Earnings Call Transcript - ICUI Q1 2022

Operator, Operator

Greetings and welcome to the ICU Medical Inc. First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. John Mills with ICR. Thank you. You may begin.

John Mills, Host

Good afternoon everyone. Thank you for joining us to discuss ICU Medical's financial results for the first quarter of 2022. 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 2022 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. The 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 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'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. With that, it is my pleasure to turn the call over to Vivek.

Vivek Jain, CEO

Thank you, John. Good afternoon everyone, I hope you're all doing well. It's been an intense couple of months since our last call as we've made strides in our legacy ICU businesses while focusing on enhancing the performance of the operations we acquired from Smiths Medical. We’ve faced ongoing volatility in the supply chain, particularly regarding fuel, freight, and raw materials, although hospital admissions for our customers have been more stable than they've been in a long time. Overall demand in the first quarter was strong across all regions except for Asia. We want to start by expressing our gratitude to all our customers and frontline workers for their trust during these challenging times. It has been rewarding to meet many of our international colleagues from Smiths Medical in person across various countries, with a few exceptions due to lockdowns. While our Q1 results for legacy ICU Medical were generally in line with expectations, the outcomes for Smiths Medical were slightly below what we anticipated. Therefore, we want to take the opportunity today to discuss the year-over-year performance of our three main legacy ICU businesses, reiterate our growth expectations for the upcoming year, examine the current volatility and inflation in the market and how that affects our profit growth, review the Smiths Medical revenues we achieved in Q1, and how those figures compare to historical performance. We'll also provide an update on the challenges and opportunities facing the Smiths businesses, clarify our priorities for success in the near term, outline why we anticipate a range of outcomes in the next few quarters, and touch on our perspectives concerning value creation in the medium to long term. The first quarter of 2022 marks our debut in joint reporting. Given some of the challenges we're observing within Smiths Medical, the narrative is quite detailed. I’ll summarize the overall company performance before diving into the specifics of each business. We ended the quarter with $532 million in adjusted revenue, achieved an adjusted EBITDA of $85 million, and reported adjusted EPS of $1.82. We have slightly more cash on hand than we initially projected, with net debt just over $1.3 billion, as we made significant investments into the business, including inventory increases. It was a complicated quarter as we are heavily investing to enhance Smiths Medical service levels, amidst restructuring and integration-related costs that arose from closing the transaction. In terms of growth comparisons, they are more relevant when assessing the individual segments of the business. Let me begin with a review of legacy ICU Medical, which presents a clearer picture. In Q1, legacy ICU generated $317 million in revenue, reflecting a 6% increase on a constant currency basis. We saw good year-over-year growth in our most differentiated segments. It’s important to note that we did not experience any pandemic-related ordering during this period and believe any prior excess inventory in the channel has started to normalize. This presents an opportunity to streamline our operations in specific areas, subject to addressing other supply chain challenges. Deeper analysis of the quarterly results shows a few clear trends. Firstly, legacy ICU continues to rely heavily on the US market, where we are influenced by admissions and elective procedures. We noted improvement in procedures and stable admissions compared to Q4, while inventory conditions are easing in the channel, indicating fewer COVID spikes and lower acuity patients, which aligns with data from public hospital reports. Secondly, aside from Asia, international markets are returning to normalcy. Though challenging to illustrate due to the strong dollar, international units are improving. Our global customers returning to a baseline and managing fewer COVID spikes is beneficial for our overall portfolio. We still lack clear visibility on the true healing baseline in the US, but Q1 felt more typical. Let’s quickly go through the business segments before returning to the current environment. Starting with Infusion Consumables, our largest segment, we reported revenues of $141 million, a 13% year-over-year increase on a constant currency basis. Both core IV therapy and oncology grew in the low teens, although it appears slightly inflated as we had lower volumes in Q1 2021. We’re optimistic about the US market, and our growth product positions us favorably as global markets open up, as we expected. The key drivers remain consistent: we are benefiting from the annualization