Welcome to the Second Quarter of Fiscal Year 2023 Earnings Conference Call for Merit Medical Systems, Inc. [Operator Instructions] Please note that this conference call is being recorded and that the recording will be available on the company’s website for replay shortly. I would now like to turn the call over to Mr. Fred Lampropoulos, Merit Medical Systems’ Founder, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you, and welcome, everyone, to Merit Medical’s second quarter of fiscal year 2023 earnings conference call. I am joined on the call today by Raul Parra, our Chief Financial Officer and Treasurer; and Brian Lloyd, our Chief Legal Officer and Corporate Secretary. Brian, would you mind taking us through the safe harbor statements, please?

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 unknown 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 those currently anticipated. In addition, any forward-looking statements represent our views only as of today, July 25, 2023, and should not be relied upon as representing our views as of any other date. We specifically disclaim any obligation to update such statements, except as required by applicable law. Please refer to the sections entitled Cautionary Statement regarding forward-looking statements in today’s press release and presentation for important information regarding such statements. Please also refer to our most recent filings with the SEC for a discussion of factors that could cause actual results to differ from these forward-looking statements. Our financial statements are prepared in accordance with accounting principles, which are generally accepted in the United States. However, we believe certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of our ongoing operations and can be useful for period-over-period comparisons of such operations. This presentation also contains certain non-GAAP financial measures. A reconciliation of non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in today’s press release and presentation furnished to the SEC under Form 8-K. 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. 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.

Thank you, Brian. Let me start with a brief agenda of what we will cover during our prepared remarks. I will start with an overview of our revenue results for the second quarter. After my opening remarks, Raul will provide you with a more in-depth review of our quarterly financial results and the formal financial guidance for 2023 that we updated in today’s press release as well as a summary of our balance sheet and financial condition as of June 30, 2023. We will then open the call for your questions. Now beginning with a review of our second quarter revenue performance, we reported total GAAP revenue of $320.1 million in the second quarter, up 9% year-over-year. Our total GAAP revenue growth was driven by 9% growth in U.S. sales and 8% growth in international sales. Our total revenue increased 9.1% year-over-year in the second quarter on an organic constant currency basis, excluding the headwind to our GAAP revenue growth related to changes in exchange rates compared to the prior year period and contributions from the two acquisitions we announced on June 8, 2023. Our second quarter revenue results were notably stronger than the growth expectations that we outlined in our quarter one earnings call. Specifically, we shared our expectations for organic constant currency revenue growth in the range of 5% to 7% year-over-year in quarter two. Let me now provide you with a more detailed review of our revenue results in the second quarter, beginning with the sales performance in each of our primary reportable product categories. Note that unless otherwise stated, all growth rates are approximated and are on a year-over-year and constant currency basis. We have included reconciliations from our GAAP reported results to the related non-GAAP item in our press release and presentation available on our…

Thank you, Fred. Given Fred’s detailed discussion of our revenue results, I will begin with a review of our financial performance across the rest of the P&L. For the avoidance of doubt, unless otherwise noted, my commentary will focus on the company’s non-GAAP results during the second quarter of fiscal year 2023. 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 13% year-over-year in the second quarter. Our gross margin for the second quarter was 51.4% compared to 49.3% in the prior year period, representing the highest second quarter gross margin in the company’s history. The increase in gross margin year-over-year was primarily due to favorable changes in product mix, improved freight and distribution expenses as well as other FFG-related efficiencies. As expected, our second quarter gross margins were impacted by the inflationary headwinds we are seeing in freight, logistics, labor and raw materials. With respect to freight specifically, we’re still seeing the headwinds to gross margin as expenses are still higher than pre-COVID, but freight expense have significantly improved compared to the prior year period. The 200 basis point increase in gross margins year-over-year exceeded the high end of the expectations we outlined on our Q1 call, which called for gross margins to increase 70 to 130 basis points year-over-year due primarily to fixed cost leverage on the better-than-expected sales performance in the period. Operating expenses increased 13% year-over-year in the second quarter. The year-over-year increase in operating expenses was driven by a 14% increase in SG&A expense and an 8% increase in R&D expense compared to the prior year period. The increase in SG&A expenses was primarily due to increased labor-related costs associated with headcount as well as increased…

Thank you, sir. [Operator Instructions] First question comes from the line of Steve Lichtman of Oppenheimer & Company.

