Icu Medical Inc/De Q2 FY2023 Earnings Call

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 Bonnell, 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 invite calendar, and it will be under the second quarter of 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 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 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 into 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.

Thank you, John. Good afternoon, everyone, and we hope you're doing well. Despite the fluctuations in the economic landscape and some revenue variations in a few of our product lines, we are experiencing a better year-to-date in 2023 compared to last year. ICU Medical is effectively serving its customers and finding the right balance between commercial focus and internal improvements, particularly in supply chain efficiency. The macro environment was generally stable in Q2, with consistent freight and fuel pricing, although we faced some pressure from currency fluctuations in our production regions. International demand remained steady throughout the quarter, while the U.S. market saw some volatility, particularly in April, but showed improvement for the remainder of the quarter. Like everyone else in the industry, we want to start by expressing our gratitude to our customers and their frontline workers for trusting us during these challenging times. Today, we will discuss the Q2 revenue performance of our various business units, provide detailed insights into certain results, update on quality remediation efforts, the separation from Smiths Group Systems, our next steps toward integration and synergies capture, review our profitability and margins halfway through the year, outline necessary actions to optimize for the medium and long term, revisit our key short-term priorities from the beginning of the year, and assess our position 18 months post-acquisition amid the broader environment. We aim to avoid comments on long-term value creation today but want to clarify our vision for the future. We ended the quarter with $535 million in adjusted revenues. Adjusted EBITDA was $98 million and adjusted EPS reached $1.88. Revenue growth decreased by 1% on a constant currency basis and was down 2% on a reported basis, though we saw improved gross margins compared to Q1. We experienced a slower pace of inventory investment in the business, believe we’ve peaked in that area, and have adjusted output to better align inventory levels with historical norms while maintaining effective service. The supply chain is stabilizing, and we have a clearer understanding of actual underlying revenues. Compared to Q1, currency fluctuations have become a greater challenge as the local currencies in Mexico and Costa Rica have strengthened against the dollar. In our last call, we expressed optimism about revenue growth for each product line where we've seen historical stability, including the Legacy ICU and revenue recapture, which is now also stable in the Legacy SM portfolio. Most of our acquired product lines are growing year-over-year, but we are facing delays in restoring Vascular Access revenues to our desired levels. The Legacy ICU portfolio for pumps and consumables has performed well, but in Q2, we experienced shortfalls in IV Solutions due to a weak April and ongoing issues with one product resource from Visor. The shortfall in Vascular Access, approximately $20 million to $25 million lower in revenue for the year, does affect profitability, with less impact on IV Solutions. Starting with our Consumables business unit, which is our largest and most profitable unit, we recorded $237 million in revenue, a 1% decline on a constant currency basis and a 2% decrease reported. This needs further explanation. The legacy ICU IV therapy product lines achieved a record quarter in Q2, becoming our largest segment. Growth in this area was fueled by new customer implementations, good census in May and June, and increased market capacity focusing on clinical differentiation and niche market creation. However, this growth was offset by challenges in the Vascular Access portion. We noted in our last call that we seemed to be at the bottom concerning losses experienced in the previous year, similar to losses seen in IV consumables and pumps after acquiring Hospira. We did not regress in Q2 relative to Q1, but new business additions did not contribute significantly, leading to flat revenues. Based on our assessments, we expect to be around $20 million to $25 million short of our goals for the year. To clarify, our confidence in our ability to succeed has not changed but is taking longer than anticipated. Losses in 2021 and 2022 primarily stemmed from supply chain troubles, which we have now addressed. We recognize that our medium- and long-term expectations were to recuperate only a portion of what was lost over the prior two years. Other components of the business unit, including oncology and tracheostomy, are performing adequately for the remainder of the