of new business we implemented last year, we have returned to effective clinical marketing reflecting positive press related to our ClearGuard product, and we are seeing reduced pandemic-related ordering as COVID spikes recede, allowing wholesalers and customers to reduce their ordering patterns. For 2022, we still anticipate this segment can achieve mid-single-digit growth considering these channels. Moving to Infusion Systems, which includes our LVP pumps and dedicated sets, this segment achieved $87 million in adjusted revenue, increasing by 5% on a constant currency basis and 3% on a reported basis. We noted a strong level of installations in Q1, as expected. We believe the same trends observed in IV consumables apply with slight softening in US ordering levels related to dedicated pump sets. Customer engagement appears to be returning, with capital no longer seeming like a constraint, even though customer P&L may soon be constrained. Signs indicate that the fatigue from COVID is lessening, and acceptance of inflation and projected costs is beginning to be internalized. We remain optimistic about competitive opportunities relative to our size and view this segment as poised for mid-single-digit growth in 2022. Finally, on Infusion Solutions, we reported $77 million in adjusted revenue, a 4% year-over-year decline both on a constant currency and reported basis. This segment faced distinct industry challenges due to shortages. IV Solutions saw no sequential improvement, and we could have sold more if we had adequate inventory. As previously discussed, Q1 was influenced by the impact of Omicron late last year and unusual weather in Texas. We feel production processes have improved since that time, and we anticipate this business will stabilize around $80 million quarterly. Now, let’s analyze what these trends mean for EBITDA and profits for legacy ICU before turning to Smiths Medical. In our last call, we outlined the mathematics behind inflation impacts and noted the influence of a strong dollar. We remain optimistic about achieving meaningful EBITDA improvement with estimates ranging from $265 million to $285 million for standalone legacy ICU this year. Although inter-business expenses have become intertwined, we believe this projection stands despite new challenges related to volatile freight costs and the ongoing issues with raw material availability. We had cautiously budgeted freight expenses for the initial phase of the year, but recent events complicate our ability to forecast actual costs accurately. We continue to seek stability and predictability in our operations while pushing to gain price improvements where feasible and illustrating the necessity for customers to understand indexing costs to inflation. Now, let’s shift to discuss the Smiths Medical businesses. Starting with the overall revenue picture and the two primary issue categories shared in our last conversation, we identified potential for varied outcomes in the early quarters, which is precisely the scenario we are navigating. Smiths Medical businesses generated $215 million in revenue, with Vascular Access contributing the largest share at $79 million, followed by Infusion Systems at $66 million, and Vital Care at $70 million. It's essential to understand how these figures compare to historical standards, as we've consistently mentioned that these categories exhibit a level of inertia and adapt slowly. Historically, excluding COVID-related impacts, these businesses have typically aligned with quarterly revenue figures in the range of $280 million to $300 million. To bridge the gap from that range to Q1 revenue, three main factors come into play. The first factor pertains to timing and accounting, as we closed the acquisition on January 6, which meant we were unable to capture about seven days or $25 million in revenue for the quarter. The second factor involves our performance as a supplier; we shipped around $20 million to $30 million less than our targets in Q1, which resulted in increased back orders through the quarter. The third factor is related to quality interruptions as previously described, equating to an approximate $15 million impact across the portfolio. The challenges we are facing stem from ineffective execution in becoming a reliable supplier, reminiscent of prior situations we encountered. We are addressing fundamental issues within the Smith supply chain that contributed to lower inventory and production levels upon acquisition. While we recognize the difficulties, the responsibility to rectify these issues lies with us, and our approach focuses on enhancing operations. We are making notable progress in improving production levels, especially for critical and high-margin items. Our efforts include increasing factory staffing and securing our supply base. Moving forward, our focus is on ensuring that enhanced production is effectively channeled through our global fulfillment network. To clarify, several aspects contributed to Q1 performance; our shipment levels were lower than intended, which negatively impacted revenue. Concurrently, we are expending efforts to enhance customer service under the ICU mindset while contending with reduced absorptions in Q4 and early Q1, ultimately leading to gross margin pressures. Demand