Greetings and welcome to the ICU Medical Inc. First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. John Mills with ICR. Thank you. You may begin.

Good afternoon everyone. Thank you for joining us to discuss ICU Medical's financial results for the first quarter of 2022. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Brian Bonnell, Chief Financial Officer. We wanted to let everyone know that we have a presentation accompanying today's prepared remarks. To view the presentation, please go to our Investor page and click on Events Calendar and it will be under the first quarter 2022 events. Before we start our prepared remarks, I want to touch upon any forward-looking statements made during the call, including beliefs and expectations about the company's future results. Please be aware they are based on the best available information to management and assumptions that are reasonable. Such statements are not intended to be a representation of future results and are subject to risks and uncertainties. The future results may differ materially from management's current expectations. We refer all of you to the company's SEC filings for more detailed information on the risks and uncertainties that have a direct bearing on operating results and financial position. Please note that during today's call, we will also be discussing non-GAAP financial measures including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into ICU Medical's ongoing results of operations particularly when comparing underlying results from period to period. We've also included a reconciliation of these non-GAAP measures in today's release and provided as much detail as possible on any addendums that are added back. With that, it is my pleasure to turn the call over to Vivek.

Thanks John. Good afternoon everybody and we hope you are well. It's been a hectic 70-or-so days since the last call as our legacy ICU businesses have continued to progress well and we've been consumed with trying to improve the performance of the businesses that came with Smiths Medical. The external volatility in the supply chain that we've been describing for the last year continued primarily on fuel freight and raw material availability, while hospital census for our customers was more balanced throughout the quarter than it has been in a long time. Underlying demand in Q1 was good in all geographies with the exception of Asia. Like everyone in our industry, we want to start first by thanking all of our customers in the frontline workers for trusting us to serve you during these times. And it's been great to meet so many of our international Smiths Medical colleagues live as we've now been to just about every single country with the exception of those on total lockdown. While Q1 results were generally in line with our previous comments for legacy ICU Medical, our results for Smiths Medical were slightly different than our expectations so we wanted to use the time on the call today to comment on the year-over-year drivers of the three main legacy ICU businesses and reiterate our view of expected growth for the upcoming year, give some sense of the current volatility in inflation in the market and how it may positively or negatively impact the level of legacy ICU profit growth, explain the Smiths Medical revenues we achieved in Q1 and how that compares to historical levels over a long period of time with some color on the variance, provide a status update on the current challenges and opportunities with the Smiths businesses as…

Thanks, Vivek and good afternoon everyone. To begin, I'll first walk down the P&L and discuss our results for the first quarter. And then, move on to the cash flow and balance sheet. So starting with the revenue line, our first quarter 2022 GAAP revenue was $543 million compared to $318 million last year which is up 71% on a reported basis reflecting the impact of the Smiths Medical acquisition, along with growth in the legacy ICU business. For your reference, the 2021 and 2022 adjusted revenue figures which exclude contract manufacturing sales to Pfizer can be found on slide number 3 of the presentation. For the legacy ICU business, our adjusted revenue for the first quarter was $317 million compared to $304 million last year, which is up 4% on a reported basis and 6% constant currency. Infusion Consumables, was up 11% reported or 13% constant currency. Infusion Systems was up 3% reported or 5% constant currency and IV Solutions was down 4% on both a reported and constant currency basis. Overall the results for the legacy ICU businesses were in line with our expectations. For the quarter, the Smiths Medical businesses contributed $215 million in revenue. As a reminder, the Smiths Medical acquisition closed on January 6th and our first quarter results include the impact from Smiths Medical's operations, beginning on January 7th and continuing through March 26th. This is the fiscal period end under Smiths Medical's historical financial reporting calendar, on which, the financial systems are still aligned. Therefore, while the ICU results for the first quarter reflect 63 business days of activity, Smiths Medical represents 56 business days, which is seven days fewer given the timing of both the transaction closing and their quarter end cutoff. As you can see from slide number 4 of the…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jayson Bedford with Raymond James. Please proceed with your question.

Hi. Good afternoon. Lot to unpack here. So, I guess, maybe just to start on the first quarter EBITDA came in a little lower than expected at least we expected and sounds like you expected. Revenue was largely in line. I realize that it's tough to tease out but was ICU profitability from a margin standpoint similar to 2021 levels?

Jayson, yes, it was the legacy ICU businesses were generally in line with last year.

Okay. You mentioned, Vivek that the $280 million to $300 million in quarterly revenue. What needs to happen to get back to that level? I know you mentioned a few things but if you had to kind of win or it down to the punch line what needs to happen here you get back to that $280 million to $300 million.

I mean -- hey, Jayson, how are you?

