Earnings Call Transcript - ICUI Q2 2024

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to the ICU Medical Inc Second Quarter 2024 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. I would now like to turn the conference over to John Mills, ICR Managing Partner. Please go ahead.

John Mills, Managing Partner, ICR

Thank you. Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the second 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 as well. To view the presentation, please go to our Investor page and click on Events Calendar, and it will be under the second 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 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 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.

Vivek Jain, CEO

Thanks, John, and good afternoon, everyone. I'll walk through our summary Q2 revenue and earnings performance, provide some highlights for each segment and then turn it over to Brian to recap the full Q2 results and outline our current thinking on the balance of the year. After that, I'll come back with updates on the various integration and consolidation efforts that will benefit our medium-term profit outlook and discuss the overall improving health of the company. Revenue for Q2 was $581 million for total company growth of 10% on a constant currency basis or 9% on a reported basis. Adjusted EBITDA was $91 million and EPS was $1.56. Gross margins were a little higher than expected, again, due to earlier capture of supply chain efficiencies and sales mix. We had a good quarter of cash generation with $63 million in free cash flow, of which $7 million was inventory drawdown and our cash balance finished just over $300 million. The broader demand and utilization environment in Q2 was healthy across all geographies and has felt that way this year to date. But of course, we've all noticed the increasing volatility in the environment. The capital environment with status quo and investments that customers need to make are getting made. The macro headwind of a strong U.S. dollar has not broken everywhere yet, and specifically is still strong in the areas where we have our largest international commercial footprint. And again, this impacts our IV Systems segment the most. Getting into our businesses more specifically, Consumables grew 11% constant currency and 10% reported. All four lines in this unit grew well with Vascular Access and tracheostomy in the teens and the legacy ICU product lines of IV therapy and oncology in the mid-to-high single digits. To mention a few highlights across the unit, and these types of examples thematically have helped our results to date, I'll give a few more specific forward-looking ones. The first example is around our core focus of improving outcomes, patient safety and improving workflows. In our IV therapy line, there was an important study published in the Journal of Vascular Access a few days ago, which is a great example of the clinical and economic value of our Clave family of connectors as the study noted the improved safety with these products as measured by infection reduction. A second example is our continued efforts in new adjacent market creation like we did in oncology closed systems a number of years ago. We've also been doing that in the renal market since our acquisition of Pursuit Vascular and recently signed a multiyear committed agreement with a leading U.S. operator of dialysis clinics and believe this will help us grow our evidence base to attract other operators. Lastly, we've been focused on getting our geographies right. For the most part, we have historically been a very small player in China. Shortly after rebaselining the acquired Smiths Medical business in China, we've been working to register additional core infusion products to expand our Seaboard portfolio in the country and expect several approvals over the next years. We have nothing to lose here as our business is currently limited in China, our manufacturing costs are competitive, and we're now big enough to try to compete. And lastly, over the medium term, each of these lines has its innovation roadmap as we mentioned previously. For the balance of 2024, nothing else is new here. We would expect results in line with our original targets and with legacy ICU consumable lines being at record levels. Our IV systems business unit grew 11% constant currency and 7% on a reported basis. Again, we had a wide range of performance across the product lines here. As we mentioned on the last call, we finally saw stabilization in our ambulatory line and there were some tailwinds emerging with the macro trends of home care remaining solid. Those have started to generally come true, and we had a very strong quarter of ambulatory hardware sales, and those pumps will soon start using dedicated sets. We had a lighter quarter of LVP hardware installs just based on the calendar, and we expect both lines to perform well in Q3. Some key highlights here include: first, we now have multiple signed contracts for our Plum Duo system with a variety of customers and in general, customer decisions are more active than they have been over the last couple of years. We're pleased with what we're seeing so far. Second, since the last call, we have filed 510(k) submissions for our Plum Solo precision infusion pump and several enhancements to our LifeShield safety software and our already cleared Plum Duo device. After these products are cleared, the combination of the dual channel, Plum Duo and the single channel Plum Solo, will provide customer flexibility across all clinical care areas. Third, as we wait for responses, much of our energy shifts towards the refreshed syringe platform of our Medfusion product with the goal of filing that 510(k) submission over the next several quarters and also having a connection to our LifeShield safety software. Our ambition is to have the most modern fleet of infusion devices that can anchor the portfolio for many years to come. Simplistically, we want customers to have the right tools for the right job, all connected with a common user interface and software solution that minimizes training, improves onboarding, and drives standardization. For the balance of 2024, nothing else is new here either. We would expect results in line with our original targets. Just wrapping up the business segments, our Vital Care segment grew 8% constant currency and 7% reported. The majority of the growth was driven by IV Solutions, which did have an easier comp as it was at a low level last year, and by Critical Care. The rest of the segment was generally 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. There are, of course, many areas to still improve with some of the normal bumps and bruises in manufacturing, but customer back orders remain low and hopefully, our comments from the last few calls that our efforts shifting to innovation and displaying our integrated value to customers has been noted. That's a brief recap of Q2 at a high level. I'll turn it over to Brian and then come back with some comments on our medium-term outlook and a few other thoughts.

