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Welcome to Merit Medical Systems' Second Quarter 2026 Earnings Conference Call. 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 Martha Aronson, Merit Medical Systems' President and Chief Executive Officer.
Thank you, operator, and welcome, everyone. 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, Martha. This presentation contains forward-looking statements that receive safe harbor protection under federal securities laws. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to risks and uncertainties. The realization of any of these risks or uncertainties as well as extraordinary events or transactions impacting our company could cause actual results to differ materially from the expectations and projections expressed or implied by our forward-looking statements. In addition, any forward-looking statements represent our views only as of today, July 30, 2026, 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. For a discussion of factors that could cause actual results to differ from these forward-looking statements, please also refer to our most recent filings with the SEC, which are available on our website. Our financial statements are prepared in accordance with accounting 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 Martha.
Let me start with a brief agenda of what we will cover during our prepared remarks. I will begin with a brief summary of the second quarter financial results. Then I will discuss several areas of operating and strategic planning progress in Q2. Raul will then provide a more in-depth review of the quarterly financial results as well as our financial guidance for 2026, which we updated in today's press release. Then we will open the call for your questions. Beginning with a review of our second quarter results. For avoidance of doubt, all growth figures are on a constant currency basis, unless otherwise noted. We reported total revenue of $418.8 million, up 10% year-over-year on a GAAP basis and up 9% year-over-year on a constant currency basis. Our constant currency revenue results exceeded the high end of the expectations that we outlined on the Q1 2026 earnings call. Second quarter total constant currency growth was driven by 9% organic growth and to a lesser extent, contributions from our acquisitions of Biolife and the C2 CryoBalloon device, both of which exceeded the high end of our expectations. Our guidance for Q2 called for an acceleration in organic growth from the 3.7% we reported in Q1. We were pleased to deliver strong organic growth that not only exceeded the high end of our expectations, but also represents the strongest quarterly organic growth the company has delivered in 3 years. With respect to the profitability performance in Q2, we delivered financial results that significantly exceeded expectations. Our non-GAAP operating margin increased 142 basis points year-over-year to 22.6%. Our non-GAAP EPS increased 18% year-over-year. And we generated nearly $52 million of free cash flow. Importantly, our financial results included a benefit from tariff refunds in Q2. Excluding this benefit, our second quarter non-GAAP operating margin and non-GAAP EPS results exceeded the high end of our guidance for the second quarter. I want to congratulate our team members all around the world. The stellar growth and profitability performance delivered in Q2 is a direct result of their efforts. They continue to stay focused on our current 3-year strategic plan, which we refer to as Continued Growth Initiatives, or CGI. And most importantly, they demonstrate a commitment to our customers each day. We have increased our 2026 revenue and non-GAAP earnings per share guidance to reflect the stronger-than-expected results over the first half of 2026. We remain confident in our team's ability to execute, deliver attractive constant currency growth, improve profitability and generate solid cash flow this year. Our organization is aligned around our priorities for 2026, specifically to drive strong execution around the globe and to successfully complete our CGI program, which includes our previously disclosed financial targets for the 3-year period ending December 31, 2026. Turning now to a brief update on our progress with acquisition integrations. First, we have made considerable progress in our integration of View Point Medical, the strategic acquisition in our oncology platform that we announced on April 1st. By way of reminder, View Point Medical manufactures the OneMark detection imaging system and OneMark tissue markers. This unique ultrasound-enhanced technology offers an innovative solution to localize more lesions at the time of biopsy, representing an estimated 1.3 million procedures annually in the United States alone. This acquisition expands our portfolio of therapeutic oncology products dedicated for the diagnosis and localization of breast and soft tissue tumors. The team has managed the multiple work streams we prioritized in preparation for our planned U.S. commercial launch in July, including: building the requisite inventory; finalizing our marketing and sales strategies; and training our U.S. field team. This is an exciting time for our oncology team. The launch of the OneMark System follows the commercial launch of Merit's SCOUT MD technology in late May. The combination of SCOUT and OneMark provides physicians with localization options during the initial diagnostic biopsy, which may reduce the need for a separate procedure to mark the location of the tumor prior to surgery. We are pleased with the initial response from the marketplace following these commercial introductions. The Merit oncology story is resonating with clinicians. And