Good day, and welcome to the ICU Medical, Inc. Second Quarter 2022 Earnings Conference Call. [Operator Instructions]. Please note this event is be recorded. I would now like to turn the conference over to John Mills with ICR. Please go ahead.

Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the second 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 second 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. 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 discuss 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. And 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 quick 90-or-so days since the last call, and our legacy ICU business unit revenues are on track in 2022, and we have now seen weekly improvements over the last 8 to 10 weeks through today in our operational performance for the businesses that came with Smiths Medical. The external economic volatility in the supply chain around freight and fuel that we've been describing for a while, hit its highest peak in Q2 for any time our team has been in the industry. However, the issues around raw material availability are narrowing, but still remain volatile. From a customer perspective, we felt hospital census was stable and underlying demand was good in all geographies. Like everyone in our industry, we want to first start by thanking all of our customers and their frontline workers for trusting us to serve you during these times. While Q2 revenues were generally in line with our previous comments for legacy ICU Medical, our results for Smiths Medical were again different from our original expectations. So we wanted to use the time on the call today, too. First, comment on the year-over-year drivers of the 3 main legacy ICU businesses, give an update of the current inflation in the market and how it has negatively impacted legacy ICU profits, which is really just about fuel, explain the Smiths Medical revenues we achieved in Q2 and bridge to how that fits with our comments on the last call, provide status update on the Smiths Medical businesses current challenges and opportunities in the 2 buckets we've highlighted on the last 2 calls, begin to talk about Smiths Medical revenues sequentially and describe what we think the next few quarters could look like in the…

Thanks, Vivek, and good afternoon, everyone. To begin, I'll first walk down the P&L and discuss our results for the second quarter and then move on to cash flow and the balance sheet. Along the way, I'll provide our updated outlook for the full year for each of these areas. So starting with the revenue line. Our second quarter 2022 GAAP revenue was $561 million compared to $322 million last year, which is up 74% 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 by business unit can be found on Slide #3 of the presentation. For the legacy ICU business, our adjusted revenue for the quarter was $324 million compared to $311 million last year, which is up 6% on a constant currency basis and 4% reported. Infusion Consumables was up 9% constant currency and 6% reported. Infusion Systems was up 6% constant currency and 3% reported and IV Solutions was up 3% on both a constant currency and reported basis. Overall, we were pleased with the results of the legacy ICU businesses. The second quarter was the first full quarter of Smiths Medical under our ownership and the business contributed $223 million in revenue. As Vivek mentioned, this was less than we expected as the operational challenges we discussed on our last call have taken longer to address. However, over the course of the second quarter, revenue per billing day improved from April to May and May to June, and we expect this trend to continue for July as we finalize those results. The June revenues, when annualized, we're still not back to historical levels, but we have now seen multiple months of sequential improvement since the…

[Operator Instructions]. And our first question comes from Jayson Bedford with Raymond James.

I guess few questions here. Did the back order increase in 2Q versus 1Q?

It did. Jason, you were a little bit choppy in there, different answer for different regions. The U.S. backorder actually has started to come down now. It's been longer to get the products. OUS back orders went up a little bit. Net-net, probably holding in the same place.

Okay. And I think you described it, but just can you -- can you walk through the sequential decline in Smiths sales, if just normalize for a full 1Q?

If I set it right, Smiths infusion systems went up Q2 over Q1. Vascular Access went down, I think, $2 million sequentially. And Brian, do you have the vital care memory -- Vital Care was down, I think

About the same amount as those four.

About the same as those 4. 4. So up in infusion systems in the down in the other 2 -- minimally down in vascular access. I'm just waiting for Brian to confirm the final care number.

And is that demand or supply related?

No, that was -- we didn't ship as much of -- we didn't ship as Vital Care was too also. We didn't ship as much, Jason, we were focused on getting the dedicated pump sets out for the infusion business in legacy Smith, the first kind of essentially 4 or 5 weeks of the quarter. And we paid the price on those 2 items. And that's why I'm saying sequentially now with the things that have happened, we can see and it still feels early to us, but I think we could say it, I think we feel like we can show consistent growth sequentially for a while now in the Smiths Pump segment. We could see that in kind of the medium-term avascular access, so we still got to execute better. And I think you won't see meaningful improvement in sequential on the third segment of Vital Care the end of this year, right? It sort of lasted bit less.

And I think early on in the year, you talked about the potential contribution from the legacy business in the Smiths business. I'm just curious, within the $350 million to $370 million in the '22% EBITDA guide, what is the expected contribution from Smith?

