of 5% organic constant currency.

And we're committed to a minimum of 20% operating margins and a minimum of $400,000,000 in free cash flow.

We're confident obviously in the LRP Like I just said, we're super excited about year one of CGI and how 2024 played out.

Right now, we're just hyper focused on making sure that we execute in 2025 And yes, that's all I'll say. But great question. Amen. [indiscernible] All right. Appreciate it. Thanks guys. Congrats again. Yes.

Thank you. One moment for the next question please. And the next question will be coming from the line of Laurence Biegelsen of Wells Fargo. Your line is open.

I heard Wells Fargo. It's Larry Biegelsen. I didn't hear my name. I assume Okay. Brad and Raul? Yes, we got you. We got you.

Okay. Where should I start? On OEM, Fred, really strong 22% in Q4.

Is that these I imagine these are like long term contracts, Fred.

So how should we think about OEM growth in 2025? Is that a good jumping off point? In other words, is that 22% for the next few quarters until it lapsed in Q4?

Yes.

Well, let me just say that first of all, it's well ahead of what our guidance assumed in the third quarter call.

Our OEM customer demand, Larry, in The U. S. Remains strong. As we expected Product on the OEM side outside The U. S. Were impacted more by challenging raw material and some supply chain things, but I think we've discussed that in the past. But the bottom line is, is we're just getting better than expected order demand. We do have some contracts, but again, it goes back to what's always been the hallmark of Merit's Merit OEM business. It's reliability and quality. And at the end of the day, that's that's what carries the day for merit and always has. So We were confident in the numbers and that I think Mike Black and his team a really good job. And we had to build all the stuff and deliver it, which we did.

Yes. I mean, Larry, I mean, maybe adding, we don't really guide to the underlying product category growth, but obviously, we have a high level of confidence in OEM and their what they've been able to do over the last several years. So I think everything that we expect out of OEM is baked into our All right. One on Rhapsody multipart here. So just early feedback Fred, on Rhapsody. I think, Raul, you said you'd give us sales by quarter. And just lastly, Raul, you said the 5% minimum organic I seem to recall that doesn't include Rhapsody in The U. S. So Rhapsody contributes about 60 basis points this year.

Is that the right way to think about it? For taking the question. Yes. So obviously, we gave the yearly guidance on Rhapsody, dollars 7,000,000 to 9,000,000.

We did not say that we were going to provide a actual revenues by quarter. But CGI is organic constant currency. [indiscernible] and we did not include the U. S. Launch of the Rhapsody, if that's what you were asking. [indiscernible] Early feedback Fred?

We're just excited about the product. [indiscernible] The initial market response is great. I think the RTG group, the Renal Therapy Group and those products and that whole program we put together is performing as we hoped it would. And we're looking forward to introducing the twelve month data by physicians and a full discussion of that at the CIR meeting And we're confident in the numbers First couple of months have been very encouraging. And It's nice. We invested a lot. We took a lot of time We're excited about the product and what it means to us, Larry, in the long run.

All right. Thanks for taking the questions guys.

Thank you.

Thank you. One moment for the next question. And the next question will be coming from the line of Steve Luchman of Oppenheimer. Your line is open. Thank you. Evening, guys.

Gross margin was a standout in the quarter. Wondering, Raul, what gross margin is implied in the 2025 operating margin guidance? And if you could talk about some of the drivers you're seeing on the gross margin line?

Yes. Well, first of all, I'm going to take the time to run around the bases on what was a home run hit by the by on the gross margin to be honest with you.

You. Steve, you've heard me say this that and a lot of our investors have heard me say this along with a lot of our covering analysts When we go after gross margin, we really kind of throw the kitchen sink at it.

And with knowing that there's going to be things that are not going to work out in [indiscernible] our approach is just to tackle it from pricing to efficiencies to logistics, essentially the kitchen sink. And what happens in the fourth quarter is we essentially kind of hit on everything. And that's what you see the execution there. I mean a 300 basis point improvement in the gross margin just outstanding. The mix was great. OEM was strong.

U. S. Was strong.

Our mix was was strong.

Our operations group, I just have to call out because they really high level Unit growth. Unit growth was strong. So everything that we would have wanted in gross margin really hit in the fourth. Now as far as the 2025 guidance, as you know, we don't give gross margin guidance. We do give operating margin guidance. And as you can see, we feel really strongly about what we're giving. We're going to give 40 to 80 basis points in 2025. [indiscernible] we would most of the operating margin accretion least on the low end would be coming from gross margin. And on the high end, there would be a mix of gross margin improvement and OpEx leverage. And so I'll just leave it at that, that I think that plan has not changed.

