Good afternoon, and welcome to the ICU Medical Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to John Mills, Managing Partner at ICR. Please go ahead.

Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the second 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 want 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 the invite calendar, and it will be under the second quarter of 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 all of you to the company's SEC filings for more detailed information on the risks and uncertainties and that have a direct bearing on the 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 also include a reconciliation of these non-GAAP measures in today's release and provide 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, everyone, and we hope you're well. Even with the volatility in the economic environment and some revenue variance in a few of our product lines, we are enjoying 2023 year-to-date more than last year. ICU Medical is operationally serving customers well and finding the proper balance of time between commercial focus and internal self-help, which has become most acutely about supply chain efficiency. The macro environment was broadly fine for Q2 with consistency in freight and fuel pricing and some increasing pressure from currencies in our production geographies. International demand was consistent throughout the quarter, and the U.S. was a little choppy for us with lower acuity census and admissions in April, but improved through the rest of the quarter. Like everyone in our industry, we want to start first by thanking our customers and their frontline workers for trusting us to serve you during these times. We'll use the time today to discuss the Q2 revenue performance of our business units, provide more color below the business unit level due to certain of the results, update on the normal housekeeping items including our quality remediation, the separation from Smiths Group Systems and our next steps towards integration and synergy capture, explain our profitability and margins halfway through the year, and outline the actions we need to take near term to ensure we optimize for the medium and long term, reiterate and check our progress against the key short-term priorities we outlined at the start of the year, and take stock of where we are 18 months into the acquisition and the broader environment. And again, we'll skip any comments on longer-term value creation, but did want to make a clearer view of what we want to be. We finished the quarter with $535 million in…

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 2023 GAAP revenue was $549 million compared to $561 million last year, which is down 2% on a reported basis or 1% on a constant currency basis. For your reference, the 2022 and 2023 adjusted revenue figures by business units can be found on Slide number 3 of the presentation. Our adjusted revenue for the quarter was $535 million compared to $547 million last year, which is down 2% on a reported basis or 1% constant currency. Adjusted revenue for consumables was down 2% on a reported basis or 1% constant currency. Infusion Systems was up 3% reported or 5% constant currency and Vital Care was down 8% reported or 7% constant currency. As you can see from the GAAP to non-GAAP reconciliation in the press release, for the second quarter, our adjusted gross margin was 39%, compared to the first quarter gross margin of 38%, this represents a sequential improvement of 1 percentage point, driven primarily by the mix benefit from lower sales of IV solutions. Similar to the first quarter of this year, the second quarter gross margin reflects the benefits from; one, reductions in expedited freight, along with lower diesel prices and lane rates; two, the impact from recently implemented price increases; and three, higher manufacturing absorption from recent increases in finished goods inventory levels. As we mentioned on our last earnings call, there are a few items that will affect gross margin over the back half of…

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

Maybe I'll just focus a bit more on the revenue line, which is where I think most of the discussion will be. On the consumables, you're kind of parsing through some of the commentary there. It seems like you expect it to increase sequentially over the next couple of quarters. Just on an annual basis, is it fair to assume it will be down kind of low single digits. Is the math or assumption there, correct?

Yes. I think, Jayson, I don't think we expect it to necessarily be down year-over-year. I think we'd have a hard time saying right now that it's going to be mid-single digits like we said, we've got to obviously take $25 off of that, right? So we want to have some caution around that. Right? I don't know that we have it perfect, but we'd say it's what the exact number is, but I don't think we think it's negative for the year.

Okay. That's very helpful. On Infusion Systems --

Just to add on that, I mean, so there's no secrets, right? The legacy ICU consumables piece was up 5-ish percent for the quarter, and the Smiths was down in the consumables line.

Okay. But Master access was flat sequentially. Is that correct?

Correct.

Okay. Okay. Just on infusion, I was a little unclear as to just looking at it sequentially, it was down $9 million-ish. Was it just kind of the timing of capital or -- and I realize this segment can be a little bit lumpy, but was there anything that really weighed on the growth there?

No. Sequentially, I think it was -- we had a little bit of catch-up in Q1 on hardware placement, and we had good hardware get in Q2, but we started to ship more last quarter in the hardware, and there was some historical back orders that I think we cleared a little bit more last quarter. And we said that on the call last script that it was a high quarter for pumps.

