Icu Medical Inc/De Q4 FY2023 Earnings Call

Good day, and welcome to the ICU Medical, Inc. Fourth Quarter 2023 Earnings Conference Call. Please note, today's event is being recorded. I would now like to turn the conference over to John Mills. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining us to discuss ICU Medical's financial results for the fourth quarter and full year of 2023. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Brian Bonnell, Chief Financial Officer. We wanted to let everyone know that we have a presentation accompanying today's prepared remarks as well. To view the presentation, please go to our Investor page and click on Events Calendar, and it will be under the fourth 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 discuss non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into ICU Medical's ongoing results of operations, particularly when comparing underlying results from period to period. We'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, and good afternoon to everyone. I'll walk through our Q4 revenue and earnings performance, highlight and provide some commentary on the main topics of 2023, and then turn it over to Brian to recap the full Q4 and fiscal 2023 results and provide our 2024 guidance. After that, I'll come back with some brief comments on our medium-term outlook and the actions and opportunities in front of us to improve our performance. Revenue for Q4 was $576 million for total company growth of 2%. Adjusted EBITDA was $86 million and EPS was $1.57. We added $56 million of cash to our balance sheet as a result of the actions we've been taking on inventory, combined with modest growth. As we had anticipated, we had sequential growth in all the segments and a larger inventory reduction in Q4 versus Q3. The broader demand and utilization environment in Q4 was the most positive since 2021 across almost every geography. The capital environment was status quo, and it does appear investments that customers need to get done are being completed. There were no additional macro headwinds or tailwinds as compared to earlier in the year, but the inflationary labor environment in some of the larger production countries continued. Our consumables segment grew 4% in constant currency or 5% reported. The legacy ICU product families of IV therapy and oncology combined, again hit a record level in absolute sales with 11% growth, which is probably a few points overstated due to the Italian tax accrual in Q4 of '22. All four product lines in this segment grew well sequentially, with Vascular Access finally turning around and reaching at least Q4 2022 levels. The sequential growth was driven by new global customer implementations, improved 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. Our IV Systems business was down 1% constant currency or down 2% reported, and was the best quarter of the year in total. There was a wide range of performance across the product lines here. Our LVP pump business grew 11% with the best performance since 2021, due to a strong census environment, a larger installed base, and the usual robust Q4 for capital. Syringe pumps sold near normal quarterly levels but were down year-over-year due to higher shipments in Q4 of 2022 from the release of certain product holds. Ambulatory pumps and their dedicated consumables were down year-over-year and are still below historic levels, but had a nice sequential improvement as did the segment. Since our last call, we've been putting our newly cleared Plum Duo infusion system and LifeShield IV safety software through real-world use cases in a large U.S. IDN environment, and we're starting to be production-ready to make Plum Duo generally available. The early feedback has met our expectations, and we're incorporating super user feedback into our roadmap and believe we have a hardware product and related safety software that can be the anchor of our offering for years to come. Just wrapping up the business segments, our Vital Care grew 2% with IV solutions being up 6% and flat sequentially. From an operational perspective, the company is running the best it has in the last two years. Customer backorders are at the lowest levels in eight quarters and fulfillment has been very stable due to all of the efforts of our team, along with what appears to be a more predictable supply chain and logistics environment. Discussions have shifted far more to innovation and the integrated value of what we've amassed. Quality has been an area of heavy investment. We feel we're on solid footing. We have had, and likely will have, a few more important customer notifications, as part of the overall remediation efforts previously discussed and enhancements we've made. We started 2023 with five goals that we reiterated on each call last year. Ultimately, we had revenue growth in most, but not all, of our differentiated product lines. We did progress our quality remediation and ensured quality for patients and high compliance for regulatory authorities, respectively. We finished the TSA separation and have the groundwork and operational stability in place to pursue remaining synergies. We finally improved cash flow towards the end of the year but continue to be burdened by necessary investments in quality and integration projects to unlock additional synergies, as well as certain underutilized production assets that we're working to address. We're improving the portfolio from a revenue growth and quality perspective, which will increase any opportunities to rationalize the portfolio at sensible levels. That's my brief recap of Q4 and 2023 at a high level. I'll now turn it over to Brian, and then come back with a few comments on our medium-term outlook, some targets and a few other thoughts.