that is you can use OneMark for all biopsies and you can select SCOUT MD when advanced localization is needed. Together, they create a comprehensive breast care offering, spanning diagnosis, localization and surgery. The strategic rationale for this acquisition is compelling. And the financial rationale is both attractive and consistent with our continued growth initiatives program. We believe this acquisition represents another example of Merit selectively investing to expand our product portfolio in key strategic markets that leverage our existing commercial footprint. Importantly, the integrations of Biolife and the C2 CryoBalloon have progressed meaningfully over the first half of 2026 as well. We acquired Biolife in May of 2025, adding unique patented hemostatic devices to our portfolio, most notably StatSeal. These products are effective, differentiated hemostatic solutions for percutaneous devices with a broad range of clinical applications, including vascular closure and indwelling catheter bleeding complications. Adding StatSeal to Merit's hemostatic portfolio is intended to provide health care partners with an additional effective solution that complements a wide range of percutaneous procedures, including interventional radiology and cardiology, dialysis, electrophysiology, biopsy and drainage. Biolife operations have been fully integrated within Merit. And their stand-alone manufacturing facility has requisite capacity to meet our growth objectives. The team continues to execute on our commercial strategy, including launches in markets outside the U.S. Revenue contributions from our acquisition of Biolife exceeded our expectations in the second quarter and first half of 2026. And we now expect annualized revenue of approximately $23 million this year versus our original expectation of $18 million to $20 million. The integration of our acquisition of the C2 CryoBalloon and related technology from PENTAX Medical last November is also progressing well. The C2 CryoBalloon treats Barrett's esophagus as well as a less common vascular disorder known as GAVE, or Gastric Antral Vascular Ectasia syndrome, by freezing and eliminating abnormal cells while still maintaining the integrity of surrounding tissue structures. This acquisition strengthened our position in the multibillion-dollar gastroenterology market and provides opportunities to treat more patients from the effects of chronic gastroesophageal reflux disease, or GERD. Production has been transferred to our South Jordan facility. And we have added an additional production line to support future demand. Revenue contributions from this acquisition exceeded our expectations in the second quarter and first half of 2026. And we continue to expect revenue in the range of approximately $8 million to $9 million on an annualized basis. While relatively small, this acquisition represents an important strategic transaction that not only expands the portfolio of solutions our endoscopy sales team has to offer customers, but also positions the endoscopy platform to accelerate growth and gain market share in the coming years. I would like to highlight three other noteworthy developments from our second quarter before turning the call over to Raul. First, on May 19th, we announced that shareholders elected Scott Ward to the company's Board of Directors at Merit's Annual Meeting. Scott brings more than 40 years of experience in the medical device industry, including nearly three decades at Medtronic, where he held numerous senior leadership roles. He most recently served as CEO, President and Chairman of Cardiovascular Systems, Inc. up until its acquisition by Abbott. Several of his roles were in markets where Merit competes today. Scott also brings extensive experience in both venture capital and private equity. Merit's Board of Directors has appointed Scott to serve on its Governance and Sustainability Committee as well as the Finance and Operating Committee. Scott's deep medical device experience and proven leadership track record will bring an invaluable perspective as we continue to build on our foundation and advance our strategy. Second, as discussed on our recent investor calls, during 2026, in addition to staying focused on delivering each quarter, we are developing our strategic plan for the period of fiscal years 2027 through 2029. While doing this important work, our team remains focused on delivering our continued growth initiative commitments. Specifically, for the 3-year period ending December 31, 2026, we are targeting an organic constant currency revenue CAGR of 5% to 7%, a non-GAAP operating margin in the range of 20% to 22% and cumulative free cash flow generation of more than $400 million. As our 2026 financial guidance indicates, we are tracking nicely toward these CGI financial targets. Let me share with you a bit more about our strategic plan work. During the first quarter, we took time to align with our top global leaders on where we felt our strengths were as a company and where we felt we wanted to devote more focus. We took the pulse of these leaders with belief audits and converged on several key themes. We came away with multiple work streams focused on our drivers of growth for the future, our optimal organizational structure and necessary leadership capabilities for the future and our systems and processes necessary to grow. During the second quarter, our work stream leaders collected additional data on our global markets and engaged in dialogue and debate about our product pipeline. Importantly, each work stream engaged across functions and geographies to capture key stakeholder perspectives. While doing so, we continued our work on SKU rationalization. And