Good afternoon, ladies and gentlemen, and welcome to the ICU Medical Inc Second Quarter 2024 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentative, we will conduct a question-and-answer session. I would now like to turn the conference over to John Mills, ICR Managing Partner. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the second 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 as well. To view the presentation, please go to our Investor page and click on Events Calendar, and it will be under the second 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 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 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 walk through our summary Q2 revenue and earnings performance, provide some highlights for each segment and then turn it over to Brian to recap the full Q2 results and outline our current thinking on the balance of the year. After that, I'll come back with updates on the various integration and consolidation efforts that will benefit our medium-term profit outlook and discuss the overall improving health of the company. Revenue for Q2 was $581 million for total company growth of 10% on a constant currency basis or 9% on a reported basis. Adjusted EBITDA was $91 million and EPS was $1.56. Gross margins were a little higher than expected, again, due to earlier capture of supply chain efficiencies and sales mix. We had a good quarter of cash generation with $63 million in free cash flow, of which $7 million was inventory drawdown and our cash balance finished just over $300 million. The broader demand and utilization environment in Q2 was healthy across all geographies and has felt that way this year to date. But of course, we've all noticed the increasing volatility in the environment. The capital environment with status quo and investments that customers need to make are getting made. The macro headwind of a strong U.S. dollar has not broken everywhere yet, and specifically is still strong in the areas where we have our largest international commercial footprint. And again, this impacts our IV Systems segment the most. Getting into our businesses more specifically. Consumables grew 11% constant currency and 10% reported. All 4 lines in this unit grew well with Vascular Access and tracheostomy in the teens and the legacy ICU product lines of IV therapy and oncology in the mid-to-high single digits. To mention a few highlights across…

Thanks, Vivek, and good afternoon, everyone. Since Vivek covered the Q2 revenue for each of the businesses, I'll focus my remarks on recapping the Q2 performance for the remainder of the P&L as well as the Q2 balance sheet and cash flow, and then provide our updated outlook for the full year. As you can see from the GAAP to non-GAAP reconciliation in the press release, adjusted gross margin for the second quarter was 36.6%, which was slightly better than our expectations. Similar to the first quarter, we experienced favorable product mix with a higher proportion of disposables revenue relative to hardware during the quarter compared to our plan as well as supply chain synergies captured earlier in the year than expected. Adjusted SG&A expense was $117 million in Q2, and adjusted R&D was $23 million. Total adjusted operating expenses were up 6% year-over-year and reflect a combination of increased selling expenses from higher revenues, R&D investments and higher incentive compensation. Adjusted operating expenses were 24.2% of revenue for the quarter. Restructuring, integration and strategic transaction expenses were $17 million in the quarter -- in the second quarter and related primarily to IT system integration and manufacturing network consolidation. Adjusted diluted earnings per share for the quarter was $1.56 compared to $1.88 last year. The current quarter results reflect net interest expense of $24 million. The second quarter adjusted effective tax rate was 16% and includes a discrete benefit from the release of tax contingencies as a result of the expiration of various tax statute of limitation periods, which contributed approximately $0.15 per share. For comparison purposes, the prior year tax rate reflected discrete benefits, which contributed approximately $0.25 per share. Diluted shares outstanding for the quarter were $24.4 million. And finally, adjusted EBITDA for Q2 decreased to $91 million…

Thanks, Brian. On the last 2 calls, we've talked about revenue stabilization, and the ability to grow our differentiated product lines. While it's nice to have that revenue growth now and earnings and cash flow a bit higher than our expectations, it's not lost on us that we're still under earning as a company relative to the industry and is evidenced by the fact that we had higher earnings on less revenues historically. As a result, we're extremely focused on the actions to improve profit in the medium term, which are about, obviously, revenue growth, mix and pricing, operational efficiency and eventually waiting for the macro items on currency and interest rates to improve. Our innovation efforts have become more visible in the market as that is mandatory for sustained revenue growth. The other area we continue to be focused on is pricing as we've not fully recouped the substantial inflation that we experienced. We do see more logical behavior here, both from the market and customers in general. From an operational efficiency standpoint, we have been pursuing several work streams, which will each add to our margin improvement over time. First, the cutover of our U.S. and Canada order-to-cash systems is in flight as we speak. We have done these typically early in the quarter to be able to handle any of the bumps that come. This integration allows for the optimization of our physical logistics networks and corporate infrastructure. After we ensure that the U.S. and Canada flows are stable, we'll begin these activities internationally next year. Second, as previously discussed, we have been doing the basic blocking and tackling of factory network consolidations. It is as simple as to have fewer production sites, have them fuller and in the right geographies. These are not easy choices. It…

[Operator Instructions] We'll take our first question from Larry Solow with CJS Securities.

