ICU Medical, Inc.

Excuse me, this is a conference operator. Please stand by. The call will begin in just a few minutes. Please continue to hold. Thank you. Thank you. Thank you. © transcript Emily Beynon We'll be right back. Good afternoon and welcome to the ICU Medical Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. 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 question, please press star then two. 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 Bunnell, 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 Invits calendar, and it will be under the second 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 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 in the 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 Smith's 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 to start 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 clearer view of what we want to be. We finished the quarter with 535 million in adjusted revenues. Adjusted EBITDA came in at 98 million, and adjusted EPS was $1.88. Revenue growth was down 1% on a constant currency basis, minus 2, and a minus 2 on a reported basis. and we had improved gross margins versus Q1. We finally had a slower quarter of inventory investment into the business and believe we have peaked on that and have adjusted output to bring inventory more in line with historical levels as we are sustaining appropriate service. And the supply chain is more stable and we have a better sense of the actual underlying revenues. Relative to Q1, the operational impact of currency is becoming more of a headwind as both the Mexican and Costa Rican local currencies strengthen meaningfully against the dollar. On the last call, we said 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 SM portfolio. The majority of the acquired product lines are growing year over year, but we specifically have delays in bringing back the vascular access revenues to the level we wanted. The legacy ICU portfolio of pumps and consumables has grown fine, but in Q2, we had some shortfalls in IV solutions with a weak April combined with some of the lingering issues we had on the one product we sourced from Pfizer. The VASCR access recapture, which is ballpark about 20 to 25 million less in revenues for the year, does impact profitability and the IV solutions less so. So let me start with our consumables business unit, which is our largest and most profitable unit. We had 237 million in revenue, which was down 1% on a constant currency basis and down 2% reported. Obviously, we need to explain a bit more here. The legacy ICU IV therapy product lines, which are the largest component of the business unit, had a record quarter again in Q2, with the business being the largest it's ever been. The growth was driven by new customer implementations, good census in May and June, and increased capacity and ability to serve the market with focus on clinical differentiation and the creation of niche markets. But like Q1, that growth was offset by the vascular access portion of the business unit. On the last call, we said we were at the bottom here as losses occurred throughout last year, and that felt 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. We did not backtrack at all in Q2 versus Q1, but the new business ads did not bring any meaningful net improvements, so revenues were flat. Relative to our own expectations, as I just mentioned, our best estimate is that we'll be about 20 to 25 million short here for the year relative to our plan. And to be clear, our confidence and right to win here has not changed, but it's just taking time. The losses from 2021 and 2022 were primarily due to supply chain issues and those core issues have been addressed by our team. To be even more transparent, our medium and longer-term expectation was only to get back the minority of what was lost over the last two years. The other components of the business unit are oncology and tracheostomy, both of which are okay over the balance of the year and aided from increased costs. Paul Cecala, On the last call we said in the near term, we believe all four underlying lines are improving commercially and operationally with the losses predominantly out and improved capacities. Paul Cecala, And we saw that on the revenues over the first half of the year on three of the lines and believe we will see sequential improvement each line for the balance of the year. Paul Cecala, But the vascular access delays do make it to jump over the back half comps of last year, which included some of the Q3 operational catch up and had meaningful COVID related syringe sales. So the overall business unit growth rate will be impacted, and we're gonna have to keep talking about the individual lines until it's rectified. Moving to infusion systems, which is the combination of the legacy ICU LVP pump business and the syringe and ambulatory pump businesses. This business reported 153 million in revenues, which equated to 5% growth constant currency, or 3% reported. Q2 of 22 started to get more normal last year after the miserable start of Q1 22. The ambulatory and syringe product lines continue to be moving towards historical levels. Similar to last quarter, we saw good hardware improvement for both ambulatory and syringe pump hardware, which was offset by decreases on a year-over-year basis on ambulatory disposables, as in the latter part of Q2 last year. And throughout Q3 2022, we shipped so many ambulatory disposables to catch up on back orders as we improved production mid-Q2 last year. It'll make Q3 a tougher comp, but regardless of that, we feel fine with our previous commentary on the business unit for the year. On LVPs, we've talked about how it was bumpier for decision-making over the last two years. We hope the recent market events allow customers to move forward with evaluations and akin to some of the large non-infusion capital vendors. We don't see capital availability as a massive impediment to our types of products. We're starting to see some commercial benefits of having a full infusion device portfolio. with our combined portfolio positioned differently versus other participants. Again, we believe over the medium term relative to our size, our competitive opportunity is solid and we're focused on commercial execution here in a more action-oriented market. Finishing the business unit discussion with Vital Care, which had 145 million in revenues or a decline of 7% on a constant currency basis. The entire decline in the business unit was due to IV solutions on a year-over-year basis. Really three primary drivers here, First, just an