Thanks, Vivek, and good afternoon, everyone. Since Vivek covered the Q4 revenue for each of the businesses, I'll focus my remarks on first recapping the full year revenue performance compared to our original expectations; second, discussing Q4 performance for the remainder of the P&L, along with the Q4 balance sheet and cash flow; and third, providing guidance on our expectations for 2024. To recap our full year 2023 revenue performance, consolidated adjusted revenue was down 1% on a reported basis and flat constant currency. At the business unit level, consumables revenue for the year was down 1% reported in flat constant currency compared to our original expectations of mid-single-digit growth. The shortfall was due primarily to the vascular access product category, where the decline was larger than anticipated, along with a few other variances within the business unit. Q4 was important because after three previous quarters of stability in Vascular Access, we finally saw sequential improvement. Infusion Systems revenue for the year was up 2% on a reported basis and up 4% constant currency, in line with our original guidance of mid-single digits, driven by a combination of the LVP and syringe product lines. Vital Care was down 3% reported and down 2% constant currency for the full year, which is at the low end of our original guidance range of flat plus or minus a little. Here, IV Solutions was the largest gap to our expectations, offset partially by solid growth within the temperature management and critical care product categories. Moving on to Q4 results and further down the P&L. As you can see from the GAAP to non-GAAP reconciliation in the press release, gross margin for the fourth quarter was 34%, which was in line with our expectations and reflects the impact from lower manufacturing absorption as we continue to reduce inventory and improve cash flow. Recall that for the first six quarters following the acquisition, we increased inventory levels each quarter by an average of almost $50 million in order to, one, address the legacy SM backorder situation; two, build bridge stock in anticipation of the new EU MDR requirements, the effective date of which was eventually delayed; and three, bolster safety stock levels across the combined company. However, as each one of these situations evolved, we took action to bring inventory levels in line with underlying demand. During the third quarter of '23, we decreased inventory levels for the first time. We said on the Q3 earnings call that we expected inventory reductions to accelerate in the fourth quarter, and they did as we saw a cash flow benefit from inventory reduction of over $60 million. However, the lower production levels in Q3, and to some extent Q4, negatively impacted gross margins in the quarter. Adjusted SG&A expense was $113 million in Q4, and adjusted R&D was $22 million. Total adjusted operating expenses were up 3.5% year-over-year and reflect a combination of increased selling expenses from higher revenues, along with lower incentive compensation in Q4 2022. Restructuring, integration and strategic transaction expenses were $11 million in the fourth quarter and related primarily to acquisition integration. Adjusted diluted earnings per share for the quarter was $1.57 compared to $1.60 last year. The current quarter results reflect net interest expense of $24 million, which is an increase over the prior year of $4 million and equates to just under $0.15 on a per share basis. The fourth quarter adjusted effective tax rate was a benefit of 1% and includes certain discrete benefits in year-end items that contributed approximately $0.35 per share. Diluted shares outstanding for the quarter were 24.3 million. Finally, adjusted EBITDA for Q4 decreased 11% to $86 million compared to $96 million last year. Moving on to cash flow and the balance sheet. For the quarter, free cash flow was a positive $61 million, which represents a significant step up relative to Q3 free cash flow of $14 million. If you recall, Q3 was the first quarter of positive free cash flow since the acquisition if you exclude the one-time benefit from the accounts receivable sales program in Q1 of 2023. This improvement was driven primarily by a reduction in inventory during the quarter of more than $60 million. The focus on inventory allowed us to generate meaningful free cash flow while still investing in the areas that will drive future returns. These investments included $14 million of cash spend for quality system and product-related remediation for legacy SM, $11 million on restructuring and integration, and $30 million on CapEx for general maintenance and capacity expansion at our facilities as well as the placement of revenue-generating infusion pumps with customers outside the U.S. We finished the quarter with $1.6 billion of debt and $255 million of cash and investments. Moving forward to the 2024 outlook, we expect full year consolidated adjusted revenue growth in the low to mid-single-digit range, and we expect the growth rates for each of the underlying business units to be in line with the longer-term outlook that we've discussed before, which is mid-single digits for both consumables and infusion systems and roughly flat for Vital Care. The consumables growth reflects a combination of volume and some price, with volume increases driven by continued share gain in core infusion, a modest recovery in vascular access, and the benefit of higher growth markets for oncology and specialty. The infusion systems growth reflects normal market growth, a little bit of price, and the assumption of limited P&L impact from Plum Duo in 2024, given the usual lag between customer contract signing and implementation. Moving further down the P&L, we expect adjusted gross margin for the full year to be approximately 35%. The 35% includes price increases offsetting the negative impacts from labor inflation in our Mexican plants, as well as continued pressure from the peso exchange rate, and assumes a relatively stable environment for freight rates and fuel. It also reflects the temporary impact from lower absorption as we expect further inventory reductions over the course of 2024. In terms of progression over the year, we expect gross margin to be lowest in the first quarter as a result of the delayed P&L recognition from the inventory reduction that occurred in Q4 of 2023, with improvement over the course of 2024 from higher manufacturing volumes as inventory reductions taper and revenue growth takes effect. We plan for adjusted operating expenses as a percentage of revenue to be similar to 2023 levels, which is just under 24%, reflecting the benefit from synergies offsetting the impact from resetting incentive compensation plans and general inflationary increases. Net interest expense is expected to be approximately $105 million based on current market forecasts for interest rates as well as the roll-off of a portion of our interest rate swaps. The adjusted tax rate should be around 23%, which is our normalized tax rate before discrete items. Finally, diluted shares outstanding are estimated to average $24.6 million during the year. Bringing these components together results in 2024 adjusted EBITDA in the range of $330 million to $370 million and adjusted EPS in the range of $4.40 to $5.10 per share. On cash flow, we ended 2023 with $83 million of free cash flow for the year, which is driven mostly by the one-time benefit from the implementation of the accounts receivable factoring program during the first quarter. For 2024, we expect free cash flow to be around the same levels as 2023, but to be driven entirely by operations. The final amount will depend on the degree of inventory reduction and the amount we choose to invest in quality remediation and integration activities, as there is value in completing this work sooner to capture additional synergies. In terms of remaining inventory reduction, we said on the last call that the total opportunity was roughly $100 million. After more than $60 million captured in Q4, that would leave approximately $40 million left to go, and we think that's a fair assumption heading into 2024. We expect CapEx requirements in 2024 to be in the range of $90 million to $110 million. Timing of free cash flow throughout the year should be consistent with our historical trend, which is lighter in the first quarter as a result of payments for prior year annual incentive compensation, with improvement over the remainder of the year helped by the benefit of revenue growth. To wrap up, we're happy with the sequential improvements in Q4 revenue we saw across all three businesses as well as the meaningful step-up in free cash flow. For 2024, we're focused on foundational work that will drive earnings improvement in 2025 and beyond, which Vivek will expand upon. I'll hand the call back over to Vivek.