Jason, we can't -- it's hard -- now that we're almost 6 months into the integration, to really break that out between the 2 businesses on the earnings line. But clearly, the majority of that -- of the shortfall for the full year is related to the legacy Smith Medical business.

I mean I think Brian tried to directionally say, Jason, where you said there was 3 points on increased freight and raw material purchases and the majority of that -- not all, but the majority was on solutions. So you just took that percentage against the legacy ICU business, you can make some extrapolation. I don't want to paint a picture that's 100% all on it, right? Some of the inflation is in Transportation Solutions business.

Okay. And then maybe last one, and then I'll give someone else a shot. You mentioned Medfusion and kind of the reintroduction of that product. I think you also mentioned you're serving current customers. Are there any restrictions in terms of your ability to fulfill demand there?

No. I mean, I think, again, we've reached the point where we feel solid and reliable on the testing that we've done. It's sort of our choice how we bring things into the market. I think we feel like the vast majority of -- given the history of the product, a huge portion of the market is holding the product, plenty for us to keep ourselves busy with and where people have experience with the technology, et cetera, we can remediate some of the stuff that's out there. on a timely basis. I think it's more we're starting there than anything else.

Our next question comes from Matthew Mishan with KeyBanc.

Just the first question is for me. To get you to like the low end of your guidance of parial improvement, was something need to happen that is beyond your control for you to get to the low end? Or is that something where you could -- or is that a real outcome from on current levels of manufacturing?

I don't actually think right now, Matt, it's the manufacturing piece so much for the back half. It's all about fulfillment costs. And I think we've gotten burned certainly from January 6, which is January 6 to mid-May. We felt like we really, really got burned and we don't want to overestimate any rate of improvement here, right? Yes, it's great. We've had 10 weeks that have gotten a lot better. It's still expensive in 10 weeks doesn't make a long-term trend. So I think we're just trying to be mindful of the journey we've put everybody through ourselves.

I think that makes sense. And then last quarter, you've bucketed the quality issues around like a quarter in revenue. What does it mean in relative to that $16 million to be back to supporting existing customers?

It means a portion of that 15%, I think we feel like we can participate in now. Not all of that was related to just the common Inmet Fusion. So range are some other products in Vital Care, some other self-inflicted European quality holds, et cetera. But there is a portion of it that comes back online, that's where we're going.

And then just if things do continue to get better, is there a hangover from like manufacturing absorption of the inventory that still needs to be worked through the P&L or things continue on a trajectory and you can actually see a better sequential improvement.

I mean, I'll go first and let Brian go. I mean the pain we're feeling right now is, right, if you make the product today, and your factory is not as productive, you feel that pain later when you sell that product. Right now, we're feeling the pain of unproductive factories in Q1 and in part of Q2, and if to the extent product was moving even from the fall of last year. Those factories are much more productive today and those products are just starting to make their way into the market. So we would -- minus whatever inflation labor, raw materials cost increases that have come through. We would certainly -- we're trying to be more efficient going forward, but I'll pause there and let Brian add.

Yes. And Matt, maybe to your question, there is a little bit of a lag in -- between the actual operational improvements from a manufacturing standpoint and when you see those benefits come through the P&L, and that's -- can be 1.5 quarters or so before you see it.

And I asked the question last quarter, this is the last one around how -- have you lost any customers? Do you get a sense of like if they're now happier with the overall process of remediation and moving forward with ICU and SMEs?

I think to give a very market-oriented answer would be where there was lots of multiple choice in the market, I think we do believe we've lost some share, and we need to turn that back very similar to some of the analogies we lived through in Hospira, where the products were maybe a little bit more limited into the market? Or were there were heavy capital outlays and people have equipment that's running fine where they just need a predictable disposal to shop, they've hung in there. So it's a little bit of a different answer. If it's not related to a piece of capital equipment, it's truly a single-use disposable that has lots of choice in the market. at some point, brand matters less, if you can supply. There are spots where brand matters a lot, safety matters, quality matters a lot. And if it's correlated to hardware, it's even more sticky. So I think that my story, my opinion on this stuff for all participants, these products last and are a lot longer than anybody expected and are stickier than a lot longer than anybody expects, right? We've seen that in multiple versions of the story.

[Operator Instructions]. And our next question comes from Larry Solow with CJS Securities.

