Good afternoon, ladies and gentlemen, and welcome to the ICU Medical, Inc. First Quarter 2024 Earnings Conference Call. [Operator Instructions]. This call is being recorded on Tuesday, May 7, 2024. I would now like to turn the conference over to John Mills, ICR Managing Partner. Please go ahead.

Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the first quarter of 2024. 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 2024 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 been direct bearing on the 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 in 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, and good afternoon, everyone. I'll quickly walk through our summary of Q1 revenue and earnings performance, provide some commentary on the overall health of the company and then turn it over to Brian to recap the full Q1 results. After that, I'll come back with updates on the various integration and consolidation efforts that will improve our medium-term profit outlook. Revenue for Q1 was $553 million for total company growth of 1% on a constant currency basis or minus 1% on a reported basis. Adjusted EBITDA was $79 million and EPS was -- adjusted EPS was $0.96. Gross margins were a little higher than expected due to supply chain efficiencies and mix. Our cash balance was near flat sequentially as we continued to reduce inventory and had our typical higher Q1 cash outflows. The broader demand and utilization environment in Q1 was healthy across all geographies with March seeing some reduction in census and it appears to be fine in Q2 at the moment. The capital environment with status quo and investments that customers need to make are getting made. The only additional macro headwind is the strong U.S. dollar in certain commercial geographies, which impacts our IV Systems segment the most as it's our largest OUS business. Getting into our businesses more specifically, our consumables segment grew 3% constant currency [ as ] reported. Growth was driven by our Oncology and Vascular Access lines, which were both at or above 6%, IV therapy was low single digits, and [ Traches ] was closer to flat. We did expect some sequential declines given the very robust volumes we saw in Q4. Nothing else is new here, we would expect sequential improvements in this segment as we wrap up Q2. Our IV systems business was flat on a constant…

Thanks, Vivek, and good afternoon, everyone. Since Vivek covered the Q1 revenue for each of the businesses, I'll focus my remarks on recapping the Q1 performance for the remainder of the P&L, as well as the Q1 balance sheet and cash flow, and along the way, provide commentary on any implications to our expectations for the full year. As you can see from the GAAP to non-GAAP reconciliation in the press release, adjusted gross margin for the quarter was 35%, which was higher than expected for this point in the year. The drivers of this favorability were roughly equally split between first, product mix, where we experienced a higher proportion of disposables revenue relative to capital during the quarter compared to our plan, and second, supply chain synergies captured earlier in the year than expected. These favorable items helped to offset much of the anticipated negative impact from the manufacturing under absorption related to the recent inventory reductions, which is reflected in the Q1 gross margin rate consistent with our previous guidance. I'll get into the implications to the full year outlook in a moment when taken into consideration with some other items. Adjusted SG&A expense was $115 million in Q1 and adjusted R&D was $21 million. Total adjusted operating expenses were up 3% year-over-year and reflect a combination of increased selling expenses and R&D investments. Adjusted operating expenses were 24.7% of revenue for the quarter, and we continue to expect the full year rate to be at or below 24%. Restructuring, integration and strategic transaction expenses were $16 million in the first quarter and related primarily to IT system integration and manufacturing network consolidation. Adjusted diluted earnings per share for the quarter was $0.96 compared to $1.74 last year. The current quarter results reflect net interest expense of $24…

Okay. Thanks, Brian. On the last call, and we don't need to rehash all the reasons here, we tried to articulate our belief that we were under earning as a company relative to the industry and we wanted to go through the actions to date to improve profit in the medium term. We still need to prove that we're capable of predictable sustained revenue growth, but do believe we have seen less volatility over the last few quarters as the business has stabilized. Our original model expectations continue for a number of our acquired products where the goal is to get back to near historical sales levels and for some of the legacy ICU lines to recoup the substantial inflation we absorbed over time with price improvements. But sustained revenue growth is also at innovation. And on the last call, we described some of the key programs. An update versus the last call is that we now expect to get our Plum Solo IV pump and LifeShield safety software with interoperability 510(k) submissions to the FDA before the end of Q3, a quarter earlier than expected. This is an important program because in addition to broadening out the full infusion hardware suite, it specifically allows us to approach our existing installed base with a better tech solution. As a reminder, most of our current Plum 360 pumps were only put into service from 2015 onward, and we've never really had the benefit of having our own installed base rolled over to any substantial degree. We continue to expect to refresh syringe [ pump on ] filed by the end of the year, and all of these products will work with the latest version of LifeShield software. We also expect certain important new filings over the next 12 to 24 months,…

[Operator Instructions]. Your first question comes from the line of Jayson Bedford from Raymond James.

Congrats on the quarter. So maybe just a few questions. Just -- I know you're not changing any guidance here, but the revenue -- I don't think you necessarily guided it. But last call, you talked about low to mid-single-digit revenue growth in '24 based on 1Q, would you tweak any of the segments or that commentary at all?

I don't think we have any change at all, Jayson, on that.