Brian Bonnell, CFO

Thanks, Vivek, and good afternoon, everyone. Since Vivek covered the Q2 revenue for each of the businesses, I'll focus my remarks on recapping the Q2 performance for the remainder of the P&L as well as the Q2 balance sheet and cash flow, and then provide our updated outlook for the full year. As you can see from the GAAP to non-GAAP reconciliation in the press release, adjusted gross margin for the second quarter was 36.6%, which was slightly better than our expectations. Similar to the first quarter, we experienced favorable product mix with a higher proportion of disposables revenue relative to hardware during the quarter compared to our plan as well as supply chain synergies captured earlier in the year than expected. Adjusted SG&A expense was $117 million in Q2, and adjusted R&D was $23 million. Total adjusted operating expenses were up 6% year-over-year and reflect a combination of increased selling expenses from higher revenues, R&D investments and higher incentive compensation. Adjusted operating expenses were 24.2% of revenue for the quarter. Restructuring, integration and strategic transaction expenses were $17 million in the second quarter and related primarily to IT system integration and manufacturing network consolidation. Adjusted diluted earnings per share for the quarter was $1.56 compared to $1.88 last year. The current quarter results reflect net interest expense of $24 million. The second quarter adjusted effective tax rate was 16% and includes a discrete benefit from the release of tax contingencies as a result of the expiration of various tax statute of limitation periods, which contributed approximately $0.15 per share. For comparison purposes, the prior year tax rate reflected discrete benefits, which contributed approximately $0.25 per share. Diluted shares outstanding for the quarter were $24.4 million. Finally, adjusted EBITDA for Q2 decreased to $91 million compared to $98 million last year. The lower profitability on higher revenues this year reflects the prior year manufacturing absorption 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 $63 million, which represents the best free cash flow quarter since the acquisition, as well as the fourth consecutive quarter of positive free cash flow generation. Reductions in inventory contributed $7 million of cash, and we also benefited from lower cash outlays for capital expenditures and quality remediation due to the timing of these projects, along with some one-time cash flow benefits from the integration. During the quarter, we invested $10 million of cash spend for quality system and product-related remediation activities, $17 million on restructuring and integration, and $19 million on CapEx for general maintenance and capacity expansion at our facilities as well as placement of revenue-generating infusion pumps with customers outside the U.S. To wrap up on the balance sheet, we finished the quarter with $1.6 billion of debt and $303 million of cash. As we think about the balance sheet and cash flows over the remainder of the year, there are a few items worth mentioning. First, we believe the current cash balance is adequate to support the day-to-day liquidity needs of the business, and we would anticipate any further increases to the cash balance to be used for either early pay down of term loan principal or reducing usage of the accounts receivable factoring program. Second, over the course of the past 12 months, we've been able to reduce inventory levels by approximately $100 million, and we believe current levels are appropriate to support the near-term needs of the business, including onboarding of new customers, providing adequate safety stock to ensure supply chain resilience, and facilitating our planned manufacturing network consolidations. While we may have opportunities for additional inventory efficiencies over time, we don't expect any meaningful further reductions in the near term. Third, year-to-date free cash flow is $93 million, which is already ahead of our original full year guidance. For the second half of the year, we do not expect the same level of cash flow generation due to the reasons already mentioned, including the lack of one-time benefits from inventory reductions and other integration-related items we experienced in the first half, as well as the potential reduction in the utilization of our accounts receivable factoring program given our improving liquidity position. In addition, capital expenditures, which we expect to be in the range of $85 million to $100 million for the full year, will be more weighted towards the second half. Consistent with our usual cadence, we are updating our full year guidance for adjusted EBITDA and adjusted EPS. For full year adjusted EBITDA, we are narrowing and raising the midpoint of our previous guidance range of $330 million to $370 million to a range of $345 million to $365 million, reflecting solid first half performance and higher confidence in the expected back half earnings improvement. For full year adjusted EPS, we are narrowing and raising the midpoint of our previous guidance range of $4.40 to $5.10 per share to $4.95 to $5.35 per share, which includes the same impacts as adjusted EBITDA plus the previously mentioned $0.15 tax benefit recognized in the second quarter. On the revenue line, there are no changes from our original expectations for full year consolidated adjusted revenue growth of low to mid-single digits, comprised of mid-single-digit growth for both consumables and Infusion Systems and roughly flat for Vital Care. For gross margin, we expect full year adjusted gross margin of approximately 36%, which is 1 percentage point higher than our original guidance. We expect gross margin in the back half to reflect the benefits of improving manufacturing volumes and a stable supply chain environment, offset by the impacts of our scheduled annual maintenance shutdown of the Austin plant, as well as sales product mix more heavily weighted towards hardware. Adjusted operating expenses should be approximately 24.5% of revenue for the back half of the year, consistent with what we saw in the first half. There is no change to our full year expectations for interest expense of $105 million, and for modeling purposes, you can assume a back half adjusted tax rate of 23% and back half diluted shares outstanding of $24.6 million. Our forecast for the remainder of the year generally assumes a macroeconomic environment that is consistent with what we experienced over the course of Q2. We're obviously aware of the volatility the markets have experienced over the past several days, and it's too early to know where things will ultimately settle. The latest market views on currency and interest rates would be positive, whereas other factors such as hospital census and capital budgets could be less favorable in a slowing economy. To the extent we see any meaningful impacts from these developments over the course of the third quarter, we will provide updates on our next call. To wrap up, we're happy with our performance for the first half of the year, including improvement in our gross margin rate, continued progress in free cash flow generation, and a more stable balance sheet. Our updated full year guidance reflects continued improvement for both revenue and earnings in the second half. We remain focused on the foundational work that will drive earnings improvement in 2025 and beyond. I'll now hand the call back over to Vivek, who will provide updates on the specific initiatives underlying that earnings improvement.

