Well, thank you everyone for joining. I'm John Young. I'm one of Canaccord's med tech analysts, and we're thrilled to host Merit Medical. With us today is CFO Raul Parra and Travis McDougal, Executive VP of Corporate Finance and Treasury. The company recently announced strong Q2 results and raised fiscal 2026 guidance, so let's jump into it. Raul, CGI, it wraps up the end of this year, and Merit's clearly tracking towards the 5%-7% organic CAGR revenue, the 20%-22% margin, and the $400 million plus of cumulative free cash flow, especially the latter you pretty much have already almost hit. I know you said you're neck deep in the next strategic plan, which I think investors are going to like knowing you're going to be issuing another one.
Without pre-announcing numbers, how should investors just think about the shape of the next plan and the timing of when you'll share it?
Yeah, it's a great question, and thank you. As we mentioned on the earnings call, obviously hyper-focused on making sure that we execute on CGI, right? Football season's upon us. We don't want to drop the football on the one-yard line. Everybody's marching to make sure we execute on those goals. Look, I think the way the CEO transition happened, I think it was done in a perfect way, where Martha had one year left on CGI, essentially about a year and a half, or a year and a quarter when she came on. That allowed her to kind of get around, visit all the sites, and then work with us on the strategic planning. We're obviously going through that.
I'd say it's a little premature right now to tell you what that looks like other than to say we're super excited about executing on CGI. We think we've done a lot of great work with Martha, and I think we'll have a good game plan for that next three years that we'll be excited to share. As far as when we share it, Foundations for Growth, I think we did in November of the year right before we started the program. CGI, we did it on our Q4 call. I think ideally, we'd like to kind of stick to the Q4 call.
But we're also asking those questions, should we do it sooner or when should we do it? I think everybody right now is hyper-focused on CGI.
Got it.
Yeah.
How should we think of the anchoring to the three targets that you previously used the past two LRPs? Do you think you're going to continue using those three targets for this next one that you're contemplating currently?
Again, not to be vague, but we're focused on that too. Do those targets continue to make sense? They've worked well for us. I don't think anybody's arguing that, but it's a good time to just kind of question everything, right? That's what we're doing.
Got it.
Yeah.
The Q2 call, a lot of it was spent on portfolio review. You really went in depth there and talked about it, leaving no stone unturned. How should we think about what's core to Merit today as the company evolves now with Martha being at the helm? Could we see more meaningful divestitures in the future beyond what you guys have done so far with DualCap, for example?
Yeah, look, I think it's the natural kind of planning process of when you're reviewing your strategic plan, right? Obviously you guys are getting a lot more access to the platforms. That's kind of how we're running the business. So really kind of just diving deep into each platform and really understanding where do we win? What needs to be better? What's executing at a very high level? How do we keep that going? Then what doesn't make sense? As you guys know, over time we've kind of put this portfolio together. If you see kind of where the acquisitions are, we're doing the acquisitions from a platform level, it's basically almost every single one of them. We've invested in oncology, our endotech, our endoscopy I guess I should say, renal therapies, access, and so the list kind of goes on.
I think we've got a really good portfolio right now. We're in really good markets, and procedures, and call points. Now it's just about finding the stuff that we're not really good at, and where does that make sense? I'm not sure that we have a size that we're looking at, but there is definitely things that we can prune. A lot of what, very similar fashion to what you've seen under Foundations for Growth and CGI.
Got it.
Right. I think it is really just very strategic and surgical in the way we do it.
Yeah. I know under the past two plans, obviously one is still ongoing, a lot of it has been more SKU rationalization.
Yeah.
I know you have talked a lot at length about that. Does this signal though that this is going to be something beyond that, where it is really a sale of maybe a number of product lines or anything along those lines? I was trying to figure out how to read into this.
Yeah. I think it is early to tell. But look, obviously we did the DualCap one. A smaller asset. I think there are small assets like that, and again, I like to explain it more as a surgical kind of process. We are not talking large dollars, we are talking kind of very strategic components and pieces that just are right outside our call point that maybe do not make sense.
That makes sense.
Right.
Yeah. Operating margin improvement, you have delivered 850 basis points. You pointed close to 950 basis points if you hit the high end of this year's guidance. We are very familiar with the Merit kitchen sink. We have joked about that a little bit. Just pricing, mix, facility moves, freight, automation. What does the next leg of margin expansion come from as the wins get incrementally harder?
Yeah, look, I do joke about the kitchen sink because I have no better way of explaining it. If anybody has a different name for it or description, I am more than happy to, because I am also getting kind of sick of it, to be honest. But I think it does describe it the best way because we really are just hyper-focused on everything. I like to say, and I have started saying that I think we will perpetually be in the seventh inning. Obviously the heavy lifting, those first six innings, we kind of got through them under Foundations for Growth and to a certain extent, CGI. Now it is just about applying all the things we have learned and just kind of being consistent with them. So, when you look at the operating margin, yeah, look, we still think that we can have pricing, right?