year, benefiting from increased capacities. In our previous call, we mentioned that we believe all four underlying lines are showing operational and commercial improvements, with losses mostly resolved and improved capacities. We have witnessed revenue increases in three lines during the first half of the year and expect ongoing sequential improvements for the rest of the year. However, the delays in Vascular Access will affect comparisons with the latter half of last year, which included some operational catch-up in Q3 and substantial COVID-related syringe sales. As a result, the growth rate for the entire business unit will be influenced, and we must continue to discuss individual lines until these issues are resolved. Shifting to Infusion Systems, which combines the Legacy ICU LVP pump business alongside the syringe and ambulatory pump businesses, this sector reported $153 million in revenues, reflecting 5% growth on a constant currency basis or 3% reported. Q2 of 2022 was more stable after a difficult start in Q1. The ambulatory and syringe product lines are returning to historical performance levels. Similar to last quarter, we observed positive hardware improvements for both types of pumps, although we experienced year-over-year declines in ambulatory disposables since we shipped a lot to reduce back orders after production improved in mid-Q2 last year. This situation may pose challenges for Q3 comparisons, but we feel confident in our prior commentary about this business unit's performance for the year. For LVPs, we’ve noted how the decision-making process has been unpredictable over the last two years. We hope recent market developments will encourage customers to move forward with evaluations, similar to large non-infusion capital vendors. We do not perceive capital availability as a significant barrier for our products. We are beginning to see commercial advantages from having a complete infusion device portfolio, which differentiates our combined portfolio from competitors. We believe there are solid medium-term growth opportunities for us relative to our scale, and we are prioritizing effective commercial execution in a more dynamic market. Concluding the discussion on our business units, Vital Care generated $145 million in revenues, experiencing a 7% decline on a constant currency basis. This entire decrease is attributable to IV solutions year-over-year, driven by three major factors: an unusually weak April that wasn't compensated for later in the quarter, a continued short supply from Pfizer regarding one of our resources, and a shortage of some specialty SKUs. For June and July, orders appear closer to normal, but the Pfizer shortage will persist due to the Rocky Mount situation, which slightly impacts profitability as IV Solutions contribute to a 500 basis point reduction in corporate gross margin. The remainder of the business unit remained relatively stable, as expected, with temperature management experiencing slight growth. The message remains consistent: our differentiated Legacy ICU businesses are performing well, and we aim to recover some of the lost revenue in acquired categories highlighted in our investor presentations. Among the five product families detailed in that slide—ambulatory pumps, syringe pumps, vascular access, tracheostomy, and temperature management—all except vascular access are improving year-over-year but remain below pre-COVID levels. We need to ensure consistent improvement across all five. In our last call, we discussed the self-inflicted challenges across many businesses. We felt in Q2 we would see all three business units growing year-over-year and expected to address the decline in acquired products. Unfortunately, we fell a few million short in vascular access and faced more variances in IV solutions than anticipated. Nevertheless, we have become more reliable for our customers, with few exceptions, and are working on rebuilding trust and service as our products are well received. Enhancing customer service, which was hindered by broader environmental issues last year, has resulted in increased inventory levels beyond what is necessary for day-to-day operations, similar to other healthcare sectors and industries. As mentioned in the last call, we must concentrate on improving inventory efficiency to achieve our desired cash generation, despite short-term challenges, as this approach is crucial for long-term value. Specifically, we have been building both raw material and finished goods inventories since early 2022, but the rate of increase slowed in Q2, with recent months indicating improvements. Brian will detail this further, but we have made efforts to manage inventory without disrupting our supply chain or incurring significant capital restructuring. Now, let’s address housekeeping items, after which I will return to results and our priorities. Regarding quality, as previously noted, we are fully engaged, and our teams are diligently working to resolve the FDA warning letter concerning our acquired company