Yes, and just certainly not on a constant currency basis, which is what our guidance was based off of.

Okay. Gross margin is clearly the highlight here. I understand the mix dynamic, but what were the supply chain dynamics that went better in the quarter? And just can you talk about the sustainability of that?

Jayson, I would say it wasn't necessarily any 1 thing related to supply chain. It was just a number of initiatives to bring together the supply chain operations from the combined -- from the 2 separate companies into one. And we're able to get some of those things in place a little bit sooner than expected. We had anticipated it would happen at some point in the year. It's just that we guided a quarter or 2 sooner.

Okay. And then maybe Vivek on the Duo rollout. Where are you in terms of kind of a full launch? And when would you expect the full launch?

I would say, Jayson, for the last 8 weeks, 10 weeks, we've essentially been in a full launch. We're getting people familiar with the architecture of the system. And that's why it's really important for the solo and the syringe to follow on the heels of that as people get comfortable with all the different pieces of the system. So I would say we're there right now. Again, things don't happen that fast in pumps in our experience, but it is a long game, and there is a lot of activity in the next 2 or 3 years in the market. So we think we're in a pretty good place.

Okay. And just the competitive landscape, you've got obviously 3 big players with kind of the hand -- all the hands are out there. And so I guess my question is, the competitive environment, is it favorable? Where do you see opportunity? And you kind of alluded to the capital dynamic, but is there a desire to make decisions out there today?

Two parts in that. The first is capital environment is fine. I mean it's not -- it's not any better, it's not any worse than it has been for a while. It's -- stuff that needs to get done, gets done. Obviously, it's a good time to be a customer. There's more choice, which is good for the market. In terms of the market itself, people have dragged the feet on making some decisions and given some of the industry dynamics, customers have to make decisions over the next few years. And so there are more decisions being made finally and folks, given some of the background, the equipment has gotten older in the marketplace and requires refreshment for a variety of different reasons. And so the decision-making is better than it has been. And yes, while there's more vendors, there are more decisions being made, which one could argue is good for all participants.

Your next question comes from the line of Brett Fishbin from KeyBanc.

Just wanted to follow up on one of the opening comments that you guys made around hospital utilization trends. It sounded like January and February were particularly strong months and you might have noted a little bit of normalization into March, and you said things into 2Q have been looking fine. Just maybe like a little bit more on like how you define that March and trend into 2Q, and how much of like a pullback you may be seeing versus Jan and Feb?

Yes. I mean, Brett, obviously, we don't want to get into like the -- because you don't have perfect information what's happening every day or every week out there. It was really busy for 3 months in the fourth quarter of last year and then January and February. And the March had to go below those levels. I think when we make those comments on it's a relative basis, is the trend going. We would consider status quo to mean flat to up. That's probably what we see and bad to us would be down. I don't think we're -- so when we say fine, we would say it's equal to or greater than what the most recent period everybody has talked about has been.

All right. Yes, definitely fair. One quick follow-up on gross margins. Definitely appreciate some of the puts and takes and then presumably not wanting to get too far ahead of like how you're thinking about the full year after only 1 quarter. I just wanted to get a sense, you had 35.3% this quarter. We're talking about 35% range for the year. Some of the potential headwinds or offsets around currency or fuel. Are those things that you're seeing already in 2Q, and we should be modeling some type of reduction in 2Q? Or is that comment more around just some of the puts and takes, like for the full year?

Yes, Brett, I think on that, just the couple of items that we've mentioned as being headwinds were the impact of FX as well as potential volatility within the kind of freight rate and diesel markets. I think it's -- the first one of those FX is very real, and we are seeing it, and we started to see some impact late in Q1, and I think that is something that should be considered as we think about what -- how the rest of the year plays out. I think as it relates to the broader environment around supply chain expenses. There's the potential for some volatility there, but I don't think there's anything specific worth modeling.

All right. Very helpful. And then last question for me. It feels like the quality remediation and warning letter item, like all of the stuff that's on your end in your control seems to be progressing at least in line with how you were thinking about it. So question is just what still needs to get done besides waiting around for an eventual FDA inspection? I guess is there still some stuff in your hands that still needs to get done before that can happen?

Sure. I'll answer that one. Our job, our responsibility, regardless of our own or what we acquired is to be improving on the quality scores every single day. And so there's never a day of sort of waiting around. I think the expectation is that you're improving you're improving your situation. And that can mean a lot of different things that can mean assessing every single product and where there's applicable notifications to customers making some of those notifications like we've referenced on the last 2 call scripts and you've seen in the in the various reports, it can also mean researching all the historical plates to make sure everyone is adequately composed. We've done a mountain of work. You've seen the investments into the quality remediation that we've put in for 8 quarters. You're never really done. We think we've come a long, long way, and we hope we get the opportunity to show that to somebody, but it's not really -- you just hit a line and stop, it and never ends.

Your next question comes from the line of Kristen Stewart from CL King.

