Welcome to the Fourth Quarter of Fiscal Year 2023 Earnings Conference Call for Merit Medical Systems, Inc. At this time, all participants have been placed in listen-only mode. 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 very much, and welcome, everyone, to Merit Medical's fourth 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?

Thank you, 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, February 28, 2024, 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 fourth quarter. I will then discuss our continued growth initiatives program and related financial targets for the three-year period ending December 31, 2026, which we announced in a separate press release this afternoon. 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 2024, as well as a summary of our balance sheet and financial condition as of December 31, 2023. Then we will open the call for your questions. Beginning with a review of our fourth quarter revenue performance, we reported total revenue of $324.5 million in the fourth quarter, up 10.6% year-over-year on a GAAP basis and up 10.3% year-over-year on a constant currency basis. The constant currency revenue growth we delivered in the fourth quarter was stronger than the high end of our range of growth expectations that we outlined on our quarter three earnings call, specifically, we expressed constant currency revenue growth in the fourth quarter in a range of five to eight% year-over-year. Importantly, the better than expected constant currency revenue growth in the fourth quarter was driven by a strong organic growth reflecting particular strength versus expectations in our PI, CPS, and OEM product categories, and relatively balanced contributions to the upside in quarter four from both the U.S. and international markets. With respect to our profitability performance in the fourth quarter, we leveraged the strong revenue results to deliver non-GAAP gross profit and operating profit growth of 13% and 13% respectively, which resulted in year-over-year margin expansion of 100 basis points and 40 basis points respectively. And we…

Thank you, Fred. We'll start with a detailed review of our revenue results in the fourth quarter, beginning with the sales performance in each of our primary reportable product categories. Note, unless otherwise stated, all growth rates are approximated and presented on both a year-over-year and constant currency basis. We have included reconciliations from our GAAP report results to the related non-GAAP item in our earnings release and presentation available on our website. Fourth quarter total revenue growth was driven by 10% growth in our cardiovascular segment and 20% growth in our endoscopy segment. Our cardiovascular segment was the primary driver of the better than expected revenue results versus the high end of constant currency growth expectations, while our endoscopy segment sales were in line with expectations. Sales of our peripheral intervention or PI products increased 19%, representing the largest driver of total cardiovascular segment growth again this quarter. Excluding sales of acquired products, PI sales increased 14% on an organic constant currency basis. Organic growth in the PI product category was driven by sales of our drainage and radar localization products, which increased 19% and 18% respectively, and together represented a little more than 40% of total PI sales growth. And by sales of our access and geography and biopsy products, which together increased 13%, and represented nearly one-third of our total PI growth in Q4. Sales of both our cardiac intervention and OEM products increased 6%, and were also key contributors to our organic growth in the cardiovascular segment this quarter. Cardiac intervention product sales were at the high end of our growth expectations, driven primarily by strong sales of both our hemostasis and EP and CRM products, which increased 35% and 12% respectively. Sales of our OEM products exceeded the high end of our growth expectations, which…

Thank you, sir. [Operator Instructions] And our first question comes from Jason Bednar with Piper Sandler. Your line is now open.

Hey, good afternoon. Thanks for taking the questions. Congrats on a nice finish to the year and I appreciate all the 2024 and CGI guidance color here. I'll pick up first on CGI. I don't think any of these ranges will really surprise investors that are close to your story and that's not a criticism or a compliment to the predictability here. The revenue guide here makes sense. I wanted to check to see if there's anything notable to call out as a tailwind or headwind embedded in that 5% to 7% growth outlook on, again, in the CGI, new products, regulatory elements, pricing, just anything there to be aware of? And then on the margin side of the equation, I think the math works out to be something like 60 to 120 basis points of annual margin expansion at the operating line. Given what we're looking at for 2024, it looks maybe at the lower end of that, are there benefits here that skew more towards '25 and 26? I'm sorry to pack a few in here, but how do we think about the balance between gross margin expansion and OpEx leverage?