and related inspectional findings. Our initiatives for quality system enhancements and associated remediations are progressing well. We have invested heavily in remediation and expect most work to conclude in the coming months, reducing spending over time. It is important to reiterate that, while the presence of a warning letter is undesirable, it reflects the regulatory agency's efforts to drive compliance forward, and we believe these regulations allow us to participate meaningfully. Regardless of its impact on the P&L, we are prioritizing substantial spending in this area, and making progress here is crucial. In Q2, we successfully transitioned away from Smiths Group's IT systems, achieving full separation from all TSAs, enhancing stability, and now we can focus on integrating our ERP. Standing independently is the first step toward real integration next year to capitalize on additional synergies in manufacturing, supply chain, and functional support over time. This separation is also significant for potential decisions regarding our underlying portfolio. In the first half of the year, we initiated steps toward certain manufacturing consolidations and real estate adjustments, with more likely to come, all of which will contribute positively to gross margins in the medium to long term, although implementation will take time. Progressing with ERP integration is critical as it will facilitate the optimization of duplicative physical logistics and service networks. Looking forward to the rest of the year, being halfway to the midpoint of our EBITDA range, we need to improve inventory efficiency and address lower vascular access sales than anticipated. We want to ensure that investors understand the limited flexibility we realistically have to aim for the upper end of our previous guidance range. While gross margins have improved year-to-date, they will take a hit as we decrease factory output below current demand levels. It is essential for us to operate a smoother operation; even with high customer service levels, we cannot afford an inefficient production setup. Brian will provide the specifics. Eighteen months into the acquisition amidst a changing economic landscape, we have resolved production, logistics, and operational stability issues while delivering growth in most businesses. We remain committed to achieving quality excellence and meeting regulatory compliance effectively. Our priorities for 2023 are unchanged: to deliver expected revenue growth in our differentiated business units while advancing key product platforms, to continue our quality remediation efforts ensuring patient safety and regulatory compliance, and to focus on improving cash flow by enhancing working capital management and addressing available items on the P&L. We also aim to lay the groundwork for separation and future integration to realize remaining synergies and rationalize the portfolio, a process that will be simplified post-separation and stabilization. To be clear about our medium-term outlook, we aspire for our consumables and systems businesses to demonstrate reliable growth with an industry-standard profit margin supported by an optimized manufacturing network and a multiyear innovation pipeline. In recent years, we transformed an innovative component supplier into a leading global player, and we expect these efficiencies to be leveraged over time as we scale. There is clarity within the company regarding this objective, and we will maximize the remainder of our portfolio as specific contractual or strategic opportunities arise. The core rationale for our acquisitions was to enhance product offerings in categories that drive returns, while also adding logical adjacencies based on shared characteristics: sticky categories, low capital intensity, single-use disposables, and opportunities for innovation within a coherent industry structure. These portfolios complement each other, and we are actively exploring how to integrate them either literally or economically where appropriate, while striving for improvements across the board to reflect positively on the P&L. Although the pandemic revealed substantial volatility, we believe the vulnerabilities exposed in the healthcare supply chain further emphasize the need for all participants to be stable and reliable, reinforcing our position since becoming a full-line supplier. We manufacture essential items that demand significant clinical training, face manufacturing barriers, and generally consist of products that customers prefer not to switch unless absolutely necessary. The market requires ICU Medical to serve as a dependable supplier, and our combination positions us more favorably. Our company has emerged more resilient from the challenges faced over the past few years. We have been knocked down somewhat, but we are getting closer to the peak to extract value from this combination. Thank you to all our customers, suppliers, and frontline healthcare workers as we strive to improve each day. Now, I’ll hand it over to Brian.