Okay. Okay. And then just on Solutions, it looks like it was down, what, $12-ish million year-over-year, depending on the assumption on the rest of the pie there. Is this just a timing dynamic? I can't imagine you're either losing share or seeding on price. If you can just -- and as add on to that. Can you just comment on the impact of the Tornado and Rocky Mount on your business?

Yes, sure. I mean I don't think we've seen any real change in long-term committed customers over the last bit of time nearly really through the pandemic, today, things have been pretty stable. That's why we said it was just a weird -- a chunk of it was -- the biggest chunk was a weird April that didn't really come back in May or June. Another chunk of it had been Rocky has been hurting us. It's been evident in the results, $3 million, $4 million a quarter. We had anticipated it hurting us, and we have some substitutes there, but it's -- we can't imagine it's going to get better. We haven't had a final disposition from them on the Tornado. But it was a very small amount of our sales anticipated this year, but it is a couple of million bucks a quarter. We don't really have a better answer than that on solutions because your other points are right that you started the question with.

The next question comes from Matthew Mishan with KeyBanc.

I wanted to ask a 2-piece on the guidance. First, I guess, just the midpoint of the guidance comes down by about $10 million. Is that just simply the vascular assets piece, the $25 million at a decent contribution margin on kind of bringing that down? And then the second piece that I also wanted to ask was what had happened this year that could have enabled you to get to the higher end of your guidance.

It's a great question, Matt. On the first part, yes, you're generally directionally right on that, right? This contribution margin maybe isn't quite as robust as every piece of the infusion consumables market, but it's still pretty good. So it makes a difference. And that was important if we wanted to be at the high end. Two, as Brian said in his prepared remarks, this notion of getting everything perfect on inventory production and demand has been challenging. And so even if we feel okay about the aggregate gross margin, I think it's on our minds that it's been hard to predict everything perfectly, right? And then we always, I think, believed to get all the way to the high end also is everything on the macro had to work right, currency, broader supply chain costs, et cetera. And some of the currencies, particularly what's going on in the peso and Costa Rica and Colonias hurts a little bit, right? So there's some headwinds coming there. I think it's more of the macro than the stuff we operationally planned for.

Okay. I think that's fair. And that's – A –Vivek Jain: And it was both reasons we gave a wide range, right? We had that conversation at the time. And I remember we had a [Indiscernible], what has to do to get all the way there. So everything has to go right, and the macro has to go, has to go right. Q –Matthew Mishan : And then there’s still a lot that’s still left to do as long as integration goes. I was just hoping you could help us with like the time line of the ERP integration because it does seem as if you need to get that piece finished or at least further along before you get to that next wave of synergies like footprint and kind of supply chain. A –Vivek Jain: Brian, do you want to do that one, Brian or? A –Brian Bonnell: Yes. I mean the IT integration is a multiyear project that we are starting to work on but it’s not something that happens necessarily quickly. I would say, Matt, that as it relates to synergies, you don’t have to wait until all that work is 100% complete in order to see some of the benefits. So there are some things that we can – where we – there is some areas where we can reduce cost as we’re doing the IT integration, and there’s other things that aren’t necessarily predicated upon that work in order to see the benefits.

In the case of the Pfizer transaction, we were under a shot clock where Pfizer was no longer going to provide us systems, and we had to make all of those moves in 18 months, which I think it ultimately took 21 months-or-something to get off. Here, we’re kind of in month ‘18, and we’re starting the journey of the first action was to separate and specifically where the ERP just give some examples of where it is very valuable, is things like what’s our long-term warehousing and distribution model where we have our service repair model, we have a lot of duplication not only domestically, but around the planet. And when you have everything on a common order to cash infrastructure, you can kind of deal with some of those things in an easier fashion, to Brian’s point, you don’t have to have it, but it just makes it easier operationally. It’s the right sequence of events. And there – and we tried to get the laundry list there of whether it was manufacturing network, distribution, functional support. There’s a bunch of other stuff, right, so in just real estate, we haven’t gotten all of it. Q –Matthew Mishan : Is that a 2024 time line by the time you get to that that impacts ‘25? Or is that something which you can kind of get to at the end of this year or start to get to that could also start to benefit you in ‘24? A –Vivek Jain: I would say some of it. There are some announcements we’ve made on production that will impact ‘24. I think some of the items like real estate or the long-term distribution costs are probably more of an earliest late ‘24 or ‘25 type of item, but there’s a lot…

I mean, I guess, without trying to be indirect about it. We have $650 million to $700 million pump business, we’re a reasonable-sized player. And obviously, a chunk of our R&D spend goes into that area. The one lesson of having been in the infusion industry for a long time, we understand is, it is unpredictable what’s happened at the regulatory agency. And so we would like to focus on our own product quality and our own innovation, and we’ll talk about it when we have something to talk about, right? We’re not a small player in this space.