Just a couple of quick follow-up questions. Maybe I'll ask in different way. On the -- I know it's hard to break out the legacy from Smith, the sort of $45 million to $50 million incremental impact of inflation from the start of the year that you guys called out, that's across the company, I assume not just legacy. Is that correct?

Yes. That's across the company, Larry. Sorry. That's what I was trying to say it...

And then that that's okay ...

It was all.

And then that $25 million is right -- and that $25 million of expedited freight would mostly be Smiths, right? Is that correct?

That's what -- correct.

And that $25 million -- the $45 million to $50 million could eventually come down inflation comes down, but that's a number that's -- we can talk about it in a second, but I have a follow-up question on that. But the $25 million inevitably, if you -- if your fulfillment and production is optimized, then that number should really go to 0 inevitably, right?

There's always some. We always have. There's something happening somewhere, right?

Right. A few million may be under $10 million, certainly, right?

Even in legacy ICU, you have a little bit of of that here and there. So I don't want to say it doesn't happen. But none of us are very superset like this. So basically, just to be super blood, if stuff can get on the water, again, and the forward networks get fully replenished. We're spending money now to try to get the forward networks fully replenished, so stuff can stop going in the air and can go on both and on opening up as we speak.

Right. Yes, absolutely. And then what about just -- I know you mentioned you think you can exit the year kind of getting back to that sort of run rate on revenue or close to ex currency. Obviously, the margins will be lower for one, just because of expedited freight costs and whatnot. And then -- what about -- do you feel like you taking a step back from when you bought Smith to today, anything has really -- the structural things that you didn't realize were there? Or is it just more going to take longer time. And obviously, as you're going to have this higher inflation, other costs that maybe -- which is impacting not just your legacy business and many others, too.

Yes. I mean there's a lot in that statement, Larry...

So yes, my question is has anything really changed significantly? Or is it just more blocking and tackling? Are there some -- are there broken tackles here? I'm just trying to figure out because it seems like you talked about the business moving. This is a business that moves kind of slow and whatnot, but you're cutting guidance pretty dramatically from when we spoke in mid-May, right? So I'm just trying to...

I think one, as it relates to -- we look back on the transaction, yes, we think it starts with revenues. And so getting the revenues -- and that's after currency, which has been really rough. So if you don't have the revenues in order, you can't get the profits. We think the revenues are getting in order here at each day and each week is getting better. And so we think we'll be at Q4 where we should have been revenue-wise, not out of the box, but soon they're up. And from a profit perspective, somewhere where we thought we'd be 3 or 4 months into this. So yes, we got knocked down 7 or 8 months in this thing. But on the other hand, we have a much bigger book of business and many more synergy opportunities together across the network, where if we were stand-alone dealing with some of this inflation on ourselves, I think it would have been tough to find an equivalent amount of things to lay that off out of solutions to mitigate that. And so there are merits over time to being bigger here -- with [indiscernible] in the portfolio. And in terms of the guidance thing, again, back to the previous question, I think there's no reason to try to squeeze blood and marginally disappoint a customer here for the next 2 or 3 or 4 or 5 months, right? What we said is holding the share, serving people well and showing that we can fix this is more valuable than any, so that we can get the revenues there, serve the customers, run good factories, the costs, et cetera, will stabilize. And we have a long list of self-help items that we try to schedule out there in a lot of detail that add up to a big number if we can get after all of them as long as the customers are...

Absolutely, absolute. And just lastly, you never want to squeeze your customer and obviously, there are certain situations where you can't. But just in terms of pricing, and you you've touched on it for several calls. But a big question you see most -- many industries, companies large market shares or such as yours are able to get price. I realize your businesses are mostly contracted, but so you spoke about contract talks and renegotiations for future contracts. Do you feel like you'll be able to get more price? And why can't you have some kind of a surcharge in there that covers fuel and other things like many other health care companies do that have contracted businesses that sort of helps you in periods like this?

I think I would say, Larry, we are exploring all options. There's no renegotiation of anything going on. I think we were trying to lay out at least our thinking about the way we believe the industry should maybe deconstruct value on some of these items because the historical way of doing business doesn't necessarily apply. And in the short term, certainly, we will -- we're paying attention to what the competitive set is out there, and we'll will follow the lead if given the opportunities.

This concludes our question-and-answer session. I would like to turn the conference back over to Vivek Jain for any closing remarks. Please go ahead.

Thanks, folks. It's obviously been an interesting 6 months. We really appreciate everybody's interest in ICU, your patience. The situation is improving, and we look forward to updating you on our next call.

Thank you for attending today's presentation. You may now disconnect.