Thanks, Vivek, and good afternoon, everyone. To begin, I'll first walk down the P&L and discuss our results for the second quarter and then move on to cash flow and the balance sheet. Along the way, I'll provide our updated outlook for the full year for each of these areas. So starting with the revenue line. Our second quarter 2023 GAAP revenue was $549 million compared to $561 million last year, which is down 2% on a reported basis or 1% on a constant currency basis. For your reference, the 2022 and 2023 adjusted revenue figures by business units can be found on Slide number 3 of the presentation. Our adjusted revenue for the quarter was $535 million compared to $547 million last year, which is down 2% on a reported basis or 1% constant currency. Adjusted revenue for consumables was down 2% on a reported basis or 1% constant currency. Infusion Systems was up 3% reported or 5% constant currency, and Vital Care was down 8% reported or 7% constant currency. As you can see from the GAAP to non-GAAP reconciliation in the press release, for the second quarter, our adjusted gross margin was 39%, compared to the first quarter gross margin of 38%, this represents a sequential improvement of 1 percentage point, driven primarily by the mix benefit from lower sales of IV solutions. Similar to the first quarter of this year, the second quarter gross margin reflects the benefits from; one, reductions in expedited freight, along with lower diesel prices and lane rates; two, the impact from recently implemented price increases; and three, higher manufacturing absorption from recent increases in finished goods inventory levels. As we mentioned on our last earnings call, there are a few items that will affect gross margin over the back half of the year that will partially offset the improvements we realized during the first half. The first is the impact of lower manufacturing absorption as we continue to reduce production volumes over the remainder of the year. During the second quarter, we made progress in slowing the build of inventory levels as the Q2 increase of $27 million was roughly half of the recent historical average increase of approximately $50 million per quarter. Over the back half of the year, we expect to further slow the build of inventory levels and then maintain or even slightly reduce those levels to help drive positive free cash flow. As a result, the benefit from higher production levels as we increase inventory will not continue for the remainder of the year. The second item is the impact from scheduled plant shutdowns during the second and third quarters as part of the IT TSA separation from Smiths Group as well as the annual maintenance shutdown of the Austin IV Solutions manufacturing plant as contemplated in our original guidance. So while we are pleased to see the positive trajectory in gross margins for the first half of the year, the combination of lower volumes and recent plant shutdowns will impact the rate over the remainder of the year. And as a result, we expect the full-year gross margin rate to be approximately 37%, consistent with our original guidance. On previous calls, we talked about our desired long-term gross margins, and the primary drivers towards that improvement continue to be; one, manufacturing absorption benefits from volume increases towards historical levels for our acquired product lines, plus continued growth for the Legacy ICU differentiated products; two, price increases as our multiyear contracts renew; and three, synergies from the integration of our manufacturing and distribution networks and service. And it's also worth noting, there is a high degree of variability in the gross margin rates of individual product families across our portfolio. Adjusted SG&A expense was $110 million in Q2, and adjusted R&D was $22 million. The adjusted operating expenses were down 2% year-over-year and generally in line with Q1 and reflect acquisition synergies as well as our usual focus on SG&A cost management, which has more than offset inflationary pressures. Moving forward, we expect total adjusted operating expenses as a percentage of revenue to remain around Q2 levels for the remainder of the year. Restructuring, integration, and strategic transaction expenses were $12 million in the second quarter and related primarily to the integration of the acquisition. Adjusted diluted earnings per share for the quarter was $1.88 compared to $1.37 last year, an increase of 37%. The current quarter results reflect net interest expense of $24 million, which is an increase over the prior year of $9 million and equates to just under $0.30 on a per share basis. For the full year, we continue to expect net interest expense of approximately $100 million. In the second quarter, the adjusted effective tax rate was 8% and includes benefits from the release of tax contingencies as a result of the expiration of various tax statute of limitation periods, which contributed approximately $0.25 per share. We expect the second half adjusted tax rate to be more in line with our normalized tax rate of 23%. Diluted shares outstanding for the quarter were $24.4 million. And finally, adjusted EBITDA for Q2 increased 16% to $98 million compared to $85 million last year. Now moving on to cash flow and the balance sheet. For the quarter, free cash flow was a net outflow of $18 million, which reflects our continued investment in the three key areas of the business that we highlighted for the past several calls. The first is higher levels of inventory to bolster safety stock and allow for onboarding of new customers, where, as previously mentioned, we invested $27 million in additional raw materials and finished goods inventory during the quarter which is approximately half of the recent historical average. The second was quality improvement initiatives for legacy SM. And during the quarter, we spent $13 million on quality system and product-related remediation, and the third area was acquisition integration, where, as previously mentioned, we spent $12 million on restructuring and integration. Additionally, we spent $18 million on CapEx for general maintenance and capacity expansion at our facilities as well as placement of revenue-generating infusion pumps with customers outside the U.S. For the remainder of the year, the aggregate level of spending on these items will decrease with the largest decrease coming from the continued moderation of inventory builds. Additionally, we should see slightly lower spending in the back half of the year for both quality remediation and restructuring and integration, while capital expenditures will likely increase over the remainder of the year compared to a light first half with total CapEx spending for the full year estimated to be in the range of $80 million to $100 million. And just to wrap up on the balance sheet, we finished the quarter with $1.6 billion of debt and $198 million in cash and investments. Consistent with our usual cadence, we are updating our full year guidance for adjusted EBITDA and adjusted EPS. For the full year adjusted EBITDA, we are narrowing our previous guidance range of $375 million to $425 million to a range of $375 million to $405 million. This reduction in the top end of the previous guidance range reflects lower vascular access revenue relative to our original expectations, some operational flexibility as we work through aligning production with demand, and the impact of lower volumes in the IV Solutions business. For the full year adjusted EPS, we are narrowing our prior guidance range of $5.75 to $7.25 per share to $6 to $6.85 per share, which includes the same drivers as adjusted EBITDA, plus the previously mentioned $0.25 tax benefit recognized in the second quarter. In summary, we feel good about the earnings we delivered for the first half of this year, and we're seeing progress on inventory levels to improve free cash flow. On the revenue line, the majority of our businesses are increasing in size, but we recognize that the score is measured on the total, and our focus is on eliminating the negatives. For gross margin, we have a number of opportunities to drive improvement over the long term. And on SG&A, we've demonstrated our ability to operate efficiently. We remain convinced of the longer-term opportunity, financial returns, and our ability to tackle the remaining issues. And with that, I'd like to turn the call over for any questions.