We tried to give the actual bridge. I mean, we're the same people that said things all move that fast in this industry, right? For years we've been saying that and they don't move that fast. So why such a spread. One piece was just math. That should happen right? As long as there's been some IT bumps and stuff along the way too. As long as the IT platforms remain stable that should automatically happen. Then the second and third issues are related to the two big buckets. One is just clearing the backorders and producing enough stuff and getting into the channel. We didn't make as much progress as we wanted on that in Q1. We thought we would get an extra five or six days out the door. That's the difference and that's $20 million to $30 million and we're trying as hard as we can to get all of that out. It's just been tough with a very inconsistent supply chain. So that's kind of item one that has to happen to get back to normal. And then some portion of it the small portion is associated with the quality related interruptions and we're working those issues. It's really the same three buckets that went through on the script the punch line is run a good operation, right? The first thing happens on our pilot seconds on a good operation where that relates to quality or productionship.

Is the expectation that the backlog will come down in 2Q versus 1Q?

I think that is our expectation, but I don't want to quote an amount, because it's really been -- it's only started to improve frankly over the last seven to 10 days even we didn't make progress in January, February or March. We were really buried. So -- and it's hard if you're going 24/7 anyway or max shift anyway to increase beyond that. We're certainly trying, but we're spending like orders of magnitude more on solving that than we had sort of -- and so we're trying to balance the right value in there all the time too.

Okay. And not to get too granular Vivek, but what's allowed it to improve over the last seven to 10 days.

Just getting stuff out the door. And so I mean, this is basic warehouse operations, receiving, clearing out space by shipping and getting stuff received into warehouse and moving it out literally focused on not most acute customer backorders and the things that really impact patient care on a day-to-day basis getting that prioritization. And then first, adjusting the IT systems and the workflows so that you could actually run your business that way that wasn't necessarily happening.

Okay. So it sounds like, and again, this is my interpretation. So, please, correct me, if I'm wrong. Assuming there's not a big bolus in demand here, the backlog based on the last seven to 10 days of improvement should start to work its way down in 2Q and beyond?

I mean, right now Jayson, I would say, if we just had a normal quarter of sales, put the backlog on the side almost, I don’t know is that we had a normal quarter of sales, we would be happier than we are today, right? Obviously, what we want to make sure we want to fill that back on because you don't want to evaporate, right? And there's a lot of old orders in there that we've kind of scrubbed through and tried to remove things we didn't think were real. I don't want you leaving that comment saying, oh, we'll get a normal quarter of sales and all the black on will get cleared on top of that. Right now we wouldn't say that. We would just be happy if we get a normal quarter today, I think, to come down a little bit.

Okay. Okay. That's helpful. And then just maybe lastly for me. Yes, go ahead.

No, no. You're on the right topic here. Go ahead.

Gross margin, I think, you explained it away and it sounds like it's all Smith. But previously, I think, you talked about a 40% bogey out there for gross margin. Is that still on the table, or does that come down a bit?

I mean, I think, over the long-term certainly, I mean, I think that's a minimum frankly over the long-term. I think you'd be shocked if we told you how many points were impacted by just trying to catch up and by running an unabsorbed factory and by it's dramatic. It's dramatic. And we'd rather take that pain right now trying to serve customers and catch you.

Okay. That's helpful. Thanks guys.

Hello, Brian, would you like to add. I don’t know want to stop probably there.

Thanks, Jayson.

Thank you, Jayson.

Thank you. Our next question comes from the line of Larry Solow with CJS Securities. Please proceed with your question.

Great. Thanks. Good afternoon, guys. Can you -- just a follow-up on the revenue growth sort of at Smith. You mentioned the bookends where one scenario your revenue is sort of flat, but you value add other ways. And then you have the other -- the opposite side where your revenue grows. Can you sort of -- I miss particular, can you speak maybe a little bit historically, why it's been flat? What has been growing? And what maybe hasn't been growing? And what's going to change -- what could maybe -- what would be the growth drivers in the future that could maybe turn this into more of a growth revenue grower than it has been?

Yeah. I mean I could -- I'll try to give a short answer there Larry because in aggregate, if you just look at like -- if you look at a 10-year plot of revenues, it would be almost flat from 2011 to 2021 something like that plus or minus $25 million currency adjusted. Underneath that, there were pockets that really went up like ambulatory infusion went up right because of all the drivers underneath that market and the inherent market structure. Some of the categories in Vital Care went up and will probably continue to go up, if remediated properly because of the unique nature of the markets and the market structure. And then there were categories like consumer -- their version of consumables that went down where we actually believe if we can focus on that both from a production and commercial standpoint, we can improve there. And so something should grow because the market structure should enable it with the underlying dynamics and just with focus and some we actually need to turn around a bit more. But the belief was, even if it could hold flat at the revenues was we have synergies. And duplication in lots of places and that's value. A little bit like the Hospira story right consumables, it took one year, 1.5 years to get Hospira consumables moving, but it became very powerful once we did that, I think some of those categories we continue to have that belief in. So it's a complicated answer because there's a lot of different lines of business. But right now, we think a normal quarter that equaled their flat historically where we were adding value below the revenue line. We'd start with that.