Yes, a lot to unpack there, Jason. So I'm going to try and hit maybe on the revenue side. So if we kind of think on the key drivers, at least on the 5%, we always kind of like to start on the low end and then tell you kind of what the upside would be, depending on what happens. But look, I think it's really more of the same when it comes to the 5%, right? Product introduction, selling the products that we have, we're really kind of hitting on positive CAGR in each of our reportable product categories, specifically PI and CI, CPS, OEM, and Endotech, with really the largest contributors coming from PI and CI. And then, international CAGR is a little bit less than the U.S. CAGR. So it's really kind of a really just a follow-on of really what we did with FFG, quite frankly. So that's on the revenue side. As far as on the operating margin piece, we really focused on the operating margin. And I would say that on the low end, the primary driver is going to be gross margin. When you get to the higher end, you're really leveraging up, you're getting more leverage from OpEx than what we would in the low end. So hopefully that provides you a little bit of color.

And also, let me add this to that, that the revenue thing does not include new products.

That's correct.

These are existing products. It does include WRAPSODY that we're currently selling, but no prognostications or any of the new products that Merit may release next year. We have a long history of new product releases, but this is our existing business, and as they release and when they release, then we'll make notice of that.

Yes, that's a good point. So the WRAPSODY, just for a point of clarity, it's really the outside of US sales that we included in CGI. WRAPSODY U.S. sales, where we haven't been approved yet, have not been included, as one would expect, given that we don't know the exact timing. But we think we know when it's going to happen, but we weren't 100% sure, so we didn't include it.

Okay. All right, very helpful. And yes, you kind of picked up on what I was hinting at there with WRAPSODY, so that sounds like that's entirely upside and I appreciate all the details there on CGI. On the guide for here for 2024, a few different moving parts here. I think core organic growth would be something like 5% to 6%, if not for that SKU rationalization you mentioned. You know, presumably that SKU rationalization has some margin benefits. Can you talk about whether you're realizing these margin benefits here in 2024? Are those and the EPS impact, is that more of like a 2025 dynamic?

Yes, you know, it's very similar to CGI. So on the low end, you're really talking about gross margin expansion is the main driver of that operating margin expansion as we make some investments in the business, especially as we ramp up for WRAPSODY. And then on the high end, you're getting more operating expense leverage that gets us to the higher end of that operating margin range. So hopefully that helps, Jason.

Yes, sorry, I was asking, has it gotten the SKU rationalization in particular, that's going to be a helping or a benefit in 2024?

Yes, I mean, it helps us out, you know, throughout CGI. And its things we've been working out throughout the last several years. But it's included in the numbers.

All right, very helpful. Thank you.

Yep.

Thank you. One moment for our next question. Our next question comes from Steve Lichtman with Oppenheimer. Your line is now open.

Thank you. Good evening guys and congratulations on the quarter. I guess a couple on cash. Is your higher free cash flow outlook, as you look at over the next few years versus the last three, based solely on higher operating income that you're forecasting or they're working capital levers to that you see playing out? And it looks like for '24, there's a step up in CapEx. Anything to call out specifically on what that spend is directed toward?

Yes, so on the CapEx, you know, specifically around free cash flow. So obviously we're going to have higher earnings throughout the CGI program, so we expect that obviously to flow through. Now, as far as the cash flow generation, I mean, it'll come from working capital. We do expect CapEx to be somewhere in the 4% to 4.5% of sales over the next several years. We do have within the CGI three year program, we will be making a couple of investments that I think we want to highlight just so we don't surprise anybody. One is there will be a little bit of work that we'll do in our Mexican facility this year as we were able to obtain the other half of the building that we're currently in. So now we have the two full buildings. And we did that because it was advantageous, it was available, and we wanted the space. It's a lot easier to take it when it's available than when you need it.

Well, we don't want to have to be driving across town to do that. So we just were able to...