we are examining our registrations around the world for additional rationalization opportunities. We also worked on building out our M&A playbook and broader capital allocation strategy. Now in Q3, we are rolling up our global forecast, prioritizing our investment opportunities in both our product pipeline and potential tuck-in acquisitions. Alongside that work, our efforts around optimal organizational structure, productivity and efficiency are well underway. As we mapped our company's core competencies with where we feel our growth opportunities lie, there is a strong correlation. Within each platform, we are highlighting where we feel we have the right to win, whether we are focused on high-growth procedures where we offer foundational products or an entire procedure where we offer a suite of both foundational and therapeutic products. At the same time, we're asking ourselves tough questions about product families and whether they still make sense to be part of our longer term portfolio. In key geographies around the world, we are defining how best to win and what it will take to do so. We look forward to continuing our strategic planning process. And we intend to share the key highlights of this strategy and new 3-year financial targets related to this strategic plan following the completion of our current CGI program. I'm proud of the team for not only delivering strong execution and better-than-expected financial results over the first half of fiscal 2026, but also engaging so fully with this important strategic planning process. Finally, I want to highlight an enhancement to our presentation of revenue in our second quarter earnings press release. As discussed on our first quarter earnings call, we transitioned our revenue reporting to focus on two primary product categories; Foundational; and Therapeutic. This decision aligns how we talk about the business externally with how we plan to execute each of our underlying platforms. It also enables greater ownership and accountability for each platform. As part of this transition in reporting, we provided 4 years of historical revenue for the 8 platforms within the Foundational and Therapeutic categories. We provided this level of detail in the interest of transparency and to help our stakeholders better understand our business today, along with the underlying growth drivers of our business in recent years. As we continue to share the Merit Medical story for both long-standing as well as new investors, we continually look for ways to help people understand our complex business. So we have decided to share the global platform revenue results each quarter. My hope is that investors will see more clearly the value of our various platforms and how they contribute to our steady growth. With that, I'll turn the call over to Raul for an in-depth review of our quarterly financial results and our updated financial guidance for 2026. Raul?
Thank you, Martha. I will start with a detailed review of our revenue results in the second quarter. Note, unless otherwise stated, all growth rates are approximated and presented on both a year-over-year and constant currency basis. Second quarter total revenue increased $33.4 million or 9%, exceeding the high end of the expectations we outlined on our Q1 call. Our total revenue increased 9% on an organic constant currency basis, exceeding the high end of our expectations by approximately 210 basis points. As detailed in our earnings press release, organic constant currency revenue excludes revenue from acquisitions in the second quarter of 2026 of $4.7 million and revenue from our divested DualCap product line of $5.3 million from the second quarter of 2025. By geography, our total revenue in Q2 was primarily driven by growth in the U.S., where sales increased $26.1 million or 12% and international sales increased $7.3 million or 5%. Turning to a review of our revenue results by product category. Second quarter total revenue growth was notably balanced between our two product categories. Sales of Foundational products increased $17 million or 6% and sales of Therapeutic products increased $16.4 million or 14%. In terms of organic growth, in Q2, excluding the contributions from acquired products of $2.4 million in the current period and divested products in the prior year period of $5.3 million, sales of Foundational products increased 7.8%. Excluding $2.3 million of acquired product revenue, sales of Therapeutic products increased 11.7%. Organic growth in the Foundational product category was driven primarily by our Vascular Intervention and Access platforms, again in the second quarter. We also experienced notable improvement in OEM growth trends as expected. Organic growth in the Therapeutic product category was driven by strong growth in our cardiac therapies and Endoscopy platforms and contributions from solid growth in our Vascular Interventions and oncology platforms. Growth in the Therapeutic product category also benefited from the improvement in OEM sales trends mentioned earlier. A couple of items to bear in mind when evaluating our constant currency growth results detailed in the presentation of revenue by platform in our earnings release. First, as noted earlier, we were pleased to see improving growth trends in our OEM business in the second quarter. Our total OEM sales increased 15% year-over-year in Q2. We expect to see continued improvement in OEM year-over-year growth trends over the second half of 2026. Second, sales of Procedural Solutions products declined 12% on a constant currency basis. This is entirely due to our divestiture of the DualCap product line. Excluding this impact, Procedural Solutions sales increased 5% on an organic basis in