Vivek Jain, CEO

Thanks, Brian. On the last two calls, we've talked about revenue stabilization and the ability to grow our differentiated product lines. While it's nice to have that revenue growth now and earnings and cash flow a bit higher than our expectations, it's not lost on us that we're still under-earning as a company relative to the industry, as evidenced by the fact that we had higher earnings on less revenue historically. As a result, we're extremely focused on the actions to improve profit in the medium term, which are about, obviously, revenue growth, mix and pricing, operational efficiency, and eventually waiting for the macro items on currency and interest rates to improve. Our innovation efforts have become more visible in the market as that is mandatory for sustained revenue growth. The other area we continue to be focused on is pricing as we've not fully recouped the substantial inflation that we experienced. We do see more logical behavior here, both from the market and customers in general. From an operational efficiency standpoint, we have been pursuing several work streams, which will each add to our margin improvement over time. First, the cutover of our U.S. and Canada order-to-cash systems is in flight as we speak. We have done these typically early in the quarter to be able to handle any of the bumps that come. This integration allows for the optimization of our physical logistics networks and corporate infrastructure. After we ensure that the U.S. and Canada flows are stable, we'll begin these activities internationally next year. Second, as previously discussed, we have been doing the basic blocking and tackling of factory network consolidations. It is as simple as having fewer production sites, having them fuller, and in the right geographies. These are not easy choices; it impacts 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. Lastly, we continue to make progress on our various real estate commitments with a number of consolidations and repricings kicking in over the next 18 months. While these may seem like mundane topics, all three items I just mentioned are economically meaningful and contribute to getting where we need to be and help to offset the normal bumps that happen in business, but it takes a little bit of time to execute. Given what we've been through in the last few quarters, we're not willing to commit to exact dates in absolute margin levels, but our team's experience and integration allows us to go as fast as possible. We have been talking about the macro items of rates, currencies, et cetera, for frankly, too long. Just as recent as the last call, we said we were operating with a higher for longer mindset. These will play out however they do, but from a value perspective, we felt it more sensible to bear more interest expense as long as manageable versus not maximizing the asset values while the revenues, earnings, and quality of our assets and businesses are improving but take a little bit of time and investment. 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 multiyear 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, which Brian noted, we are finally better prepared to move on. There is no confusion within the company in the pursuit of these goals, and we don't have any frivolous activities here. We produce essential items that require significant clinical training, have manufacturing barriers, and in general, are items that customers do not want to switch unless they must. The market needs ICU Medical to be an innovative, reliable supplier. Our company is stronger from all the events of the last few years. Thanks to all the team members and customers as we improve each day. And with that, we'll open it up to questions.