So it'll be a nominal investment there as we build that out for whatever we need it. There's no immediate plans for it, but we have the space and we'll do a little bit of work on it. The bigger one would be a distribution center that we're planning on doing here in Salt Lake. That'll be about a $50 million spend that is included in our free cash flow numbers, but I just want to call it out that it is something that we plan on doing. We could get started as early as this year in the fourth quarter, but more than likely we'll get pushed into next year, so just a couple of call-outs. But a lot of the drivers has increased profitability and working capital.

Great. Thanks. And then just as a follow-up, you know, given that free cash flow outlook and your solid balance sheet. Can you provide just your latest thoughts on M&A, your sort of appetite to do deals? You know, are you seeing opportunities out there? Any thoughts on that would be helpful. Thanks, Fred [ph].

Yes. Listen, I think we'll continue to identify opportunities. You know, we look at them all the time. They have to fit and not frustrate. I think if we go back and look at the last three years, in our opinion, the things that we did were things that we felt that would enhance the business, and that's the same attitude. There's no money burning a hole in our pocket. We will spend it when it's right. It's consistent with our sales objectives, our sales force, and it's consistent with our plan. So, and we see things. But that's it. I mean, we're just going to keep the same discipline, the same approach that we've done in the past. But we have the cash to do it, and we won't be hesitant if we find the right things But it's just an ongoing process that is business. I don't want to call it business as usual, but for lack of a better word, that's exactly what we've been doing. And even to this point, it's been a couple of months, we didn't have something that we're going to go, you know, do right away. We're looking and we'll be very patient and find the right things.

And also, just as a reminder, the CGI program does not contemplate any M&A activity.

That's a good point.

Yes, kind of. Thanks for that, Raul and Fred, thanks.

You bet.

Thank you. One moment for our next question. Our next question comes from Jason Bedford with Raymond James. Your line is now open.

Good afternoon. It looks like the cumulative free cash flow goal came in 600 grand shy of the goal. I'm not sure if you guys are fans of the movie Glengarry Glen Ross, but I really hope that Rual didn't get a set of steak knives instead of the Cadillac Eldorado that he deserves.

No, they were actually plastic and wrapped in a wrapper.

Hey, just a reminder, Jason, remember, we had that $12 million that had to be treated slightly different from a contingent payment standpoint, you know, because of the estimated fair value that we made four years ago or whenever it was. But yes, you're right. We were just a hair short. But honestly, I think after what we've been through, you know, all companies have been through from a supply change standpoint from everything that happened with COVID and whatnot. I think we're pretty proud of the team of what we were able to accomplish, to be honest. And to be within a rounding error of that, I think is a great example of kind of the commitment that we've made as an executive team and also our employees for toying the line on everything.

Yes, no doubt. You should be proud. So that wasn't my question. That was just a comment. So, just two quick ones here. It looks like the implied organic and cardio is about 4%, guessing it's disproportionately impacted by the SKU rationalization. But that's the SKU dynamic, you know, in which segment do you expect to see a bit of a slowdown? You kind of called out PI and CI as the drivers. Where are you going to see this anticipate slowdown in '24?

Well, a lot of the rationalization, you know, comes from our kits and packs. You know, so that's where we'll see most of the impact. But other than that, I mean, I think there is a little bit of MDR related stuff, some of the spine business and whatnot. But really, I think most of our growth is going to be coming from the U.S., you know, it almost over 7%, 7.6 growth year-over-year, and then about 2.3% growth outside of the U.S. So hopefully that helps.

Okay. Okay. Maybe just broadening it out a bit. Revenue growth, I think implied in this CGI, there's basically an acceleration in '25 and '26. Is the upper end all due to the potential success of WRAPSODY? And just remind us on the anticipated timing there in the U.S.?

Yes, Jason, Fred. Yes, look, it is weighted on the back end in almost all programs you see that are three years. It's a little bit slower in the front. It depends on when we get approval on that thing. But remember that that revenue is not in the plan other than the existing. But to say it's back weighted in '25 and '26 is fair.