Q2. Finally, sales of Renal Therapies products declined 2%, but increased approximately 10%, excluding the impact to our business resulting from the product recall discussed on our Q1 call. Turning to a review of our P&L performance. For the avoidance of doubt, unless otherwise noted, my commentary will focus on the company's non-GAAP results during the second quarter of 2026. And all growth rates are approximated and presented on a year-over-year basis. We have included reconciliations from our GAAP reported results to the most directly comparable non-GAAP item in our press release and presentation available on our website. Gross profit increased 15%. Gross margin was 55.8%, up 262 basis points year-over-year. Excluding $6.9 million of refunds related to previously paid tariffs recognized within cost of sales, gross profit increased 12% and our gross margin was 54.2%, up 98 basis points year-over-year. Gross margin, excluding tariff refunds, exceeded the high end of our expectations. This performance is particularly impressive given the approximately $2 million incremental impact from tariffs incurred year-over-year, representing an approximately 50 basis point impact to gross margin in that period. Operating expenses increased 14%. The increase in operating expenses was driven primarily by a $15.5 million or 16% increase in SG&A expenses and to a lesser extent, a $1.2 million or 5% increase in R&D expense compared to the prior year period. Total operating income was $94.6 million. Excluding the tariff refund, operating income increased $6.8 million or 8% from the prior year period to $87.7 million. Our operating margin, excluding refund, was 20.9% compared to 21.2% in the prior year period, a decrease of 22 basis points year-over-year. Operating margin, excluding refund, exceeded the high end of our expectations by approximately 56 basis points. Second quarter other expense net was $2.3 million compared to $2.3 million for the comparable period last year. Second quarter net income was $71.3 million or $1.19 per share compared to $61 million or $1.01 per share in the prior year period. Excluding the after-tax benefit from tariff refund of approximately $0.09, second quarter EPS was $1.10, exceeding the high end of our guidance range by $0.09. Turning to a review of our balance sheet and financial condition. As of June 30, 2026, we had cash and cash equivalents of $448.7 million, total debt obligations of $747.5 million and available borrowing capacity of approximately $697 million. Our net leverage ratio as of June 30 was 1.6x on an adjusted basis. Our cash and cash equivalents at June 30 were essentially flat year-to-date, driven by a combination of strong free cash flow generation of $76.6 million and $25.5 million of proceeds from our divestiture of the DualCap product line, offset partially by $90 million in cash used for the View Point Medical acquisition. Turning to a review of our fiscal year 2026 financial guidance. For the 12 months ending December 31, 2026, we now expect total GAAP net revenue growth in the range of 7.6% to 8.4% year-over-year and 6.9% to 7.6% year-over-year on a constant currency basis, excluding an expected 80 basis point tailwind to GAAP growth from changes in foreign currency exchange rates. There are a few factors to consider when evaluating our projected constant currency revenue growth range for 2026, including: first, the increase in our revenue guidance range reflects the flow-through of our better-than-expected results in Q2. Second, our constant currency growth range assumes sales of Foundational products increase in the mid-single-digits year-over-year and sales of Therapeutic products increase in the high single to low double digits year-over-year. Third, we now expect organic constant currency growth in the range of 6.9% and 7.5% compared to 6% to 7% previously. Our organic growth guidance excludes revenue from acquisitions in the range of approximately $18 million to $20 million compared to $17 million to $20 million previously and product sales and royalty revenue from our divestiture of DualCap of $20.3 million in 2025 and approximately $1.6 million of sales in Q1 2026. Fourth, our total net revenue guidance for fiscal year 2026 continues to assume U.S. revenue from the sales of WRAPSODY CIE of approximately $7 million. With respect to profitability guidance for 2026, we now expect non-GAAP diluted earnings per share in the range of $4.25 to $4.35, up 11% to 14% compared to $4.01 to $4.15 previously. For avoidance of doubt, our 2026 non-GAAP EPS guidance now assumes a 12-month tariff impact of approximately $16 million or $0.21 per share compared to $15 million or $0.19 previously and $9 million or $0.12 per share realized during the last 8 months of 2025. Finally, we would like to provide additional transparency related to our growth and profitability expectations for the third quarter of 2026. Specifically, we expect our total revenue in the range of $408 million to $413 million, representing growth of 6% to 8% year-over-year on a GAAP basis and up approximately 6% to 7.5% on a constant currency basis. Note, our third quarter organic constant currency growth is expected in the range of 7% to 8%, excluding revenue from acquisitions in the range of approximately $2.8 million to $3.8 million and revenue from our divestiture of DualCap of $5.2 million in the prior year period. With respect to our profitability expectations for the third quarter of 2026, we expect non-GAAP operating margins in the range of approximately 19.6% to 21.5% compared to 19.7% last year and non-GAAP EPS in the range of $0.98 to $1.08 compared to $0.92 last year. With that, I will now turn the call back to Martha for closing.