Operator, Operator

We'll take our first question from Larry Solow with CJS Securities.

Larry Solow, Analyst

I guess the first question, obviously, really nice revenue growth off of a little bit of a lower base last year. I guess Q2 was your weakest point last year. But just curious, just your pulse on the environment. It sounds like things are running really well. Are hospitals maybe stocking up a little bit when times are a little better? I'm just trying to figure that out. And you did kind of mention hospital spending and capital budgets and there's always a concern that could change. But can you just give us kind of a feel on where that is today?

Vivek Jain, CEO

Yes, thank you. In our last call, we provided an update and mentioned that in May, Q1 was quite good. Although March showed a slight decline, it returned to normal levels. We have continued to experience a generally normal environment. One of the analysts inquired previously about volumes, and they remain strong. We are keeping an eye on the broader economic landscape to ensure there are no unexpected developments. I wouldn’t say anyone is stockpiling, and there are no shortages in the market. Overall, everything feels quite normal across all regions.

Larry Solow, Analyst

Could you discuss your pricing strategy and positioning for next year? I know there are a few significant GPO contracts. Specifically in solutions, how do you feel about your current positioning as you look ahead to the next few quarters, especially for 2025 and beyond?

Vivek Jain, CEO

Inflation significantly impacted our earnings over the past two and a half years. We focused on improving our business to provide stability for our customers, which we achieved across our entire portfolio. After stabilizing, we aimed to secure a fair return in areas where we had the contractual flexibility to do so. We have several contracts coming up in the U.S., and while GPOs are important, building relationships with individual customers will be key for next year. We are optimistic that customers recognize the need for fairer pricing on valuable categories that have been underpriced. Overall, we feel positive about our position moving forward.

Larry Solow, Analyst

And just lastly, just a couple on Smith, just a couple of things that have been kind of some negatives feel like they turn to positive. First, I guess, just Vascular Access, I know that had been down or even flat more recently, but it looks like that returned to growth this quarter? And then the second part of that question, just update on quality issues, particularly on the syringe side. It sounds like things continue to progress. I know you called out a whole new refreshed product line coming out too. So I guess things are looking more positive on that end, too.

Vivek Jain, CEO

Larry, I think we’ll need to ask you to return to the queue after this question. Regarding the first issue, Q2 last year saw particularly weak results in solutions, which was a significant shift. You are correct that solutions were lower, but the consumables business, including Vascular Access, remained relatively steady sequentially. As we mentioned last year, the core business in Vascular Access has declined, and a bit of focus and effort would help us reclaim some of those losses. That's what has happened. Additionally, the Smiths portfolio performed exceptionally well this quarter, marking the best sales since the backorder resolution across most of the portfolio, although there is still much room for improvement. I appreciate your comment, but we still have areas that need enhancement.

Operator, Operator

The next question comes from Kristen Stewart with CL King.

Kristen Stewart, Analyst

I was wondering if you could just focus in a little bit on gross margins. They came in a little bit better than expectations, or at least my expectations for the quarter. I was wondering if that was the case for you guys as well? And how should we think about that as we look out into the third and fourth quarter of the year? Do you still feel confident that you can kind of exit at a higher rate than when you came in, in Q2? Or how should we just think about the puts and takes there?