And is the consumables piece is that in the catheters is that in the bar access mostly, or is that sort of spread out?

It's not just catheters everything in that vascular access bucket

Right, right.

Which is what was the largest factor.

Yeah, yeah, absolutely. And then just on pricing, I know you disclosed, you have significant inflation impacts. And I know you've been raising prices a little bit, but it does seem like you're sort of limited on the ability to raise price. So people have asked me this question. Is it just the industry there was only a few providers. Why can't you raise price a little more. Like I see – I mean I know. It's more like an open and maybe you can answer that question but it seems like a lot of – in a lot of industries people are raising prices everywhere. So can you eventually raise price and you just have contract and stuff you can't raise price on. There's no kickers in them. Is that kind of what restricts you, or can you maybe speak to that?

I'll sort of – I mean I obviously been paying very close attention to the public commentary on this topic for months. I think we would say for many years we sold under long-term fixed-price GPO contracts, which people enjoyed because we had 0 price erosion and the opportunity to take little increments here and there. I think we've tried to address that framework constructively. Obviously, our customers are suffering and operate on thin margins. And each unique product category has its own competitive dynamics. I think we have tried to illustrate our value and historically legacy I certainly in many categories was a low-price player. And we've tried to address that wherever have the opportunity to address that. It's absolutely the right topic, difficult to implement everywhere and you have to do the partnership with customers who have their own problems every day right now as we're all reading about. I mean the journal had a great.

And I guess it's a long term. It takes a long time. I mean a low-cost product you have to change. Yes I understand.

But our competitive position actually works in that where we were participating like that's how I see care out its original roll way back aside from the clinical. So I think we're trying to be – do everything we can possibly do there.

If I can just sneak one more in real fast. So the guidance basically sounds like that the legacy is basically in line. I mean inflation may be hurting you more but you have this big range. So maybe you're at the lower or middle part of the range or something. I mean that's met not worsen to your mouth. And then Smith I guess is – it sounds like it might be hard to get to your number but maybe your goal is at least you can exit the year at the target you started with but maybe you don't get quite all that EBITDA in this year. Is that at least one scenario.

Yes. I mean I think that is one scenario but there's so many moving parts going back to this back order. Like you can't say it's me because I'm playing for the back half. right now, right? But we just see off? Like that doesn't make sense. We're improving things each day. And there's so many pieces and by the way in the regular business even if you go like you there's – every week there's been challenges for the last 12 months on raw material availability, components at that. And we've done a pretty good job of Bob and we've been surviving all of those right because it was our core business but there's just more stuff. So, it's just it's hard right now with the randoms that come in each week to say. So we'd rather take our time. We're seeing what's happening each week do it the right way. And prove to ourselves that even with another 90 days we can -- because it was a short time between the last call and today even with other 90 days we can add real value and it will take stock on where we where we are, right? You can't malt.

No less confident. Right. No, I get it. But you’re no less confident in maybe the exit year or what you do in 2023 than you were a few months ago unless barring something on that spectrum?

I think the issues are all solvable. Nothing structurally changed in the market. There's no even pass now.

Okay, great. And I’ll appreciate all that color. Thanks so much.

Thanks, Larry.

Thank you. Our next question comes from the line of Matthew Mishan with KeyBanc Capital Markets. Please proceed with your question.

Great. Thank you for taking my question and good afternoon, guys. I guess my question is on the customers. Do the customers have enough inventory to work through this backorder issue, and are they sticky with Smiths?

We think about that every minute of the day and that is absolutely the right question. In certain areas, it's very lean out there, which is why we're spending like crazy to solve the issues and going at it so hard. So that answer is it universal in all categories. So our fear is, if it goes on too long, you lose -- you could lose the business and it goes out of your permanent book of business. We don't want that right? And that's why we're trying to be transparent to the customer. And again, it's akin to our last big situation. It was pretty ugly when we walked into it, right? People have had the experience with us about fixing these things and we're trying to make it very clear what's going on with real timelines and real commitments and show them we'll at some level like we did in Hospira, we put our money where our mouth is on a number of supply items and we're crossing the bridge on some of those topics now. But it starts with really being honest and transparent to everyone of what's going on with a real calendar of when to fix it. So the answer -- the direct answer is in some items inventory is very thin out there. Those are the ones we talked about improving production on the fastest, the critical items and the highest and they often are the highest margin items and getting those into the channel right now is what we're currently do.

Okay. Excellent. Thank you. That’s all I had.

It's the right question. Thanks guys. We appreciate the support and the questions as always and answer anything else offline if we need to.

Thank you. We have reached the end of the question-and-answer session. I'd like to turn the call back over to Mr. Jain for any closing remarks.

Thanks Michelle. Nothing else. The team is working incredibly hard. We appreciate the interest in ICU. It's a very unusual time out there. And I think we're committed to improve what we got our hands around here every single day. So we'll talk to you in 90 days and hopefully have constructive things to say then. Thanks very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.