Thanks, Raul. As I reflect on my 9 months since joining Merit Medical, I continue to be inspired by our global team and their commitment to customers and patients. This team delivered an excellent Q2 and has strong momentum as we move into the second half of the year. I want to reiterate how pleased I am that we are on track to meet our 3-year CGI goals. And while staying focused on that goal, this team is putting the hard work into our global strategic plan. Simultaneously, we are integrating several acquisitions and evaluating additional tuck-in possibilities. Once again, my hat goes off to the team. And I am energized by the opportunities I see ahead to enhance our strong growth profile and to create long-term value for our shareholders. Operator, we would now like to open up the line for questions.
分析師問答
Our first question or comment comes from the line of Jason Bednar from Piper Sandler.
Congrats on a really impressive quarter for your team. I'll start big picture. There's been a lot of questions across the med tech community with respect to procedure volumes, different data points painting different pictures. With Merit posting such a strong top line result, this seems maybe a little silly question to ask, but I'll ask it anyways. Have you seen any slowdown in procedure volumes tied to ACA subsidy changes across any of your end markets? Or do you anticipate any moderation in volumes tied to this issue when you look at the second half of the year?
Yes, Jason, thanks very much. And obviously, we've been hearing some of the various reports, as I'm sure you have as well. But we've been doing very regular checks with our field. And at this point, we have not seen a slowdown in procedures. So currently, that's the reports we're getting from the field. And as you said, I think given the strong results from the quarter, that checks.
All right. Perfect. Very helpful. And then, Raul, just as I think about 2Q guidance, you just put up a smash on margins this quarter, is really impressive. If you try to normalize for EPS, I think you said $1.10, excluding those tariff refunds. Usually, you get a little bit of a step down, maybe $0.05 or so 2Q to 3Q in most normal years when I look back to past years. Your guidance range is maybe a little bit wider than I would think, $0.10 for 3Q. What are you baking in, in terms of the conservatism or the puts and takes on bottom end and top end there? Because it is a little bit of a wide EPS and wide margin range coming off of a really strong 2Q.
Yes, Jason, I think just with the ever-evolving tariffs, right? I mean, we just had an announcement right on Friday. It's just so hard to kind of predict what's going to happen with that and when they're going to be in place, with the Section 122 still out there and USMCA considerations. There's just a lot of variables. And we thought just in this environment, with that being out there, let's just go a little wider. Obviously, feel super confident about the back half and our guidance for the year and obviously just put up a stellar second quarter. So it's really just more of a reflection of the changing dynamic in tariffs that seems to come at us like on a weekly basis. And so just a little bit of coverage there. But obviously, feeling pretty optimistic about the third quarter and the fourth quarter.
Our next question or comment comes from the line of Robbie Marcus from JPMorgan.
This is Lilia on for Robbie. 9% organic growth is a really big number. So can you walk through what drove that strength and the sustainability of this sort of growth? How much of that was catch-up following some of the dynamics that pressured growth in the first quarter versus true underlying demand?
Yes, Lili, thanks very much. Look, I think as we mentioned in the first quarter, our OEM business is a business that fluctuates a bit just by nature of the business. And we were obviously really pleased to see a 15% uplift in the second quarter on the OEM business. And we continue to see that business, right, annually in the sort of mid to high single-digit range. So that was certainly one of the drivers. I think we also saw our Access platform as well as our Vascular Intervention platforms on the Foundational side, along with Cardiac Therapies and Endoscopy having very strong quarters on the Therapeutic side. So really pretty broad-based results for the second quarter.
Yes. I'll add that it was also very balanced between our two product categories, between Therapeutic and Foundational. So the beat was really broad-based. And again, when our portfolio—because of the index-style portfolio that we have—when it all kind of is hitting, you get these types of growth rates. So it was really exciting to see.
Great. And maybe just to follow up on that. Last time you were pointing to a continued ramp in organic growth in the back half of the year as some of the trends around supply, the Medtronic agreement, OEM improved. Now it looks like 3Q is going to be a slight step down on an organic basis. So do you think you've seen all of those improvements already? Or is this just some conservatism?
No, that's a great question. I always have to remind everybody there is a level of seasonality in our business with Q3 usually having a step down. Now that wasn't true last year, but most years it is. I'll always just highlight that Q1 and Q3 are typically our softer quarters from a revenue standpoint. Q2 and Q4 are our strongest. And so really, what you're seeing that step down is not that we're not confident. We're very highly confident in the business and how it's performing. It's really just that seasonality we're adjusting for.
Our next question or comment comes from the line of Larry Biegelsen from Wells Fargo.