Congrats on a good quarter. I was wondering if you could just focus a little bit on free cash flow in the quarter. It was positive, which is a great thing. How are you looking for the rest of the year from a cash flow perspective?

Yes, Kristen, I think we got off to a pretty good start to the year, especially given Q1, we do tend to have more outflows in that quarter each year. I think -- we feel like our previous guidance around free cash flow is still relevant in that it would be basically the same as last year but without some of the financing benefit that we got, which means $80 million roughly, give or take, for the full year this year. And so I think we're still very much on track for that.

Okay. Great. And then I just wanted to turn over to Vascular Access. It sounds like that had a good quarter. How should we be thinking about that business going forward?

Kristen, it's Vivek. I think in our mid-single guidance for the Consumables segment for the year, we assume Vascular Access would be in line with that. But it is still far below peak historical levels. We've just gotten the house in order a bit over the difficulties we had in the first 6 quarters or something. So it feels a lot to us sort of what we went through post Hospira with consumables, where it really did take 2 years to be stable and to show that we could move it upwards. And we think we're in kind of the first part of that journey right now. There's a long way to go, but I think we, at a minimum, believe it would be in line with the overall segment that is.

[Operator Instructions]. Your next question comes from the line of Larry Solow from CJS Securities.

I guess coming back to Jason's question on the pump market. And you said it sounds like decisions are being made, so where do you stand? How do you feel with a lot more jump, I guess, if you will, and share of [ programs ]. You feel like you have an opportunity -- clearly, you've gained some share in the last couple of years, but now [ Atrion ] is back in the market. I think [ Baxter ] has a new pump. How do you feel your positioning is to continue to -- I know it's a slow moving market, but to continue sort of that positive momentum.

It is jump ball season. It is the playoffs. I think our view is also not to sound less than ambitious here or hedge, it's also relative to the size of our business, right, which is the point we were trying to make on the other scripts the last 2 years, which is our business is actually -- it's big, but it's not that big relative to the total available market opportunity. And so if we can increase our win rate above historical levels, it makes a real meaningful difference on our P&L. And we think we have the right technology. And all participants, I suspect, have more conversations going on that they've had in the last number of years, which is good. Things will settle out. And we just need to -- we know what our peak share of our products were. We know how low they got and why we had to step in Hospira and we know what the opportunity is in front of us. So we feel good -- I would leave it at, we feel very good about the technology investments we've made and have been committed to for in a good sense of what we think customer preference could be in this product family. And we've obviously suffered a little bit, right? But we undertook getting the full line together right between syringe, ambulatory, et cetera.

Okay. I appreciate that color. Just on the gross margin back to that, the cadence sounds like maybe we come back down a little bit in Q2, like that's where you can have a little more inventory scale back as well and then maybe a little bit of stabilization in the back half, but regarding -- just regarding the cadence, but just kind of situationally, where do you think they'll stand as you exit the year, mostly inventory management should be behind you, hopefully, mix is starting to improve. But do you think you can sort of as we start next year, without giving the specific depth -- back a little bit off of the sort of mid-30s number and then we get more consolidation benefits next year and work from that, maybe you can give us just a little more guidance altogether.

Yes, Larry, I think as it relates to this year. On the last call, we said we would expect to exit this year slightly above the 35% average for the year, absent something unusual happening in terms of product mix or currency or anything like that. I think we still think that's probably the most likely scenario. And you're right, that means that then throughout the year, we won't have the steep trajectory in gross margins that we were expecting, it will be a bit more flattish, I suppose. But I think our views on where we exit really haven't changed.

I mean I think that -- Larry, it's back. I think the bigger picture is that, Brian was trying to say it as simply as you could in the script, which was last year, we had just a little less revenues than we had this quarter and look how much more money we made, and then I talked about all this manufacturing consolidation et cetera, and other things to drive gross margin synergies, right? The difference between Q1 this year and Q1 last year was a little bit of investment in SG&A, but it was the difference in gross margin. Obviously, the perception of the situation is very different in those moments. So we understand the value of getting the gross margin where it needs to be.

I would like to just lastly, I know price pressure and solutions could be somewhat of a driver to -- not this year, but going forward. When do we -- when those contracts, I think that some of them will come more of your contracts up for grabs or coming up for renewal, I think, in the back half of this year? When will that be some better than [ is building on ].

I mean the contracts are only part of the equation. They'll get done first in the process and then it's really getting individual systems and members to absorb whatever you may have been contracted, which is its own set of challenges to work through. All of that probably doesn't become effective until some point in Q1 of next year.

And speakers, we don't have any questions over the phone. I would like to hand over the call to Mr. Vivek Jain, Chairman and Chief Executive Officer. Please continue.

Thanks, Franz. Look, we hope today's call was direct into the point, a little bit shorter. We look forward to speaking to everybody on our Q2 call, and we'll update everybody on all of these various items we're working to make the company more valuable and drive innovation for patients. Thanks very much, everyone. Appreciate it.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.