remains strong; this isn’t a matter of product features but rather self-inflicted operational challenges that do not require hefty capital investments or technological advancements, just a commitment to operational excellence. The last revenue impact of $15 million ties back to quality-related interruptions, which were exacerbated by frequent changes in personnel and strategies that hindered quality processes. Since the last call, we have made considerable headway in resolving these issues. We've communicated transparently with customers and regulators regarding our path forward, including making decisive actions and prioritizing product quality resolutions. We’re also ceasing support for older product lines as we address these matters. Further, from a synergy perspective, customers are keen to see operational execution across the portfolio. We remain optimistic about achieving our $25 million synergy target within the first year and see long-term opportunities, but stabilization must be our immediate priority as we prepare for IT system integration. We swiftly completed the US commercial integration within 90 days of acquisition, with cross-training already ongoing. Integration efforts for Europe and LatAm have commenced, along with necessary straightforward decisions for the Asian markets. We aim to finalize all global commercial integration by year-end. Where do we stand for the full year? As we began the year, we anticipated a wide range of financial outcomes while addressing operational cleanup and synergy realization, and this observation remains valid. While Q1’s results were slightly shy of expectations, we see various addressable issues and open orders that, if fulfilled, can lead to substantial positive impacts. As usual, we plan to reassess our outlook in Q2, balancing effective service for customers while maintaining responsible spending. Sequential improvements will stay a focus for us this year to ensure we exit at a strong run rate heading into next year. However, we are still unclear when we can achieve full stability in supply chains or complete compliance, limiting our ability to forecast accurately compared to our legacy ICU operations. In terms of medium and long-term objectives, our focus remains on legacy ICU, where we anticipate enhanced profitability levels driven by differentiated offerings. The core strategy behind the Smiths acquisition is to augment product offerings in areas that drive returns and explore logical adjacent markets with similar attributes of disposable single-use products. Though we are currently bogged down with fundamental operations, the long-term opportunity lies in leveraging our combined portfolio to strengthen offerings in existing markets while also expanding into new segments. The Smiths portfolio was logically constructed, contributing to its resilience over the years. Our objectives since the start of the year remain unchanged: we aim to address the challenges presented, stabilize our customer base, and focus on easy-to-achieve synergies. In the medium term, our strategy will be centered on delivering selective innovations, enhancing our IT integration across pump platforms, refining consumables, and extracting increased value for our customers while preparing for core systems integration. Ultimately, our long-term goal is to broaden our market participation. From a value creation perspective, in the short to medium term, we view the Smiths acquisition through two potential scenarios. In the best-case situation, improved execution can enhance Smith's top-line performance and operational effectiveness. In the worst-case, we may continue to face challenges impacting Smith's top line; however, we anticipate generating solid operational returns. Both scenarios encapsulate value relative to our transaction expectations, emphasizing the necessity to align Smiths Medical's core revenues with the profitability of our differentiated businesses. Achieving this, alongside determining the required post-integration capital expenditures, could yield swift returns. In the long term, we hold ourselves accountable to growth in both size and profitability. Our team understands the ongoing challenges involved, especially given the unique circumstances of operating in a legacy ICU and a PE-like environment concurrently. We remain committed to rectifying these issues as expediently as possible. Although the pandemic's volatility has been pronounced, it also reinforces the need for resilience throughout the healthcare supply chain, directly contributing to our commitment as a comprehensive supplier. Smiths Medical products demand significant clinical training and capital expenditure considerations, ensuring customers are unlikely to switch suppliers without compelling reasons. The market requires Smiths Medical to provide reliable supply, and this combination enhances our positioning. We are grateful to our shareholders for their patience as we deployed capital and utilized our liquidity. Thank you to our dedicated teams and the new Smiths colleagues as we strive for value generation from this integration. Lastly, a heartfelt thank you to all our customers, suppliers, and frontline healthcare workers—your roles are invaluable as we aspire to enhance our services daily.