It's Lei calling in for Larry. Just on the first one, going back to the Q3 guidance, can you dive a little bit more into the 6% to 8% and maybe by business, what slows down a little bit seasonally in Q3 versus Q2 to get you to the 6% to 8% versus the 9% we saw in Q2? And I have a follow-up.
Again, we're not going to get into the details. We guide on total revenue, obviously, giving you some commentary on what we think Q3 will be, so you guys can work your models. Again, it's really just the seasonality in our business that we're adjusting for. As most of you know, it's the summertime. Doctors take time off. Patients don't go in for procedures. That's very typical for us to see a step down and then a pretty strong rebound in the fourth quarter. So from our standpoint, if you look at kind of the back half of the year, we think it's pretty consistent with what we're doing for the first half. So again, really optimistic about how the business is doing. And we see a lot of momentum. It's really just us adjusting for that seasonality.
Got it. That's helpful. And for my follow-up, you're absorbing obviously, tariffs. There's the View Point dilution, the convert dilution. But you're still looking to grow EPS faster than the top line. Can you just remind us what's giving you the operating leverage there?
It's obviously broad-based, just like our revenue beat. When you look at the performance that our sales team has put up, it's excellent. These guys have been delivering for a better part of 30-plus years. So kudos to them. We're in the last year of our CGI program. The progress that we continue to develop there with the programs that we have in place, you're seeing those kind of come through. Gross margin was a big part of that. When we announced CGI, we said that a big piece would come from gross margin. And you're seeing that come through. Specifically, it's our sales force focusing on pricing, focusing on the right product mix. It's the acquisitions that are ahead of plan from a gross margin standpoint and sales. I mean you saw it tick up a little bit. And our operations group, too, they deserve credit. It's been a really challenging five years with tariffs and COVID and supply chain issues and labor shortages, but they've done some really good things. We moved one of our largest manufacturing departments to Tijuana. We're starting to see the benefits of that. We've implemented some automation and you're starting to see labor efficiencies come through. We're looking at our supply chain and our distribution network and getting more inventory on the water, which is less costly than air freight. You're starting to see the benefits. So again, it is a 'kitchen sink' approach—we're looking at everything. We don't want any leakage. This is the result you get because we're hyper-focused on protecting gross margin. Even when we see things we don't anticipate, like the tariffs, it's working and we're continuing. We've been doing this for a long time. When you look at foundations for growth and CGI, the operating margin improvement through the end of 2025 is almost 850 basis points. If we hit the high end of our guidance for this year, you're looking at almost 950 basis points of operating margin improvement. So that gross margin, we're letting it flow through, while also making the right investments in the business. Operating expenses grew, but we're very specific in how we're investing those dollars. We're controlled in the way we do it, making sure that the gross margin is coming in where it needs to be and making sure that the sales are coming through. We're focused on the entire P&L and it's clearly showing. We're neck deep in strategic planning right now and continue to look at what else we can do. We're excited to present that when it's ready.
Our next question or comment comes from the line of Travis Steed from Bank of America Securities.
This is Aidan on for Travis. I guess one question on SCOUT MD. I know you said it started shipping. Can you remind us what the clinical benefits are there? If there's a price uplift or a margin benefit? And then I have one follow-up.
Yes. So the main clinical benefit of SCOUT MD is that you have four distinct shapes of the reflectors. So it makes it much easier to see these on x-ray. That's the primary advantage of SCOUT MD. Our Merit Oncology team is excited. This platform had essentially one product for quite some time. To have SCOUT, then improved SCOUT MD, and then combine that with OneMark from the acquisition of View Point provides a comprehensive offering. The way we think about it is you can use OneMark technology for all biopsies, expanding the market, and when advanced localization is needed, you select SCOUT MD. Our team is excited; we've trained the field and they're ready to go.
Great. And then obviously, a great quarter. You're raising by the beat. And from your comments, it sounds like the underlying operating environment is really strong. So I guess why not raise more than the beat if you think that's going to continue into the second half?
That's just not our style. We typically take the first half beat, flow it through, and leave our back half unchanged, which is essentially what we did. We remain fully confident in our full year guidance and look forward to a strong finish to our CGI program.
Our next question or comment comes from the line of Mike Matson from Needham & Company.
Yes. So I just wanted to follow up again on the OEM business. So it's good to see it recover. Is there anything you would call out there? Did you get new contract wins? Or— and is this level of growth sustainable in your view now? Or is this just sort of an inherently lumpy business quarter-to-quarter?
