Good afternoon, everyone, and welcome to the ICU Medical, Inc. First Quarter 2024 Earnings Conference Call. This call is being recorded on Tuesday, May 7, 2024.

Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the first quarter of 2024. 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. To view the presentation, please go to our Investor page and click on Events Calendar, and it will be under the first quarter 2024 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 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 in 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, everyone. I'll quickly walk through our summary of Q1 revenue and earnings performance, provide some commentary on the overall health of the company, and then turn it over to Brian to recap the full Q1 results. After that, I'll come back with updates on the various integration and consolidation efforts that will improve our medium-term profit outlook. Revenue for Q1 was $553 million for total company growth of 1% on a constant currency basis or minus 1% on a reported basis. Adjusted EBITDA was $79 million and adjusted EPS was $0.96. Gross margins were a little higher than expected due to supply chain efficiencies and mix. Our cash balance was near flat sequentially as we continued to reduce inventory and had our typical higher Q1 cash outflows. The broader demand and utilization environment in Q1 was healthy across all geographies with March seeing some reduction in census, and it appears to be fine in Q2 at the moment. The capital environment is status quo, and investments that customers need to make are getting made. The only additional macro headwind is the strong U.S. dollar in certain commercial geographies, which impacts our IV Systems segment the most as it's our largest OUS business. Getting into our businesses more specifically, our consumables segment grew by 3% constant currency as reported. Growth was driven by our Oncology and Vascular Access lines, which were both at or above 6%. IV therapy was low single digits, and the Tracheostomy segment was closer to flat. We did expect some sequential declines given the very robust volumes we saw in Q4. Nothing else is new here; we would expect sequential improvements in this segment as we wrap up Q2. Our IV systems business was flat on a constant currency basis or down 3% reported due to the currency impact I just mentioned. Again, we had a wide range of performance across the product lines. Our LVP pump business grew by 8% with good dedicated set utilization due to census and a larger installed base. Syringe pumps sold slightly above normal quarterly levels and grew by 5%. Ambulatory pumps were down 10% as Q1 '23 was the last quarter of the catch-up we were dealing with at the time, which will finally get lapped now. More importantly, ambulatory was sequentially flat, and the line is stable, and the macro trends of home care remain solid. We have some specific opportunities that are additive to getting the business back to historical levels which are, first, the replacement of our own LifeCare PCA products in the market; and second, a market event with a smaller player, which is relevant to us. Our new Plum Duo device and LifeShield IV safety software have been fully available for the last few weeks, and we've had our first customer signing. The early feedback is meeting our expectations, and we are incorporating super user feedback into our road map and believe we have a hardware product and related safety software that can be the anchor of our offering for many years to come. Just wrapping up the business segments, our Vital Care segment was down 4%, both on a constant currency and reported basis. IV Solutions, the largest component of the segment was flat, and the entire decline was essentially due to Critical Care, where we had a reduction in nonhospital OEM sales due to a large order we had in Q1 of last year. The rest of the segment was flat. From an operational perspective towards our customers, like the comments on the last call, the company is running the best it has in the last few years. Customer back orders are at the lowest level in nine quarters, and fulfillment has been very stable because of all of the efforts of our team. The 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, all as part of the overall remediation efforts previously discussed and enhancements we have made. Our goals in 2024 are not so different from our historical goals as we lost time in the first 6 to 7 quarters following the acquisition. We expect revenue growth in all of our differentiated product lines. We have substantially progressed our quality remediation and ensured quality for patients and high compliance for regulatory authorities and desire to bring our open warning letter to a close. We intend to execute the substantial integration work as we have operational stability in place to pursue remaining synergies. And ultimately, obviously, these actions are intended to improve our profit levels and cash flow over the medium term. We're focused on optimizing 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 Q1 at a high level. I'll turn it over to Brian and then come back with a few thoughts and comments on our medium-term outlook, some targets and a few other thoughts.