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

Great. I guess just a few follow-ups. I guess, just following up on the question just about the pumps, and I don't know what you can or can't say, but -- does -- your operations do you operate differently now that the large competitors back in the market? Is there any change in the competitive environment? I'm just trying to get any feel for what that does to you how you react to that, if at all, or anything you could say?

I mean I think the customers the customers have had a belief that all market participants would be on the market eventually. And to some degree that, that has -- and that was certainly our belief, as we've said we act very directly, and to some degree, that likely stalled people's decisions on making a purchase or when not all choices were available. And so we did okay for the last time. And we always said we don't need that much, and we've clawed back a chunk of what Hospira had lost that made ICU do the transaction in the first place that theirs, continued opportunity available for us. So we just hope people get on with making decisions because there's really no reason to not make a decision anymore. So we're kind of probably a bit more optimistic about it than concerned because the message of the customer as [attributable] from all Parkinson's was very consistent over the last years that everybody was going to be there. So everybody is there, time to get on with that.

Okay. That's fair. Can you just on the sort of shortfall and vascular access? You mentioned sort of $20 million, $25 million for the year. You also spoke to some new business that I think maybe you said it was delayed. So can you just kind of help us or tell us why it's been slower? And is it timing? Is it just your ability to to get new contracts? And I guess, part 2 of that question would be as you doesn't feel your confidence has changed too much and you get into where you inevitably want to be there. So can you just kind of help us through that?

Yes. I mean this particular -- these particular lines, which are in the acquired vascular access category, have been in the market for many, many years with until recently a very consistent share position, but they really didn't get a lot of focus in the last 4 or 5 years and with some of the supply chain interruptions and production failures, customers were not served well and moved away from them. We never assumed that, that would all come back. We assume that some portion would come back. And it's only been a year in earnest because we only combined our commercial or a year ago-or-so or 14 months ago, and it just takes time. We thought a few more things would come in than did. And it was really the difference between what we thought for Q2 and [Indiscernible] getting a couple of million bucks, which means we know that there were pieces of business in the hopper, it just takes longer to get them in and implemented. But we're not talking about some assumptions over the long term that are huge shifts in market share, more subtle shifts in market share in the category that we literally connect to with our largest and most core business. So I don't think we're sitting here with some outlander set of long-term market share recapture assumptions, just takes a little bit of time to have a few points to come back in.

Got it. Okay. Great. Great. And then just last question maybe for Brian, just on the gross margin. So obviously, it was better this quarter than expected. It was mostly mix related. Was some of the -- I know you certainly slowed your inventory production, but had you initially expected to slow production even more in this quarter I think your original assumptions gross margin was going down sequentially like 100 bps instead of going up 100 bps. So I guess part of it was mix, but was part of it just a slower slowdown in production that's going to kind of be picking up more in the second half? And then I guess the other question would be just to clarify, your guidance kind of assumes a 35.5% gross margin in the back half. Is that right?

Yes. I guess, Larry, on your 2 questions there, taking the last one first. Yes, I think just the math works out such that it's around 35% gross margins in the back half of the year to get to our -- the full year of 37%. And then as it relates to the improvement, why we didn't see a decline in the second quarter, we did take action, I would say, consistent with what we had planned to do around the slowdown. It's just that the P&L impact of that, there is a bit of a delay because that lower absorption as it occurs, gets capitalized on the balance sheet as inventory and then rolls out over our inventory turns, which these days are a little bit longer in the kind of 4- to 5-month range. So that's the reason why you're not seeing it in the second quarter, but we'll see it in the back half of the year.

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

Thanks, everyone, for participating in IT's Q2 call. We're making progress on a lot of fronts. There are a few negatives that we need to flip to positive. And we look forward to talking about it more. over the balance of the year. Thanks very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.