Yes. OEM is inherently lumpy. We were confident we'd have a nice rebound this quarter and we saw a 15% increase. Big shout out to our OEM team. We believe, annually, it should perform in the mid to high single-digit range. One of our OEM customers put out a press release noting work we did with them, which accounts for some of the growth. There was also some increase in stocking due to transfers we had done in the last 3 to 6 months and that's all come due this quarter. Outstanding result by our OEM team, but you should expect that business to go up and down.
We still continue to believe in mid to high single digits for OEM on an annual basis.
Yes. Okay. And then just want to ask one on WRAPSODY. I mean I heard you reiterate the $7 million target. Just, what are you hearing, seeing out in the field from the physicians? And is there a potential for that to kind of ramp more aggressively over the next few years?
We're pleased with how WRAPSODY is doing in the U.S. Clinician feedback continues to be strong. WRAPSODY is being used in hospital and non-hospital settings. Our team is pursuing both vigorously and having good success. Competitors are not standing still, so it's a day-to-day battle. Feedback on the delivery system is very positive. We continue to be on track to meet the $7 million guidance for this year.
Our next question or comment comes from the line of Michael Petusky from Barrington Research.
So congrats. And I did not hear if you mentioned it. Did you make any comments around how the quarter was in China? And if not, if you could speak to that?
It essentially came in as expected. There isn't anything significant to call out. It was in line with our expectations. VBP was a little bit lower than expected, but no changes to our expectations for China for this year. It continues to move along.
I mean was it flat or slightly down?
It was in line. I think it was slightly up, low single digits.
Okay. Great. So I guess then turning— I know that you guys are highly focused on the current CGI and you want to get that done. But I feel like you did open the door talking about the strategic planning starting for the '27-'29 period. And I would just love to ask Martha, if— just in terms of how you guys think about like key metrics that you may want to attach to any kind of public 3-year plan? I mean, are there different ways that you think about the thing— sort of the key goals, obviously currently revenue growth, OP margin, free cash flow. I mean, are there other metrics that you think are important for investors to understand or important goals to target? I'm just wondering if you have a different way of thinking about how to sort of talk about longer term plans and how you might communicate that with investors?
I'm super excited about the work this organization has undertaken on our strategic plan. It's a big lift. We're engaging a large group of our global leaders across functions and geographies. We delivered a strong quarter while doing this work, which is very encouraging. We are talking about various metrics and engaging in healthy debate within the management team and with our Board of Directors. We're considering possibilities and what makes the most sense given our evolution as a company. Right now we want to keep our teams focused on finishing out CGI this year. We'll continue these discussions, but it's a little early for me to list off other metrics publicly. It's an important part of the discussion.
Our next question or comment comes from the line of Sam Eiber from BTIG.
Congrats on the nice quarter. Maybe I can just get a status check on the endoscopy business. I know it's still relatively small today. But you've done a few deals over the past few years. C2 sounds like it's going well. Are we far enough in the integrations at this point where you feel like you have the right team in place, the right product portfolio to better compete and maybe this is the start of accelerated growth to come from here?
Yes. It's fair to say our endoscopy platform was a contributor to our growth this quarter. The team has come together; I've spent time with them and they presented at DDW. At DDW, results from a multicenter randomized controlled trial comparing the cTIF procedure to the standard-of-care Nissen Fundoplication were presented. The room was packed. The data show the cTIF procedure, which uses our EsophyX product, is an effective alternative to Nissen Fundoplication for patients with chronic GERD. That's encouraging; GERD is a large market. The C2 integration is going well. We launched our Resilience through-the-scope product at the end of Q1 and that product line has continued to do very well in Q2. There's a lot to be excited about in our endoscopy team.
Okay. Really helpful color there, Martha. And maybe just a follow-up question on the renal. And I know growth was impacted this quarter by the recall. But I guess, does the guidance assume an immediate recapture of any lost revenue there? How should we be thinking about that?
We resolved the issue before the end of the quarter. Hats off to our team. We are back in the market but it will take some time to recapture accounts that switched while our product was off the market. We don't feel that's a material impact for the second half.
Our next question or comment comes from the line of David Rescott from Baird.
Congrats on the results here. I want to follow up on some of the comments provided already just on OEM in China and Asia Pac. I know that part of the weaker growth you saw in OEM in part was due to some stuff in Asia and China. Maybe at least it sounds like that's not massively getting better or at least the bigger driver of the outperformance in OEM in this quarter. If that's true, when you think about growth and the reiterated OEM guide for the full year 2026, what are the bigger factors to either hitting that expectation in the back half or whether this mid-teens growth number in Q2 is something that could sustain in the second half?
