Merit Medical Systems Inc Q1 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Jason Bednar - Piper Sandler - Analyst : Hey. guys. Good afternoon. Congrats on another nice quarter here. Look, a lot of investor focus and questions on the tariff topic. I'll start there to unpack some of the moving parts. And thanks, Raul, for all the color and quantification in the prepared remarks. Can you give maybe a bit more color on maybe some of the mitigation efforts you have in mind? Are you able to talk about what some of those are? Have you already started down the path of those mitigation efforts? And then just so we can think about this appropriately on an annualized basis after mitigation, I hope I don't lose your on numbers. But is that $26 million closer to $40 million to $50 million on an annualized basis, but you expect to offset 45% of that through mitigation and that those efforts would be felt -- those mitigation efforts are felt at some point in '26, but probably starting not at the beginning of the year? Sorry, I'm just trying to figure out really how to baseline ourselves when we look at kind of a full-year fully mitigated basis.

Question: Jason Bednar - Piper Sandler - Analyst : All right. That's really helpful. Yeah. No, I appreciate that it's pretty messy right now and not just for Merit. So I totally get it. I want to come back and a follow-up here on the China market specifically. The demand situation there it seemed maybe a bit weaker than what was originally forecasted. It might be hard to tell. But from where you sit, Fred and Raul, do you think this was all macro related? Was there any demand impact tied to the trade tensions with the US? And then given where everything stands today, I guess, how are you internally thinking about the demand for Merit products in China over the balance of this year?

Question: Jason Bednar - Piper Sandler - Analyst : Well said. Thanks, guys.

Question: Gursimran Kaur - Wells Fargo Securities - Analyst : Hey, guys. This is Simran on for Larry. Thanks for taking the questions. Maybe just to follow up on Jason's second question around China. What are some of the items that I guess are underlying the softer demand that you're seeing in China? And do you think that can get worse given sort of the escalating geopolitical tensions that you're seeing in the region? And how should we think about sort of the recovery of China throughout the year? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 24, 2025 / 9:00PM, MMSI.OQ - Q1 2025 Merit Medical Systems Inc Earnings Call

Question: Gursimran Kaur - Wells Fargo Securities - Analyst : Got it. That's helpful. And maybe just a follow-up on the tariff color. I appreciate all the color that you guys have given. Just to dig in on the impact in China, are you willing to disclose like what percentage of sales in China are manufactured in the U.S. And maybe just more broadly speaking, which manufacturing plants service China and how have you guys shifted manufacturing in the interim to sort of help mitigate some of that impact?

Question: Gursimran Kaur - Wells Fargo Securities - Analyst : Okay. Great. Thanks.

Question: Steve Lichtman - Oppenheimer & Co. - Analyst : Thanks. Hi, guys. I guess first question just on the quarter. Last couple of quarters, including this one, gross margin coming in well ahead. So obviously, great to see heading into this tariff period. Can you talk a little bit more, Raul, about sort of what you're seeing as the underlying driver there?

Question: Steve Lichtman - Oppenheimer & Co. - Analyst : Dinner.

Question: Steve Lichtman - Oppenheimer & Co. - Analyst : I wanted to ask on the cadence of tariff impact because this goes to the annualization. I've been doing the numbers, apologies if I got this wrong, but it seems like the second quarter impact is not too far off from 3Q and 4Q. Am I right on that? And if that's the case, then that annualization number would actually be lower than sort of --

Question: Steve Lichtman - Oppenheimer & Co. - Analyst : Okay, that helps. Thanks.

Question: Robert Marcus - JPMorgan - Analyst : Great. Thanks for taking the questions. Two for me. First, one another tariff question, one not tariff related. Tariff related, you said earlier in the call, you've left your underlying operational expense assumptions alone in the rest of the guide. And I wonder how much opportunity is there to pull back on planned spending or not invest in certain projects to help minimize the EPS impact this year? And then I have a follow-up.

Question: Robert Marcus - JPMorgan - Analyst : Great. And maybe as a follow-up, you reiterated your free cash flow guidance of at least $150 million in 2025, which to me is kind of impressive given the EPS headwind from tariffs. Maybe speak to that, how you're able to do that, where it's coming from and how you're able to offset the tariff impact on free cash flow? Thanks.

Question: Robert Marcus - JPMorgan - Analyst : Great. Thanks a lot.