Brian Bonnell, CFO

Yes, Kristen, we would agree Q2 gross margins were a little bit better than we had planned. Part of that was from just product mix and that we had more disposables and less hardware revenues, and there's different margin profiles between those two categories. We also had the benefits of some supply chain synergies show up a little bit earlier than we had planned this year. So as we think about the back half, we won't have the benefits from the product mix. In fact, we expect it to kind of go the other way. So that will pressure gross margins in the second half relative to the first, but we should benefit in the second half from improving volumes. I think as we think about how we exit the year, I think our view on where we exit is similar to our view on full-year, meaning full-year gross margins are going to be about one point better than we expected. We said we would exit the year at 35% or slightly better. I think we would say, okay, now it's probably 36% or slightly better.

Kristen Stewart, Analyst

So exiting the year at 36% is what I'm hearing you correctly?

Brian Bonnell, CFO

Yes.

Kristen Stewart, Analyst

And I guess in terms of just the operating expense, why can't you get a little bit more leverage? I think you had mentioned you guided to 24.5%, last year, you were 23.8%. Is there anything unusual we should be thinking about just from a year-over-year comparison basis there?

Brian Bonnell, CFO

Yes. I mean last year, given we didn't hit our financial goals, the incentive plans did not fund at the target level. This year, we're sort of at or a little better when it comes to the incentive plans and potential payout. So I would say that's probably one of the bigger differences on a year-over-year basis.

Operator, Operator

Our next question comes from Brett Fishbin with KeyBanc Capital Markets.

Brett Fishbin, Analyst

Just wanted to start off with a really quick follow-up on the previous gross margin question. You called out a lot of drivers in both directions. But I didn't necessarily catch commentary on the inventory under absorption topic. So just curious how much of a headwind that's still representing in terms of the second quarter from just absorbing the inventory that was underproduced a few quarters ago? And how much that might also improve into the second half?

Brian Bonnell, CFO

I would say that the impact from the inventory under absorption has been decreasing throughout this year. As we enter Q3, with only a modest $7 million reduction in inventory levels in the second quarter, I don't see that impact being significant moving forward.

Brett Fishbin, Analyst

Moving to the consumables, you mentioned last quarter that you anticipated some improvement, but no one expected nearly 20% sequential growth compared to Q1. You highlighted a few areas where performance was positive. Could you elaborate on that sequential change and discuss its sustainability for the second half of the year?

Vivek Jain, CEO

All four lines in the consumables business experienced sequential growth, driven by different factors. The core infusion therapy business played a significant role, and all areas grew similarly both globally and in the U.S. Census data has been strong, contributing positively. In infusion therapy, we achieved some price increases and completed several installations that were already on the agenda. We anticipate a solid pipeline for the remainder of the year. We are particularly confident about the infusion therapy segment, which represents nearly half of our overall segment. In oncology, there appears to be a recovery in screening and diagnosis, indicating market improvement. Although we have successfully converted some business, there seems to be a general uplift in the market as well. Regarding the Vascular Access line, while it still needs work, the removal of previous issues and making some positive changes have led to significant improvements. We have a strong product and have been consistently engaging with customers for two years. As mentioned in previous calls, it took us two years to transform the consumables business, and although there are still some fluctuations, this category remains valuable, with good long-term demographics. Being in the right market is crucial, and we believe we are positioned well across all categories, benefiting from effective execution and timing.

Operator, Operator

The next question comes from Mike Matson with Needham & Company.

Mike Matson, Analyst

Yes. I guess just on the new syringe pump. So how important do you think that is to winning pump share in terms of coming into the hospital with the complete range of products on your new software platform? Or do you think you can kind of sell features, to some degree, and just promising them that it's on its way is enough to kind of satisfy them?

Vivek Jain, CEO

I think a key driver for us, I mean, there were 3 or 4 core reasons we took on the difficulties we did with the most recent acquisition, one of them was to have an opportunity in the syringe market. Again, we have been in this market for a long time and a large chunk of the U.S. market, 40-ish-plus percent or more bought LVP pump separate from who provided their syringe. So it's certainly not an end-all and be-all issue, but it is better for customers if they can have a simpler setup depending on their use cases. We want the flexibility to offer both situations. I'm not sure necessarily that these things are that far away when you say selling futures. We still are the leading stand-alone syringe pump company in the United States today. It's more about the innovation, and connected to the other pieces and a little bit of modernization of advice the same as we've done in the other areas. I think it can play either way. It's certainly a convenience item, but not everybody makes the choice. Nobody, in our opinion, likely chooses a full LVP system solely on the notion of what the syringes is. It's a combined decision.

