New Jersey Resources Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Merit Medical Systems Second Quarter 2024 Earnings Conference Call. At this time, all participants have been placed in a listen only mode. Please note that this conference call is being recorded I would now like to turn the call over to Mr. Fred Lampropoulos, Merit Medical Systems' Founder, Chairman and Chief Executive Officer.

Operator

Please go ahead, sir.

Speaker 1

Thank you, and welcome, everyone. I am joined on today's call by Raul Parra, our Chief Financial Officer and Treasurer Joe Wright, our President and Brian Lloyd, our Chief Legal Officer and Corporate Secretary. Brian, would you mind reading us through the Safe Harbor statements, please?

Speaker 2

Thanks, Fred. I would like to remind everyone that this presentation contains forward looking statements that receive Safe Harbor protection under federal securities laws. Although we believe these forward looking statements are based upon reasonable assumptions, they are subject to risks and uncertainties. The realization of any of these risks or uncertainties as well as extraordinary events or transactions impacting our company could cause actual results to differ materially from the expectations and projections expressed or implied by our forward looking statements. In addition, any forward looking statements represent our views only as of today, August 1, 2024, and should not be relied upon as representing our views as of any other date.

Speaker 2

We specifically disclaim any obligation to update such statements except as required by applicable law. Please refer to the sections entitled Cautionary Statement Regarding Forward Looking Statements in today's press release and presentation or 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 the SEC, which are available on our website. Our financial statements are prepared in accordance with accounting the 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.

Speaker 2

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 8 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 for, financial reporting measures prepared in accordance with GAAP.

Speaker 2

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 Investors page of our website. I will now turn the call back to Fred.

Speaker 1

Thanks, Brian. I appreciate it very much. Let me start with a brief agenda of what we will cover during our call and prepared remarks today. I will start with an overview of our financial results and key operating progress areas during the Q2. After my opening remarks, Joe will provide a summary of our revenue results before turning the call over to Raul, who will provide a more in-depth review of our quarterly financial results and our financial guidance for 2024, which we updated in today's press release.

Speaker 1

Then we will open the call for your questions. Our second quarter results exceeded our expectations. We reported the total revenue of $338,000,000 in the 2nd quarter, up 5.6% year over year on a GAAP basis and up 6.6% year over year on a constant currency basis. The constant currency revenue growth we delivered in the 2nd quarter was stronger than the high end of the range of growth expectations that we outlined on our quarter 1 earnings call. Specifically, we expected constant currency revenue growth for the 2nd quarter in the range of 4.7% to 5.8% year over year.

Speaker 1

Importantly, the better than expected constant currency revenue growth in the 2nd quarter was primarily driven by strong organic growth and to a lesser extent contributions from acquired products, which modestly exceeded the high end of our growth expectations as well. With respect to our profitability performance in the Q2, we leveraged the solid revenue results to deliver non GAAP gross profit and operating profit growth of 6% and 11%, respectively, which resulted in year over year margin expansion by approximately 15 basis points 92 basis points respectively. And we delivered 17% growth in our non GAAP earnings per share, which exceeded the high end of our expectations as well. Perhaps most notably, we generated nearly $58,000,000 of free cash flow in the quarter, a record for Merit, and have generated more than $82,000,000 of free cash flow over the first half of twenty twenty four, representing a more than fivefold increase year over year. We believe our second quarter results reflect continued strong momentum in the business over the first half of twenty twenty four and we are confident in our team's ability to deliver the updated financial guidance that Raul will review later on the call.

Speaker 1

While we are proud of the results achieved over the first half of the year, we are not resting on our laurels. We are focused on delivering continued strong execution, stable currency constant currency growth, improving profitability and solid free cash flow in 2024 as well as continued progress in our continued growth initiative program related financial targets for the 3 year period ending December 31, 2026. I would now like to share a brief update on several areas of operational progress in recent months. First, with respect to new product introductions, we announced multiple regulatory clearances and commercial introductions in the Q2, including in May, we announced FDA 510 clearance for our seeds vascular plug and the commercial launch of our Behring NS PVA Express prefilled syringe in the United States and Australia. These addition to Merit Symbolic's portfolio complement a comprehensive offering of MicroSphere, particle and gelatin foam products supported by a range of microcatheters, guide wires and other enabling devices.

Speaker 1

We also announced the U. S. Commercial release of the Basic Sky Inflation Device in May. Basic Sky is the latest addition to Merit's comprehensive inflation device portfolio, which includes both digital and analog devices. The basic Sky is available as a standalone solution and in kits with mirrored angioplasty packs configured to offer complementary Access Plus, ONRR and PhD hemostasis valves.

Speaker 1

2nd, with respect to our progress in the area of clinical validation in recent months, we are pleased with the progress achieved in recent months for our RAPSODY arteriovenous access efficiency or WAVE pivotal study. We completed the clinical study report and filed the final module with the FDA for pre market approval or PMA by the end of the Q2 of 2024 as expected. We look forward to engaging with the FDA as they review our PMA application for this innovative technology. The RAPSODY cell impermeable endoprostasis is built to combat the challenges dialysis patients can often experience due to stenosis and occlusions in the dialysis outflow circuit. We believe this technology can extend long term vessel patency rates and reduce the complications associated with existing treatment options on the market today, including the need for repeated interventions, frequent trips to the hospital and inadequate dialysis treatment.

Speaker 1

Importantly, we are excited to announce the clinical results from our RAPSODY studies will be featured in scientific sessions at key medical meetings this fall, including at the Cardiovascular and Interventional Radiology Society of Europe or CIRCE Annual Congress on September 14 in Lisbon, Portugal and at the Controversies in Dialysis Access or SITA meeting in Washington, D. C. On October 5. 3rd, we announced important enhancements to both our executive leadership team and our Board of Directors. In May, we announced the appointment of Joe Wright as President.