Okay. Thanks, Brian. And that's the reality of where we are right now. But what's not lost on us is the reality of where we should be. Profitability in parts of this industry has obviously been impacted by the lag between inflation and pricing and the underlying competitive dynamics and differentiation in each category. But even with all that, we think most reasonably efficient companies in these types of markets now operate at somewhere in the low 20s EBITDA margin level. We do not think this can apply to our IV Solutions business, which has its own unique competitive dynamics and with a general misvaluation of the product in the market. However, we believe the rest of our portfolio is capable of achieving such a margin over time. Given what we have been through the last few quarters, we are not willing to commit to a certain date of being there, but our experience in time in the category makes us believe that this is a fair metric. For our lean company, achieving this metric is all about revenue growth and our gross margins, which for us include all costs related to logistics and many other areas. Most of the improvement opportunities with these items should be directly under our control. We still need to prove that we're capable of predictable, sustained revenue growth, which has not been the case as certain lines were going backward, but we are on more solid footing now. Our original model for several of these products and our goal was to just get back to near historical sales levels, and we will need additional price given some of the share losses. However, in the background, we've been actively refreshing the portfolio to ensure we're capable of either creating new markets or protecting product families that can take share. Plum Duo was the first step in a series of products in our next generation of infusion technologies. We should have a single-channel Plum Solo and a refreshed syringe pump on file at the FDA by the end of this year. These products will work with our already cleared LifeShield infusion safety software and would be just the beginning of a long cycle in that space. Alongside that, over the last year or two, there have been several new launches, including a series of capital and disposable devices in the Diana family for drug preparation that should help our CSTD prep products, a refreshed tracheostomy series called Blue Select, and a refreshed hemodynamic monitor that upgraded the already newer Cogent. We expect certain new filings over the next 12 to 24 months in our consumables area and our valuable temperature management business. We're growing our positions with the existing products of today, and these will be supplemented by a significant refresh in key parts of the portfolio, with a large portion already completed. We've been carefully targeting these investments because, obviously, innovation drives sustained revenue growth. Another challenge has been gross margin volatility, and we mentioned some of the areas for optimization on this call last year. Where we have businesses at record levels, those production environments are fully utilized and improving efficiencies. However, for smaller businesses, we have real inefficiencies where the pain has been compounded with the inventory choices we've made or the loss of revenue. This is all about the basic blocking and tackling of network consolidations. Some of the announcements have been made, like the move of our syringe and ambulatory pump production to Costa Rica and our U.S. pump service center consolidation to Salt Lake City, while other projects are underway. In simple terms, we need fewer places and to have them fully utilized, and the same applies for real estate. Logistics network consolidation is also embedded in this gross margin work for us, but it's more in the planning stage and depends on our IT system integration. That foundation has been laid, and we'll integrate our U.S. system sometime in Q3 of this year. We've handled this type of project several times now. This list of actions is economically meaningful and contributes a huge portion to achieving our goals and offsetting the normal bumps that occur in business, but they take time to execute. Outside of our control are interest costs, which we do expect to change eventually. However, from a value perspective, we felt it more sensible to bear more interest expense as long as it is manageable, versus eroding value by not maximizing the assets where the revenue, earnings, and quality of those assets are improving. Debt paydown continues to be our highest capital allocation priority, and any extra cash above our needs would be allocated to repayment. To be direct on our goals for the next year or two, 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 multiyear innovation portfolio. We want the rest of the portfolio to contribute to levels that allow us to deliver an acceptable profit margin that ultimately enables us to transfer value from debt to equity. There is no confusion within the company on the pursuit of these goals; we have no frivolous activities here. We produce essential items that require clinical training, hold manufacturing barriers, and in general, items that customers do not want to switch unless they must. The market needs ICU Medical to be an innovative, reliable supplier, and our company is stronger from all the events over the last few years. Thanks to all our team members and customers as we improve each day. With that, I'll open it up to questions.