Mike Matson, Analyst

I was just wondering maybe some sort of inflection point once you get that piece in place. But okay. And then, I guess, just also on the pump market, what are you hearing and seeing out there with Becton kind of back in the market now with their ALARIS pump? Are you able to pick off and share there?

Vivek Jain, CEO

I believe that all public companies have acknowledged it is a very active time, with a significant advantage for incumbents. It is our responsibility, along with others, to create a compelling case for change across the relevant products. We recognize that people are evaluating all vendors, and our task is to showcase our innovation and present ourselves effectively. The interest from multiple companies trying to penetrate this market indicates that there is an expectation of choice, rather than market stagnation. Our previous discussions about supply changes, in relation to our size, show that even minor adjustments can greatly influence our earnings potential. We believe we possess what was once the leading technology in the market, now available in a more modern format, with additional developments on the horizon. Although our business size has decreased, even small victories can significantly impact our success. We are confident in the investments we have made to launch Duo and Solo file, and we are committed to leveraging our hard work and investments to achieve market share growth over time.

Operator, Operator

Our next question comes from Jayson Bedford with Raymond James.

Jayson Bedford, Analyst

I imagine that I'm at the back of the bus, so I'll ask a few questions here. That's fine. Just to be clear here, revenue was strong in Q2 better than most expected. Just to be clear, there was nothing onetime in the Q2 revenue number, correct?

Brian Bonnell, CFO

Yes, Jason, that's correct. Nothing…

Vivek Jain, CEO

I think the only thing we thought, Jason, that there were a couple of market issues in that ambulatory segment that we flagged on the last call, and that's why the points on identifying some of those things came true. Maybe that was just a tent of that; that would be the only thing.

Jayson Bedford, Analyst

Curious, your comment on the multiyear dialysis partnership I wasn't aware of that. Did you see an impact in Q2? And kind of when will you start to see an impact?

Vivek Jain, CEO

It's had an impact. The ClearGuard family of products has been contributing to consumables for over a year; its success was overshadowed by other negative aspects in this segment, but it is a significant factor. We've had that relationship for several years, and it's now been solidified for many more, which is excellent. We are trying to highlight that in oncology, there is an unconverted whole cloth market where we only support a fraction of the global operators, and there is more potential to tap into.

Jayson Bedford, Analyst

Two financial questions. The cash usage comment, I'm less familiar with the AR factoring program. Can we just assume that paydown of debt is probably the most shareholder-friendly use of cash?

Brian Bonnell, CFO

Yes, I think that's right. Essentially, the AR factoring program is just sort of another financing program that we put in during the second quarter of '23 to help with our liquidity as opposed to taking on additional borrowings.

Vivek Jain, CEO

The cash you owe other people is more when you weren't charging our liquidity.

Brian Bonnell, CFO

So we view that as being not that dissimilar from debt, and that gives us another option, that's another use of cash at some point in the future for us.

Jayson Bedford, Analyst

But the message is excess cash generation from here is earmarked for debt paydown?

Brian Bonnell, CFO

Yes.

Vivek Jain, CEO

Correct.

Jayson Bedford, Analyst

Last one, I guess. Just if I take the midpoint of the EBITDA guide for the year, it kind of implies a small step-up in the second half versus Q2. You went over a lot of stuff, but maybe you can just remind us what's kind of tempering second half versus the Q2 print?

Brian Bonnell, CFO

Well, I think, Jason, if you kind of think about just first half versus second half, the midpoint of the updated guidance does imply a $15 million improvement in the second half relative to the first half. There is obviously some level of improvement there. Yes, if you use Q2 as your starting point, it's more modest than that. But we do feel like there was substantial improvement in the second quarter, and we would like to see that continue before getting aggressive on the forecast.

Vivek Jain, CEO

It's not lost on you what we've been through, Jason. There's a lot of volatility in the markets out there, currencies, FX, right? We don't know where everything is going to land.

Operator, Operator

We have no further questions at this time. I will now turn the program back over to Vivek Jain, Chairman and CEO, for closing remarks.

Vivek Jain, CEO

Thanks everyone for your interest in ICU Medical. We look forward to speaking to you. We hope for continued strong momentum here, and we look forward to speaking to everyone on our Q3 call. Have a great rest of the summer. Thanks very much.

Operator, Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time.