Speaker 1

Joe now oversees Merit's global commercial, marketing and operations teams. With more than 19 years of experience with Merit serving a variety of leadership roles and in multiple geographic regions, I believe he is the ideal leader for this important position. Joe has been central to executing our strategic plan and positioning the company for continued success, including spearheading our commercialization efforts and overseeing significant international expansion, engineering the advanced capabilities of our Renal Therapies Group, including the integration of the business and assets we acquired from AngioDynamics in 2023 and directing the development of our commercial excellence initiatives globally. I look forward to continuing to work closely with Joe going forward. We also enhanced our Board of Directors with the selection of Sylvia M.

Speaker 1

Perez as a new Director at Merit's Annual Meeting of Shareholders on May 15, 2024. Sylvia is President of the Commercial Branding and Transportation Division at 3 ms Company. Her expertise and proven track record of leadership success will provide valuable industry and organizational perspective to both the Board and our management team as we pursue our continued growth initiatives program. Now before turning the call over to Joe, I would just like to take a few minutes to discuss the strategic acquisition we announced on July 1. We announced the acquisition of assets for Endogastric Solutions Incorporated for a total cash consideration of approximately $105,000,000 and the assumption of certain liabilities.

Speaker 1

We believe this acquisition represents multiple strategic and financial positives and importantly this acquisition is consistent with and will not distract us from our continued growth initiatives program. Strategically, this acquisition enhances our endoscopy product portfolio in existing clinical specialties while expanding our global footprint in the gastrointestinal market. This acquisition adds an innovative solution for patients suffering from chronic gastroesophageal reflux disease or GERD, which is a significant annual addressable market opportunity estimated at $2,000,000,000 annually. GERD is a digestive disorder that occurs when the lower esophageal sphincter doesn't tighten correctly, allowing acid from the stomach to enter the esophagus. When this occurs chronically, it can result in serious health conditions such as esophageal damage and cancer.

Speaker 1

The Esophage Z Plus treats GERD by restoring the body's reflux barrier. By restoring the body's reflux barrier, the Esophix Z Plus device is designed to provide relief of GERD symptoms and reduce acid reflux that can cause long term complications and risk. Now this is accomplished under visualization during a minimally invasive procedure called transoral incisionless fundoplication or TIF 2.0. Recently, the American Gastroenterology Association released a clinical practice update on the evaluation and management of GERD and listed TIF 2.0 as an effective endoscopic option in carefully selected patients. We estimate that there are more than 5,000,000 patients in the U.

Speaker 1

S. Alone currently using pharma treatment options for refractory GERD that represent potential candidates for TIF 2.0 with Esophix Z Plus procedure each year. The Esophix Z Plus device is supported by economically favorable reimbursement, level 1 clinical evidence and strong advocacy for medical societies. We also believe this device is highly complementary with our existing portfolio and customer base while expanding access into interventional gastroenterologists and surgeons in the endoscopy unit and the operating room. In addition to the strong strategic rationale, we believe the financial profile of this acquisition is extremely compelling.

Speaker 1

Now Raul will share give you some additional color on the favorable financial profile of this acquisition later on the call. In the interim, I will share with you that we expect sales contribution in the range of $13,000,000 to $15,000,000 over the second half of twenty twenty four and we expect this acquisition to be accretive to our multiyear total program excuse me, total company growth profile on an annualized basis going forward. Now with that, let me turn the call over to Joe, who will review second quarter revenue performance.

Speaker 3

Joe? Thank you, Fred. I'll provide a detailed review of our revenue results in the 2nd 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 a year over year and constant currency basis.

Speaker 4

We

Speaker 3

have included reconciliations from our GAAP reported results to the related non GAAP item in our earnings release and presentation available on our website. 2nd quarter total revenue growth was driven by 6% growth in our Cardiovascular segment and 16% growth in our endoscopy segment. Our cardiovascular segment was the primary driver of the better than expected total revenue results versus the high end of constant currency growth expectations again this quarter. However, our endoscopy segment sales did exceed the high end of our expectations as well in Q2. Sales of our peripheral intervention or PI products increased 11%, representing nearly 74% of total cardiovascular segment growth in the period.

Speaker 3

Excluding sales of acquired products, PI sales increased 7.6% on an organic constant currency basis. Organic growth in the PI Cat product category was driven by sales of our access products and our delivery systems increased 22% and sales of our radar localization products increased 9% and together represented nearly 3 quarters of our total PI organic sales growth in Q2. Sales of our custom procedural solutions or CPS products increased 3%, which was notably better than the low single digit decline we expected in Q2. This performance was fueled by strong growth in sales of kit products, which more than offset the expected year over year declines in sales of trays resulting from our ongoing SKU rationalization efforts discussed on prior calls. Cardiac intervention product sales increased 1.5%, slightly above the high end of our growth expectations, driven primarily by strong sales of EPCRM products and to a lesser extent, growth in sales of fluid management and intervention products.

Speaker 3

Sales of our OEM products increased 5% year over year in Q2. While sales to OEM customers increased in the mid teens on a sequential basis, sales of our OEM products were the only area of our cardio business that came in softer than our growth expectations heading into the quarter. We continue to believe the softer than expected sales trends of our OEM products are a result of order timing and fluctuations in demand as our customers work through efforts to optimize inventory levels. Demand trends from customers in both the U. S.

Speaker 3

And OUS regions improved from Q1 as expected. We saw solid growth in product sales to OEM customers outside the U. S. While demand from U. S.