Please note, today's first question comes from Jayson Bedford with Raymond James.

Good afternoon, and thanks for all the additional details, especially on '24. So maybe just to start on the revenue guide. Just given the comps, can we assume that the growth is higher in the second half than the first in terms of revenue growth?

Probably a little in between, Jayson. I mean Q2 was pretty low for us in '23. I'd say it's probably a little more balanced throughout the year. Maybe the revenue part is so back-end weighted; our margins might be a little different.

Q1 may be a little bit lower than the average guidance that we provided, but the remainder of the quarters are probably pretty consistent.

Okay. And then you mentioned price a couple of times. Is the expectation that price is a bigger tailwind in '24 than it was in '23?

No, it wouldn't be of greater magnitude. Probably around the same impact.

Okay. And then just on IV Solutions, good growth in the fourth quarter. Is this kind of the right level here to think about on a quarterly run rate for '24?

Yes. We think that's kind of the same level it should be at from here on out.

Essentially, Jayson, the gap would be the 80 we used to be at, minus products we were getting from Pfizer as we've talked about in the previous calls.

Right. Okay. Sorry, I'm just going to ask a few more here. But just on IV Solutions margins, you kind of called that out. I think we all understand that. But maybe other than price, what else can you do to improve IV Solutions margins?

I think, Jayson, it's a traditional manufacturing industry. We try to find the right balance between ensuring high quality and reliability to the customer. There are opportunities in terms of how the value chain works for the customer, specifically with what type of service model, what type of service delivery, logistics costs, et cetera, which are a huge component of the products. There are improvements available on the factory floor. There are improvements potentially available if we put CapEx into the business, but we think about that very clinically. So it's sort of more normal manufacturing operational improvements.

Okay. And then maybe lastly, and I'll let someone else jump in. But just on the Smiths integration, kind of what's left and what's the potential impact of those efforts on the P&L?

Well, some of the gap to what ideal margins would be where we are, are underpinned by cost savings and synergies that come from a full system integration that allows us to get after the duplicative logistics networks and duplicative service organizations in some spots. That work, similar to what we did with Hospira, is on track; it's probably simpler than we did with Hospira. It's scheduled to happen in Q3 of this year. If you look back at some of the previous scripts, we tried to detail where those things are valuable both in terms of logistics as well as support functions that still have some duplication.

Okay. Thank you.