We did see slightly better results in China for our OEM business, but at the end of the day we feel pretty confident. We've signed new agreements with customers that will be strong in the back half. The beat was broad-based with customers coming back after destocking. OEM beat our expectations and is ahead of where it needs to be to reach the mid to high single-digit expectation we have for them annually. We have visibility and feel confident we can hit that mid to high single digits, though the business remains lumpy.
Okay. That's helpful. Martha, I appreciate the comments you made on some of the longer term strategic planning goals. I know you're not going to comment on that upcoming 3-year outlook. But when you think about potential M&A or some divestitures in the portfolio, can you help us think about what the goals or metrics are around how you're thinking about that next 3-year plan? For example, do you get some slower business segments out to raise the weighted average market growth of the portfolio? Are there segments that, even though slower growth, still contribute meaningfully to operating margin expansion? How should we gauge what this longer-term strategy could become?
These are the types of questions we're asking. Everything is on the table; we're not leaving a stone unturned. We're looking across the entire portfolio and product families, asking about strategic rationale and financial profile, and considering whether procedures will continue to be high-growth globally. We're still in process and will share conclusions when the work is complete.
We're pragmatic about long-term plans. You saw us execute Foundations for Growth and we're on target for CGI. We want to make sure we finish CGI this year and get the long-range plan right. These plans take detailed work. We've done 850 basis points of operating margin improvement through 2025. If we hit the high end of our guidance this year, we'll be near 950 basis points. We think there's more to be had, and Martha is leading a thorough process.
Our next question or comment comes from the line of John Young from Canaccord Genuity.
It's Zachary on for John. When you think about SCOUT MD and OneMark, can you maybe get a little more granular on the cross-selling potential with the 1.3 million soft tissue localization TAM?
When we only had SCOUT, we looked at roughly 400,000 procedures per year in the U.S. When we add OneMark, that expands by about three to four times, up to roughly 1.3 million procedures because OneMark covers the lower-risk biopsies that occur. These are two separate technologies—one uses ultrasound and one uses radar. Physician preference matters and there is price differentiation. In some cases, people want a lower price point and where they feel it's a higher-risk biopsy they may prefer SCOUT MD. Our team knows these customers well—their preferences and the economics of various sites of service—so they're able to sell the most applicable and useful technology.
Great. And for my follow-up, I know you talked about WRAPSODY, you still feel good about it in the long-term. But can you talk more about what you're seeing in terms of sensitivity to pricing in the outpatient setting given that you don't have add-on payment?
It depends on whether the outpatient setting is connected to a hospital or is a freestanding ASC or OBL. Office-based labs are far more price-sensitive. We're not going to share pricing detail, but we've asked our commercial organization to be very competitive. They're being competitive and also smart—it's not in our interest to give up price unnecessarily. Overall, we are seeing a range of prices because we are seeing a range of sites of service.
Our next question or comment comes from the line of Jim Sidoti from Sidoti & Company.
Inventory is up a little over $20 million in the quarter. Is that due to the View Point acquisition? Or are you ramping up inventory in anticipation of higher sales in the second half of the year?
I'll take this and also highlight free cash flow progress. CGI's goal was $400 million; we hit that at the end of last year. We're focused on the $200 million target for this year. We spent cash on inventory strategically. We had product lines last year where we wanted better inventory, so we increased it. We shifted more shipping to ocean freight, which requires more inventory because it takes longer. We also bought resin and certain raw materials to guard against potential disruptions given geopolitical concerns. We haven't seen disruptions or pricing increases yet; we think inventory is well managed. I would expect the build to taper off the rest of the year while we continue to pursue the $200 million target.
Okay. Got it. And do you anticipate any additional tariff refunds? Or do you think what you received in the second quarter is what you'll have for the year?
We've essentially received just about everything we were expecting. There is still about $1.5 million or so that will come from a third-party freight forwarder who is responsible for submitting some items. They have many customers to process, so I wouldn't expect anything substantial back this year. If we do, great. But for the most part, we've gotten what we were expecting.
I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Martha Aronson for any closing remarks.
Well, thanks very much. And again, I just want to thank our global team for delivering the strongest quarterly organic growth in 3 years, just an outstanding result. So hats off to them. And again, I appreciate all of our investors for taking your time today to be with us. We appreciate your attention and your interest in Merit Medical. Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.