That we can still focus on mix. New product introduction, acquisitions, those also can help on the gross margin side. Operationally, you can be better. You can still continue to transfer stuff to lower cost areas like we've done for the last 10 years. You can continue to automate, you can continue to be more efficient at the plant level, and just the people level too. Raw materials you can attack. You get more scale. The bigger you get, the better you are. We really want to look at everything, logistics.
Yeah. Modes and nodes, right?
Yeah, exactly. That is what, one, prevents leakage, right? H istorically, we would say, "Hey, you know what? This year we're going to focus on price." Everybody does really good on price or mix.
Then you look back and you're like, "Well, wait a minute. Our operations group just gave it away because they weren't as efficient." Right? Or the opposite, like, "Hey, we moved something down to Tijuana, and our sales force was like, oh, they just gave the cost savings away." When you focus on the entire piece, you see the incremental gross margin improvements, which obviously lead to operating margin improvements that you've seen from us. I think there's still more to be had. Again, we'll perpetually be in that seventh inning, just kind of finding the areas to improve.
Any updated thoughts on capital allocation and M&A? How should we think about the pipeline of tuck-in M&A, and maybe what parts of the Merit portfolio today you think could benefit from further tuck-ins?
Well, I think it's all dependent on what's out there, right? But I think if you look at the platforms that we currently have, I think we're really interested in any one of those, right? I think we have the right areas, and we just want to make sure that we're going deeper in the bags that we already play in. From a capital allocation standpoint, I don't think you'll see much of a change. Obviously, stock buybacks are a pretty big discussion point right now, especially when med tech was down as much as it was say three months ago. The discussions were definitely taking place, and quite frankly, they're just part of strategic planning, right?
What is our capital allocation policy? What's our capital strategy for the next few years? We're just neck deep in understanding all that stuff.
Got it.
Yeah.
Q2 was the strongest organic growth in three years at 9%, and you had 22.6% non-GAAP operating margin. You did call out some variables with the OEM rebound and also the renal recall resolution, maybe some stocking as well. How should we think about the genuine demand or a clean run rate in the quarter versus some catch-up that may have happened?
Well, I think you just should look at our yearly guidance, right? What we gave there. I think that's really what we're shooting for. I think when you look at Q1, we still felt it was a strong quarter, even though the revenue growth seemed a little bit light. We did call out OEM, we did call out the recall. When you adjusted for those items, the underlying business was doing great. The Q2 really didn't surprise us, especially as those things, the OEM rebounded, and then we got the recalls essentially behind us. I would just point you to our revenue guidance. I think that's a good barometer of where we think we'll end the year, and hopefully we can do better than that.
Awesome. Yeah. Maybe on guidance, you've lifted organic growth to 6.9%-7.5%.
Yeah.
EPS to $4.25- $4.35. Essentially the first half beat, but you left some of the back half unchanged if you look at it. Where do you think about setting the bar? Can you maybe just talk about any dynamics you're seeing now in Q3 beyond any usual summer seasonality that usually you guys experience?
Yeah, nothing out of the ordinary, right? I think demand continues to be as expected. We're not seeing any softness. I know some people were concerned about procedure volumes. We're not seeing any of that. We continually check with our sales force, and they're not seeing it. T hat's a positive sign. Other than normal seasonality, I wouldn't call anything out.
I do want to double-click on the softness too. I know we've heard it from some of the hospital players really-
Yeah.
a couple of med tech strategics, but really more on the hospital side. I know Merit does a really good job of touching lots of avenues of healthcare.
Yep.
What do you expect there? If hospitals continue to remain under pressure with ACA subsidies, do you expect that to eventually hit the med tech sector overall? I know you guys have experiences in the past too, so just love to hear your views there.
Yeah, I'm not sure that everybody's going to be immune to it, right? I think when we look at the value that we bring, and really the ASP of the products that we sell, right?
Yeah.
It's pretty low.
We're not the big therapeutic driver, which is I think where really you'll see more of the impact.
For us, you're going to need access products, you're going to need delivery devices, you're going to need closure devices. I think when you look at our average ASP, which is what? Somewhere around $9-
$9 bucks
$9 bucks. We're really not that big-
Yeah.
of a cost factor in the whole system. Obviously, it is important for us to prove our value to the systems. I think given our broad product portfolio and our vertical integration and our quality, our sales force does a really good job of selling that, then making sure that the systems that we sell into understand the value that we bring.
Great. I think we may move to some of the segments, SCOUT and then the recent OneMark acquisition. They've been a pretty exciting near-term catalyst. OneMark from View Point, the acquisition expands your TAM to about $1.3 billion by reaching lower-risk biopsies. You've also announced on the Q2 call about the SCOUT MD launch in late May. How is the commercial launch tracking, and how does the cross-sell actually work in the field between the two technologies as we think about the ramp into next year?
You want to take it?
Why not? We view this as the continuum of the patient pathway here. Right? What that $1.3 billion does is it allows us to engage with physicians earlier in the process, so we're really happy with that. The other thing that you consider is down the road in the MD space, that's more suspicious lesions, more technical cases and whatnot. Yes, there is some cannibalization that occurred. We factored it in when we guided, but the reality is we view this as a continuum of care throughout the patient journey, and it's been very nice for us. We're very happy with it, and we look forward to the OneMark going forward.