Thank you. Evening, guys. Just a quick question on the AngioDynamics product acquisition. Wondering if you could talk about sort of the early feedback from the field and what you see the key opportunities to accelerate the sort of underlying growth of those products now under the Merit umbrella ?

Steve, this is Fred, and thanks for the question. First of all, the strategy has always been to be able to strengthen and get ready for the Rhapsody, which will be around here in the near future. And to take a look at the Surfacer, the HeRO, and then how all of those products and then to align a sales force along with that and be prepared for it. So that is the basic thinking, and we think it’s sound. I mean we wouldn’t have done the deal. We also are, of course, transferring the product to Mexico, and we have the guy that did our Becton, Dickinson deal, Greg Fredde, who’s sitting in the room with us, and he’s running that program. So I think that it’s an area that we know our customers are I think 99% or 98% were existing Merit customers. So we feel strongly. I think the program is coming along as planned. And going to the question of growth, and without criticizing anybody else. Essentially, on the biopsy side, there was one product sold in Europe from the company we bought it from, from Angio, Merit has a broad direct sales force. All of it is all distribution. And very candidly, it’s something that we felt like we now have that full portfolio, which I have to say, by the way, is something that nobody else has to be able to have the peritoneal, the acute, the chronic, the Surfacer, the HeRO, the Rhapsody, I mean, who wouldn’t want to have that. So the positive thing, I think, from customers is we love having all these pieces and all the access part of it, and we appreciate it. We’ve reached out to all those customers. We went order to cash almost immediately, and we’re in the process of now transitioning over to our facility in Mexico So I think we continue to be optimistic about the opportunity and the ability to use this product to get growth out of it. Because you’re right, it was something that, unfortunately, from – they didn’t do it, they just didn’t focus. For us, it’s an exciting opportunity. One of the best I’ve seen, and we’ll look forward to reporting, I think, this – in the success of this in the future. I hope that answers your question.

Yes. Thanks. And then just secondly, following up on your comments on the end markets, Fred. You talked about improving end markets. You also talked to another point about some challenges out there having come in better than expected here in the first half. As you look back, what are the biggest improvements you’ve seen in the end markets here over the last 6 months plus? And what are still some of the challenges that you think you need to navigate? Thanks.

Yes. I’ll hit a couple of these and I’ll ask Raul to weigh in on these. Listen, I think the U.S. market is doing fine. There would continue to be challenges in other areas. But we still see growth across the entire gamut of our product lines. You can see the numbers on OEM where, again, reliability becomes such an important factor. People buy from us because they’re reliable, we’re reliable. And that goes a long way. Other people have had shortages. Now we’re not without headwinds and that sort of things. Raul, let me give you a few minutes or seconds or whatever you want to do, just do you want to comment on that?

Yes. No, look, I think we continue to be excited about the business, Steve, obviously, had great results for Q2. I think when you look at the back half of the year, the implied organic constant currency revenue growth is 6% to 7%, we did – I think it’s important to call out that we did let some of that beat flow through into the U.S. market. So that growth is going to go 7% to 8% versus the 6% to 7% we previously had. I think when you look at the international market, there’s still some kind of noise out there and we’ve accounted for it there, which is why we didn’t raise revenue guidance. But if you look at the international organic constant currency growth, it’s approximately 5% to 7% versus a 7% to 8%. And that’s really due to two specific issues. One was the EMEA kind of the Russia issue, right? There’s different requirements now to sell into Russia, which we’ve accounted for as part of our guide. And then the APAC region, we got additional volume-based purchasing out of China that will hit us in the fourth quarter of this year or could. We haven’t been very good at guessing the stuff, but it’s accounted for in our forecast. And so those are really the two things. We’re excited about how the business is doing, quite frankly.

Thanks

Thank you. Our next question comes from the line of Jayson Bedford of Raymond James.

Good morning, guys. Can you hear me. Good afternoon, guys. Can you hear me, okay.

Yeah. We can hear you, Jason. Its good to hear you voice. Thank you.