Yes. And remember, as we talked about, we'd have some SKU rationalization that's happening this year, about $15 million at the 120 basis points for this year. So, as we get that behind us, then you start to accelerate back to kind of what the -- to get us back into that 5% to 7% that you guys are used to. So, again, I think it's really just a timing thing, at least from a CAGR standpoint.

And another thing to just recall, we have existing products we're selling in the U.S. that because of the MDR and approaching the finish line for Merit, we will now start applying for those products. They're not in the numbers, but there are other things of these new products that we are selling in the U.S. that we haven't been selling so we could get MDR completed. So, I mean, we feel comfortable with this. I mean, I think you can tell that, you know, we feel comfortable with our sales guidance.

Yes, again, I think just, I can't highlight enough the 120 basis points were, you know, that they had when related to SKU rationalization, which again, I think everybody should be, you know, happy about that we're going through the process of doing that because at the end of the day, it just leads to higher profits.

Okay. Thank you.

Thank you. One moment for our next question. Our next question comes from John Young with Canaccord Genuity. Your line is now open.

Hi, good evening, and thanks for taking my questions. I think we're on a strong end of the year here. Maybe just a circle back to WRAPSODY to follow-up on that question. I believe that you're supposed to complete the final patient follow-up in February. We sit here in the 28th, but just wondering if that was done and will the file module still be submitted in Q2? Can you characterize interactions with the FDA so far on it?

Thanks. Yes, listen, we have filed the first three modules and the final one is the data which is now being reviewed and populated and making sure that we have it all tidied up the way that the FDA requires it. And we're still on schedule to submit that per our previous calls, which is, I think in April or May. But yes, we're on schedule for everything. And then at that point, John, it's in the hands of the FDA.

Okay, great, Fred. Just when I think of the 2024 growth projections, how should we think about pricing power as a function of that growth? Maybe any color on just contracts we expect to come up for renegotiation this year or just how the SKU rationalization could help push to higher price products here? Thanks again.

Yes, thanks, John. As you know, we don't disclose our pricing versus volume, but just to give you guys some general context, I mean, I think that the pricing initiative that we've set out, we started under Foundations for Growth. They'll continue into CGI. And they're just part of the initiatives that we're working on. And so, we do expect it to be a tailwind for us, but we don't disclose the amount. It is one of the initiatives that we're working on among several others that we have going to get the CGI goals of at least or a minimum of 5% revenue CAGR and a minimum of 20% operating margins.

And John, I think just maybe just a little bit of color on that is we have made it, I think, very clear that going forward, that the things that we learned from Foundations for Growth are not things that are forgotten. They are ongoing. We have contracts that are coming due for renegotiation, this, that, and the other, so all of those things will come into play and although we won't go through all the specific numbers. The concept of attention to contracts, pricing, engagement, and all those things are still part of our program that we work on every single day. We have our Chief Commercial Officer in the room, and I'm looking over at him and he's just nodding his head. So that's his commitment. You can't say it, but I can. And now he has his thumbs up. So there you go. Thanks, Joe. I appreciate that.

Great. Thanks again.

You bet.

Thank you. One moment for our next question. And our next question comes from Michael Petusky with Barrington Research. Your line is now open.

Hey, good evening, guys. Congrats. So a couple of my questions were asked and the answered. But let me ask a couple more. In terms of sort of the wage pressure that's going on in Mexico, I was just wondering if you could comment on that. I mean, is that something that should be weighed, or is that sort of immaterial as you sort of think about it?