Speaker 3

Customers drove product sales growth of just 3% year over year in Q2. Importantly, we continue to expect low double digit growth in OEM sales for the full year 2024. Lastly, sales in our endoscopy segment increased 16%, which exceeded the high end of our growth expectations. We continue to see a normalization of growth trends in this business as expected and our updated 2024 guidance now assumes low double digit organic growth in our endoscopy business this year. Turning to a brief summary of our sales performance on a geographic basis.

Speaker 3

Our 2nd quarter sales in the U. S. Increased 8.5% on a constant currency basis and 6% on an organic constant currency basis. Similar to what we experienced in Q1, sales to U. S.

Speaker 3

Customers came in roughly a point softer than what our guidance had assumed, driven by the softer than expected OEM sales as previously mentioned. We continue to expect to deliver International sales increased 4% year over year and 3.8% on an organic constant currency basis, exceeding the high end of our growth expectations by more than 4 70 basis points in the quarter. The stronger than expected organic constant currency growth to customers outside the U. S. Was driven primarily by 1% growth in APAC compared to our guidance range, which had assumed a decline in the range of 10% to 11% in Q2.

Speaker 3

With respect to China specifically, sales decreased 5% year over year better than the low 20% decline our guidance had assumed. We continue to see quarter to quarter variability in growth trends related to volume based purchasing tenders as expected. By way of reminder, while we are not providing country specific growth assumptions in our guidance messaging, the midpoint of our 2024 constant currency growth guidance range now assumes our total international sales will increase 4.3% year over year, driven by 7% to 8% growth in EMEA and 11% to 12% growth in the Rest of World region, partially offset by a 0% growth in the APAC region versus the 4% decline assumed in our prior guidance range. The lower headwind from APAC assumed in our updated guidance is driven by better than expected results in China over the first half of twenty twenty four. Note regarding our China business in 2024, our guidance continues to assume that we will be able to increase sales of units on a year over year basis, but we expect total revenue to decline due to continued pricing headwinds related to volume based purchasing.

Speaker 3

With that, let me turn the call over to Raul, who will take you through a detailed review of our Q2 financial results, balance sheet and financial condition at June 30.

Speaker 4

Thank you, Joe. Beginning with a review of our P and L performance, for the avoidance of doubt, unless otherwise noted, my commentary will focus on the company's non GAAP results during the Q2 of fiscal year 2024. We have included reconciliations from our GAAP reported results to the related non GAAP item in our press release and presentation available on our website. Gross profit increased approximately 6% year over year in the Q2. Our gross margin was 51 0.5%, up 15 basis points year over year.

Speaker 4

The increase in gross margin year over year was driven by pricing uplift, favorable product and geography revenue mix and improvements in freight and distribution offset partially by manufacturing variances compared to the prior year period. Operating expenses increased 3% from the Q2 of 2023. The year over year increase in operating expenses was driven by a 2% increase in SG and A expense and a 7% increase in R and D expense compared to the prior year period. Total operating income in the Q2 increased $6,500,000 or 11% from the Q2 of 2023 to $67,800,000 Our operating margin was 20 0.1% compared to 19.1% in the prior year period. The 92 basis point increase in operating margin was driven by a 15 basis point increase in our non GAAP gross margin and by a 76 basis point decrease in our non GAAP OpEx margin compared to the prior year period.

Speaker 4

2nd quarter other expense net was a benefit of $1,400,000 compared to expense of $3,400,000 last year. The change in other expense net was driven by an increase in interest income associated with our higher cash balances, partially offset by an increase in net interest expense associated with increased borrowings. 2nd quarter net income was $53,800,000 or $0.92 per share compared to $45,900,000 or $0.78 per share in the prior year period. We are pleased with our profitability performance in the 2nd quarter where we leveraged stronger than expected revenue results to drive both expansion and operating margins and non GAAP diluted earnings per share that exceeded the high end of our expectations. Turning to a review of our balance sheet and financial condition.

Speaker 4

As of June 30, 2024, we had cash and cash equivalents of $636,700,000 total debt obligations of $822,500,000 and available borrowing capacity of approximately $680,000,000 compared to cash and cash equivalents of $587,000,000 total debt obligations of $846,600,000 and available borrowing capacity of approximately $626,000,000 as of December 31, 2023. Our net leverage ratio as of June 30 was 2.4 times on an adjusted basis. We generated $57,900,000 of free cash flow in the 2nd quarter compared to $11,500,000 in the prior year period. The year over year improvement in free cash flow generation was primarily a result of significant improvements in cash used in working capital compared to the prior year period. We have generated more than $82,000,000 of free cash flow over the first half of twenty twenty four, expect strong free cash flow generation in 2024 and continue to believe our CGI program will generate more than 400,000,000 of free cash flow in the 3 year period ending December 31, 2026.

Speaker 4

For reference, we have included a table in our earnings press release, which details each of our updated formal financial guidance items and how those ranges compare to prior ranges as of July 1, 2024, when we updated our guidance to reflect the projected impact of our acquisition of the assets of Endogastric Solutions. Our updated guidance ranges now assumes the following: GAAP net revenue growth of 6% to 7% year over year net revenue growth of approximately 5% to 6% in our cardiovascular segment and net revenue growth of approximately 45% to 52% in our endoscopy segment and a headwind from changes in foreign currency exchange rates of approximately $9,100,000 or approximately 70 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 6.9% to 7.7% in 2024. Finally, our total net revenue guidance for fiscal year 2024 now assumes inorganic revenue contributions from the acquisitions announced on June 8, 2023 July 1, 2024 in the range of $24,600,000 to $26,600,000 in the aggregate. For avoidance of doubt, this aggregate range consists of approximately 11,600,000 dollars of inorganic revenue related to our acquisitions of assets from AngioDynamics in Q1 and Q2, plus the contributions from our acquisition of assets from Endo Gastric Solutions in Q3 and Q4.