Me too. Just picking up maybe on the China comment. Strong 2Q, I imagine there was probably a bit of a catch-up there, but I’m just more interested in the VBP commentary. So the guide assumes an impact in the fourth quarter. I guess I’m just curious, are these VBP programs in place now? Or does the guide reflect what you think may happen to announce VBP programs?

So they are announced VBP programs that the Chinese government has announced that will happen in the second half of 2023, Jayson. So as you know, we did have an impact that we had already included in our guidance for the year, our original guidance that we put out in Q1. This is incremental to that. And so again, given that we had strong results, we didn’t really have to change our guidance just given that we had such a strong beat that we were able to kind of maintain our guidance.

And it’s reflected in our APAC numbers as well.

Exactly.

So it’s in our model.

Okay. And to be clear, the expectation it starts in 4Q, not 3Q?

Yes. In the second half, look, I mean, with China, it will change tomorrow, Jayson. I mean I’ll just say the second half, and I think that will account for any changes there.

Okay. And then just on the third quarter gross margin, very strong 2Q, and I realize it always, I think, trends down sequentially. But is there an impact from the acquired assets that’s weighing on the third quarter or fourth quarter with GM for that matter?

For the third quarter, look, it’s all in, right, what we think is going to happen. Most of what you’re seeing is the impact from just reduced revenue. We’ve got fixed cost that we have to cover. And really, that’s what’s driving it. We always see a decrease in revenue in the third quarter. We always typically see a decline in the gross margin also and also in operating margin and earnings for that matter. So as you know that, Jayson, but that’s really what’s driving those – that impact.

Okay. And then just maybe last one from me. In terms of Endoscopy, that was probably the only wrinkle I’d say in 2Q, how confident – it sounds like it’s more of a supply issue than a demand issue, just the level of confidence here that you kind of have this fixed and under control over the next quarter or two?

Yes. Listen Jayson. We finished, I think, 80%. I mean, we got – all the other things done. In one of the units, there’s more work to be done, and we just want to make sure they’re right. So the vendor, we have absolute confidence in. I mean they’ve done extraordinary work and transferring this over. I think we handled it as well as we could. So – and I think what last quarter was, what, 12%, 13%, 14%?

Yes. I mean, I think really, it’s really just these final qualifications that we’re kind of waiting on, Jayson. I think we have a pretty good robust plan. And just – this is one of the issues that Fred was talking about a little bit earlier with Steve’s question, right? We just kind of – there’s still this kind of noise out there with supply chain and just availability of product. And so this is just one of the – one areas that kind of hit us.

A lot of these little things out there. I hope that helps you a lot Jayson.

It does. Thank you.

You bet.

Thank you. Our next question comes from the line of Larry Biegelsen of Wells Fargo.

Good afternoon . Thanks for taking the question and congrats on a nice quarter here. Raul, I’m just – I have to admit, I’m a little confused on the numbers. I thought I heard you say the second half implied organic growth is 6 to 7, isn’t it 6 to 7 still organic for the full year?

Yes.

Okay. And so if it’s 6 to 7 for the full year and you did, I think, about 9.5 in the first half, tell me if I’m wrong, but the second half implies about 4%. Is that right?

That’s correct, Larry. It does go down sequentially.

Okay. So on the China and Russia, headwinds. So Russia, what percent of sales are from Russia for Merit? And what is the implied impact in the second half guidance? And on China, could you tell us the same thing, which areas – last time you had a VBP impact,you told us how much it was and in what area. So can you tell us what you’re assuming for China, the amount and in what areas?

Yes. We’re not going to give that detail, Larry. I think the last time we did this was a year ago, and we spent the better part of that year explaining $10 million. I think you can just – it’s implied in our guidance, and it’s 1% of the APAC growth change reflected in our guidance, if that helps.

Okay. And Russia, have you disclosed a percent of sales for Merit? I can’t remember.

Again, yes, we won’t disclose that. It’s baked into our guidance. Yes.

I got it. Okay. Fair enough. Fred, I’m just curious, what’s your view of catch-up or deferred procedures? Some areas are seeing that. Does Merit have areas that you think would benefit from procedures that were deferred during the pandemic? And what are you assuming in the guidance? Thanks.

