Good afternoon and welcome to the ICU Medical Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. John Mills, Managing Partner at ICR. Please go ahead.

Thank you. Good afternoon, everyone and thank you for joining us to discuss ICU Medical's financial results for the first quarter of 2023. 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 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 2023 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 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, 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 grander 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're well. Even with the volatility in the economic environment, we are enjoying 2023 to date much more than last year. ICU Medical is operationally running well and largely back to playing offense and serving and expanding customers with the proper balance of time between internal self-help versus commercial focus. The macro environment eased a bit with finally some relief in the supply chain as freight, fuel and foreign exchange were all at their best levels in a while in Q1 and the rollover and labor inflation did materialize predictably. Global demand was healthy in Q1 with the US having improving admissions. 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. We hope today's call is shorter and we'll use the time to discuss the Q1 revenue performance of our reporting segments as we said we would define them starting in 2023. Give the best color on revenue performance for these segments in the near-term, explain our profitability in Q1 and outline the items in the near-term that impact this level both positively and negatively, characterize those items in the context of the comments from the year-end call on what comes back in the medium term and long-term and what is permanent. Update the normal housekeeping items including quality remediation integration and separation status. And reiterate and check on our progress against our key short-term priorities that we outlined on to start the year and we'll skip any comments on longer term value creation and self-help and just get to the financials. We finished the quarter with $556 million in adjusted revenues. Adjusted EBITDA came in at $102 million and adjusted EPS…

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 cash flow and the balance sheet. So starting with the revenue line, our first quarter 2023 GAAP revenue was $569 million compared to $543 million last year, which is up 5% on a reported basis or 7% on a constant currency basis. Our adjusted revenue for the quarter was $556 million compared to $532 million last year, which is up 4% on a reported basis or 7% on a constant currency basis. For revenue by business unit, as we've previously mentioned, for the first year after the acquisition, we maintained the historical ICU and Smiths Medical business unit revenue reporting structure to provide transparency and insight into underlying performance and the individual legacy businesses. But now that we have a full year of operating as a combined business, we have migrated to our new three business unit reporting structure of Consumables, Infusion Systems, and Vital Care. Slide number three of the presentation highlights the key product lines that comprise these three business units and provides the quarterly revenues for 2022 and year-to-date 2023. As shown on the slide, adjusted revenue for Consumables was down 2% on a reported basis or up 1% constant currency. Infusion Systems was up 17% reported or 21% constant currency and Vital Care was up 3% reported or 6% constant currency. As you can see from the GAAP to non-GAAP reconciliation in the press release for the first quarter, our adjusted gross margin was 38% relative to the fourth quarter gross margin of 36%. This represents a sequential improvement of two percentage points driven by one lower logistics expenses from a combination of reductions in expedited freight along with…

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] First question comes with Jayson Bedford with Raymond James. Please go ahead.

Good afternoon and congrats on the progress. Maybe just a few questions. First, just on revenue, can you comment on your backlog, meaning you exited 4Q with an elevated backlog, given all it went on last year, did the backlog exiting 1Q increase stay the same trend lower? Be curious.

Jason, it's Brian here. During the quarter, we did make progress as it relates to the back orders, both on the legacy Smiths Medical side as along with the legacy ICU side. But I think it's probably in terms of progress, the most -- in terms of the recent quarters, probably the one where there's been sort of the least amount of progress just given the fact that most of the progress happened over Q3 and Q4 of last year. You're we're always going to have a little bit, there's always going to be a little bit of back order out there. I would say ICU's kind of close to normal levels. Smiths is still elevated, but it didn't really have an impact in the results for the quarter. And it didn't turn out to be some magic catch up if that was the real question, Jason. Right? That there wasn't a bolus in addition, we worked through it last year and it was none of the losses too.

Right. Okay. But it sounds like it's still a little elevated on the Smiths side?

A little bit, but not meaningfully. Customers are well served right now.

Okay. And just Smiths revenue in the quarter, is there any way to kind of break out what was Smiths and what was ICU?

I think we're trying to talk at the segment level and that's the way we manage the business internally. I think we tried to give color, Jason, in each of the segments. The pump portion of Smiths executed well, both syringe and ambulatory. And there was back order catch up there in Q3 and Q4, but it was a more normal kind of number this quarter. We tried to give the color that the Vascular Access, as we said in the last two or three calls, was the thing that needed attention. And it's a very specific area, the Vascular Access that needs attention. That still was negative substantially year-over-year. And just about everything else was up year-over-year from the Smiths portfolio. Everything else that's in the Consumable segment, meaning trachs and everything that's in the Vital Care segment.

