ICU Medical, Inc.

Good afternoon and welcome to the ICU Medical Inc. Third Quarter 2023 Earnings Conference Call. All participants will be in a 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 will 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 like now 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 third 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 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 third 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 the call today, 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 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. We hope you're well. Even with the volatility in the economic environment and some revenue variance in a few of our product lines, ICU Medical is operating very well for our customers in 2023, delivering high service levels, improving quality, and relevant innovation. We're also equally focused on ensuring we take the right short and long-term steps to do the same for our other stakeholders. The global demand environment was generally consistent and healthy in Q3, And it continues to feel that way, and the only macro items were some uptick in fuel pricing and continued pressure from currencies in our production geographies. Like everyone in our industry, we want to start first by thanking our customers and the frontline workers for trusting us to serve you during these times. We'll use the time today to discuss the Q3 revenue performance of our business units, and hopefully we've reached the point where this is the last quarter with unusual year-over-year comparisons. Provide more color on some of the product families that have been good and some that have been challenged. Go into a bit more detail on the actions we've been taking in aligning our inventory with demand, its impact on the P&L, and explain why we're making this temporary choice. Update our next steps towards integration and synergy capture, as there are no other meaningful housekeeping updates. Check our progress against the short, check our progress against key short-term priorities we outlined to start the year. and quickly frame up some of the items on the strategic agenda and make clear where we want to be. We finished the quarter with $547 million in adjusted revenues. Adjusted EBITDA came in at $90 million, and adjusted EPS was $1.57. Revenue growth was minus 6% on a constant currency and reported basis, with growth in the legacy ICU portfolio offset by year-over-year declines on the acquired products from Smith's Group. We finally had a sequential decrease in inventories, and as we had previously described, our efforts to adjust output to bring inventory more in line with historical levels, and as a result, did generate some cash flow from operations and expect this trend to continue. The Mexican and Costa Rican local currencies continue to pressure gross margins in addition to the inventory correction. Our results reflected what we stated on the last call. Good revenue growth in our differentiated historical portfolio and stability on the acquired product lines, but the large catch-up in fulfillments we started to make in Q3 of last year make the year-over-year results unattractive. So we'll have to go into that in more detail. For the balance of the year, we would expect continued sequential revenue growth, improved cash flow from operations, and to have earnings inside of our revised guidance from last quarter, but towards the lower end as we've prioritized inventory reduction. So let me start with our consumables business. which is our largest and most profitable business unit. We had 242 million in revenue, which was down 5% on a constant currency basis and down 4% reported. Again, we need to explain a bit more here. The legacy ICU product lines, IV therapy and oncology, which are the largest components of the business unit, had a record quarter again in Q3 with 7% growth, and those businesses combined to be the largest they've ever been. That growth was driven by new customer implementations, consistent census throughout the quarter, and increased capacity and ability to serve the market with a focus on clinical differentiation and the creation of niche markets. The tracheostomy unit was also slightly positive for the quarter. The balance was the same story as the first half of the year with large year-over-year negatives in vascular access, which were accentuated by the strong backorder recovery and COVID syringe deliveries we had in this line in Q3 of 2022. Of course, that's not desirable. but we've been focused on stability here, and we have had stability sequentially for a few quarters now. On the last two calls, we said we're at the bottom here as losses occurred throughout last year, and that it felt very similar to the IV consumables and pump losses when we purchased Aspira, when customer losses were still felt in the four to six quarters post-deal. In Q3, we did see some sequential improvement in the U.S. vascular access lines, which is the largest portion of the product line, And that was offset by some minor variations OUS. But again, we did not backtrack versus the previous few quarters. For the year, nothing different than we said in the last call were relative to our own expectations. Our best estimate is that we'll be 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 taken time. The losses from 2021 and 2022 were predominantly due to supply issues. and those have been addressed by our team as evidenced by our inventory overbuild. To be even more transparent, our medium and longer-term expectations are only to get back the minority of what was lost over the last two years. We continue to believe our previous commentary of all four product families improving commercially and operationally with the losses predominantly out and improved capacities and believe we will see sequential improvement in the business unit for the balance of the year. We believe that this is the last time we'll need to explain historical backorder catch-up here, COVID adjustments, et cetera. Moving to infusion systems, which is the combination of the legacy ICU LVP pump business and the syringe and ambulatory pump business, the acquired syringe and ambulatory pump business. This business reported 149 million in revenues, which equated to a decline of 7% constant currency or a decline of 8% reported. It's a similar story to the consumables business. with a wide year-over-year range across the subproduct families. The LVP and syringe product lines both grew at 6% constant currency or better, and those are offset by a sharp year-over-year and minor sequential reduction in the ambulatory pump product lines. We're clear on the last call that Q3 would be a tough comp, but regardless, we feel okay in our commentary on the business unit for the year and would expect good sequential growth in the business unit. After our Q2 call, we did announce that ICU Medical received five 10K clearances for the new IV performance platform, including the Plum Duo Precision Infusion Pump and LifeShield Enterprise Safety Software, both of which we had obviously tried to develop as quietly as possible. That pump has now been on patients outside