Yes. Larry, I think you stated it properly. That is there are some areas, I think I stated last time we visited that they’re having problems staffing OBLs, let’s say, in Texas and maybe in the Midwest, someplace here in Utah, as an example, that’s not a problem. In other areas, it’s – they’ve been able to solve it. So it’s spotty, but higher, but we do believe there’s a lot of pent-up demand out there.

Fair enough. Thanks for taking the questions.

Okay. Thank you.

Thank you. Our next question comes from the line of Jason Bednar of Piper Sandler.

Good afternoon. Thanks for taking the questions. And I’ll echo the congrats here on a strong result here. I wanted to maybe follow up on one item of strength that just really stood out to us in the quarter, and it’s really for the first half of the year, but we’ll focus on 2Q. And that was gross margins. And these aren’t just moving higher on a sequential basis, so you’re hitting new record highs in gross margin, which is just really extremely impressive in this environment. Not a lot of companies can say that just given inflationary pressures. I understand the guidance here for third quarter, but could you elaborate maybe with quantifying some of the contributors here that you’re seeing in the second quarter on gross margins and also talk about your level of confidence and sustainability of those gross margin levels beyond this year? Anything there? And to what extent might be able to consider additional upside that could materialize through additional pricing actions or benefits from these product line transfers to Mexico, anything like that?

Yes. Look, it’s a great question. We expect strong gross margin expansion in ’23 despite all the headwinds that are out there. I think we were very vocal when we give our initial guidance, and we continue to be happy with the way it’s progressing. A lot of the contribution is really coming from our FFG initiatives, which include pricing. It also includes covering some of our fixed cost leverage. And then tailwinds to gross margin that we’re really getting is the freight and logistics, which we’ve really focused on and have been very vocal about making sure that we can get things back on the ocean. As far as beyond 2023, we’re not going to talk about that. But as you can imagine, things are – we’ll continue to do work and there’s transfers and things that continue to happen. So I’ll leave it at that.

And I don’t want to rehash what you just said because I agree with it all. But I think Raul made a comment on our opening comments, that is it’s working. FFG has worked, and we’re now just starting to see some of the benefits of that. It’s not you make a decision or overnight it changes, it takes time for these things to work through a system and through a business and it’s working and it will continue to work.

And Jason, the reason we’ve been so confident in the gross margin is because we’ve been working on some of these programs for not a month or two. I mean, years in certain cases. So again, we still got another 6 months to go, but the plan does call for gross margin expansion.

Okay. Perfect. That’s really helpful, guys. Really comprehensive too. Maybe to shift gears a little bit, the recent transaction you executed with Angio, it looks like a fairly low risk move, 1 that probably has some nice operating margin upside and also even revenue growth upside you talked about earlier in the call. But on the deal, glad this you’re able to find an asset to you’re liking, can you talk about maybe philosophically about how you’re approaching the potential for additional M&A from here? Is there still an appetite do you need to get through a certain portion of the digestion period with Angio before taking that next M&A step. And have you identified procedural gaps that you’d like to fill externally as you did with Angio dialysis and biopsy?

Well, thank you. I think we did a lot of work to sort this out and find it and then to execute it. I’m very confident in our ability in the transition agreements and things like that of the people that are engaged in as I mentioned, Greg earlier in the history we’ve had in the past and very candidly, our associates in Mexico very these guys know what to do. I think that there are opportunities out there I think that being patient and being wise and not frustrating what we’re doing has been the key to it. I mean, you can do – there’s a lot of stuff out there and a lot of people looking for money. But it has to fit the things and the criteria that we’ve set. And if it doesn’t do that, it might be a great technology, but it’s just not going to work for us. We like what has worked, but I think it’s – to do the things that we want, I think is maybe more difficult. And I think our shareholders are going to have to be patient. I think you hit the nail on the head. I think the risk factor for this transaction was one that we felt that we could digest. But I’ve also learned from the past, and that is when you try to do two, three 3 big deals or product transfers, it really, really pins out your resources and capabilities. I think we’ve learned from that. And we all know about that period of time in aligning the sales forces and having a Chief Commercial Officer and doing the changes that we’ve made over the last several years will be very, very helpful. So patience and that patience will be rewarded from, I think, just good and wise choices. Raul?