Right. Okay. And then maybe Vivek, the state of the LVP market today. Are active decisions being made out there? Is there still some paralysis is as the other players in the market kind of await new FDA clearances?

I don't know. It's changed that much from Q4. I think everybody is kind of have the same story for a while. So, it's more just stuff is getting older and so decisions have to get made. I felt like there were more decisions made in Q1 than there were in Q4. It's still not near normal historical levels, but it's enough for us to make a limit on right now.

Okay. And then maybe just last one from me and I'll let others get in queue. Vivek, you mentioned that results were in line with your expectations, but profitability was clearly well ahead of at least consensus expectations. And I realize you're not changing guidance, but can we assume that your blessing the higher end of the range, or was did 1Q really turn out as expected within the framework of your original guide?

Jason, we've used the same words in the press release for five years. I think we didn't hyper analyze those words that much. What we don't have perfect -- like, perfect view on is as we try to manage the interplay between inventory, cash, working capital, there are decisions that are probably good on a cash basis that can hit margins a little bit. And if you look at the raw -- well, the in total inventory bill, but a lot of the things we did to ensure the supply chain last year, we can slow down a little bit that hits margins and therefore we may make decisions that help the balance sheet a bit more than the income statement. And so, I don't want us -- Brian, and I don't want us to be pinned down on that right now. I think we'll have a better sense. We have the Q2 call and we'll try to keep things the same as we do and talk about it after the Q2.

Okay. That's fine. Thanks.

Thank you. The next question comes with Larry Solow with CJS Securities. Please go ahead.

Awesome. Great. Thanks. Congrats on -- definitely like Jason said, good movement, forward improvement in just operational efficiencies. Just a couple follow up. Just on the revenue side, first, it feels like, I know you don't break out legacy in Smiths, but just a couple of categories within Smiths. So the Vascular Access, I know you highlighted that Vivek is sort of a similar to the Hospira and the system side. You kind of acquired a falling knife here, but what kind of gives you the confidence that you have a right to win in this segment and when could we potentially see some return to growth? Is it going to take a while? Is there a lot of lifting, heavy lifting you have to do in there? What needs to be done.

It is in that area, Larry -- and first thanks on both on the congratulations sentence. I mean, I think we've just feel like we are kind of getting closer to what we're supposed to be. I don't think we're thinking this is some heroic thing so far. Right?

Sure.

It was a difficult year. It's finally gone in the right direction. On the Vascular Access products, it's a hundred percent about commercial execution, right? We started life with some supply issues and there's three or four sub lines in there. Each of them is producing fine now. It's literally getting back the customers where Smiths made some short-term trades historically to get some government business, et cetera, and move volume away from long-term committed customers. You can imagine how those customers felt about that. We need to go back there and win those customers back, and they use these products for a long time and they use many of the other ICU products. We have a right to be there in making those calls. And it's a lot of the same clinical areas where the original consumables business started. So, I feel like we have scale, commercial breadth, adequate supply, and economic value across all the pieces of that portfolio that we -- there's no reason we shouldn't be able to compete.

Okay. And then just on the Smiths legacy pumps business, it feels like -- I know you lost a little bit of sales last year, but longer term, now that you sort of back in the marketer or getting more normalized there, do you feel like you have some share ground to, did you lose any share? How'd you kind of maintain that share or what's sort of the current state of those businesses, if you can help with that or really the syringe piece?

I think the value -- Larry, value comes from the legacy Smiths pump market in two dimensions. One is it comes from actually gaining market share and placing more hardware. I think that is much more of the conversation today and going forward. The other part of that conversation is, are all the assets being used, meaning the pumps being used effectively in the market, and are they pumping as much as possible? And when we were short dedicated disposables for those pumps, a lot of the fleet wasn't pumping at the historical rates. And so, as we've improved not only disposable supplies, service and repair, turnaround time, training, et cetera, the assets are getting better utilized. And so, there should be more pumping going on with pumps that are out there. And then as those capacity is filled up with those pumps, there's a reason for people to acquire new hardware. So, it's a little bit self-fulfilling. We had to get the basics right. That's most of what we've done so far is that.

Got it. And then just a couple gross margin, on the price, some price benefit this quarter. Did you mention that you actually got some price increases even in the solutions piece? Did I hear that right? And I imagine that's just a small, hopefully you'll have a lot more in the next couple years, but is that -- did I hear that correctly?

Yeah. Larry, I mean, that's correct. We mentioned three drivers of gross margin improvement in Q1 relative to Q4. Supply chain and logistics was probably the biggest contributor to that improvement. And then both pricing and mix, I would say were a close second and third.

