ICU Medical, Inc.

Good afternoon and welcome to the ITU medical conference call. All participants will be in a listen only mode. Should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your questions, please press star then two. Please note that this event is being recorded. I would 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 Bunnell, 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 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 risk 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 risk and uncertainties that have a direct bearing on 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'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, everyone, 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 in 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 in labor inflation did materialize predictably. Global demand was healthy in Q1, with the U.S. 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 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 was $1.74. Revenue growth was 7% on a constant currency basis and 4% growth reported. And we had just over 200 basis points sequential improvement in gross margins, largely due to having a healthier supply chain with better service levels and the improving macro landscape. We did have a comparable quarter of inventory investment into the business and believe we are near peak on that to sustain the appropriate service levels. Relative to Q4, currency eased a bit but did not materially improve earnings as both the Mexican peso and Costa Rican local currency strengthened meaningfully against the dollar. At the highest level, we feel better about revenue growth for each product line where we've been historically stable, meaning legacy ICU, and revenue recapture where we're now stable, meaning the legacy Smith's medical portfolio. Near-term profitability is impacted with some duplicative IT costs as we separate from Smith's IT systems and by decisions we're making to improve working capital and cash flow like we did relentlessly for many years. So let me start with our consumable segment, which is our largest and most profitable segment. We had $236 million in revenue, which was up 1% on a constant currency basis and minus 2% reported with customer demand good across all product lines. Going a bit deeper, there were a few different drivers that will become clearer over the balance of the year. The legacy ICU IV therapy product lines, which are the largest component of the segment, had a record quarter, with the business being the largest it's ever been. That growth was driven by new customer wins, strong underlying census, and increased capacity and ability to serve the market. We continue to focus on clinical differentiation, and there was a publication in April's Journal of Infection Control and Hospital Epidemiology which highlights the favorable infection control features of our clave needle-free connector technology. The growth in IV therapy was offset by the vascular access portion of this segment having the lowest level of sales in the five quarters we've owned the business. This low level was driven by customer losses that were still occurring until recently. We believe this to be bottom, and it feels very similar to the IV consumables and pump losses when we purchased Hospira. when customer losses were still felt in the four to six quarters post-deal. The other components of the segment are oncology and tracheostomy, both of which had year-over-year improvements, and both those businesses will be benefiting over the balance of this year from increased capacities. In the near term, we believe all four underlying lines are improving commercially and operationally, and with the losses predominantly out and improved capacities in, we should start seeing the benefits of this in Q2. We have the right to win in all these categories and are focused on the innovation between the Legacy Smith products and the Legacy ICU products. Moving to infusion systems, which is the combination of the Legacy ICU LVP pump business and the Legacy Smith syringe and ambulatory pump businesses, this segment reported $162 million in revenues, which equated to 21% growth currency or 17% reported. Q1 of 22 was obviously miserable last year, which made an impact. But the core message is each of the product lines is expected to increase on a year-over-year basis. The Legacy Smith product lines, we expect to be getting closer towards historical levels, meaning they're still down from what we would deem normal levels, but improving quickly. We see that most directly in the hardware sales, where both ambulatory and syringe hardware improved quarter-over-quarter. Regarding the legacy ICU portfolio of LVPs, we've had a good signings year to date, increased our install base again in Q1, also increased our number of EHR integrated customers. We continue to believe our LVP line of infusion pumps addresses the most important clinical issues, and in addition being recognized as the best in class smart pump in EHR integrated pump for the past six consecutive years. Additionally, we're starting to see some commercial benefits of having a full infusion device portfolio between Smith's Medical and the ICU Medical portfolios. We continue to believe, as we said in the previous few calls, that customer attention is generally back with bandwidth to have real discussions as some of the fatigue from COVID has passed and the acceptance of inflation and the costs of nursing, et cetera, have been internalized. Yes, the stresses of the current environment do make it a bit bumpier for decision-making, but we don't believe over the medium term relative to our size there's any change in our competitive opportunity, and we're focused on commercial execution here in a more action-oriented market. Finishing the business unit discussion with VitalCare, which had $158 million in revenue, with growth of 6% on a constant currency basis and 3% reported, Ivy Solutions, the largest portion of VitalCare, improved sequentially and was close to flat on a year-over-year basis, which was the net effect of some undersupply from Pfizer, being tight on inventory on certain SKUs, both offset by some price improvement that we received. The growth in the segment was driven by the combined critical care product lines and the temperature management franchise. That temperature management product line does go hand in hand with our infusion and anesthesia oriented businesses. It's important to get that right as it contributes attractive margins and is still meaningfully below historical levels. The short story message here is, Our differentiated legacy ICU businesses are doing well, and we're focused on regaining some of the lost revenues in the Smith's categories that are outlined in our investor presentations. We're