Question: Craig Bijou - Bank of America Securities - Analyst : Good afternoon, guys. Thanks for taking the questions. I wanted to start with a follow-up on China. And I guess the question is, given the underperformance in Q1, but as you said, Raul, the guidance for the year hasn't changed. I guess maybe just what's your confidence that it was either something that specifically happened in Q1 and you can recover some of those sales in the subsequent quarters? Or is it a market issue that may get better throughout the year? Just maybe a little bit more color or understanding on what happened there.

Question: Craig Bijou - Bank of America Securities - Analyst : Got it. That's helpful. And actually, a pretty good segue into my second question, which is on the OEM business and the strength that I think you called out in the US particularly. But 20-plus percent growth the last two quarters. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 24, 2025 / 9:00PM, MMSI.OQ - Q1 2025 Merit Medical Systems Inc Earnings Call I guess, what's driving that growth? And maybe more specifically in that question is, have you seen some inventory pull forward or build out from some customers ahead of some of the tariffs? Is that something that may be driving some of that underlying growth?

Question: Craig Bijou - Bank of America Securities - Analyst : Got it. Thanks, guys.

Question: David Rescott - Robert W. Baird & Co Inc - Analyst : Oh great, thanks. Can I be heard?

Question: David Rescott - Robert W. Baird & Co Inc - Analyst : Another one on the tariff kind of commentary here. You called out that 45% number as the potential estimate that you could be able to offset with some shifting around or some investments that you have. A two-part question. One, I guess, is the 45% related to whatever that $23.6 million annualized number looks like? Is the majority of that again coming from China or is there some pieces in in Mexico and elsewhere? And when you think about like the internal decisions around how you make those investments, I mean, you could come in tomorrow and the expected tariffs could be half of what they are today. So how do you internally make the decisions around what the go-forward timing is on when those investments are made to attempt to offset some of these tariff headwinds? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 24, 2025 / 9:00PM, MMSI.OQ - Q1 2025 Merit Medical Systems Inc Earnings Call

Question: David Rescott - Robert W. Baird & Co Inc - Analyst : Okay. Great. Maybe on gross margins, again, I know it's already been called out, but the gross margins this quarter were obviously significantly ahead of what our Street expectations were. I think maybe this is the second quarter where you've had really a pretty significant benefit. Really, I think you said you threw the kitchen sink at it last quarter, and that was what drove the upside. So curious for the second part of this year, how you're thinking about that underlying first quarter performance translating to what the otherwise unaffected gross margins by tariffs could have been, meaning that is what you saw or the trends you saw in Q3 and Q1 of just this pretty significant gross margin upside kind of where the business was tracking to ahead of this tariff headwind? Thank you.

Question: Michael Petusky - Barrington Research - Analyst : Hey. Good evening, guys. So I guess I would have expected -- and I'm not going to pretend, I know more about China ordering patterns than I do, but I guess I would have expected some stocking-type orders either late in the quarter or possibly right after the quarter ended in very early April. Did you guys see any evidence of that kind of ordering out of any of the customers in China?

Question: Michael Petusky - Barrington Research - Analyst : Did it hit Q1? Or did it -- or was it more in very, very early Q2?

Question: Michael Petusky - Barrington Research - Analyst : The boxing footwork. Okay. So I did want to also ask about Endoscopy. I'm just curious, sometimes you do M&A, meaning the generic, you do M&A and there's some customer loss for whatever reason. I'm just curious, the guide down, is that associated with customer attrition? Or what's going on there, if you can speak to that?

Question: Michael Petusky - Barrington Research - Analyst : Okay. And then let me sneak one last one in. In terms of OEM, and I know you're sort of downplaying it and hey, this is sort of what we do and there is some lumpiness to it. But at the same time, it's been really positive lumpiness here the last couple of two, three quarters. And I'm just curious, is there sort of with the new accounts you guys sort of alluded to maybe a new normal for the nearer term in terms of sort of growth expectations around that business? I mean, is mid-single-digit growth no longer really the right way to model that at least over the next several quarters?

Question: Michael Petusky - Barrington Research - Analyst : Well, I mean it was 21% in Q1, though. If you're saying high single-digit growth, you probably are assuming roughly mid-single-digit growth the rest of the way.

Question: Michael Petusky - Barrington Research - Analyst : Last part of that. Have the brand-new accounts that you guys have signed, have they had an outsized impact on the recent success in that business?

Question: Michael Petusky - Barrington Research - Analyst : Fair enough. Thanks.

Question: Jim Sidoti - Sidoti and Co - Analyst : Hi. Good afternoon. Thanks for taking the questions. So a part of your growth strategy has always been the inorganic growth through acquisitions. And your targets are just like you, they're subject to these tariffs. Has the number of targets increased? Or are people more willing to make deals as a result of this?