Speaker 4

Excluding inorganic revenue, our updated guidance reflects total net revenue growth on a constant currency organic basis in the range of approximately 4.9% to 5.6% year over year. With respect to our updated profitability guidance for 2024, we now expect non GAAP diluted earnings per share in the range of $3.27 to $3.35 representing an increase of 15% to 17 percent year over year. Note, this range includes the expected dilution related to our acquisition of assets from Endogastric Solutions, which as disclosed on July 1, is expected to be in the range of $0.04 to 0 point 0 $6 As Fred discussed earlier, we believe this acquisition offers a very attractive financial profile, while we believe this acquisition will be modestly dilutive to our full year 2024 non GAAP profitability, given the partial year contribution and the impact of approximately 2,700,000 dollars of lower interest income on cash balances used for the total purchase consideration, we expect the acquisition to be accretive to our non GAAP gross and operating margins, non GAAP net income and non GAAP EPS in the 1st full year post closing. For modeling purposes, our updated fiscal year 2024 financial guidance now assumes non GAAP operating margins in the range of approximately 18.4% to 18.7%, up 120 basis points to 150 basis points year over year.

Speaker 4

Non GAAP interest and other expense net of approximately $1,500,000 compared to $10,600,000 last year. Non GAAP tax rate of approximately 21.5 percent diluted shares outstanding of approximately 58,800,000 and we now expect CapEx in the range of $55,000,000 to $60,000,000 and free cash flow of at least $130,000,000 compared to at least $115,000,000 previously. We would also like to provide additional transparency related to our growth and profitability expectations for the Q3 of 2024. Specifically, we expect our total revenue to increase in the range of approximately 5.7% to 7.1% year over year on a GAAP basis and approximately 6.4% to 7.8% year over year on a constant currency basis. The midpoint of our Q3 constant currency sales growth expectations assumes approximately 9% growth year over year in the U.

Speaker 4

S. And 5% growth year over year in international markets. Note, the midpoint of our Q3 constant currency sales growth expectations also includes approximately $6,400,000 of inorganic revenue. Excluding these inorganic contributions, our 3rd quarter total revenue is expected to increase approximately 5% year over year on an organic constant currency basis. With respect to our profitability expectations for the Q3 of 2024, we expect non GAAP operating margins in a range of approximately 18% to 18.7% and we expect non GAAP EPS in the range of $0.77 to $0.82 Finally, I wanted to call out one item for consideration when comparing our updated non GAAP operating margin assumptions versus our original guidance for 2024 we introduced on our Q4 call and subsequently reaffirmed on our Q1 earnings call on April 30 and again in our Endogastric Solutions press release of July 1.

Speaker 4

As detailed in our earnings press release this afternoon, beginning in the Q2 of 2024, consulting expenses associated with initiatives conducted under our Foundations for Growth program are no longer adjusted as part of our non GAAP measures. Non GAAP financial measures detailed in the reconciliation tables in our earnings press release reflect the removal of these FFG consulting fees for the 3 6 month periods ended June 30, 2023 and 2024, specifically $4,200,000 in the first half of twenty twenty three $1,000,000 in the first half of twenty twenty four. FFG consulting fees totaled approximately $12,300,000 pretax for the 12 months ended December 31, 2023, representing approximately 100 basis point impact to the previously non GAAP operating margin for that period. Accordingly, our updated non GAAP operating margin assumptions for fiscal year 2024, excluding FFG consulting fees, now reflect expected year over year expansion in the range of 120 basis points to 150 basis points compared to expected year over year expansion in the range of 45 basis points to 70 basis points previously. Importantly, when applying this new treatment for FFG consulting fees throughout the 3 year FFG program, our non GAAP operating margin expansion performance is extremely strong.

Speaker 4

Our efforts to improve profitability over this period resulted in a non GAAP operating margin of 17.2% in fiscal year 2023 compared to 13.2% in fiscal year 2020, an increase of approximately 400 basis points. Further, this new treatment does not impact the cumulative free cash flow we generate over the 3 years ending December 31, 2023, which totaled nearly $300,000,000 And by way of reminder, we generated nearly $419,000,000 of free cash flow since the beginning of 2020. Finally, this new treatment does not impact our 2024 guidance nor our CGI financial targets for the 3 year period ending December 31, 2026. That wraps up our prepared remarks. Operator, we would now like to turn open the line up for questions.

Speaker 5

Thank

Operator

you, And our first question will come from the line of Jason Bednar from Piper Sandler. Your line is open.

Speaker 6

Hey, good afternoon, guys. Congrats on another solid quarter here. I wanted to start first with guidance. It looks like you're flowing through mostly that 2Q overage here. Not much changing here with the implied outlook for the second half of the year.

Speaker 6

I think this is within how you could manage your guide or your outlook. But I wanted to check to see if there's any incremental caution you have with respect to pieces of your business that just had you thinking the momentum from the first half of the year doesn't continue into the back half. It doesn't sound like that, but really wanted to check-in on that. And then within that conversation, maybe discuss a little more specifically your China assumptions within your overall guidance range. It doesn't look as onerous, but I don't think I heard exactly what you're assuming now for China this year.

Speaker 4

Yes. So yes, you're right, Jason. This is how we typically do it, right? So we're flowing through that first half increase. As you know, we beat by about $7,000,000 on the high end of our guidance.

Speaker 4

And so we're flowing that through. Obviously, you have the dynamics of EGS that we're also that we've also included in that which we did that earlier this month when we did the acquisition. So I think generally speaking, we're super optimistic about how the business is doing. The U. S.