Hi, good afternoon. How's it going, guys? I guess the first question - first of all, I appreciate lots of color on this call. And I appreciate the long-term guidance. It sounds like you're confident in the business. And I guess that is reflected in checking out some recent filings of your recent investment. So good to see that. In terms of that margin, the fact that low 20s EBITDA margin, is that like a 3- to 5-year target? I know you don't want to put an exact target on that, but is that a reasonable timeline for that expectation?

I think, Larry, the short answer is yes. We would feel comfortable right now saying all the cost savings aspect of those activities, the network consolidation, system will largely be fully implemented by the end of next year, with the biggest step-up in value occurring next year over this year. Some actions take time to get in, but there's some big stuff happening throughout the year. Then to get through the last couple of points, it's about revenue growth. We don't want to put a line in the sand on revenues, but all the synergies that are still available for us to capture are clear.

Got it. And then in terms of revenue growth, obviously, you gave that 5% target for your consumables and your systems at least for this year. Do you feel like you're out of place now - or once we can maybe get a little bit better pricing in vital care that you have sort of sustainable, that target of mid-single-digit revenue growth and maybe you'll need a little bit more or maybe when you actually get to that target, it may take a little while to get that leverage to get to that margin goal. But without – again, without putting a timeline on it, do you feel like you're in a comfortable spot now and have somewhat visibility and confidence that you can sort of maintain these revenue growth levels?

Look, we're giving guidance for this year, and we're giving it with at least two years of some struggles under our belt. We feel that way certainly about '24 revenues, as well as the synergies and expense items out there. The short story is the company is running the best it has in a long time for customers, for patients with innovation; we're just under earning. The margin talk indicates there are moments in our history where we over earned. But right now is a moment where we're under earning, and we need to work on getting that in line.

Just lastly, just your state of the union or just your brief summary in the hospital outlook. Obviously your major customers are hospitals. In terms of operational trends, utilization, maybe to a lesser extent, budgets and capital expenses going forward. How do you feel about your general customers today?

I really think our view is that it's as reliable as it's been in a long time. The lag time between reimbursement changes and labor utilization sorting itself out seems to have all happened; it feels like it's getting back to normal. We don't have anything negative to say on the customer environment. It's really under our ability to execute.

Got it. All right. Great. Thank you. Appreciate the call.

Thanks, Larry.

Can you guys hear me okay?

Kristen, as a first-time caller.

Yes. Thank you very much. I was wondering if we could focus a little bit more on gross margins. I appreciated all the long-term color you shared on EBITDA margins getting back to the low 20s. What does that imply for gross margins? And how quickly, I guess, can you get to a more normalized level?

Yes, thinking about gross margins in the context of the EBITDA margin improvement that Vivek laid out. First, we would expect most of that EBITDA margin expansion to show up within gross margins, given the nature of the items that will drive that. For the near term, we said '24 full year rate is at 35%, and we expect improvement throughout the year, which means we will probably exit '24 slightly above the 35% rate. However, it is important to note that where we exit '24, it won't be at the same level of gross margin that we saw in Q1 and Q2 of 2023, because those quarters benefited from manufacturing volumes that exceeded underlying demand. For us to get back to those levels requires some of the cost savings Vivek talked about, as well as revenue growth on top of it.

Okay. And I think Vivek mentioned that those cost savings would largely come towards the end of 2025. Is that correct? Or can we see some improvements in 2025?

Sorry, Kristen, if I wasn't clear. I was saying of the synergy items, the cost-saving items, it would take until the end of '25 to have them fully implemented, meaning all actions are completed. However, the actual economic value would be more meaningful in '25 over '24 than in a future period. There would still be some beyond that, but the value capture was fully intended to make a difference next year.

Okay. Perfect. Thank you for that. And then last question, Vascular Access that seems to be stabilizing. What's the outlook for 2024 embedded in your forecast for that product line?

I think the words Brian used - I'm doing it from memory here, but I believe he said modest growth. So, I would consider it in line with the mid-singles that we talked about for the segment.

Hi, guys. Good afternoon. Thanks so much for taking the questions. Just wanted to start off with a quick follow-up to Kristen's question because I wanted to ask about a couple of the product lines that have been more headwinds to growth in 2023. So maybe following on the vascular access question, you could just touch on ambulatory pumps as a category, understanding that was a headwind in the past few quarters. Are you seeing any visibility towards improvement into 2024?