And I guess just building on that for the second question, what are the types of investments that you're making in Rhapsody this year? I know you talked about sort of training seminars, Can you talk about just qualitatively, I guess, some of the things that you're doing to lay the groundwork Yes. I think Steve, it comes down to training, understanding, going through the exercise of the appropriate reimbursement exercises and that the sort of things that we've talked about with NTAP and PPT and going to the trade shows, highlighting the project, [indiscernible] [indiscernible] not running away from it. We're running with it. And a lot of people [indiscernible] almost I think we're on on four twenty or so out of the 500 and people look at that and those are important things. So the investments we've made we continue on and maybe most importantly, is the psychology of the sales force. Raul and I just left our U. S. And I was also at the European, but just in The U. S, just a high level of enthusiasm for the business and what we're doing and the role that they play. So it's nice it's nice to know that you can win and that's how our people feel.

Across the board with all of our products.

Great.

Our next question is coming from the line of David Raschott of Baird.

Your line is open.

You guys hear me all right? We got you, David. Yes. Great. Thanks for taking the questions and congrats on the strong finish year to the year.

Two questions from us and I'll ask both of them up front. First on Rhapsody, I want to make sure I heard it. Clearly, you have the guide for revenue set this year and the that you laid out today and the 7% to nine would be incremental on top of that from Rhapsody? If that is the case, would it be fair to assume that any incremental kind of margin benefit that you could have from that would also be upside to the EPS guide that you set for the full year?

And then on the Endoscopy bit a touch lower than what we were kind of assuming. So I'm wondering if there's anything you can talk about on endoscopy either as it relates to the underlying business or the EGS deal and how that's being integrated, when you thought about setting out the guide for Adasi this year?

Yes. So on the Rhapsody piece, just to be clear and sorry if I confused you, when I meant the seven percent and nine was not included in the original CGI goals. David. So just to be clear, right? Obviously, clearly, the 7% to 9% that we've already disclosed in 2025 as far as our yearly revenue target for Rhapsody is included in the guidance we already gave you.

So Is that [indiscernible] And as far as Endotech, I think we feel pretty strongly about the guide that we've got out there. If you remember, we've got an integration of two sales forces going on I think what we've done here is just done a measured guidance for that group, knowing the complications integrating two sales forces We are super excited about the products. I know I was was Fred just mentioned we were at the U. S. Sales force. I talked to a lot of our endoscopy sales sales team and they're excited about having the new products but there is a learning curve. And I think we've tried to as you know, we guide with a realistic and achievable guidance. So I would say there's really nothing to see here other than that's what we've done.

And David, so you'll be aware and we may have discussed this in the past, but the product is fully integrated into our operations in Salt Lake City, all the TS are closed. And we did that ahead of time and I think we did a magnificent job of training and transferring. So that part's all been completed as well.

All right, perfect. Thank you.

Thank you. One moment please for the next question. And the next question is coming from the line of Mike Maxim of Needham and Company. Your line is open.

Yes, thanks.

I guess I want to start with the currency impact you're expecting to revenue this year. I think you said 20 basis points.

It seems kind of low relative to some of your peers. I mean, I've seen companies talking about 1% to 2% headwinds in 2024.

Can you maybe talk about I don't know if you're doing any kind of hedging revenue level or something maybe Yes. I mean, we do do hedging. As you can imagine, hedging program is kind of is a rolling program. We try and minimize the impact from FX. We think we're on the right track here and feel good about the number. Remember, our U. S. Sales number has also as a percentage of revenue has also climbed. So We're more heavy or U. S. Centric And then we have been historically Before we were more fifty-fifty, now we're kind of sitting closer to 50 five-forty five in that range. Mike. So I think that obviously helps. But we do have a hedging program in place and that helps minimize some of the impact.

Can I just add that it's consistent, Mike, We don't change it? We don't horse around. We don't time markets. We don't speculate. It's been consistent year over year for many, many years. Okay, understand.

And then just one on Rhapsody. I know you've given guidance for The U. S. But I know you're probably not going to give any numbers for OUS, but what I am wondering is has the data from the pivotal trial in The U. S. Helped at all outside The U. S. [indiscernible] what just how well is the product doing in international markets? I know it's kind of pricey product. I don't know if that's kind of an obstacle in some of those more price sensitive markets, but Well, I'll just simply say that it has not been an obstacle and we haven't we left the European sales meeting with the encouragement of the sales force on the product. And even though we don't have an RTG group there, because of the different geographies, I think that RTG group is carrying that and other products And we're quite pleased as we have said with the with the Rhapsody and we continue to receive strong positive [indiscernible] on the product and so we're looking forward to some of the events coming up like the SER meeting and others that will discuss the detail by the professionals that can interpret and give you their impression, not a bunch of manufacturing folks and that sort of thing.