No, I think that's a great question, Michael. And I would say generally speaking that the wage pressures are, I would call them global, quite frankly. We've been pretty open about that throughout the last couple of years about some of the wage pressures that we're seeing globally. And the belief around at least this table is that we don't think those go away, right? I mean, I think it's something that people are going to have to deal with. We're dealing with the wage pressures in Mexico. It's something that we've been able to overcome. I think we have a good program in our Mexican facility on how we deal with our employees. And it's something that we've been working on to make sure that they're paid properly. And we tend to be at the higher end of things. And so I think the impact is less so than it would be for other companies. But yes, it's something we're dealing with, along with the Mexican peso, like everybody else. So we are hedged and it does spread over time. But I think we're well aware of it and it's included in the numbers that we gave for CGI.

And I think that's the important part. Some of this, by the way, in Mexico is mandated. So I mean, everybody has to deal with it. We have to follow the law and we do. And I think the next part of it is, as Raul said, it's in the numbers. We've accounted in our costs, those particulars, in our best guesstimate of what those numbers would be. And we've built numbers and increases in things into our models.

I guess, Fred, when you guys did the convert notes a few months ago, I think probably a few people, I'll wrap myself out as one of those people probably suspected. Well, these guys probably have some things teed up in terms of external growth opportunities. You know, obviously without getting into any specifics, I mean, did you guys possibly have a couple things that you thought were more front burner that now aren't, you know, maybe in that position?

Yes, Mike, you know we would never comment on that. I will say that as an ongoing everyday issue, there are things that come across our desk and into our business development people every day. We look at them, we look initially. So it's ongoing. Some have particular interests that fit. I would say 80% of them, just thank you very much. This is not where we sell. This is not where we operate. So there are a lot of things that come into place for those things. So there's no burning holes. It has to fit the strategy. The financial profile has to be prudent and a prudent allocation and be disciplined like we've done in the past. Again, I will defend everything we did during Foundations of Growth, I think was well thought out and well executed. And I think even the integration parts of that were done well. So it's just, you know, the way that we do things, we just thought it would be good to be ready. We didn't know what was going to happen with inflation. So we think that we did the right thing and that we continue to do our day-to-day work. And when something fits, we'll move. But remember, we're competing in most cases with other people. We don't have control over that.

Yes. And I think also just to highlight a couple of things, right? I think a little bit of the flack that we got too was, hey, look, interest rates are going to be dropping. And we were actually believers that those wouldn't happen as fast as people were thinking. And come to find out it's looking that way. Now, you know, we're not going to run a victory lap yet, but it looks like things are going to be slower than people anticipated. So I think that's really it. I mean, at the end of the day, I think we did the right thing. We were able to leverage up and get low cost of capital, essentially leverage up, hang some cash on the balance sheet. We're earning a higher interest rate than we're paying. And it's EPS accretive.

Well, and you know, Mike, I was listening to the radio this morning. You know, the initial, I think projection for people would see seven rate decreases this year.

Yes.

I heard one this morning now was one or two.

Yes.

And inflation, I mean, I'm not an economist, but inflation almost always has two or three legs to it. So all that being said, that was a judgment at the time based on our feelings about things. And as it all works out, I will call a little bit of a headwind, you know, because it wasn't, you know, someone could have questioned it. But first of all, thank you for your candor. And I'll accept your apology.

Well, I think I owe one to Raul because I may have technically won the bet about them, you guys not quite getting the $300 million, but I think he won the spirit of the best. You know, you were there.

We're usually apologizing to you, so we're happy to accept one on the other side. Thank you.

Hey, so I just want to clarify one issue, and maybe everybody else gets this, but I want to make sure that I get it. Have you guys now seen all the sort of primary endpoint data that you needed to see in terms of WRAPSODY and in terms of moving forward? Are you still waiting for some of that data to come back?

All of the patient data is in. It is being organized properly for presentation. So that's as much as I can say about it, but all of the data from all of the patients is in. And so that's good news for us. And now it's the process of going through organizing it, looking at all the various issues to make sure the protocol was -- all of those things that you have to do now. Because once it goes in to the FDA, you've got to have it right.

It's got to be locked and everything.

And it's got to be locked. And I think that's the process we're into right now.

I think at the end of the day, we remain on track, Mike, for everything that we've disclosed so far.