Brian Bonnell, CFO

Thanks, Vivek and good afternoon everyone. To begin, I'll first walk down the P&L and discuss our results for the first quarter. Then, move on to the cash flow and balance sheet. So starting with the revenue line, our first quarter 2022 GAAP revenue was $543 million compared to $318 million last year which is up 71% on a reported basis reflecting the impact of the Smiths Medical acquisition, along with growth in the legacy ICU business. For your reference, the 2021 and 2022 adjusted revenue figures which exclude contract manufacturing sales to Pfizer can be found on slide number 3 of the presentation. For the legacy ICU business, our adjusted revenue for the first quarter was $317 million compared to $304 million last year, which is up 4% on a reported basis and 6% constant currency. Infusion Consumables was up 11% reported or 13% constant currency. Infusion Systems was up 3% reported or 5% constant currency and IV Solutions was down 4% on both a reported and constant currency basis. Overall the results for the legacy ICU businesses were in line with our expectations. For the quarter, the Smiths Medical businesses contributed $215 million in revenue. As a reminder, the Smiths Medical acquisition closed on January 6th and our first quarter results include the impact from Smiths Medical's operations, beginning on January 7th and continuing through March 26th. This is the fiscal period end under Smiths Medical's historical financial reporting calendar, on which the financial systems are still aligned. Therefore, while the ICU results for the first quarter reflect 63 business days of activity, Smiths Medical represents 56 business days, which is seven days fewer given the timing of both the transaction closing and their quarter-end cutoff. As you can see from slide number 4 of the presentation for the first quarter our adjusted gross margin for the combined business was 37%. This was a bit lower than we had expected due to the follow-on impacts from the Smiths Medical challenges that Vivek mentioned, specifically the lost absorption from lower production volumes along with additional freight costs from expedited shipping to customers, both of which are related to supply chain constraints, plus some impact from labor inflation catch-up as we increased wages in the Smiths Medical factories. Over the course of the year, we expect the gross margin for the legacy Smiths Medical business to improve as we make progress on the supply chain challenges. For the legacy ICU business, adjusted gross margin was consistent with prior year, and it was in line with our expectations, with the exception of lost absorption from lower manufacturing production volumes in our Austin plant. Otherwise, we were able to offset year-over-year inflation pressures with the benefits of favorable product mix coming from faster growth in our consumables business, as well as higher LVP dedicated set volumes within infusion systems. SG&A expense was $153 million in Q1, and we estimate that the legacy ICU spending was about the same as the fourth quarter. R&D expense was $24 million for the quarter and that was roughly evenly split between the ICU and Smiths Medical businesses. Restructuring, integration, and strategic transaction expenses were $34 million in the first quarter. Of this amount, $32 million was related specifically to the Smiths Medical acquisition, including approximately $20 million of fees and taxes associated with closing the transaction, the remaining $12 million related to integration activities. Going forward, we expect total restructuring integration and strategic transaction expenses to decline relative to Q1 as the transaction closing expenses will not recur. However we will continue to invest in integrating the businesses. Adjusted diluted earnings per share for the first quarter was $1.82 compared to $1.62 last year. Both the current and prior year results were favorably impacted by lower tax rates due mostly to excess benefits from equity compensation. The favorable tax rates contributed approximately $0.20 in the current year and $0.10 in the prior year. Basic and diluted shares outstanding for the quarter were 23.6 million, reflecting the 2.5 million shares issued as part of the Smiths Medical acquisition consideration. And finally, adjusted EBITDA for Q1 increased 47% to $85 million compared to $58 million last year. Now, moving on to cash flow and the balance sheet. For the quarter, free cash flow was negative $24 million, as there were a number of discrete cash outflows. During last quarter's call, we said we would invest heavily this year into three key areas. The first, was the integration of the Smiths Medical business. And as previously mentioned, we did spend $32 million on transaction expenses and integration activities. The second, with quality improvement initiatives for Smiths Medical and during the quarter we spent $13 million on quality system and product-related remediation. And the third, was higher levels of inventory to bolster safety stock and allow for onboarding of new customers. Here, we invested $36 million in additional inventory across both the legacy ICU and Smiths Medical businesses in order to better serve customers. These three areas, when combined with our annual incentive compensation payouts, totaled over $100 million of discrete cash items for the quarter. Going forward, we don't expect this same level of spending in future quarters. However, as we previously mentioned in aggregate, we don't expect meaningful free cash flow generation for the full year as we address the Smiths Medical supply chain and quality system matters and invest in integrating the businesses. In the first quarter, we spent $24 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. And just to wrap up on the balance sheet, we finished the quarter with $1.7 billion of debt and $347 million of cash and investments. In summary we are pleased with how we started off the year for the legacy ICU businesses even in the face of a challenging environment for supply chain stability and inflation. While the Smiths Medical acquisition has a wide range of potential outcomes in the short-term, we remain convinced of the longer-term opportunity, financial returns, and our ability to tackle the issues. Strategically, we needed to broaden our available markets and we're working to get that portion of the business on the same trajectory as legacy ICU. We look forward to providing updates on our progress during next quarter's earnings call along with any updates to our full year forecast consistent with our historical cadence. And with that, I'd like to turn the call over for any questions.