I guess the first question, obviously, really nice revenue growth off of a little bit of a lower base last year. I guess Q2 was your weakest point last year. But just curious, just your pulse on the environment, it sounds like things are running really well. Our hospitals maybe stocking up a little bit when times are a little bit better? I'm just trying to figure that out. And you did kind of mention hospital spending and capital budgets and there's always a concern that could change. But can you just give us kind of a feel on where that is today?

Yes. I think on the last call -- Larry, thank you. I think on the last call, we said -- we gave the update, and we were -- I think, speaking in May, we said Q1 was pretty good. Things were a little bit maybe just a touch lighter in March, but it kind of came back to normal. And I think we've continued to feel it as reasonably normal. I think one of the other analysts asked -- called last time, volumes have been good. They continue to be -- what we're watching is obviously what's going on in the broader economic environment. And making sure there's no surprises there. I don't think we would say anybody stocking up and anything, no items are short in the market, et cetera. The world feels pretty normal right now, and that's in all geographies.

Could you speak to pricing to maybe your positioning, maybe not so much this year, but going to next year? I know there's a couple of big GPO contracts. So I think we're resolved in particularly in solutions. What do you -- how do you feel your positioning is today as you head into -- a little bit earlier, but just looking out over the next few quarters for '25 and beyond?

Clearly, inflation was a huge hit to earnings here over the last 2.5 years. Certainly, where we had the flexibility to try to -- first, we had to improve the business and be stable for our customers. We were able to do that across the entire portfolio. Once that was done, the areas that we had the contractual flexibility to try to make sure we make a fair return. We sought to make a fair return. There are a number of contracts coming up in the U.S., the GPOs are sort of the entry ticket, so to speak, you still have to make the business with the individual customers and that will be next year's activity. I do think the comments in the script were intended to say, we approached us seeing some -- a little bit of optimism that customers know that some of these categories that are valuable and have been this priced, they at least need to be a bit more fairly priced. So I think we feel okay about it.

And just lastly, just a couple on Smith, just a couple of things that have been kind of some negatives feel like they turn to positive. First, I guess, just Vascular Access, I know that had been down or even flat more recently, but it looks like that return to growth this quarter? And then the second part of that question, just update on quality issues, particularly on the syringe side. It sounds like things continue to progress. I know you called out whole new refreshed product line coming out to. So I guess things are looking more positive on that end too.

Larry, I think we're going to ask you to get back in the queue after this one. No, but...

Yes, I'm done. I'm done.

I think on the first point, Q2 was particularly weak in solutions last year. That was the real departure. So you are correct on solutions, it was lower. It was relatively consistent sequentially on the consumables business, including Vascular Access. And Vascular Access, we -- as we said last year, the base so much business has eroded just a little bit of focus and work would help get us back that caused some of that back. That's what's gone on. And then, yes, the Smiths portfolio in aggregate, this was the best quarter of sales since sort of the back order catch-up on the most portfolio, but there's still a long way to go. So I appreciate the comment, but there's still areas for improvement.

The next question comes from Kristen Stewart with CL King.

I was wondering if you could just focus in a little bit on gross margins. They came in a little bit better than expectations, or at least my expectations for the quarter. I was wondering if that was the case for you guys as well? And how should we think about that as we look out into the third and fourth quarter of the year. Do you still feel confident that you can kind of exit at a higher rate than when you came in, in 2Q? Or how should we just think about the puts and takes there?