Okay. Last one and I'll get off. And I didn't catch it if you made any comment around Russia in the fourth quarter. I think maybe on the Q3 call you would suggest, and maybe we'll get a little incremental revenue there, but I know that's still a mess over there and just any comment there? Thanks.

You know, I think Russia, based on everything that's going on, just came in in-line with kind of our updated, I guess, expectations. We were able to get the licenses required to do business in Russia. I think within the second hurdle, not only just getting the licenses, you also have to make sure that you're able to get paid. So we have a good banking partner that allowed us to make sure that we were able to receive money in the proper way in U.S. dollars. And so I think everything worked out, I'd say the best it could under the circumstances that are happening there, Mike. But I think we were happy with how it all turned out.

Excellent. Thanks, guys. Great year. Thanks.

Thank you, Mike.

Thank you. One moment for our next question. Our next question comes from Jim Sidoti with Sidoti & Co. Your line is now open.

Hi, good afternoon. Thanks for taking the question. Now that you're close to the finish line with WRAPSODY and you've finished at least enrollment with the WAVE trial. How should we think of R&D for 2024 and 2025? Are there other projects that will fill in or will you see that number start to come down?

Now listen, on R&D, it's been a hallmark of Merit’s history to continue to invest in projects and opportunities that we see within the budgets that we have allocated. So I'm going to say its business as usual. Some products are more complicated. Some are product line extensions. Some are improvements. So there's a lot of those sorts of things out there, Jim. But we're still committed to R&D. It's always been a hallmark of our success.

Yes. I think, too, Jim, just to add, you know, I mean, similar to what we did with foundations for growth, I mean, we were able to strategically reinvest some of the efficiencies that we found back into the business. And look, I think we want to do more of the same. As Fred mentioned, there's going to be more therapeutic products. And so we want to make sure that we are able to fund those to continue to deliver the growth that you guys are all used to, and we've been able to deliver. So I think we're trying to find a balanced approach to that reinvestment and higher cost, really, when it comes to therapeutic products. But I think we've done a great job of managing through that. And we'll continue to do so under CGI.

So it sounds like you think it'll remain around that 6% of revenue.

I think it's fair. Yes.

All right. And then in terms of the AngioDynamics [ph] acquisition, I think you had one product moved over the last quarter, and another one was still yet to be moved over. Has that been completed at this point?

Yes. Everything is in place in our Mexico facility to produce our products there. So it's all been moved from Angio and all in place. And I think going back to giving credit, it's one of the things that Greg Fredde, who, you know, who did our Becton Dickinson transfer. And you know the story there. It was done with absolute precision. And I think we've seen the same things in this integration. We actually very candidly do it pretty well, Jim.

All right. Well, there wasn't too much else to pick on, so I think that's it for me.

Thanks, Jim.

Thank you. One moment for our next question. And our next question comes from Mike Matson with Needham and Company. Your line is now open.

Yes, thanks for putting me in. I guess just with regard to the CGI program, I apologize if I missed it, but I think you set some operating margin targets, but I didn't see anything in there about gross margins. And maybe that was deliberate on your part, but I just wanted to get your thoughts on kind of how the margin expansion just kind of break up between gross and operating leverage?

Yes. So, you know, similar to what we did with FFG, you know, Mike, we really only focused on a revenue CAGR of at least 5%, operating margins of 20% to 22%, and then the minimum free cash flow of 400. But we didn't actually give guidance for gross margin and FFG. We did give some modeling considerations, and then I think people tried to turn that into guidance. So, I think this time around, I think we've hopefully built up enough credibility that we're going to get it from wherever we get it, right? I mean, I think, you know, gross margin, like I said earlier, the low end of our operating margin, it really comes from gross margin. The high end, the 22% would really come from not only delivering on the gross margin, but also on operating expense leverage. But at the end of the day, I think we've shown that we can get it from either operating expense leverage and/or gross margin, and we'll adjust as necessary. What we don't want to do, similar to what we did with FFG, is get ahead of ourselves and think that we're going to be covered with just gross margin expansion to get those -- hit those levers. And so, we'll leverage operating expenses if we need to, but our preference is to really re-invest those dollars into the business and get it from gross margin. So, that's really our focus.