Yeah. Our sales force is excited. You guys know they were a single product sales force, and to have something else that they can sell earlier, as Travis McDougal said, in the process, it really helps. If you think about what this product brings is we had essentially a punch list of customers that had said, "You know what? In this procedure or this diagnosis, it probably doesn't make sense to use the SCOUT system. The price points might be a little high." Now we have something that's lower cost that they can get into, and that's why it increases the TAM. Again, really excited about it, and I know our sales force is really excited about it too, and the integration's going great.
Is it really like a better, best kind of strategy and pricing point with physicians?
Yeah.
Are physicians the same physician using both then essentially, is that how we should think about it?
Yeah, they could. They could be in a procedure where it just doesn't make sense. It's a low-risk procedure. They don't really want to use the SCOUT system because it might be a little bit too high of a price for that. T hat's where essentially View Point comes in, and it makes a difference.
Place it at the time of biopsy, right?
Yep. Yeah.
Nice feature to it.
Endoscopy, it grew 29% year-over-year. Is this acceleration that we've been seeing durable, or is this more of the integration driving this still?
Well, look, I think the hope is that it can be more durable. Look, I never promise those type of growth rates, as you know me. But I would say that I think we're excited about how not only the acquired products are doing, but also product introductions. I think we're seeing a combination of both kind of deliver the growth there. As you guys know, we've spent a long time trying to find the assets that made sense in our endoscopy segment. Finding a couple of solid assets that our sales force is excited about, they're still trying to integrate that and really get the benefit of it. But we feel like we've made the right investments. We've acquired products. We've launched new R&D products, and I think hopefully we start to see the benefits of those investments.
Well, Raul, that is also the same concept where it is the continuum of care, right? The acquisition we made several years ago with the EsophyX product, that is to treat GERD. Then you go down the pathway, then you get to the Barrett's esophagus. That is the C2 product.
Yep.
Then you get further down the pathway. That is our legacy Merit business. So it is this concept that Raul has talked about of getting deeper into the call points and deeper into the procedures.
Makes sense. OEM has been a bit of a focus too. It rebounded both by new customer agreements and stocking. What gives you confidence in the second half guidance of mid to high single digit growth for that segment?
Well, I think just the underlying business. I think Q2 was a strong OEM result. It was broad based and balanced, I would say, not only with the new agreement that we had recently signed with a new customer. We were able to deliver some product there. As we look into the second half of the year, we know we have more product to deliver to that customer. Just given the broad-based beat within OEM, we feel pretty confident in that momentum that they have.
Got it. I do have to ask on WRAPSODY. I think we are contractually obligated. I know you reiterated the $7 million target for this year. What does the multi-year trajectory for WRAPSODY look like, and will it be carved out in the next LRP?
No. No. Look, I think if you remember, when we launched CGI, we were not sure as to when the approval for the U.S. launch of the WRAPSODY would happen. Right? We made an effort to say, "Look, we know that as we stand today, we feel confident in a 5%-7% CAGR." When WRAPSODY launches, we will call out what the U.S. component is so that you guys can adjust for it. Once we get through CGI, we just feel like it is kind of part of the business. Obviously, if it is a growth driver, you guys will hear it. Other than that, it will fall back into the way we just typically talk about the business at the platform level.
Got it. I know you have really described WRAPSODY as a platform product.
Yeah.
When could we see maybe some future R&D projects coming out based on this for other use cases or other areas?
Yeah. Well, look, I think we're quick learners. I think we started talking about WRAPSODY maybe a little bit too early, and I think it was a lesson learned. I think we'll wait until we have to talk about the products before we start talking about them. T here is stuff being worked on, and I think once we get closer to approval and we understand pricing and all the dynamics and things that we kind of tripped on, we'll start talking more about it.
Great. I just want to see if there are any questions from the audience. I know Bill's in the audience and loves a good heckle, but no. Maybe just as we close out then here, as you finish CGI and you set up the next chapter for Merit, what's the one thing that you want this room to take away for where the company's headed over the next three years?
Well, look, I think the focus of the executive team and with Martha's leadership, I think we're excited about what we can deliver. I think it's very rare for a company to announce, at least that's what I tell myself, you guys can correct me. T o announce two LRPs and execute on them, and we did it in the face of COVID, supply chain shortages, conflict, all sorts of, you name it, whatever's happened in the last five and a half years. W e've been able to execute. I think as we meet as an executive team, Martha's leadership style does come with some level of consensus, obviously, and input from the rest of the executive team. We know at Merit the type of leadership and executives that we have. We haven't done a good job of showcasing those.
I think people have historically just thought of Merit as kind of Fred.
But there's a whole team of people that are behind it, and we're excited to showcase what we can do, and own the ultimate strategic plan. W e're excited to show you guys what we come up with, and the goal is to execute on it, if not beat it.
Great.
Yeah.
Well, Raul, Travis, thanks so much for joining us today.
Thank you, guys.
Appreciate it.