Yes, Kristen, we would agree Q2 gross margins were a little bit better than we had planned. Part of that was from just product mix and that we had more disposables and less hardware revenues and there's different margin profiles between those two categories. And we also had the benefits of some supply chain synergies show up a little bit earlier than we had planned this year. So as we kind of think about the back half, we won't have kind of the benefits from the product mix. In fact, we expect it to kind of go the other way. So that will pressure gross margins in the second half relative to the first, but we should benefit in the second half from improving volumes. And so I think as we think about kind of how we exit the year, I think our view on where we exit is kind of similar to our view on full year, meaning full year gross margins are going to be about one point better than we expected. And we said we would exit the year at 35% or slightly better. And I think we would say, okay, now it's probably 36% or slightly better.

So exiting the year at 36% is what I'm hearing you correctly?

Yes.

And I guess in terms of just the operating expense, why can't you get a little bit more leverage? I think you had mentioned you guided to 24.5%, last year, you were 23.8%. Is there anything unusual we should be thinking about just from a year-over-year comparison basis there?

Yes. I mean last year, given we didn't hit our financial goals, the incentive plans did not fund at the target level. And so this year, we're sort of at or a little better when it comes to the incentive plans and potential payout. So I would say that's probably one of the bigger differences on a year-over-year basis.

Our next question comes from Brett Fishbin with KeyBanc Capital Markets.

Just wanted to start off with a really quick follow-up on the previous gross margin question. You called out a lot of drivers in both directions. But didn't necessarily catch commentary on the inventory under absorption topic. So just curious like how much of a headwind that's still representing in terms of the second quarter from just absorbing the inventory that was underproduced a few quarters ago? And then how much that might also improve into the second half?

Yes, I'd say, Brett, kind of the drag from the inventory under absorption has been kind of diminishing over the course of this year. And as we head into Q3 with only -- with a more modest $7 million reduction in inventory levels in the second quarter, I wouldn't consider that drag really to be that material going forward.

And then just moving to the consumables, you definitely called out last quarter that you were expecting some level of improvement sequentially, but I don't think anyone was expecting to see close 20% sequential growth versus 1Q. You called out a couple of areas. I think I picked up like VA and [indiscernible] were positive. Maybe if you could just unpack like that sequential change a little bit more and then sustainability into the back half?

All four lines in the consumables business grew sequentially. Different drivers for each one, the biggest one is obviously the core infusion therapy business that was -- and all of them grew kind of equally globally as in the U.S. So census is a huge part of that census has been good and was good. On infusion therapy, it was about getting a little bit of price as we -- as the previous question was, and it was also getting some implementations and installs done that we knew were out there. And we think we have a decent slate of those for the balance of the year. So I think we continue -- on the biggest piece of it, which is almost half the segment. I think we still feel very comfortable. It feels like to us on the oncology lines that things have come back in terms of screening, diagnosis, et cetera. So even if we've done well, converting some business, it does feel like there's some market uplift there. I haven't had a moment to look at all the other screening companies what they're saying, but there's more activity. And on the Vascular Access line, I'm not sure it's necessarily worth spiking the ball over. It had gotten so low, just eliminating the negatives and doing something positive, made a big difference. And we have a good product that makes sense. I've been calling on customers with two years of consistency. As we said in the last call, it took two years from Hospira to change the consumables business around and [indiscernible] is just focused, -- [indiscernible] still has some bumpiness a little bit, but it's a valuable category, and we need to keep improving it. And it's a nice chronic care market that also has some demographic good things in it. So a lot is better to be in the right neighborhood, and I think in the right neighborhood in all those categories, and we've had some good execution and focus with timing.

The next question comes from Mike Matson with Needham & Company.

Yes. I guess just on the new syringe pump. So how important do you think that is to winning pump share in terms of coming into the hospital with the complete range of products on your new software platform. Or do you think you can kind of sell features to some degree and just promising them that it's on its way is enough to kind of satisfy them.

I think a key driver for us, I mean, there was 3 or 4 core reasons we took on the difficulties we did with the most recent acquisition, one of them was to have an opportunity in the syringe market. Again, we have been in this market for a long time and a large chunk of the U.S. market 40-ish-plus percent or more bought LVP pump separate from who provided their syringe. So it's certainly not an end all and be all issue, but it is better for customers if they can have a simpler setup depending on their use cases. And so we want the flexibility to offer both situations. I'm not sure necessarily that these things are not that far away when you say selling futures. We still are the leading stand-alone syringe pump company in the United States today. And so it's more about the innovation and connected to the other pieces and a little bit of modernization of advice the same as we've done in the other areas. I think it can play either way. It's certainly a convenience item, but not everybody makes the choice. Nobody likely, in our opinion, chooses a full LVP system solely on the notion of what the syringes is. It's a combined decision.