the U.S. for a few weeks in a limited market release and performing very well. By the end of the year, we expect to be doing a similar limited market release in a major U.S. health system. But we're glad to see the clearances given the heavy investments that were made into R&D since we brought all the programs in-house and realized it was hard to give appropriate color on where the majority of spend was being invested. Now that it's all public, with more transparency, that spend will continue developing the new family of products with a Plum Solo, a single-passet lower-priced version of the Plum Duo, and a refreshed syringe pump, which will all connect to the LifeShield Enterprise Safety software. On the broader market for pumps, which really starts with the LVPs, as we've talked about it, as we've talked about how it was a bumpier time for decision-making over the last two years, we do think customers are now moving 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 with innovation positioned differently versus other participants. Again, we believe over the medium term relative to our size, our competitive opportunity is solid, and we are focused on commercial execution here in a more action-oriented market. Finishing the business unit discussion with Vital Care, which had $156 million in revenue or a decline of 8% on a constant currency and reported basis. Ivy Solutions is about half the business unit. And Ivy Solutions was down $5 million year over year, but up $9 million to $76 million sequentially as demand was normal and consistent again with the only meaningful variance from our $80 million a quarter goal being the products that were impacted from Pfizer. The various contract renewals for 2025 are making progress as we need to recoup the substantial inflation that we've absorbed in Ivy Solutions. The remainder of the business unit, which is mostly acquired products, was sequentially flat but also down year-over-year due to the 2022 catch-up. For the year, both the critical care and temperature management product families should have a good full year-over-year growth rate. 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 on 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 as we become more reliable for customers with the trust and service as the products have always been well-liked. And any improvement underlying demand due to improving census works in our favor. But improving that service to the customer or ensuring it for the legacy ICU product lines, which was exacerbated in the broader supply chain environment last year and the situational issues around the acquisition, came at a cost reflected in cash consumption. The inventory levels on the balance sheet are more than what is required to run the business, and we also have had substantial investments into quality remediation to ensure that we have a continued right to participate. We have been very focused on both of those areas. Quality is reasonably self-evident as we've been methodically cleaning up history and neglect with the acquired portfolio. That will get measured ultimately with a clean bill of health, which we hope we can get assessed sooner than later. But the correction of the investment into inventory is a little harder to forecast to perfection as it's a function of service level to the customers, growth and the overall supply chain health. We are glad we finally seen reductions but we had five quarters of 50 million-ish increases without the underlying business being the size we wanted. It does not all come off immediately, but the slowdowns we are taking which impact the P&L are temporary. How long it takes is a function of growth, but it does take some time. Brian will try to quantify the impact of the production slowdown to date. We've tried to do this the right way without disrupting the supply chain and without significant capital to restructuring here. Okay, on integration, we're planning for next level activities around the ERP systems, logistics networks, functional support, and locations. As mentioned on the previous call, we've taken the first step towards certain manufacturing consolidations and real estate adjustments, and we expect to be undertaking more of these integration activities next year with the goal of having as many of them as possible positively impact 2025. Our IT platforms have been stable since separation. These items make a longer-term difference in gross margins and have our full attention. Our goal is to give more specifics here on the next call when we can at least size the prize and timing for our stakeholders as this is a meaningful amount. There are no other updates on quality, manufacturing, or any other support areas. To check our progress against the key short-term priorities we outlined at the beginning of the year, we've resolved production, logistics, operational stability, have growth in some but not all of our businesses, and are working hard to ensure a clean bill of health on 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 reliability 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 integration for capture of the remaining synergies, and rationalize the portfolio, which becomes easier after separation and stability. To be direct on our goals for the next year or two, we want our consumables and systems business 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. On the legacy ICU portfolio, we need to continue share gains and offset the inflation we experienced. On the acquired portfolio, which probably lands between $900 million to a billion in revenue, it's still large enough to deliver an appropriate profit margin. But given the lower revenue level, we need to fully integrate and optimize it would take some time as we had to focus on service and quality first. There is no confusion within the company in pursuit of these goals, and we don't really have any frivolous activities here. We know we're still off the EBITDA level we expected at the transaction, but the company is large enough to get there over time. From a balance sheet perspective, we want to focus on organic cash flow generation, and if a strategic opportunity arises in a value-creating manner for any of the periphery of the portfolio, we'll explore those options. We think the order of activities and the way we're judging ourselves now that we're at the base of the acquired business is first sustained revenue growth. We get that sounds awkward given the negative totals we just announced, but it was very messy as we stabilized. We too miss the days of doing a little better than we expected, and it's still within our muscle memory. The second lens is, are we getting back to generating cash as we used to, which is hopefully combined with improving earnings post our production changes to improve our overall leverage position. And then to have the next level synergies get incorporated for improved margins. The core premise of the acquisition 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, with 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&O. 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 to be an innovative, 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.