The first question comes from Jayson Bedford with Raymond James.

Maybe I'll just focus a bit more on the revenue line, which is where I think most of the discussion will be. On the consumables, you're kind of parsing through some of the commentary there. It seems like you expect it to increase sequentially over the next couple of quarters. Just on an annual basis, is it fair to assume it will be down kind of low single digits. Is the math or assumption there, correct?

Yes. I think, Jayson, I don't think we expect it to necessarily be down year-over-year. I think we'd have a hard time saying right now that it's going to be mid-single digits like we said. We've got to obviously take $25 off of that, right? So we want to have some caution around that. Right? I don't know that we have it perfect, but we'd say it's what the exact number is, but I don't think we think it's negative for the year.

Okay. That's very helpful. On Infusion Systems.

Just to add on that, I mean, so there's no secrets, right? The legacy ICU consumables piece was up 5-ish percent for the quarter, and the Smiths was down in the consumables line.

Okay. But Master Access was flat sequentially. Is that correct?

Correct.

Okay. Just on infusion, I was a little unclear; looking at it sequentially, it was down about $9 million. Was it just the timing of capital? I understand this segment can be a bit inconsistent, but was there anything that specifically impacted growth there?

No. Sequentially, we had some catch-up in the first quarter regarding hardware placement, and we saw good hardware results in the second quarter. However, we started shipping more hardware last quarter and cleared some historical back orders. As we mentioned in the previous call, it was a strong quarter for pumps.

Okay. And then regarding Solutions, it seems to be down about $12 million year-over-year, depending on the overall context. Is this merely a timing issue? I find it hard to believe you are either losing market share or lowering prices. Additionally, can you comment on how the Tornado and Rocky Mount have affected your business?

Yes, I believe we haven't observed any significant change in our long-term committed customers recently, especially during the pandemic. Things have remained quite stable. We noted that the reduced performance was largely due to an unusual April that did not recover in May or June. Additionally, the issues with Rocky have been impacting us, reflecting a loss of about $3 million to $4 million per quarter. We expected this impact and have some alternatives in place, but we do not foresee improvement. We are still waiting for a final update from them regarding the Tornado, which accounted for a minor segment of our anticipated sales this year, translating to a couple of million dollars per quarter. Unfortunately, we don't have a better solution at this moment to address your concerns, but I do acknowledge the validity of your points.