Thanks, Vivek, and good afternoon, everyone. Since Vivek covered the Q1 revenue for each of the businesses, I'll focus my remarks on recapping the Q1 performance for the remainder of the P&L, as well as the Q1 balance sheet and cash flow, and along the way, provide commentary on any implications to our expectations for the full year. As you can see from the GAAP to non-GAAP reconciliation in the press release, adjusted gross margin for the quarter was 35%, which was higher than expected for this point in the year. The drivers of this favorability were roughly equally split between first, product mix, where we experienced a higher proportion of disposables revenue relative to capital during the quarter compared to our plan, and second, supply chain synergies captured earlier in the year than expected. These favorable items helped to offset much of the anticipated negative impact from the manufacturing under absorption related to the recent inventory reductions, which is reflected in the Q1 gross margin rate consistent with our previous guidance. I'll get into the implications for the full year outlook in a moment when taken into consideration with some other items. Adjusted SG&A expense was $115 million in Q1 and adjusted R&D was $21 million. Total adjusted operating expenses were up 3% year-over-year and reflect a combination of increased selling expenses and R&D investments. Adjusted operating expenses were 24.7% of revenue for the quarter, and we continue to expect the full year rate to be at or below 24%. Restructuring, integration, and strategic transaction expenses were $16 million in the first quarter and related primarily to IT system integration and manufacturing network consolidation. Adjusted diluted earnings per share for the quarter were $0.96 compared to $1.74 last year. The current quarter results reflect net interest expense of $24 million. The first quarter adjusted effective tax rate was 28% and includes a discrete expense related to equity compensation. We continue to expect the full year adjusted effective tax rate to be around 23%. Diluted shares outstanding for the quarter were 24.4 million. And finally, adjusted EBITDA for Q1 decreased to $79 million compared to $102 million last year. The lower profitability on roughly similar levels of revenue reflects the prior year benefits from inventory builds combined with the current period impacts from inventory reductions. Now moving on to cash flow and the balance sheet. For the quarter, free cash flow was $30 million, which represents the third consecutive quarter of positive free cash flow. Reductions in inventory contributed $14 million of cash, and we remain on track to reduce inventory levels this year by our previously stated target of around $40 million, with most of this reduction coming in the first half of the year. 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 $10 million of cash spend for quality system and product-related remediation, $15 million on restructuring and integration, and $15 million on CapEx for general maintenance and capacity expansion at our facilities, as well as placement of revenue-generating infusion pumps with customers outside of the U.S. As anticipated and consistent with last year, our CapEx spend was a bit lighter in Q1 and should pick up over the course of the year. And just to wrap up on the balance sheet, we finished the quarter with $1.6 billion of debt and $251 million of cash. As we think about full year earnings in light of Q1 performance, we still plan to make any revisions to our guidance, if necessary, on our Q2 call, consistent with our historical cadence. For now, we believe the correct approach is to continue to assume adjusted gross margin for the year at our original guidance of 35%. While a portion of the supply chain synergies that provided upside in Q1 are more permanent in nature, there is volatility in the global environment that may impact fuel and transportation costs from the current levels. Also, and more importantly, currency and a higher for longer interest rate environment does have an impact as we don't report currency adjusted earnings. Over the course of the first quarter, we saw our large international sales currencies, yen, euro, etc., weaken against the dollar, with no strengthening of the dollar against our production currencies of the Mexican peso and Costa Rican colón, which for the full year adds up to over $10 million of EBITDA variance from the rates assumed in our plan. While we believe our supply chain synergies, if things remain stable, can offset most of this currency impact, it's too early in the year to be precise. And finally, as it relates to the Q1 gross margin benefit from product mix, our original full year forecast for capital and disposables revenue mix hasn't changed as we expect to be selling more capital in future quarters. To wrap up, we're happy with the first quarter performance, including improvement in our gross margin rate and continued progress in free cash flow generation. We remain focused on the foundational work that will drive earnings improvement in 2025 and beyond.