Yes. Also, welcome, Brett. It's nice to hear from you. I think it's an incredibly important line you referenced there. It was really one of the key value categories that underpinned the acquisition. Until maybe Q4 of this year, it has been pretty bumpy due to the operational challenges we've faced. The operational challenges arose from not being able to supply all the dedicated sets in the first couple of months of the transaction, leading to lower utilization of those pumps and potentially customers looking for alternatives. That has stabilized over the last two quarters, and this product continues to hold a global leadership position in medication delivery, especially in the home care environment and other areas. It feels better today; it's still selling reasonably below historical levels with an aging fleet. There are multiple opportunities in our minds. One is the normal capital refresh that happens in the pump business as the world starts to open up; there’s an opportunity for more of that as the fleet ages. Two is driving utilization; we want to ensure that the pumps that are out there are fully utilized. So, there have been several reasons ambulatory has been challenged, but the operational challenges are resolved, and we see real opportunities for improvement in this important line.

All right. Super helpful. And then maybe a follow-up on a related topic around pumps. Definitely understand you're still early in the cycle with Plum and are still talking to customers. But just curious about the initial customer reception in early conversations. A broader question surrounds the competitive opportunity in pumps; how do you see demand coming off of several years of the Becton recall and a couple of years of limited capacity to implement upgrades, and how do you see that progressing through the year?

Yes, it's the right question to ask regarding the value picture. There are more pumps in the United States that need to be addressed, either through the age of the devices or various recalls than there have been in many years. My comment in my opening remarks indicated that investments that need to be completed are actually being done; customers have the capacity to buy and implement, and they are almost required to do so on a reasonable timeline. We didn't include a lot in for the Duo in 2024 because things are moving slowly; we want to ensure we do this properly and appropriately. We're just getting into the general release phase. Big picture, the tone of the pump market is good, and all players are armed and competitive, which is a situation we take positively.

All right. Great. And then my last question is about the inventory drawdown and absorption topic for 2024. You managed to wind down about $60-plus million in this past quarter. If you compare that to a total opportunity of $100 million, is it fair to think that most of the remaining amount will take place in Q1 based on the pace you've set? How should we think about the lag that the Q4 drawdown has on margins in Q1?

Yes, Brett. When considering the pace of further inventory reductions, the easiest reductions tend to be achieved first, which we saw in Q4, hence the significant number. Each incremental reduction usually becomes more challenging. Therefore, the remaining $40 million is likely to be spread across the first two or three quarters of '24 instead of being concentrated in Q1, as it becomes progressively more difficult the further you get into the cycle.

Understood. Can you clarify the extent to which the delay in recognizing P&L will affect gross margins for future quarters?

The delayed impact showing up on the P&L generally has a lag of about 1 to 1.5 quarters. Therefore, there will be ongoing impacts.

Thank you for taking my questions, I appreciate it.

Just a quick follow-up. Thanks. Regarding free cash flow, Brian, you provided some solid guidance this year. Essentially, it's about even with last year. What about longer-term? Is it just remediation expenses that are holding you back in terms of getting free cash flow somewhat closer to net income? Is that something you hope to target getting to over the next couple of years as remediation expenses ease off?

Yes. Spending on remediation work is the largest bucket, followed by the spend on integration.

Exactly; we got the inventory part solved. Now we have to resolve remediation and integration. Those are the items that we need to address.

Got it. Because now inventory becomes a positive factor at least in the short run. That was just my follow-up. I appreciate it. Thanks, guys.

Thanks, Larry.

Sorry for the additional questions. Just on the gross margin, Brian, did I hear you right that exiting '24 gross margin will be slightly above 35%? I thought it would be a little higher, but that kind of depends on the first half.

Yes, I think that's our assumption at this point.

Okay. And then just on the whole EBITDA margins excluding IV Solutions, where do we stand today? I was kind of estimating around 19%, but that seems a little high.

That's high, Jayson. I think somewhere in the 17% range, 16.5% is more accurate, excluding IV Solutions. It is low; that's why I said we're under-earning.

For some reason, I thought IV Solutions was lower in terms of contribution.

Again, I'm approximating. We don’t segment report the individual business units at the EBITDA level.

Thank you.

Thanks, Jayson.

Thank you. This concludes our question-and-answer session. I would like to turn the floor back over to Vivek Jain for any closing comments.

Thanks, everyone, for your interest in ICU Medical. We look forward to speaking to you again, which will just be in a matter of weeks on our Q1 call. I appreciate everybody's efforts to keep improving the company and your interest in the company. Thanks very much.

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