Yes. And I’ll add that we’re well capitalized with sizable borrowing capacity, and we’re only at 1.2 on a net leverage standpoint.

Appreciate that, really helpful perspective. If I could just squeeze in one more. Just how much pricing might have added in the quarter? And then any views you have on what pricing might be within the second half of the year in your guidance? Thanks.

Yes. We’re not going to disclose that. We don’t want to get into the volume versus pricing discussion, but I appreciate the question, but just know that it is having an impact.

And it is one of our foundations for growth pillars.

Understood. Thanks.

Good. Thank you, sir.

Thank you. Our next question comes from the line of Mike Matson of Needham & Company.

Yes. Good afternoon. I guess I’ll start with the acquisitions as well. So looking at the products that you acquired, the dialysis products specifically in the slides, it didn’t look like there was a little bit of overlap maybe between some of the acquired products and some of the catheters that Merit was already selling. So is that the case? And is there any risk of any kind of cannibalization or dissynergies or anything there?

Yes, Mike, thank you. Listen, they have a number of catheters, but let me point out a couple of things that are very, very important. One, as part of one of those catheters, we end up with an acute catheter. Remember Merit’s products are all chronic. These are the ones that have a cuff. Oftentimes in different types of accidents where someone has renal failure, this and that, you’ll do these other products. Merit didn’t have that. So that is really in addition, a smaller part of the revenues, but nevertheless, an addition. I think what we’ll do is to go through and look at all this stuff. And just like any of our other product lines and the things that we’ve talked about, we will do that as well. I will say this, but I think that one of the things that I’m very excited about and have been for a long time is this Endexo, I’ll call it a component of the BioFlo. The BioFlo is a big deal. We just don’t think that it has been promoted. So I think that is something and we will look at this like anything else and try to come up with the right mix over time. But I think for right now, it’s getting this transferred, going through that transition, getting in place, meeting customer needs, getting our biopsy work done. And by the way, it’s very complementary, as we’ve talked about to biopsy because they didn’t have biopsy products. Merit does have biopsy products. So when we look at all the little tactical issues and how they fit into the strategy overall, we think that it’s going to be a great opportunity. Raul, you want to add something?

I mean, if there’s any overlap whatsoever, really, it’s already in the numbers, but we would call it minimal.

Yes. So just to that point, whatever overlaps, will be replaced with something. And so we don’t look at it as a cannibal or loss of revenue.

Okay. I understand. And then just on the Bluegrass Surfacer product, I don’t recall the slides having a kind of estimate of like the market opportunity for that? Like, I mean, is this something that could ultimately be tens of millions of dollars of revenue. And then is it also kind of a I mean where is the gross margin? Is it kind of significantly higher than your overall margins? Or is it in line or...

Mike, let me answer that by saying that we think it is a contributor to gross margin. We’ve been selling this product for 4 or 5 years, but it was right in the middle of COVID, and it was approved in Europe and then we had to get some work done in the U.S. So it was a difficult time to introduce a product like this. All of that being said, I want to go back to the strategy. It’s what it fits into what it leads to, how it’s complementary to the HeRO. And very candidly, a lot of input from physicians on how they like one group representing and they – so we listened to what they did over the years. And when our distribution rights went away, we looked at it and said, this fits in this strategy and particularly as we moved in and looked at the chronic and acute dialysis products and biopsy and put all this together, there was a lot of thought that went into look how these will work and how will we market this and how does it differentiate the company. So I don’t go into all of the specific products other than to say it is a product that we think will do very well and complement the strategy of the – of this whole process, which were – that, I think, is what we want to focus on is not one product, but the whole a lot because there’s a lot of subtle things, like I said, acute versus chronic, things that generally might not be understood by the investing public. But the strategy is one that’s worth talking about because it’s so much work went into it. So I’m very pleased with the work and the thought that we did to come to that conclusion and then how we approached it. I think it was a relatively unique transaction.

Yeah, okay. All right. Thanks, guys.

You bet. Thank you.

Thank you. Our next question comes from the line of Jim Sidoti of Sidoti & Company.

Good afternoon. Thanks for taking the questions.

Yeah. Good to hear your voice, Jim.