I was just wondering maybe some sort of inflection point once you get that piece in place. But -- okay. And then, I guess, just also on the pump market, what are you hearing and seeing out there with Becton kind of back in the market now with their ALARIS pump are you able to pick off and share there?

I mean I think everybody -- all public companies have been topic on. It is -- and all have said the same thing, which is a very active time. The power of incumbency is very high here. So there's a [Indiscernible] incumbent advantage is high. However, it's our job and it's all party's jobs to create the competitive case for change, across the most relevant set of products. And so we do think people are out there evaluating all vendors, and it's our job to have the most innovation and put ourselves in the best light. And, obviously, all the energy you see with multiple companies trying to get in here isn't because everybody thinks the market is going to be static. People do think there's going to be choice. And the words we said on 2 years of call strips supply, which is relative to our size, even small changes make a huge difference in our earnings potential. And so we think we have what was once the market share leading technology in the most modern format with more coming and a business that's actually much smaller today where incremental wins can make a huge difference. So I think we feel like the investment we weighed to get Duo on the market to get Solo file, but we are going to do the decision of hard work while investments where we recoup the amount of dollars we put into those investments with market share gains over time.

Our next question comes from Jayson Bedford with Raymond James.

I imagine that I'm at the back of the bus, so I'll ask a few questions here. That's fine. Just to be clear here, revenue was strong in 2Q better than most expected. Just to be clear, there was nothing kind of onetime-ish in the 2Q revenue number, correct?

Yes, Jason, that's correct. Nothing…

I mean I think the only thing we thought, Jason, that there was a couple of market issues in that ambulatory segment that we flagged on the last call, and that's why the points on [indiscernible] saying, some of those things came true. Maybe it was just a tat of that, that would be the only thing.

Curious, your comment on the multiyear dialysis partnership I wasn't aware of that. Did you see an impact in 2Q? And kind of when will you start to see an impact?

It's been an impact. It's been -- the ClearGuard family of products has been helping to drive consumables for more than a year, it was masked by all the other negative stuff going on in this segment, but it is a key driver. And that's a relationship we had for a number of years, but it's just sort of been cemented now for a number of more years, which is great. And there's a lot of -- the example we're trying to make there, and I'm sorry, taking too many words, was that it's -- in like oncology, an unconverted whole cloth market, where we only have a fraction of the global operators that we support, and there's more to get.

Two financial questions. The cash usage comment, I'm less familiar with the AR factoring program. Can we just assume that paydown of debt is probably the most shareholder-friendly use of cash?

Yes, I think that's right. Essentially, the AR factoring program is just sort of another financing program that we put in during the second quarter of '23 to help with our liquidity as opposed to taking on additional borrowings.

The cash you owe other people so assume for the debt is more when you weren't charging our liquidity.

So we sort of view that as being not that dissimilar from debt. And thats gives us another option, that's another use of cash at some point in the future for us.

But the message is excess cash generation from here is your mark for debt paydown?

Yes.

Correct.

Last one, I guess. Just if I take the midpoint of the EBITDA guide for the year, it kind of implies a small step-up in second half versus 2Q you went over a lot of stuff, but maybe you can just remind us what's kind of tempering second half versus the 2Q print?

Well, I think, Jason, if you kind of think about just first half versus second half, the midpoint of the updated guidance does imply a $15 million improvement in the second half relative to the first half. So that's -- there's obviously some level of improvement there. Yes, if you use Q2 as your starting point, it's more modest than that. But we do feel like there was substantial improvement in the second quarter, and we would like to kind of see that continue before getting aggressive on the forecast.

It's not lost on you what we -- whatever through what we went through, Jason. And there's a lot of volatility in the markets out there, currencies, FX, right? We don't know where everything is going to land.

We have no further questions at this time. I will now turn the program back over to Vivek Jain, Chairman and CEO, for closing remarks.

Thanks everyone for your interest in ICU Medical. We look forward to speaking to you. We hope for continued strong momentum here, and we look forward to speaking to everyone on our Q3 call. Have a great rest of summer. Thanks very much.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.