Okay. And that the sort of increase absorption or the better absorption this quarter or the drop off that you kind of guys feel you'll have as your slow inventory down? I know it's not an exact science, but is that -- like, can you see gross margins declining just on that, like a hundred bps? Is that like a good place to start, just looking at that in a vacuum?

Yeah. Larry, I think our original guidance around gross margins for the full year was 37%. And we don't see a reason to deviate from that at this point. So, yeah, it's probably something 100 to 150 basis points less than Q1 kind of over the course of the rest of the year.

Okay.

We take it quarter to quarter. We see what trades are in front of us. What's selling, what's there on the shelf from an inventory perspective? But the decisions are real time right now, so we don't want -- we really don't want to make a mistake on that. And that five points of gross margin that disappeared last year was the variance of where we thought we would be and where we wound up. So, we clearly know that's where the value is and want to get it back. And we're trying to illustrate in the script that there are a number of things that are still yet to come, but we need to optimize for absorption, cash, working capital service levels, everything in the calculation right now.

And clearly your idea is cut and capital usage improved for cash flow. Do you -- I mean, do you expect 2023 to be -- to working capital to be still a usage and any thoughts on what your free cash will be this year?

For 2023, I think, overall working capital, when you include both inventory and kind of this one-time benefit that we got from the accounts receivable sale program, should probably be somewhat neutral, I would say over the course of the year.

Got it. Okay.

Sorry, do you have one more -- I kind of cut you off. Sorry.

No, I just have the free cash flow number. If you have a thoughts on total net free cash flow. I guess you do seem you'll be positive this year on the free cash flow side, but I don't know if you …?

I think that's what we said in the last call. Again on Q2 we'll have a better sense of numbers.

Okay. Okay. Thanks. No, I appreciate all the color.

I'm not sure we can say more in the script that we're very focused on it.

Gotcha. No, that's fair. All right. Excellent. Thanks again guys.

Thank you. The next question comes with Matthew Mishan with KeyBanc. Please go ahead.

Hey, good afternoon and thank you for taking questions, and I'll echo my congratulations on a really nice quarter as well. Just first on the Consumables, it sounds -- it sounded as if you expected Vascular Access to be down in the quarter. I think last quarter you said something around that you expected mid single growth for the full year. Is that sort of still -- how you're looking at that business?

Yeah. I think that whole story on Vascular Access has been going for six or nine months, Matt. So even on the summer call last year, we said, well, the good number of Vascular Access had too much catch in it and Q4 or the Q3 call -- and the Q4 call, we said it's going to start going down a little bit. I think we've known for a while and I think we finally got to the predominant amount of losses out. We have a sense of where they were and we secured the supply chain. I don't think our comments on the whole segment performance is different than what we set out the year for was mid single digit Consumables. Obviously that means we have a steeper climb on some of the categories and we obviously need to make sure that the base is at the bottom like we're saying, but we feel reasonable about it today. There'll be five quarters by time.

And then -- and well, keep on going. I didn't mean to cut you off there.

No, that's really it. I think it just means the other stuff has to go and it needs to stabilize, right, to get to where we want and the other stuff. I think we feel very comfortable on the other main lines in Consumables going and we have to ensure that the Vascular Access at a minimum stabilizes, right?

Okay. And then, could you just comment -- and this happened through the quarter, but just comment on your interest in the Medtronic respiratory and patient monitoring assets, or parts of it.

I think we would never talk about any strategic thing. We were -- I appreciate the question and it's flattering that people would say things like that, including us with what we went through, but -- and are still going through. But I don't think it's right that we comment on whether big, small, whatever it may be that we comment on a strategic situation. I'd prefer to not have anything to say on that.

Alright. I think you guys wanted to keep this one short, so we'll, I'll stop it there. Thank you.

I hope you're okay. Your voice sounds a little raspy, so get…

Little bit.

You've had a long earning -- sign of a long earning season. So anyway, thanks everybody for your interest in ICU Medical. We appreciate it. And we'll turn it back over to the operator.

Thank you very much. This concludes our question-and-answer session. And I would like to turn the conference back over to Mr. Vivek Jain, CEO of the company, for any closing remarks. Please go ahead. End of Q&A:

Thanks folks. I should have waited here. Thanks folks for your interest in the company. We look forward to updating you on our Q2 call in August. And thanks to everybody at the company who's been working tirelessly to improve our situation and thanks to our customers have been very supportive along the way. Have a good summer, everyone. Bye.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Have a great day.