Well, three years ago, we said we were going to fine-tune every aspect of our income statement and our balance sheet. I think that's what we've done. So, it's not one or the other, it's all of them.

Yes. But just to give you a little bit of color, I mean, it's more of the same, Mike. We're going to have network consolidation. We've got lean manufacturing initiatives. We've got better human resources, efficiency, sharper on materials, logistics, and everything else that we can throw at gross margin, because that's what it takes.

Okay, all right. And then just my only other question really just be around kind of the guidance for '24, as well as the CGI, the longer-term guidance, particularly for revenue growth. I mean, if I look at what you've done over the past few years, you've kind of been more high single digits organically, and this guidance has kind of more mid-single digits. And so, I mean, I understand you're probably trying to be somewhat conservative, but is there, and I saw the call out about the SKU rationalization, but I mean, is there anything else that you would point to in terms of things that have maybe changed or something that would prevent you from being able to grow high single digits potentially? I mean, I'm not asking you to guide there, but just wondering if there's other headwinds, I guess, that you're baking in or something there?

Well, look, I think, look, I think when we threw out, you know, foundations for growth, I mean, I think, none of us anticipated all the headwinds we would have seen, right? I think everything in the kitchen sink was thrown in there from what everybody saw and everybody had to experience. But look, we feel really confident in that low-end a CAGR of 5%. I think, we think it's realistic and achievable, and it allows us to say no to certain things, quite frankly. And so, I think we feel comfortable with the numbers at 5% to 7%, and I will just leave it at that. I think we always aspire to do better, but 5, you know, a minimum of 5 is what we're committing to.

Okay, I understand. Thank you.

Yes.

Thank you. One moment for our next question. Our next question comes from Jason Bednar with Piper Sandler. Your line is now open.

Hey, guys, thanks for taking the follow-up. Just one quick one and you've obviously trained us all well since I don't think anybody's asked on China here. So, I'll do it for the group. You know, the guidance here for 2024, you're saying China revenue down due to VVP, just more of a fact check or clarification. Is this simply an extension of the VVP that we've all talked about from 2023, the second half of 2023, or is it something new that is now developing and hitting here in 2024?

Yes, so, I mean, we're not going to give additional color, but I think you're on the right track there, Jason. Again, we're not going to provide country-specific growth rates. I think we called out the 4% decline in the APAC region, of which most of it is related to, actually, all of it is related to China. But I will say that, we continue to expect a volume to grow on a year-over-year basis. But obviously, we are seeing a decline due to the continued headwinds related to volume-based purchasing. And it's just something that we've been managing through over the last several years, and it's baked into our 5% to 7%.

Okay, perfect. Thank you.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Fred Lampropoulos for closing remarks.

Well, again, to everybody, thank you for joining us today. It was a long call with a lot to cover. We appreciate the questions and the opportunity to present to you. Just in closing, a reminder that we put our shoulders to the wheel. We worked hard. We had every single employee in this company aligned with the company objectives, department objectives, and individual objectives. So we are all aligned as a company, and we expect to be able to deliver exactly what we said over our next three-year program, which we didn't have to do. We felt it actually helped us. We believe being on the line and being accountable is the right thing to do, and we'll look forward to reporting to you in the future. So best wishes from Salt Lake City. Just a quick reminder, the SIR Meeting starts in late March. It's being held in Salt Lake City this year. It's Merit's biggest show. We hope you get a chance to go out here and take a look at Salt Lake, the SIR meeting, and even maybe an opportunity to come to Merit. So, best wishes and good night from Salt Lake City.

That does conclude our conference call for today. Thank you for your participation.