Operator, Operator

Thank you. We will now start the question-and-answer session. Our first question comes from Jayson Bedford with Raymond James. Please go ahead with your question.

Jayson Bedford, Analyst

Hi. Good afternoon. A lot to unpack here. So, I guess, maybe just to start on the first quarter EBITDA came in a little lower than expected at least we expected and sounds like you expected. Revenue was largely in line. I realize that it's tough to tease out but was ICU profitability from a margin standpoint similar to 2021 levels?

Brian Bonnell, CFO

Jayson, yes, it was the legacy ICU businesses were generally in line with last year.

Jayson Bedford, Analyst

Okay. You mentioned, Vivek that the $280 million to $300 million in quarterly revenue. What needs to happen to get back to that level? I know you mentioned a few things but if you had to kind of win or it down to the punch line what needs to happen here to get back to that $280 million to $300 million.

Vivek Jain, CEO

Hey Jayson, how are you? We attempted to outline the actual progress. We've been saying for years that things don't move quickly in this industry, and that remains true. So why is there such a significant gap? One part is just simple math, which should be straightforward as long as there have not been too many IT hiccups. If the IT platforms stay stable, we should see that progress. The second and third issues relate to two main areas: clearing backorders and ensuring we produce enough to enter the market. We didn’t make as much progress as we hoped in Q1 and believed we could have pushed an additional five or six days out the door. That accounts for a difference of $20 million to $30 million, and we’re doing everything possible to get that shipped. The inconsistent supply chain has been a challenge. So, addressing this is the first step to returning to normal. Additionally, a smaller part of the issue is related to quality interruptions, and we're actively addressing those. The key takeaway is that we need to run an efficient operation.

Jayson Bedford, Analyst

Is the expectation that the backlog will come down in 2Q versus 1Q?

Vivek Jain, CEO

I think that is our expectation, but I don't want to specify an amount because it has only started to improve in the last seven to ten days. We didn't make progress in January, February, or March; we were really struggling. It's difficult to increase production when we're already operating at maximum capacity. We are certainly trying, but we are spending significantly more to resolve these issues than we initially anticipated, and we are continually trying to find the right balance in value.

Jayson Bedford, Analyst

Okay. And not to get too granular Vivek, but what's allowed it to improve over the last seven to 10 days?

Vivek Jain, CEO

Just getting stuff out the door. And so I mean, this is basic warehouse operations, receiving, clearing out space by shipping and getting stuff received into warehouse and moving it out literally focused on the most acute customer backorders and the things that really impact patient care on a day-to-day basis getting that prioritization. And then first, adjusting the IT systems and the workflows so that you could actually run your business that way that wasn't necessarily happening.

Jayson Bedford, Analyst

Okay. So it sounds like, and again, this is my interpretation. So, please, correct me, if I'm wrong. Assuming there's not a big bolus in demand here, the backlog based on the last seven to 10 days of improvement should start to work its way down in 2Q and beyond?