So we're quite excited about that. Okay, got it. Thank you.

You bet. Thank you.

Thank you. One moment please.

And the next question will be coming from the line of Elaine Qu of Raymond James. Your line is open.

It's Jason. Hi, guys. Couple of questions here. Was there anything anomalous or or one time in the very strong fourth quarter gross margin number?

No.

I mean, just again, it was just really strong execution by our team.

Okay. What's left to do from an operational standpoint for to integrate Coke and EGS? If anything?

Yes.

So EGS is fully integrated. The only thing that this year is the the first year Jason, as you know, [indiscernible] we have a combined sales force So as you know, last year, we did leave EGS and our endoscopy sales group as two separate sales forces.

As they were training on how to sell the products, the different products.

January 1, that went away and there's a combined sales force now. So other than that, everything is already done with EGS and fully integrated We're manufacturing the products and everything. On the Cook side, we continue to be work under a TSA Order to cash for the most part is done. There is a few Some of the major European APAC countries that are not on board yet, but we have a substantial amount of order of cash done Manufacturing continues to be done by Cook.

We're looking to obviously integrate that sometime this year, if not early part of next year. But yes, everything continues to be on pace if not ahead in certain situations.

Okay. Thanks, Rahul. And just lastly, know you've called out SKU rationalization, I think last year. Is there anything notable around SKU rationalization in 2025?

Listen, I think what we did before, we had a pack business and those sorts of things.

But there's always a continuous part of our CGI to take a look at things that the smaller amounts of product and moving customers over to something where we build 5,000 a month instead of 50 or 500. That's an ongoing program that fits into our the objectives that we have internally.

I mean, we continue to work on Fred mentioned, product life cycle management. To the scale of What you saw last year as far as the pack business, they that Fred was talking about, that we don't have any material impact this year. But obviously, clearly, SKU rationalization is just part of what we're doing.

Going forward.

Thank you. One moment please. And our next question will be coming from the line of John Young of Canaccord. Your line is open. Hi, Fred and Raul.

Congratulations on a strong end to the year. I just want to first start on Rhapsody. Did you guys get the TPT application in before the the March 1 deadline yet?

Where you guys? Yes.

Yes.

I'm sorry.

I kind of dropped on that. The answer is Yes, the NTAP and the TPT were filed on time. Both of them are in.

Okay, great. And then the supply chain challenge, you highlighted on the OEM, OUS business, obviously, did not really materialize. Should we still expect any impact going forward in 2025 of any supply chain challenges?

Yes. I think there's two components to the supply chain issues that we were having last Last year. And if you remember, one of them was being able to get sufficient raw materials for one of our products. And then the secondary one was can we ramp up production fast enough? For one of the products that that had a strong demand. And so I think we've for the most part, have solved those issues.

I would say that we can continue to keep an eye on them. But I think our level of confidence is significantly higher than it was say, during our third quarter call.

Okay, great. And then maybe just sneak in a third You were pretty crystal clear on the tariff impacts are not included in the guidance today or you're not really going to quantify anything today, but more high level just the ability to move manufacturing for you guys from next to other facilities like Ireland or Utah, What is the ability to do that for Merit? And maybe have you taken any near term mitigation or hedging efforts at this point?

I mean, there's things we've done internally to try and mitigate the impact They're minimal. Frankly, And if I'm just being honest, John, Things are changing. So drastically and so fast that making any investments and moving I think you had a lot of people do that in the last Trump administration. Or not a lot, but you had some people that did it And now those countries are also included in the target tariffs or could be. Right, because we don't know what's going to happen.

And so I think for us, it's It's business as usual. Let's control what we can control. Let's be hyper focused in our 2025 goals but to execute to those We're very nimble and we'll just adjust the best we can when something is announced that is official. John, I've always said to the team that we've survived eight American presidents and eight administrations in the history of our company We've dealt with tariffs before.

And the one thing we don't want to ever do is to overreact I think we keep we have our thumb on it. We're watching, we're listening, but it's really as Raul pointed out, it changes just during the conversation we've had with you.

So as soon as we can get something clear, we'll talk more about it when it's appropriate.

Totally understand. Thank you again. You're welcome. Thank you. One moment please for the next question. And our next question will be coming from the line of Michael Petusky of Barrington Research. Your line is open.

Hey, good evening. So, Rahul, I may have missed this. I was briefly distracted. If you addressed this, forgive me. But the R and D expense, I'm assuming the pop in that in Q4 had been had a lot to do with Rhapsody activities. But can you just sort of speak to that and then sort of speak to if this is closer to a new normal or if it's likely to to back off as we head into the first half of twenty twenty five? Thanks. Yes. I wouldn't say it's a new normal. Look at Mike, to be honest with you, the gross margin was pretty strong. We felt like we needed to make some [indiscernible] investments in R and D There was some kind of some things we wanted to look at from a consulting standpoint. And so we had our consultants in and help us work that we thought was long overdue. And so we took advantage of that.