operating with better service levels for customers and believe in Q2 we'll have all three of the segments growing year over year and have hit the bottom on the Smith's product lines that were going backwards. We're already impacting the self-inflicted challenges on infusion pumps, temperature management, and tracheostomy. And now I've had more time with stable vascular access supply under our watch to begin to improve there. As a result, we've been more reliable for customers and able to engage in rebuilding the trust in service as the products have always been well liked. And the reasonable underlying demand and improving census work in our favor. On the last call, we tried summarizing the various headwinds to earnings last year in 2022. their impact on gross margin rate, and which of the items were possible to recoup over the near, medium, and longer term. As a reminder, two of the largest three buckets were freight and logistics, currency, and obviously mix as we lost revenues in some of the higher margin categories. We focused on driving improvements on expedited freight and domestic lane costs as we increased inventory levels, and we see some relief in fuel surcharges. However, no meaningful profit improvement was really related to currency as the dollar weakened in our core manufacturing sites. Brian will go through the sequential improvement in gross margin in more detail. We just wanted to note, as it came in higher than our target for the year, that we just can't roll that through the full P&L yet as the continuing and rollover inflation is real, and we don't want to make a mistake given what we went through last year. And we still have work to do to offset inflationary effects and the impact of lower production as we address working capital. But clearly, we spared no expense last year in the supply chain, raw material procurement, et cetera. And in the medium to longer term, there's clear opportunity for improvement. Just a few quick notes on the housekeeping front, and then I'll come back to our priorities for the year. On quality, we had a long list of normal notified body inspections during the quarter. We did have a thorough FDA inspection in Q1 at the legacy Smith's corporate office, which was mentioned on the last call a bit earlier than we had anticipated. We had a few fair and manageable comments from the inspection that were in line with the work we've been doing to address the root causes of the Smith's medical warning letter. We've made heavy investments into remediation and believe the majority of remediation work will be done over the next few months and spend will ramp down over time. This part feels very similar to Hospira and our collective previous experiences, and we have the right people have been through the exact same experience, and our team is fully embedded into the operation. Same speech on the warning letter, the existence of the warning letter, while undesirable, is the regulatory agency trying to move the ball forward, and we talked about how these regulations give us the right to participate. Again, regardless of where it appears on the P&L, we're spending heavily, so making progress here is extremely important to us. In addition to the quality improvements, Another current topic is our separation from Smith's IT systems as we bear some duplicative costs this year and successful execution is important as we've seen the challenges in the industry from systems cutovers. Over the next few weeks, we'll fully separate from Smith's and should exit all TSAs within 18 months of closing. Standing on our own is the first step towards real integration next year to capture the next wave of synergies in manufacturing, supply chain, and functional support over time. It's also important to the extent we want to be able to make any decisions on the underlying portfolio. Broader production and logistics operations in the quarter improved again and really the current challenge and opportunities optimizing the interplay between production output, the right level of inventory and working capital as we were scrambling for most of last year and it takes time to get this right. We wanted to reiterate our priorities for 2023 that we outlined in the last call. so investors can assess our progress in light of the comments we've made today. Our key goals for the year were as follows. Deliver revenue growth as expected in our differentiated business units while progressing the key product platforms. Progress our quality remediation and ensure quality for patients and high compliance for regulatory authorities, respectively. Focus on cash flow again by improving working capital and addressing all the available items on the P&L, whether above or below the line. Lay the groundwork via separation and then integration for capture of the remaining synergies. And lastly, rationalize the portfolio, which becomes easier after separation and stability. To close, we're getting back to normal operations and the customer logic that underpinned this project continues to make sense. Like with the Hospira transaction, we're changing the conversation from the historical perception of Smith's to demonstrating our value through innovation and service. The core premise of the Smith transaction is to enhance the product offerings for the categories that drive our returns, as well as add logical adjacencies predicated on the same characteristics of sticky categories, low capital intensity, single-use disposables, where there's opportunities to innovate and participate in a logical industry structure. These portfolios make sense together, and we're working on how to integrate them either literally or economically when sensible. More doors are being opened as a result of having a broader set of items that are mandatory for care, and it's slowly starting to show up on the P&L. While the pandemic introduced substantial volatility, strategically, we do think the weaknesses it exposed in the healthcare supply chain add to the argument for all participants to be healthy and stable, which has been our commentary since we became a full line supplier. Smith Medical also produces essential items that require significant clinical training, hold manufacturing barriers, and in general are items that customers do not want to switch unless they must. The market needs Smith's Medical to be a reliable supplier, and the combination positions us better. Our company has emerged stronger from all the events of the last few years. We've gotten knocked down a bit, but we're getting closer to the top of the hill to drive value out of the combination. Thank you to all the customers, suppliers, and frontline healthcare workers as we improve each day. Our company appreciates the role each of us must play. And with that, I'll turn it over to Brian.