Speaker 4

Growth was outstanding again, international growth was great. So we're feeling pretty optimistic and I think I'm sure we'll get some questions on China. China did better than anticipated and we continue to see that. So generally speaking, I think we're pretty excited about how the first half went and how the back half is looking. And I think ultimately, we're putting in a pretty strong year together.

Speaker 1

Okay, thanks.

Speaker 6

And one follow-up there and then a separate question, just if you could specify just what China is within your updated guide versus where it was previously. Again, it seems like it's not as onerous. But and then I did want to ask as a follow-up, I bring it up often here, but the gross margin line was pretty solid again quarter considering this was the toughest year over year comp on the gross margin line. So those margin comps get easier over the balance of the year. I'm just wondering how you're thinking about the gross margin trend line from here.

Speaker 6

Maybe if we're thinking about a seasonal step down in the Q3, but just going forward, is this 51% or so range more or less defendable as we look ahead?

Speaker 1

Yes. I'll let Joe kind

Speaker 4

of hit on the international piece here first in China, and then I'll answer the gross margin.

Speaker 3

Yes. Hi, Jason. This is Joe. Our international sales were up 4% year on year and 3.8% on an organic constant currency basis. So this exceeded the high end of our growth expectations by approximately 4 70 basis points in the quarter.

Speaker 3

So those better than expected OUS results were driven primarily by only a 1% currency growth in or decline in APAC in Q2. Our previous guidance range had assumed a decline in the range of 10% to 11% in Q2. So regarding the APAC sales, so China sales decreased 5% year over year. So that was better than the low 20% decline our guidance had assumed. We continue to see quarter to quarter variability in the growth trends related to volume based purchasing tenders, which is as we expected.

Speaker 4

Yes. So just on the gross margin, Jason, as you know, we don't comment on the gross margin. Generally speaking, we did say at the beginning of the year and I think this still holds true that as far as the operating margin improvement, it would mostly come from gross margin. And to the extent that we would also on the high end, we would also leverage OpEx. So I'd say generally speaking, we're really happy with the way gross margin is performing.

Speaker 4

We've been happy the last 3 years, the way it's what it's done and again continue to be excited about what it's doing this year. And I'd say it's kind of where we want it to be.

Speaker 6

Okay, fair enough. I'll let others hop in here. Thanks.

Operator

Thank you. And our next question coming from the line of Mike Matson from Needham. Your line is open.

Speaker 7

Yes. Thanks for taking my questions. I guess just one on the Endoscopy deal. So I imagine this is going into the endoscopy business. So are you going to be combining the sales teams and having kind of both groups of people selling all the endoscopy products?

Speaker 7

Or will you maintain kind of

Speaker 5

a specialist sales force to solve the Esophix C Plus product?

Speaker 1

Yes, Mike. Hey, thanks. This is Fred. Thanks for the question. Listen, we've been looking for assets in this GI business for a long time.

Speaker 1

It's been very difficult. What we did with this product is we found something that we thought would be able to crossover that we could have the combined sales forces. So for the balance of this year, there's training and that will be the we did keep that sales team and some of the technical and clinical people We'll combine those together with the existing products we have in Endotech. And then as other products come out because we have a very nice pipeline, we won't discuss it specifically, but we think that that's going to serve well and we'll be more efficient. We've had a good sales force, but I mean they're still doing a good job, but the utilization wasn't what we needed it to be.

Speaker 1

This way, there was a single product company that fit into our business very nicely and we're going to combine those 2. We've had them here by the way, I should mention they all of those sales forces have been here to Salt Lake, all getting together. We've all spent time together. And I'm actually very pleased with how that's coming along as well as the integration. Joe, you want to add something to that?

Speaker 3

Yes. As you mentioned, Fred, we've been looking for something in this space for a long time. The great thing about this opportunity was just the financial profile. It's very rare that you find something that's going to be accretive to not just our growth profile, but also our gross margin and overall profitability in the 1st full year. So that was very attractive and it's our existing call point.

Speaker 3

So we are basically able to increase our footprint in a very attractive market here. So yes, we're excited about the combination and we expect to train cross train all of the EGS salespeople that we hired and also our current EndoTech sales force. So both will be able to sell both product lines. So we do expect some cross selling opportunities as we move forward.

Speaker 1

And Joe, if I could just add one more thing. Mike, the other thing is the territories and the smaller our ability to focus more instead of having people traveling so far with these additional folks, we think we can get deeper into the accounts. And incidentally, just as a point of interest, every single account that Merit has happens to be exactly the same footprint as they have. So it's not like these are new customers. They're our existing customers and they're all their existing customers.

Speaker 1

So they know who we are. We're not having new people show up in the lab. This is something that has a lot of features that Joe mentioned and that I've alluded to that we think helps to make it a pretty dynamic team. And I guess the other part that goes with that is when you get, I don't know, I had probably 10 notes from the sales force after we were here and spent a couple of days together just how excited they were to have this opportunity. And every person that we made that offer to in that sales force accepted.

Speaker 1

I think those are really interesting facts that they all came together and that group will come together under the leadership of Nicky Kennedy, who is the leader of that Endotech division. So we're quite excited about this opportunity. A lot of work to be done, but nevertheless, we're very excited about it.

Speaker 7

Yes, it sounds great. And then just on the cardiac business, have you seen any kind of impact there positive or negative from the rapid uptake we're seeing of PSA ablation?

Speaker 1

No. We have not seen that

Speaker 3

at all. We haven't seen anything that's taken away. Joe, anything that you've seen? No. We have devices that enable ablation procedures.

Speaker 3

So regardless if it's RF ablation or PFA, our tools are generally applicable to both procedures. So it hasn't been an impact for us.