Okay. Thanks, Brian. On the last call, and we don't need to rehash all the reasons here, we tried to articulate our belief that we were under-earning as a company relative to the industry, and we wanted to go through the actions to date to improve profit in the medium term. We still need to prove that we're capable of predictable sustained revenue growth, but we believe we have seen less volatility over the last few quarters as the business has stabilized. Our original model expectations continue for a number of our acquired products where the goal is to get back to near historical sales levels and for some of the legacy ICU lines to recoup the substantial inflation we absorbed over time with price improvements. But sustained revenue growth is also about innovation. An update versus the last call is that we now expect to get our Plum Solo IV pump and LifeShield safety software with interoperability 510(k) submissions to the FDA before the end of Q3, a quarter earlier than expected. This is an important program because, in addition to broadening out the full infusion hardware suite, it specifically allows us to approach our existing installed base with a better tech solution. As a reminder, most of our current Plum 360 pumps were only put into service from 2015 onward, and we've never really had the benefit of having our own installed base rolled over to any substantial degree. We continue to expect to refresh the syringe pump filed by the end of the year, and all of these products will work with the latest version of LifeShield software. We also expect certain important new filings over the next 12 to 24 months in our consumables area and the valuable temperature management business. We're growing our position with existing products of today, and these will be supplemented by a significant refresh in key parts of the portfolio with a large portion already done. We have been careful targeting these investments because innovation drives sustained revenue growth. The other half of improving our earnings power is about gross margin expansion outside of the price or the mix or volume inputs. Where we've had businesses at or near record levels, those production environments are fully utilized and improving efficiencies. But where we've had businesses that are smaller, we've absorbed real inefficiencies, and the pain was compounded with the inventory choices we made. This leads to the basic blocking and tackling of network consolidations, which is not some grand transformational program or anything like that. Since the last call, we've announced additional closures of two large underutilized production sites and consolidation of those products into existing space in our network dovetailing with our previous comments to have fewer places have them full and have them in the right geography. We can handle this now as our pump production has almost been fully consolidated in Costa Rica. These aren't easy choices, and they impact real people who have been team members for many years, but it must be done to drive value for us and our competitive positioning to the customer. Additionally, we're just about ready to consolidate our U.S. order-to-cash systems over the summer, which will lead to available logistics and back-office synergies in the quarters to follow. We continue to whittle down underutilized real estate as leases present themselves. This list of actions is economically meaningful and contributes to getting where we need to be and offsets the normal bumps that happen in business, but it will take some time to execute. Given what we've been through over the last few quarters, we're not willing to commit to specific dates in absolute margin levels, but our team's experience and integration allows us to go as fast as possible. Out of our controller interest costs, which we do expect to change eventually, but we are operating with a higher for longer mindset. From a value perspective, we felt it more sensible to bear more interest expense as long as manageable versus not maximizing the assets where the revenue, earnings, and quality of those assets is improving but requires investment. Debt paydown continues to be our highest capital allocation priority, and any extra cash above our needs would go 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 in each with a multi-year innovation portfolio. We want the rest of the portfolio to add up to levels where we deliver an acceptable profit margin that ultimately allows us to transfer value from debt to equity. There is no confusion within the company in the pursuit of these goals, and we don't really have any frivolous activities here. We produce essential items that require significant 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. Thank you to all our team members and customers as we improve each day. With that, we'll open it up for questions.

Your first question comes from Jayson Bedford from Raymond James.

Congrats on the quarter. I have a few questions. I know you're not changing any guidance, but regarding revenue, I don't think you specifically guided it. In the last call, you mentioned expecting low to mid-single-digit revenue growth in '24 based on Q1. Would you consider adjusting any of the segments or that commentary?

I don't think we have any change at all, Jayson, on that.

Yes, and just certainly not on a constant currency basis, which is what our guidance was based off of.

Okay. Gross margin is clearly the highlight here. I understand the mix dynamic, but what were the supply chain dynamics that went better in the quarter? And just can you talk about the sustainability of that?

Jayson, I would say it wasn't necessarily any one thing related to supply chain. It was just a number of initiatives to bring together the supply chain operations from the combined companies into one. We're able to get some of those things in place a little bit sooner than expected. We had anticipated it would happen at some point in the year. It's just that we guided a quarter or two sooner.

Okay. And then maybe Vivek on the Duo rollout. Where are you in terms of kind of a full launch? And when would you expect the full launch?

I would say, Jayson, for the last 8 weeks, 10 weeks, we've essentially been in a full launch. We're getting people familiar with the architecture of the system. That's why it's really important for the Solo and the syringe to follow on the heels of that as people get comfortable with all the different pieces of the system. So I would say we're there right now. Again, things don't happen that fast in pumps in our experience, but it is a long game, and there is a lot of activity in the next 2 or 3 years in the market. So we think we're in a pretty good place.