Question: Jim Sidoti - Sidoti and Co - Analyst : And with regard to the two deals you did in the second half of last year, do you think that integration is complete at this point? Are you happy with the way things are working out there? Or do you think there's still more work to do?

Question: Jim Sidoti - Sidoti and Co - Analyst : Got it. Thank you.

Question: Jon Young - Canaccord Genuity - Analyst : Hey, Fred. Thanks for fitting me in. I want to touch on CGI. I know a pillar of it has been the SKU rationalization and also the raising prices. So how should we think about your ability to raise prices in this macro environment? And how much of that is factored into the guidance? And also, could you talk about what percentage of the US business is sold to GPOs? And are those contracts generally made on a January 1 annual basis? Thanks.

Question: Jon Young - Canaccord Genuity - Analyst : Okay. Great. And then if I could sneak just one more in here, too. Just any commentary on US WRAPSODY performance this quarter? I understand that we're waiting for the reimbursement, but the device had a strong showing at SIR. I know it is commercially available. So just any commentary on performance.

Question: Jon Young - Canaccord Genuity - Analyst : Great. Thanks, again. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 24, 2025 / 9:00PM, MMSI.OQ - Q1 2025 Merit Medical Systems Inc Earnings Call

Question: Mike Matson - Needham & Co - Analyst : Yeah. Thanks. So just one more on China and the tariff situation. So I think -- I don't know if you've broken out the percentage of your sales from China really, but I think it's sort of around 10% and it looks like you're taking your EPS guidance down by about 8%, and that's probably really for kind of a three-quarter impact. So I mean, is it safe to assume at least with these -- as long as these tariffs remain in place that you're kind of not really profitable in China sort of breakeven maybe at best with your China business?

Question: Mike Matson - Needham & Co - Analyst : Okay. All right. And then just one on WRAPSODY. So good to hear the news on NTAP. But on the TPT, so would that -- would there be -- should there be something on the TPT in the OPPS outpatient proposed rule when that is published later this year?

Question: Mike Matson - Needham & Co - Analyst : Okay, and then just the inpatient versus outpatient mix for WRAPSODY. Do you have any feel for that? Is it skew one way or the other?

Question: Mike Matson - Needham & Co - Analyst : No, I understand. I guess what I was getting at is just is it -- which setting is it used more in? Or I mean, I guess you're not willing to answer understand, but -- REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 24, 2025 / 9:00PM, MMSI.OQ - Q1 2025 Merit Medical Systems Inc Earnings Call

Question: Mike Matson - Needham & Co - Analyst : Yeah. Alright. Got it. Thanks.

Question: Jayson Bedford - Raymond James - Analyst : Good afternoon, guys. Thanks for squeezing me in. Just a few -- just to be clear on the mitigation, are there new initiatives that you're putting in place? Or are you just accelerating existing efforts?

Question: Jayson Bedford - Raymond James - Analyst : Okay. Just on the underlying gross margin, two straight quarters of 53% plus gross margin makes it a trend until tariffs, I guess. But the improvement is notable. Is there anything that kind of hit or inflected here in the last couple of quarters to drive that what is legitimately a step-up in underlying gross margin?

Question: Jayson Bedford - Raymond James - Analyst : Just last one, and I realize we're getting on here. WRAPSODY, are you -- with the US launch, are you seeing any impact internationally, meaning a bit of a halo or anything like that?

Question: Jayson Bedford - Raymond James - Analyst : Okay, thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 24, 2025 / 9:00PM, MMSI.OQ - Q1 2025 Merit Medical Systems Inc Earnings Call

Question: Jason Bednar - Piper Sandler - Analyst : Hey guys, thanks for taking the follow up, and again, sorry for for making this even longer. Just Raul, real quick on maybe helping us out with the EPS bridge here for the full year guide. So where am I -- I feel like I'm missing something. So you had the tariff impact was about $0.33, $0.34 of the headwind. You took the guide down $0.28, $0.29, something like that. It seems like that $0.06 delta is you're picking up and the convert dilution is being less -- less now versus where it was 3 months ago. But you just beat by $0.12. And so I guess I'm wondering where that's coming -- where that's shaking out? And then also, I feel like currency is probably a tailwind as well. So I guess, help me out on what am I missing in the guide?

Question: Jason Bednar - Piper Sandler - Analyst : Okay. So operational and currency are both upside from where we're sitting here today?

Question: Jason Bednar - Piper Sandler - Analyst : Okay. Perfect. Thanks, guys.