And I think we feel comfortable with the historical levels of R and D. Obviously, clearly, as time progresses and we focus more on therapeutic products that will will tend to trend upwards. But I think we don't not looking to blow R and D out of the water either. I think the investment that we've made is effective and we think at the right levels.

Sufficient proof of our plan, yes.

Okay.

All right, great. And then I'm wondering, the cadence of CapEx, obviously, it's a number It's going to be a number this year. Do you have any guidance for half, second half or just where that's likely to sort of come in because it will really matter in terms of free cash generation? Thanks. Mike, I wish I had a good response to you. We keep waiting for winter to show up. And so continue we continue to build the facility across the street. We were talking about pouring footings just today. Just today, yes. Normally the ground freezes and you don't necessarily want to do that or can't do that. So you hold off till spring or summer, right? And so The weather has been [indiscernible] pretty mild here in Utah and so the building continues. Now this is Utah. We could have a snowstorm, four feet of snow here in the next two hours and we don't even it. But we have one on May, we could. We've had one before. So I'm not going to provide you with a kind of a cadence other than to say obviously we clearly talked about the additional CapEx that we would do as part of our CGI program because we wanted to build a facility which we'll think will make us more efficient over time.

Obviously, I'd be disappointed if I didn't just didn't highlight the strong free cash flow number that we had for last year. I mean, dollars 186,000,000 dollars 66,000,000 in the fourth quarter, I mean, it's just outstanding. We're focused on that number. We'll control CapEx as we've done over the last several years.

That's all I have for you. Just we're just going to keep executing.

It's the goal.

Well, congratulations. It really was a fantastic year. Thanks. And a fantastic fourth quarter. Thanks. Thank you, Mike. One moment for the next question. And our next question will be coming from the line of Jim Sidoti of Sidoti and Company. Your line is open.

Good afternoon. Can you hear me?

Yes, we can Jim. How are you?

Good, good. Fred, you sound much better than you did last I hope you're feeling better.

Yes.

I was I had the bug. I'm fine, but yes, thank you, Jim.

All right. Just following up on that CapEx question. I think I heard you say CapEx $90,000,000 to $100,000,000 for the year, which is about double, a little more than double what you've done the last couple of years.

What do you get from that distribution center? How is that going to help you?

Well, we've essentially in two ways, The first one is just from an efficiency standpoint. The system we currently have Jim is almost 20 years old. So it's essentially kind of met its end of end of life. There's a lot better systems out there that we're using at two of our other distribution centers. And we think we can just be significantly more efficient with a new system. And so we've squeezed all the juice that we can out of the current system. And we postponed it, I think sufficiently We've been talking about this for probably five years and we finally felt like we were at the right kind of size to make sure that we did what we needed to do from a distribution standpoint. But I was going to say, Jim, the other side of it is we have and are spending a lot of money to have stuff like resins and things stored off-site. They'll be in this building that eliminate that expense and and the convenience of having to go pick it up downtown and bring it back out. So there's that efficiency. But I think the biggest one too is that We have Richmond for the East Coast and it keeps creeping to the West.

And we need to get it back so there's an equilibrium so we can serve our customers as well. So there's all the reasons we've discussed here.

And the second would be capacity. Right? I mean, we've those of you who have visited our South Jordan site have seen the molding machines.

As Yes, we can't add any more molding machines there. Luckily, we have additional capacity in Mexico. But yes, as we look to expand and need additional capacity [indiscernible] We will have additional room that is opened up by moving our distribution that currently sits on the main CapEx area right across the street. So that's the goal. All right.

And it sounds like you're still going to generate some pretty good strong free cash flow even with this increased CapEx. When would you look at those numbers again?

We hit $186,000,000 Thank you for the opening there, Jim. But no, look, we'll do a minimum of $400,000,000 under CGI. I think we're well on our way with the 186 dead did. We think we can do somewhere at least $150,000,000 but [indiscernible] I think we're we're feeling pretty confident there. [indiscernible] pay down. Will that be the case again in 2025?

We'll continue to put cash on our balance sheet, Jim, and wait for opportunities that make sense for us us. We've obviously got a clear strategy on the M and A front. I think you guys have started to see that. We're finding assets that are margin accretive that can help us with with adding additional growth and also our call points that we feel really comfortable with. And allow us to get deeper in the bag. Okay. All right. Thank you. Thanks, Jim. Thank you. That does conclude the Q and A session for today.