So again, I guess everybody is focused on the transaction because it has been a while since you did one. When you completed the deal about six weeks ago, you thought – you’d see about $15.2 million in transaction costs, about $3.5 million of interest expense. Six weeks later, those still good numbers? Or what are you thinking there?

Yes. The interest that’s expected or implied is about $6 million or about $0.04 to $0.05 a for the year, Jim. And then you would have had some amortization, which I think you’re capturing in that $15 million because the transaction costs won’t be that significant. But a big portion of it will be amortization that obviously comes on as you fair value all the assets.

Okay. So of that $15 million, then it sounds like the majority of that will be in the second half of the year/

Yes. And in the number I have is roughly about $11 million just as a heads up.

That’s an amortization.

Yes, just all in for the expenses and amortization.

So that’s for all in.

Yeah. We might have given that since the last time we talked, Jim, but yes, we show $11million.

Including amortization.

Amortization. Yes.

And so how much was in the first quarter – second quarter, sorry.

It would have been probably about $6 million, somewhere around there, $5 million, $6 million. It would have been amortization and then we would have some banking fees.

Right. Okay. All right. And in terms of pricing, I know you don’t want to get too specific, but is it fair to say that the price increases that you’ve put in place are sticking?

Yes.

Yes.

Okay. And I think you said earlier that continued price increases is part of the Foundations for Growth plan. So expect them to – you’ll continue to put in price increases in ’23 and ’24 or in ’25 and ’25?

We have a program of pricing that’s an ongoing program. Some of these various issues were contracts that will come due, but it is a pillar of Foundations for Growth, and it will be a pillar of consideration and growth going forward. It’s not going to go away.

Yes. When I think of these Foundations for Growth, I always think of the foundational, there’s a lot of things that we’ve changed, how we – what we do or how we do it at Merit and this is just 1 of those pillars that Fred just talked about, obviously additional things, those things don’t end on December of this year. That will obviously help us in subsequent years. .

All right. And then the last one for me on China. If I recall correctly, at the beginning of 2022, you were expecting some pretty significant hits in China because of the volume pricing and as we went through the year, they didn’t materialize. So you’re expecting them again, but what – how confident are you that they’ll actually happen? And is there a chance that the same thing could happen and they don’t materialize in the back of this year?

Well, look, I mean, first of all, we are feeling the impacts of volume base purchasing within our P&L. And obviously, it’s kind of hitting a little bit because we just continue to execute at such a high level and the gross margin expansion continues. So I just want to make clear up that we are seeing the impacts. You’re right, Jim, we haven’t been very good at kind of estimating the exact start of these things, but we do know that they’re impacting this in China changes from day to day.

By the way, about the same as everybody else on the planet. We’ve never been able to figure that out.

I think what we have been trying to do, and I think we’ve done a pretty good job of is just making sure that we’re transparent with our investors and you guys know that, look, there’s additional impacts that we hadn’t accounted for, and we’re just letting you know about those.

Yes. I guess the reason I’m confused is you just had a very good second quarter. Your guidance for revenue for the third quarter is pretty good as well. So it implies that the fourth quarter will be significantly slower growth. And I’m just trying to get in my head is that because of China or Russia or I’m just – are you being conservative? Just trying to understand what’s going on.

Again, I think we’ll just kind of stick to our guidance that we feel pretty good about our guidance that we’ve given and the growth rate that we expect for the year, which is 6% to 7%. The growth expectations in the U.S. have not changed versus what our prior guidance we’ve assumed. It’s really kind of those impacts that we’re feeling from EMEA and APAC.

Okay. All right. Thank you.

Jim, thank you.

Thank you. Our next question comes from the line of Michael Petusky of Barrington Research.

Good evening, guys. Nice quarter. So I guess I wanted to ask Raul, on the expectations for CapEx in the second half, I mean that was up at $55 million for the full year, and it certainly seems like that is unlikely to come in that high. Can you just comment on what your thoughts are on CapEx for the full year?

Yes. We obviously have seen an increase in working capital, and we’re very focused on our free cash flow target for the year. We have slowed down some of the CapEx, and that will feed through the rest of the year, Mike. But our expectation is still to – we’re still shooting for that $300 million of free cash flow.