Speaker 1

And in fact, it's access to get in there so they can deliver those products. That would be our HeartSpan, our Sterable Sheets, our Splittable, it's those products that complement that they don't take away.

Speaker 7

Yes, got it. Thanks.

Speaker 1

Okay. Thanks, Mike.

Operator

Thank you. And our next question coming from the line of Larry Biegelsen from Wells Fargo. Your line is open.

Speaker 5

Hey guys, it's Larry. Thanks for taking the question. Fred, I wanted to ask you 2 on Rhapsody. First, a big picture one and then a little bit more detailed one. And by the way, congrats on the nice quarter here, especially on the margins.

Speaker 5

Fred, how do you expect to compete with Gore and BD in the stent graft space? We've heard that price is a key component when physicians choose a stent graft. What's your view? And I had one follow-up.

Speaker 1

Yes. I think that first of all, as you know, Larry, we made a press release early to talk about the data being presented at the CSRSA meeting on I think it's August 14 or September, whatever. It's coming up in the next couple of weeks. So we just my general take is that we have superior technology, period. That's always been why we developed it.

Speaker 1

We think it's a great product. I think we've been out there selling it for a while and the uptake on the product has been positive. So we're very excited about the long term. We continue to track well in those markets. The clinicians continue to be positive, and we're really looking forward in the future to discuss more of the addressable market opportunities.

Speaker 1

And at the right time in the very near future, we'll be talking about all of these things so that we can lay it out. And on this call, we're not intending to do that today, but we don't have I can just tell you that I don't have and I don't think the people in this room have any doubt about the viability of this technology and its performance capabilities. We'll talk more specifically in the very near future.

Speaker 5

Well, I wanted to push my luck and ask you one follow-up. How are you thinking about the likelihood you can obtain a transitional pass through payment or TBT payment? And if you believe you can get a TBT because you have breakthrough status, does this mean you're going to have to price it at a significant premium when you come out of the gate, so you can meet the TBT criteria? Thanks.

Speaker 1

Larry, we do have breakthrough status on this product that speaks to that. And at the appropriate time, as we talked about, all of this will be revealed. So we're in the very near future, we'll lay all of this out. Our primary focus today is the PMA has been filed, it's been accepted. Let's get that done and then we'll start hitting all these other things once we know and we get closer and understand.

Speaker 1

So it'll be there. Just going to have to be a little bit more patient. And I sure appreciate your press and your luck.

Speaker 5

I'm not we're not good at being patient here, Fred, but thank you.

Speaker 4

I know that.

Speaker 1

Okay. You're just I'm going to teach you a lot of things like you've taught me.

Speaker 7

You have.

Speaker 1

I know that is a compliment, Larry, you have.

Speaker 5

I know. I know.

Speaker 1

Over the years, you have, and I appreciate it. Thank you, sir.

Operator

Thank you. And our next question coming from the line of Steve Lichtman from Oppenheimer. Your line is open.

Speaker 7

Thank you. Evening gentlemen and congrats on the quarter. Wanted to ask again about Endogastric Solutions. Can you talk a little bit more about what the revenue growth profile is of the products? Appreciate the base of revenue that's being built in here.

Speaker 7

And sort of do you see opportunities in the near term to accelerate that with some potential cross sell

Speaker 2

from your current business?

Speaker 4

Yes. Great question, Steve. As you're aware, we disclosed that for this year, we're going to be in the $13,000,000 to $1,000,000 range for the back half of the year. And we also announced that it would be accretive to revenue, gross margin and operating margin in the 1st full year of integration. So other than that, I don't think we're going to get into the details of it.

Speaker 4

We'll give you obviously our guidance for 2025 in February. But I can tell you that the endoscopy team and both teams are excited about the products that we have and the scale that we think we can get there with the cross selling. So we'll leave it at that, but continue to be

Speaker 5

excited about that asset.

Speaker 1

Got it.

Speaker 7

Okay. And then obviously, you were acquisitive this quarter. Free cash flow coming in stronger though. How should we be thinking about sort of where your head is at in terms of use of free cash looking forward here in the near term?

Speaker 4

Yes. And look, first of all, I just want to I'll give a little shout out to our operations group on managing the inventory growth. I mean, it's been a huge benefit to our free cash flow this year, and we're growing ahead of plan. So they've been able to manage keeping up with our customer demands, while also essentially keeping inventory flat to down. So we continue to expect strong free cash flow generation for the back half of the year and we continue to believe that we're in a good position to hit our CGI program of a minimum of $400,000,000 in free cash flow.

Speaker 4

And lastly and more importantly, we took our 150 a minimum of $115,000,000 in free cash flow target for 2024 and we bumped that up to $130,000,000 So, super strong generation for the quarter, couldn't be more excited about that.

Speaker 6

Great. Thanks guys.

Speaker 2

Good to

Speaker 1

be with you, Steve. Thank you.

Operator

Thank you. And our next question coming from the line of David Ryszard from Baird. Your line is open.

Speaker 8

Great. Thanks for taking the questions and congrats on the strong quarter here. My first question is more around the WAVE results looking forward to seeing that. I don't think I've definitely haven't attended the CETA or the CRRC conference in the past. So I'm just wondering if you could give us sense for maybe what to look for there?

Speaker 8

And then at least in your view, maybe how data that's presented at these two conferences tends to kind of flow in some of the clinical practice?

Speaker 1

Yes. Well, first of all, this is going to be presented by physicians as part of the scientific sessions, not by merit. This is the 6 month follow-up results on patients from the randomized arm of the study, what we call the ABF cohort, which includes target lesion primary patency, access circuit primary patency and safety events. So this is the randomized part of the study and that will be presented. It will be presented from the podium in the scientific sessions.