unusually light April, which did not get made up for over the balance of the quarter. Second, as we mentioned in the last two quarterly calls, we've been a little short from Pfizer on the last remaining category from Rocky Mount, which has been hurting us for a few million a quarter. And lastly, a little light on some specialty SKUs. At least for June and July, orders look closer to normal, but the Pfizer shortage will continue to drag on given the Rocky Mount news. All of this impacts profitably slightly as Ivy Solutions currently deflates the corporate gross margin by ballpark 500 basis points. The rest of the business unit was generally flat as expected with temperature management up a little. The short story message has not changed for us. Our differentiated legacy ICU businesses are doing well and we're focused on regaining a portion of the lost revenues in the acquired categories that are outlined in our investor presentations. Of the five product families we highlighted in that slide, ambulatory pumps, syringe pumps, vascular access, tracheostomy, and temperature management, all except vascular access, are improving year over year, and all are still below historical pre-COVID levels. We need to get all five improving consistently. We stated on the last call how we were impacting the self-inflicted challenges on many of the businesses, and we believed in Q2 we would have all three business units growing year over year and hit the bottom of the acquired products that were going backwards. We came up a few million short on revenue and vascular access to deliver that for consumables, and we had more variance in IV solutions than anticipated. However, we've become more reliable for customers with very minor exceptions and are able to engage in rebuilding trust and service as the products have always been well liked. And any improvement underlying demand and improving census work in our favor. But improving that service level of the customer, which was exacerbated in the broader environment last year, has increased our inventory levels to more than what's required to run the business day to day, similar to some other healthcare categories or even other industries. As we mentioned on the last call, we need to focus here to get back to the cash generation we want. That brings some short-term headwinds, but it's the right thing to do from a value perspective. Very specifically, we have been building inventory, both raw materials and finished goods, since the beginning of 2022. The rate of build finally slowed in Q2, with the more recent months showing improvements. Brian will go through the specifics, but we have tried to do this in the right way without disrupting the supply chain and without significant capital to restructuring here. Okay, let me get through the housekeeping items and I'll bring it back to results and our priorities. On quality, as we'd mentioned on the previous earnings calls, we're completely engaged and our teams are working hard to resolve the FDA warning letter in our acquired company and related inspectional observations. Our efforts to complete related quality system improvements and associated remediations are on track. 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. Same speech on the warning letter, the existence of a warning letter while undesirable is the regulatory agency trying to move the ball forward. And we've talked about how these regulations give us the right to participate. Regardless of where it appears in the P&L, we're spending heavily, so making progress here is extremely important. In Q2, we did transition away from Smith's Group's IT systems and are fully separated from all TSAs with better stability. We're now focused on the eventual ERP integration. 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. Over the first six months of the year, we've taken the first steps towards certain manufacturing consolidations and real estate adjustments, and there's likely more to come, all of which will be additive to gross margins, medium and longer term, but they take some time to get implemented. Moving the ERP integration forward is important because it allows us to optimize some duplication in our physical logistics and service networks. In terms of the balance of the year and being 50% of the way to the midpoint of our EBITDA range, Given what we need to do to improve inventory efficiency and having less vascular access sales than we'd like, we didn't want investors to think we had the flexibility realistically to be towards the higher end of our previous guidance range. While gross margins have been improving year to date, they will be impacted as we slow down the factories below current demand levels. So we're tightening it up a bit. We need to run a smoother operation, even if customer service levels are high, We can't run an inefficient production environment, and Brian will go through the details. 18 months into the acquisition in the broader economic environment, we have resolved production, logistics, operational stability, delivered operational stability, have growth in most of the businesses, and are working hard to ensure a clean bill of health and quality. Our priorities for 2023 remain unchanged, 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 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 rationalize the portfolio, which becomes easier after separation and being stable. Just to be extremely clear on the medium-term state we're looking for, We want our consumables and systems businesses to be reliable growers with an industry acceptable profit margin with the tightest and most optimized manufacturing network and each with a multi-year innovation portfolio. Over the last few years, we took an innovative component supplier and have scaled it to a global leading player where those efficiencies should be available to us over time at our size. There is no confusion within the company in the pursuit of that goal and we'll maximize the remainder of the portfolio as the individual contractual or strategic situations arise. The core premise of the acquisitions was to enhance the product offerings for the categories that drive our returns, as well as add logical adjacencies predicated on the same characteristics, sticky categories, low capital intensity single-use disposables, and 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, and we're focusing on all lines to show up with improvements 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. We produce 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 ICU 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.