Okay. And just the competitive landscape, you've got obviously three big players with kind of all the hands out there. And so I guess my question is, the competitive environment, is it favorable? Where do you see opportunity? And you alluded to the capital dynamic, but is there a desire to make decisions out there today?

Two parts in that. The first is the capital environment is fine. I mean it's not any better, it's not any worse than it has been for a while. Stuff that needs to get done, gets done. Obviously, it's a good time to be a customer. There's more choice, which is good for the market. In terms of the market itself, people have dragged their feet on making some decisions, and given some of the industry dynamics, customers have to make decisions over the next few years. There are more decisions being made finally, and folks, given some of the background, the equipment has gotten older in the marketplace and requires refreshment for a variety of different reasons. The decision-making is better than it has been. And yes, while there are more vendors, there are more decisions being made, which one could argue is good for all participants.

Your next question comes from the line of Brett Fishbin from KeyBanc.

Just wanted to follow up on one of the opening comments that you guys made around hospital utilization trends. It sounded like January and February were particularly strong months, and you might have noted a little bit of normalization into March, and you said things into Q2 have been looking fine. Just maybe like a little bit more on how you define that March and trend into Q2, and how much of a pullback you may be seeing versus Jan and Feb?

Yes. I mean, Brett, obviously, we don't want to get into the specifics because you don't have perfect information on what's happening every day or every week out there. It was really busy for three months in the fourth quarter of last year and then January and February. March had to go below those levels. When we make those comments about it's a relative basis, is the trend going. We would consider status quo to mean flat to up. That's probably what we see, and bad to us would be down. When we say fine, we would say it's equal to or greater than what the most recent period everybody has talked about has been.

All right. Yes, definitely fair. One quick follow-up on gross margins. Definitely appreciate some of the puts and takes and then presumably not wanting to get too far ahead of like how you're thinking about the full year after only Q1. I just wanted to get a sense, you had 35.3% this quarter. We're talking about a 35% range for the year. Some of the potential headwinds or offsets around currency or fuel. Are those things that you're seeing already in Q2, and should we be modeling some type of reduction in Q2? Or is that comment more around just some of the puts and takes, like for the full year?

Yes, Brett, I think on that, just the couple of items that we've mentioned as being headwinds were the impact of FX as well as potential volatility within the freight rate and diesel markets. I think the first one of those FX is very real, and we are seeing it, and we started to see some impact late in Q1, and I think that is something that should be considered as we think about how the rest of the year plays out. I think as it relates to the broader environment around supply chain expenses, there's the potential for some volatility there, but I don't think there's anything specific worth modeling.

All right. Very helpful. And then last question for me. It feels like the quality remediation and warning letter item, like all of the stuff that's on your end in your control seems to be progressing at least in line with how you were thinking about it. So question is just what still needs to get done besides waiting around for an eventual FDA inspection? I guess is there still some stuff in your hands that still needs to get done before that can happen?

Sure. I'll answer that one. Our job, our responsibility, regardless of our own or what we acquired, is to be improving on the quality scores every single day. There's never a day of sort of waiting around. I think the expectation is that you're improving your situation. That can mean a lot of different things — assessing every single product and where there are applicable notifications to customers, making some of those notifications like we've referenced in the last two call scripts and you've seen in the various reports. It can also mean researching all the historical plates to make sure everyone is adequately composed. We've done a mountain of work. You've seen the investments into the quality remediation that we've put in for eight quarters. You're never really done. We think we've come a long, long way, and we hope we get the opportunity to show that to somebody, but it's not really that you just hit a line and stop; it never ends.

Your next question comes from the line of Kristen Stewart from CL King.

Congrats on a good quarter. I was wondering if you could just focus a little bit on free cash flow in the quarter. It was positive, which is a great thing. How are you looking for the rest of the year from a cash flow perspective?