Speaker 1

In terms of the specific data, come to Lisbon or tune in because we can't speak to it until that date and then we'll be happy to have the physicians, not merit the doctors talk about the results and how they view it. So I think we're excited to we'll all be there. I can just tell you the people in this room will be at that meeting in Lisbon, Portugal.

Speaker 8

Okay. Thanks. I don't think I'll make it out to Lisbon this year. But my second question is more on China APAC. Obviously, that was a stronger growth driver than you expected or the comments there.

Speaker 8

I'm just wondering if you can help us think about some of the components of the way in which your business model operates in that market and the level of visibility at least you have into the next several quarters of growth. I mean, it seems like in medtech, it's a weaker kind of macro market in general. Seems like you've held in there a little bit better than maybe expected. So just wondering if your business or the visibility you have into those markets is maybe any different than what some other kind of medtech competitors out there have? Thank you.

Speaker 4

Yes. Joe is going to take the China question, but David just as a point here, I believe that the, Circe will be able to webcast that information. So if you can't make it there, I think a pass will get you a webcast. I don't know all the details yet. We're trying to find that out, but our understanding is that there is a webcast available for that, so for those of you that can't make it.

Speaker 3

Yes. Thanks, Raul. And on China, just as a way of reminder, we don't provide country specific growth assumptions, but we did have better than expected results from China in the first half of twenty twenty four. We, like all the other medtech companies, are affected by volume based purchasing. And there is some variability to that.

Speaker 3

But we still look at China as a very strong demographic, strong growth market for us. The key for us is just getting through this year and perhaps next year, and then we reset our growth based on a new baseline and we still expect great things from China in the future.

Speaker 4

Yes. And I think one thing to highlight too that we're excited about is that, even though we did have a total revenue decline, we did see sales of volume growth year over year. So I think that's important as Joe mentioned once we reset that then I think we can get back to normalized levels of growth in China.

Operator

Thank you. And our next question coming from the line of Jason Bedford from Raymond James. Your line is open.

Speaker 9

Good afternoon, guys. Can you hear me okay?

Speaker 1

Yes. We got you, Jason.

Speaker 9

All right. So a few questions. Following up on RAPSODY, I apologize if I missed this, but did you provide an update on expected timing around FDA approval?

Speaker 1

No. It's in there. It's in their hands. We'll go through all the steps. We're prepared for it.

Speaker 1

We're prepared for the various aspects of a PMA, but it's in their hands now. We've completed the submission as we said we would on time. And now we just sit back and we respond. And when they're done, they're done. So we haven't spoken to it because it's in their hands, Jason.

Speaker 5

Got it.

Speaker 9

Okay. That's fair. OEM, flat year to date, but I think I heard you say that you're still expecting double digit growth for the year. I wonder if you could just kind of confirm that and I don't mean to be overly obvious with the question, but do you have strong visibility because it does imply a pretty big ramp in the second half to get to double digit if indeed that's the guide?

Speaker 4

Yes, Jason. I mean, first of all, I'd like to highlight our U. S. Sales growth was just tremendous and it continues to be. So, and OEM did contribute in the Q2.

Speaker 4

So they grew at about 5% on a constant currency basis. That's compared to Q1 where they were down approximately 5%. So we've seen a good rebound. We haven't changed the guidance for OEM because we do feel like we have the visibility to better second half and it does, obviously the math would imply that it's a pretty strong back half of the year and we feel good about what we've guided there. So again, I think we're really happy how things bounce back and we're seeing some pretty strong demand there.

Speaker 4

As you know, there was also a deal announced which we included was in our guidance, but nevertheless I'll highlight it with Medtronic on our spine business that our OEM division is helping with. So strong demand for sure.

Speaker 10

And that

Speaker 1

pipeline is filling back up, Jason. So we do have probably more visibility there of the stuff that's coming. Those orders are coming in behaviors are going back to what we would see has been kind of the general after the ups and downs and the workouts of COVID are starting to come back to normalization. Yes.

Speaker 3

And we have seen in the past 20% plus growth quarters from OEM. So while we're not necessarily saying when that will happen, it's not out of the ordinary for the sales division.

Speaker 9

Okay. Yes, the business obviously lends itself to some pretty good visibility. Just and last one, I guess, for me, just on the EGS deal and the improving growth profile there. Is there an international angle to the strategy? Or is it mostly U.

Speaker 9

S. Driven?

Speaker 1

Well, it is mostly U. S. Driven. However, they do have and I think they just didn't have the bandwidth. We think that's one of the things we're exploring is they have sales coming out of Europe and the Middle East and we think we can add to that and we'll be pursuing those growth opportunities wisely and very methodically.

Speaker 9

Okay. Thank you.

Speaker 1

You bet. Thank you.

Operator

Thank you. And our next question coming from the line of Craig Mitchell from Bank of America Securities. Your line is open.

Speaker 10

Thanks guys for taking the questions and congrats on a strong quarter. Just had a couple of quick follow ups on China and the better than expected results in Q2. Just wanted to know was that VPPs maybe not coming through on certain products you were expecting or the impact the pricing impact from the VPP wasn't as big as you expected or maybe the underlying markets got a little bit better there? And then similar question for the rest of the year and how conservative you guys think you are on the VBP side. And I think this was alluded to in a couple of other still expect volumes to grow, so that's positive.

Speaker 10

But any broader thoughts on the underlying market there? Thanks guys.

Speaker 4

Yes. And so I'll let Joe kind of tackle the market and what he sees there. But first of all, we haven't changed our second half VBP headwind assumptions, those kind of stay. I will say that during the first half of the year, obviously, we've done better than expected, clearly, as we talked about. And I think the one thing that I do want to highlight, which I think is really important is that we continue to grow sales of units on a year over year basis, which I think is really important because we're able to overcome some of that volume based purchasing impact.