The next question comes from Matthew Mishan with KeyBanc.

I wanted to ask a two-piece on the guidance. First, I guess, just the midpoint of the guidance comes down by about $10 million. Is that just simply the vascular assets piece, the $25 million at a decent contribution margin on kind of bringing that down? And then the second piece that I also wanted to ask was what had happened this year that could have enabled you to get to the higher end of your guidance?

It's a great question, Matt. On the first part, yes, you're generally directionally right on that. This contribution margin maybe isn't quite as robust as every piece of the infusion consumables market, but it's still pretty good. So it makes a difference. And that was important if we wanted to be at the high end. Two, as Brian said in his prepared remarks, this notion of getting everything perfect on inventory production and demand has been challenging. And so even if we feel okay about the aggregate gross margin, I think it's on our minds that it's been hard to predict everything perfectly. And then we always, I think, believed to get all the way to the high end also is everything on the macro had to work right, currency, broader supply chain costs, etc. And some of the currencies, particularly what's going on in the peso and Costa Rica and Colonias hurts a little bit, right? So there's some headwinds coming there. I think it's more of the macro than the stuff we operationally planned for.

Okay. I think that's fair.

We provided a wide range for this reason. We discussed it at the time, and I recall that we talked about what needs to happen to achieve that. Everything must go smoothly, and the macro conditions need to be favorable.

And then there’s still a lot that’s still left to do as long as integration goes. I was just hoping you could help us with like the timeline of the ERP integration because it does seem as if you need to get that piece finished or at least further along before you get to that next wave of synergies like footprint and kind of supply chain.

Brian, do you want to do that one, Brian or?

Yes. I mean the IT integration is a multiyear project that we are starting to work on, but it’s not something that happens necessarily quickly. I would say, Matt, that as it relates to synergies, you don’t have to wait until all that work is 100% complete in order to see some of the benefits. So there are some things that we can – where we – there are some areas where we can reduce cost as we’re doing the IT integration, and there are other things that aren’t necessarily predicated upon that work in order to see the benefits.

In the case of the Pfizer transaction, we were under a shot clock where Pfizer was no longer going to provide us systems, and we had to make all of those moves in 18 months, which I think it ultimately took 21 months-or-something to get off. Here, we’re kind of in month 18, and we’re starting the journey of the first action was to separate and specifically where the ERP just gives some examples of where it is very valuable, is things like what’s our long-term warehousing and distribution model, where we have our service repair model, we have a lot of duplication not only domestically but around the planet. And when you have everything on a common order to cash infrastructure, you can deal with some of those things in an easier fashion, to Brian’s point, you don’t have to have it, but it just makes it easier operationally. It’s the right sequence of events. And we tried to get the laundry list there of whether it was manufacturing network, distribution, functional support. There’s a bunch of other stuff, right, so in just real estate, we haven’t gotten all of it.

Is that a 2024 timeline by the time you get to that that impacts ‘25? Or is that something which you can kind of get to at the end of this year or start to get to that could also start to benefit you in ‘24?

I would say some of it. There are some announcements we’ve made on production that will impact ‘24. I think some of the items like real estate or the long-term distribution costs are probably more of an earliest late ‘24 or ‘25 type of item, but there’s a lot of stuff there.

On potential for portfolio rationalization, one of the things that we have seen from some of the peers has been in the ability to sell a couple of assets, and the markets do seem open to that. How are you kind of looking at the portfolio and thinking about potentially a positive cash flow event from a potential asset sale like accelerating the debt pay down?

I mean, of course, in our ideal scenario, all of those options would be available to us, right? But I think, first, we feel good about in most of the businesses we have stability, right? Things are easier to do when you can prove the business stability and things are easier to do when you have the ability to separate IT and manufacturing systems. And we’ve really just gotten to that point where service level is very high to the customer. There’s some business stability in the majority of lines, and that gives us a little time to be introspective on it. Obviously, if the right situation was available, we would explore such an opportunity. But we haven’t had so much time to deal with, yes, today.