Yes, Kristen, I believe we have had a solid start to the year, particularly considering that Q1 usually sees higher outflows. We feel our earlier guidance on free cash flow remains applicable, suggesting it will be similar to last year but without some of the financing advantages we experienced, which equates to approximately $80 million for the entire year. We are still very much aligned with this outlook.

Okay. Great. And then I just wanted to turn over to Vascular Access. It sounds like that had a good quarter. How should we be thinking about that business going forward?

Kristen, it's Vivek. I think in our mid-single-digit guidance for the Consumables segment for the year, we assume Vascular Access would be in line with that. But it is still far below peak historical levels. We've just gotten the house in order a bit over the difficulties we had in the first 6 quarters or something. It feels a lot to us sort of like what we went through post-Hospira with consumables, where it really did take 2 years to be stable and to show that we could move it upwards. We think we're in the first part of that journey right now. There's a long way to go, but I think we, at a minimum, believe it would be in line with the overall segment that is.

Your next question comes from Larry Solow from CJS Securities.

I want to return to Jayson’s question about the pump market. You mentioned that decisions are being made, so what is your current perspective? With more decisions being implemented and an increase in program shares, do you see a significant opportunity? Clearly, you’ve gained some market share in recent years, but now Atrion has re-entered the market, and Baxter has introduced a new pump. How do you assess your positioning to maintain this positive momentum, even though it’s a slow-moving market?

It is an important time for us as we enter the playoffs. Our perspective remains ambitious, especially considering the size of our business. While our company is substantial, it is still relatively small in comparison to the total market opportunity. If we can enhance our win rate beyond historical averages, it will significantly impact our profit and loss statement. We believe we possess the right technology. I expect all players in the market are engaging in more conversations than in previous years, which is encouraging. Eventually, the market dynamics will stabilize. We are aware of our peak product shares and the reductions we've experienced, particularly following our collaboration with Hospira, and we recognize the opportunities ahead. Overall, we feel optimistic about our technology investments and believe we have a solid understanding of potential customer preferences within this product range. While we've faced some challenges, we are focused on bringing together our complete product line, including syringes and ambulatory solutions.

I appreciate that information. Regarding the gross margin, it seems like we might see a slight decline in Q2, possibly due to some inventory adjustments, followed by a stabilization in the latter half of the year. Considering the overall situation, where do you anticipate things will stand as we approach the end of the year? Ideally, inventory management would be mostly resolved, and the product mix is starting to improve. Do you believe that as we begin next year, without getting into specific details, you might ease back from the mid-30s range, while also benefiting from consolidation next year? Any additional guidance would be helpful.

Yes, Larry, I think as it relates to this year, on the last call, we said we would expect to exit this year slightly above the 35% average for the year, absent something unusual happening in terms of product mix or currency or anything like that. I think we still think that's probably the most likely scenario. And you're right; that means that then throughout the year, we won't have the steep trajectory in gross margins that we were expecting; it will be a bit more flattish, I suppose. But I think our views on where we exit really haven't changed.

I think Larry is back. The bigger picture is that Brian was trying to convey simply that last year we generated slightly less revenue than this quarter, yet we made significantly more profit. I've mentioned the manufacturing consolidation and other strategies to enhance gross margin synergies. The difference between this year's Q1 and last year's Q1 was mainly some investment in SG&A, but the key factor was the change in gross margin. Clearly, perceptions of the situation vary greatly in different moments. We recognize the importance of achieving the gross margin target.

I would like to mention that price pressure and solutions could potentially be a factor not just this year, but in the future. When do we expect some of your contracts to come up for renewal or become available? I believe that will happen in the latter part of this year. When can we anticipate that improvement?

I mean the contracts are only part of the equation. They'll get done first in the process, and then it's really getting individual systems and members to absorb whatever you may have been contracted, which is its own set of challenges to work through. All of that probably doesn't become effective until some point in Q1 of next year.

And speakers, we don't have any questions over the phone. I would like to hand over the call to Mr. Vivek Jain, Chairman and Chief Executive Officer. Please continue.

Thanks, Franz. Look, we hope today's call was direct and to the point, a little bit shorter. We look forward to speaking to everybody on our Q2 call, and we'll update everybody on all of these various items we're working to make the company more valuable and drive innovation for patients. Thanks very much, everyone. Appreciate it.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.