Vivek Jain, CEO

I mean, right now Jayson, I would say if we just had a normal quarter of sales, put the backlog on the side almost, I don’t know is that we had a normal quarter of sales, we would be happier than we are today, right? Obviously, what we want to make sure we want to fill that back on because you don't want to evaporate, right? And there's a lot of old orders in there that we've kind of scrubbed through and tried to remove things we didn't think were real. I don't want you leaving that comment saying, oh, we'll get a normal quarter of sales and all the backlog will get cleared on top of that. Right now we wouldn't say that. We would just be happy if we get a normal quarter today, I think, to come down a little bit.

Jayson Bedford, Analyst

Okay. Okay. That's helpful. And then just maybe lastly for me. Yes, go ahead.

Vivek Jain, CEO

No, no. You're on the right topic here. Go ahead.

Jayson Bedford, Analyst

Gross margin, I think, you explained it away and it sounds like it's all Smith. But previously, I think, you talked about a 40% bogey out there for gross margin. Is that still on the table, or does that come down a bit?

Vivek Jain, CEO

I mean, I think, over the long-term certainly, I mean, I think that's a minimum frankly over the long-term. I think you'd be shocked if we told you how many points were impacted by just trying to catch up and by running an unabsorbed factory and by it's dramatic. It's dramatic. And we'd rather take that pain right now trying to serve customers and catch you.

Jayson Bedford, Analyst

Okay. That's helpful. Thanks guys.

Vivek Jain, CEO

Hello, Brian, would you like to add? I don’t know want to stop probably there.

Brian Bonnell, CFO

Thank you, Jayson.

Operator, Operator

Thank you. Our next question comes from the line of Larry Solow with CJS Securities. Please proceed with your question.

Larry Solow, Analyst

Thanks for the opportunity. Good afternoon, everyone. I would like to follow up on the revenue growth situation at Smith. You mentioned two scenarios: one where revenue is relatively flat and another where it experiences growth. Could you elaborate on the historical context of why revenue has been flat? What aspects have contributed to growth, and what factors have not? Additionally, what changes do you foresee that could drive revenue growth in the future?

Vivek Jain, CEO

I can provide a brief response to your question. Overall, if you examine a 10-year revenue chart from 2011 to 2021, you'll see it has been relatively flat, varying by around $25 million when adjusted for currency. However, there have been specific areas of growth, such as ambulatory infusion, driven by market factors and the structure of that sector. Certain categories within Vital Care have also seen growth and are likely to continue if managed effectively due to the unique characteristics of those markets. On the other hand, some consumer segments have declined, but we believe that with concentrated efforts in production and marketing, there is potential for improvement. Therefore, we anticipate some growth in areas where the market structure supports it and where we can shift our focus. We recognize that some aspects require more significant turnaround efforts. Even if revenue remains flat, we believe there are synergies and efficiencies that create value, similar to our experience with Hospira consumables, which took time to gain momentum but became impactful once we did so. The situation is complex due to the variety of business lines, but we currently see potential for a typical quarter to align with past flat performance while still adding value beneath the revenue figures.

Larry Solow, Analyst

And is the consumables piece is that in the catheters is that in the bar access mostly, or is that sort of spread out?

Vivek Jain, CEO

It's not just catheters everything in that vascular access bucket.

Larry Solow, Analyst

Right, right.

Vivek Jain, CEO

Which was the largest factor.

Larry Solow, Analyst

Yeah, yeah, absolutely. And then just on pricing, I know you disclosed, you have significant inflation impacts. And I know you've been raising prices a little bit, but it does seem like you're sort of limited on the ability to raise price. So people have asked me this question. Is it just the industry there were only a few providers. Why can't you raise price a little more. Like I see – I mean I know. It's more like an open and maybe you can answer that question but it seems like a lot of – in a lot of industries people are raising prices everywhere. So can you eventually raise price and you just have contract and stuff you can't raise price on. There's no kickers in them. Is that kind of what restricts you, or can you maybe speak to that?

Vivek Jain, CEO

I'll sort of – I mean I obviously been paying very close attention to the public commentary on this topic for months. I think we would say for many years we sold under long-term fixed-price GPO contracts, which people enjoyed because we had 0 price erosion and the opportunity to take little increments here and there. I think we've tried to address that framework constructively. Obviously, our customers are suffering and operate on thin margins. And each unique product category has its own competitive dynamics. I think we have tried to illustrate our value and historically legacy I certainly in many categories was a low-price player. And we've tried to address that wherever have the opportunity to address that. It's absolutely the right topic, difficult to implement everywhere and you have to do the partnership with customers who have their own problems every day right now as we're all reading about.