Okay. But I mean in terms of CapEx, I mean, I think at one point, and forgive me, I may be getting this wrong, but hadn’t you said that CapEx would probably be somewhere around $55 million or might maybe misremembering that? Or...

Yes, you’re right. We haven’t changed that. I guess I’m saying that we did slow it down in the second quarter, and so that will kind of feed through, right? But we haven’t changed the guidance. We haven’t changed any guidance for free cash flow for that matter.

Or CapEx. It can slow down for the quarter, but for the year, we haven’t changed anything.

There’s a lot of timing-based things that happen with capital expenditures and just free cash flow, in general, to be honest.

Okay. Okay. All right. Okay. So in terms of the earnings guide for Q3, sort of the good possibility that maybe you have a couple of pennies negative comp or a couple of pennies positive comp essentially. I mean is a big – a meaningful part of that around whether Endoscopy sort of really continues to lag? Or what essentially is sort of the delta between the two?

It’s really just the revenue right, that will drive it in the gross margin, right? I mean, I think we’ve got the operating expenses that we’ve increased incrementally from quarter-to-quarter, we’ve got the incremental interest expense that’s going up. So it’s really what impacts our third quarter every year from an earnings perspective and our margin perspective is really that revenue and how much we – where we end up on that between the high end and the low of the guidance – of the commentary we gave.

Okay. And then just 1 housekeeping and I probably should be able to figure this out, but I just want the extra sort of handholding. In terms of interest expense that you expect in the second half, I mean, is that roughly like $7.5 million for the second half, something like that? Or is it...

Yes. I mean it’s $0.04 to $0.05, Mike, it’s the best way to kind of put it. And obviously, a big portion of that is going to happen in the back half of the year.

Okay. All right. Very good. Thank you guys. Appreciate it.

Thanks, Mike.

Thank you. Our final question comes from the line of Bill Plovanic of Canaccord Genuity. Q – Unidentified Analyst: This is Zachary on for Bill. Thank you for taking the question. Again, just on the free cash flow, you sort of touched on it there, but given you’re at just over $13 million from the first half and the goal for the year-end was $300 million, can you provide a little more color on how you’re looking to specifically get there? Is it really just the CapEx? Or is there anything else you can give us? Thank you.

Yes. There’s also some work being done on inventory. As you know, we’ve tried to move our – we haven’t tried. We’ve actually done a pretty good job of moving our freight from ocean or from air to ocean. So that obviously creates more inventory. We do have a plan in the back half to start to eat into that inventory. So it becomes in addition to free cash flow as opposed to taking away. In addition, we’re just – I’ll call out that 1 of the things that happened in the second quarter, and it’s not an excuse, but there is a kind of an accounting issue that happens when you originally fair value your contingent payments,anything that exceeds that fair value is actually it moves from financing and into operating cash flow. So that impact was $12.5 million. So really in my eyes, we hit about $25 million in free cash flow. I want to call that out because it’s kind of a unique thing. As you can imagine, we fair value this contingent payment 5 years ago before COVID, and everything else that happened. And so it’s a good thing that we’re paying the contingent payment above what we thought we would pay because that means that Cianna is doing much better than we anticipated, which is good for us. But I did want to call that out. And just as a highlight, I guess, we’ve generated over $200 million in free cash flow in the first 2.5 years of FFG despite all the headwinds in the global macro environment, supply chain, raw material costs, freight and distribution expenses, et cetera. So overall, I’m pretty excited, and we’re still focused on that $300 million of cumulative free cash flow. And so we’ll continue to work towards that. I think we’ve demonstrated, though, that this business is really capable of generating strong free cash flow, and we continue to expect this not only for this year but into the future. Q – Unidentified Analyst: Great. Thank you very much.

Thank you. I would now like to turn the conference back to Fred Lampropoulos for closing remarks. Sir?

Yes. Well, okay, everybody. Thank you very much and for the staff. Thank you for your preparation. Raul and I will be around for the next couple of hours to do our one-on-ones. We appreciate you taking the time on a busy earnings season and all best wishes from Salt Lake City. Good night.

That does conclude our conference call for today. Thank you for your participation. You may now disconnect.+