Speaker 4

So we're definitely seeing it in our P and L. We're definitely getting hit with BBP, but our team is doing an excellent job of continuing to growing units, which is giving us a little bit of upside. So, optimistic about China. Joe, what do you think?

Speaker 3

Yes. I think the overall unit growth highlights the fact that procedural growth in China is still strong. So while we're dealing with the VBP headwinds, the first half VBP was largely in line with our expectations. So there's no real change even in our second half guidance. We still expect it's in our plan right now.

Speaker 5

Great. Thanks guys.

Operator

Thank you. And our next question coming from the line of John Young from Canaccord. Your line is open.

Speaker 6

Hey, good afternoon and thanks for squeezing me in here. First, I just want to touch on Rhapsody too. A lot of questions have been asked on it, but maybe just going back to you. What is the commercial infrastructure for the product today, Fred? And how you think about building it up to the PMA approvals you're ready at launch?

Speaker 1

Well, we put together a renal therapy group that we put together last year that a number of products that are in there that that product will fall into. They include things like the Surfersure and our hemodialysis product because they call on the same physician and the same point of sale. So part of that has been under development getting ready for this for some time. So Drew, do you want to comment any further on that?

Speaker 3

Yes. As Fred mentioned, we established a renal therapy sales group, and we've been adding to that this year in preparation for Rhapsody. The good thing for us is, as Fred mentioned, we have other renal therapies products that were frankly under focused previously. So when we broke out this team, they've been able to focus on these products that we already have, grow that business, while at the same time, we've been spending a lot of time training them up on Rhapsody, letting them hear physician experiences in other approved markets outside of the United States. So we feel like we're doing all we can.

Speaker 3

We expect to add to that team over time, but we're going to be judicious in how we do that.

Speaker 4

The other thing to add too, John, is that you can clearly see that that team is performing well, right? They have the angio products, which are slightly ahead of where we anticipated they would be. And so clearly, they're doing a good job and the integration part of things.

Speaker 1

And let me just maybe add to the last thing to that. And that is, I think the ability for these guys to focus on 6 to 8 products all at the point of sale is really significant. Again, as Joe pointed out, we've seen that performance and we're being, I think, very cognizant of making sure we stay within our budgets, at the same time, making sure that people are trained. So when it comes in, we can go to the market without having either too much inventory because that's another important part of this, the training and the focus. Focus is a key because Amerit's broad product bag and you can't it's hard to do.

Speaker 1

So with this, we think that it was the right call. It was developed some 18 months ago, and we're just working through it. And when we get approval, we'll be all set with people that know the product and have complementary products to sell with it. Great.

Speaker 6

And maybe just a follow-up on that approval. On the submission, heard you that it's in the FDA can. Have you gotten any deficiency letters yet back or has the 180 day clock stopped for questions at this point yet?

Speaker 1

We generally don't comment, but I will on the stuff that comes in because there could be misunderstood, misconstrued and whatever. They have it. The clock is ticking. That's why I'll leave it at that.

Speaker 6

Great. Thank you.

Operator

Thank you. And our next question coming from the line of Jim Sidoti from Sidoti and Company. Your line is open.

Speaker 11

Hi, good afternoon and thanks for taking the question. On Rhapsody, do you think that presenting the data in Spain will have any impact on your international sales of the product? And do you think that there is an international market for the product?

Speaker 1

Well, first of all, Jim, we're already selling it international and data is the name of the game to physicians. That is the name of the game. We hear it over and over every day, where is the data, where is this, where is that on a lot of products. And if you don't have it, how do you prove that it's efficacious? So data is important.

Speaker 1

It will have an impact and we're very excited to be able to deliver this in at Saoirse.

Speaker 11

Okay. And then can you just give us some sense on the impact of the acquisition on the sales team? How big was the endogastric sales team that you brought in compared to what you had with your sales existing sales force?

Speaker 3

Yes. So it was about 50% of the size of our Endotech sales force. So we could have taken more, but we decided to selectively hire those we thought were in strategic areas and where we had opportunity. So it will grow that overall force by about 50%.

Speaker 11

I'm sorry, was that 1.5 or 5.0?

Speaker 3

50.

Speaker 11

50. Okay. And then also, I'm sure that there was a lot of customer overlap, but are there new customers that you'll be calling on now for your core products?

Speaker 1

Well, the bottom line is, is every customer there is a customer of ours already.

Speaker 4

Maybe 2 new customers, something like that.

Speaker 1

So that was one of the beauties of all this, Jim, is that they're not new people that we don't know or that they don't. So when we're calling on a lab, they know who we are and we know who they are. So I've never seen anything quite like this where every account that we have, they have as well and they have something in there. So but let me go the other way around. Every account that they have is an account that we're already calling on, okay?

Speaker 1

All

Speaker 11

right. Thank you.

Speaker 1

Yes. Thanks, Jimmy.

Operator

Thank you. And I'm showing no further questions in the queue at this time. I will now turn the call back over to Mr. Brett Lampropoulos for any closing remarks.

Speaker 1

Ladies and gentlemen, it's a long call, so we appreciate your patience. There was a lot of things to talk about. Roland and I and Joe will be around for the next couple of hours to answer specific questions. We want to thank you for your interest and I thought the questions were great. So thank you very much for your interest.

Speaker 1

And all best wishes from 100 Degrees of Heat in the Mountain Land of Salt Lake City, Utah. Good evening. Best wishes.

Operator

This concludes our conference call for today. Thank you all for your participation. You may now disconnect.

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New Jersey Resources Q2 2024
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