Yes. So without talking about timelines, how are you thinking about a submission of a new LVP pump through the FDA? I think you’ve seen other large players and competitors obviously have some success there now. Do you think they’ve kind of laid down the pathway for you or you kind of know what it takes to get through the FDA at this point? And it could be a little bit more streamlined.

I mean, I guess, without trying to be indirect about it. We have a $650 million to $700 million pump business. We’re a reasonable-sized player. And obviously, a chunk of our R&D spend goes into that area. The one lesson of having been in the infusion industry for a long time, we understand is, it is unpredictable what’s happened at the regulatory agency. And so we would like to focus on our own product quality and our own innovation, and we’ll talk about it when we have something to talk about, right? We’re not a small player in this space.

The next question comes from Larry Solow with CJS Securities.

Great. I have a few follow-up questions. Regarding the pumps, can you share how your operations may have changed now that large competitors are back in the market? Is there any shift in the competitive landscape? I'm trying to understand how this impacts you and how you might respond, or if there's anything you can share about that.

I believe customers have been under the impression that all market players would eventually participate, which has likely caused some delays in their purchasing decisions due to the limited options available. We performed reasonably well last time, and we've managed to recover a portion of what Hospira lost, which prompted ICU to pursue the transaction initially. There are still opportunities for us. We just hope that customers start making decisions because there is no longer any reason to hesitate. We feel a bit more optimistic than worried, as the feedback from customers in relation to Parkinson's has been very consistent over the years indicating that everyone would eventually be present. Now that everyone is here, it's time to move forward.

Okay. That's fair. Can you just on the sort of shortfall in Vascular Access? You mentioned sort of $20 million, $25 million for the year. You also spoke to some new business that I think maybe you said it was delayed. So can you just kind of help us or tell us why it's been slower? And is it timing? Is it just your ability to get new contracts? And I guess, part 2 of that question would be does it feel your confidence has changed too much, and you get into where you inevitably want to be there. So can you just kind of help us through that?

These lines in the acquired vascular access category have been on the market for many years and maintained a consistent market share until recently. However, they did not receive much attention in the last four or five years. Due to supply chain interruptions and production issues, customers were not adequately served and moved on. We never expected that everything would return, but we assumed some portion would. We have just been actively focused on this for about a year since we merged our commercial efforts, and it takes time for changes to take effect. We anticipated more improvements than we actually saw. The difference in our expectations for Q2 and the few million dollars we received indicates that there are opportunities in the pipeline, but the process takes longer. We're not expecting major long-term shifts in market share, just gradual changes in the category closely connected to our core business. It will take time for some of those points to return.

Understood. Great. And for Brian, regarding the gross margin, it performed better this quarter than anticipated, largely due to product mix. I know you reduced inventory production, but were you initially planning to decrease production even further this quarter? Originally, your projections indicated a sequential decline in gross margin by 100 basis points, but instead, it increased by 100 basis points. Was the improvement solely due to product mix, or was there also a slower rate of production reduction that will increase in the latter half of the year? Additionally, your guidance suggests a gross margin of 35.5% in the second half, is that correct?

Yes. Regarding your questions, starting with the last one, it seems that the math indicates about 35% gross margins for the latter half of the year, which aligns with our overall goal of 37% for the full year. As for the lack of a decline in the second quarter, we did take measures in line with our plans related to the slowdown. However, the impact on the profit and loss statement has a slight delay, as the reduced absorption translates into capitalized inventory on the balance sheet, which will only get recognized over our inventory cycles, which currently take about 4 to 5 months. This is why the effects aren’t visible in the second quarter, but we expect to see them in the latter half of the year.

This concludes our question-and-answer session. I would like to turn the conference back over to Vivek Jain for any closing remarks.

Thanks, everyone, for participating in IT's Q2 call. We're making progress on a lot of fronts. There are a few negatives that we need to flip to positive. And we look forward to talking about it more over the balance of the year. Thanks very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.