Larry Solow, Analyst

And I guess it's a long term. It takes a long time. I mean a low-cost product you have to change. Yes I understand.

Brian Bonnell, CFO

But our competitive position actually works in that where we were participating like that's how I see care out its original roll way back aside from the clinical. So I think we're trying to be – do everything we can possibly do there.

Larry Solow, Analyst

If I can just sneak one more in real fast. So the guidance basically sounds like that the legacy is basically in line. I mean inflation may be hurting you more but you have this big range. So maybe you're at the lower or middle part of the range or something. I mean that's met not worsen to your mouth. And then Smith I guess is – it sounds like it might be hard to get to your number but maybe your goal is at least you can exit the year at the target you started with but maybe you don't get quite all that EBITDA in this year. Is that at least one scenario.

Vivek Jain, CEO

Yes, I think that's one possibility, but there are many variables to consider regarding the back order situation. It's challenging to pinpoint a single cause because I'm focused on the latter half of the year right now. We are seeing progress daily, but there are numerous elements at play. Over the past year, we've faced ongoing challenges with the availability of raw materials and components, yet we have managed to navigate those issues effectively, as it's essential to our core business. However, there are added complexities at this moment. Consequently, it's difficult to make definitive statements with the unexpected developments we encounter weekly. We prefer to proceed cautiously, observing the situation week by week to ensure we handle it correctly. We believe that even with an additional 90 days, we can add real value. Given the short interval since our last call, we want to assess our position accurately and understand where we currently stand.

Larry Solow, Analyst

No less confident. Right. No, I get it. But you’re no less confident in maybe the exit year or what you do in 2023 than you were a few months ago unless barring something on that spectrum?

Vivek Jain, CEO

I think the issues are all solvable. Nothing structurally changed in the market. There's no even pass now.

Larry Solow, Analyst

Okay, great. And I’ll appreciate all that color. Thanks so much.

Vivek Jain, CEO

Thanks, Larry.

Operator, Operator

Thank you. Our next question comes from the line of Matthew Mishan with KeyBanc Capital Markets. Please proceed with your question.

Matthew Mishan, Analyst

Great. Thank you for taking my question and good afternoon, guys. I guess my question is on the customers. Do the customers have enough inventory to work through this backorder issue, and are they sticky with Smiths?

Vivek Jain, CEO

We focus on this constantly, and it's definitely the right question. In some areas, the inventory is very low, which is why we are investing heavily to address these issues. Our concern is that if this situation continues for too long, we could potentially lose the business permanently. We want to avoid that. That’s why we strive to be transparent with our customers. This situation is similar to our previous major challenge. It was quite difficult when we first encountered it. Customers have experience with us regarding how we resolve such issues, and we're making an effort to clearly communicate what’s happening, along with realistic timelines and commitments. Just like we did with Hospira, we are backing our promises with financial resources for several supply items and are tackling those issues now. It all begins with honesty and transparency regarding our timeline for resolving these matters. Specifically, the direct answer is that for certain products, inventory is indeed very limited. We are prioritizing improving production for these critical items, which are often our highest margin products, and we are currently working to get them into the market.

Matthew Mishan, Analyst

Okay. Excellent. Thank you. That’s all I had.

Vivek Jain, CEO

It's the right question. Thanks guys. We appreciate the support and the questions as always and answer anything else offline if we need to.

Operator, Operator

Thank you. We have reached the end of the question-and-answer session. I'd like to turn the call back over to Mr. Jain for any closing remarks.

Vivek Jain, CEO

Thanks Michelle. Nothing else. The team is working incredibly hard. We appreciate the interest in ICU. It's a very unusual time out there. I think we're committed to improve what we got our hands around here every single day. So we'll talk to you in 90 days and hopefully have constructive things to say then. Thanks very much.

Operator, Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.