Good afternoon. And welcome to the ICU Medical Inc. Third Quarter 2023 Earnings Conference Call [Operator Instructions]. Please note, this event is being recorded. I would like now to turn the conference over to John Mills, Managing Partner at ICR. Please go ahead.

Good afternoon, everyone. Thank you for joining us to discuss ICU medical's financial results for the third quarter of 2023. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Brian Bonnell, Chief Financial Officer. We want to let everyone know that we have a presentation accompanying today's prepared remarks. To view the presentation, please go to our Investor page and click on the Event calendar and it will be under the third quarter 2023 events. Before we start our prepared remarks, I want to touch upon any forward-looking statements made during the call, including beliefs and expectations about the company's future results. Please be aware they are based on the best available information to management and assumptions that are reasonable. Such statements are not intended to be a representation of future results and are subject to 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 the call today, we will also be discussing non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into ICU Medical's ongoing results of operations, particularly when comparing underlying results from period-to-period. We also include a reconciliation of these non-GAAP measures in today's release and provide as much detail as possible on any addendums that are added back. And with that, it is my pleasure to turn the call over to Vivek.

Thanks, John. Good afternoon, everyone. We hope you're well. Even with the volatility in the economic environment and some revenue variance in a few of our product lines, ICU Medical is operating very well for our customers in 2023, delivering high service levels, improving quality and relevant innovation. We're also equally focused on ensuring we take the right short and long term steps to do the same for our other stakeholders. The global demand environment was generally consistent and healthy in Q3 and it continues to feel that way, and the only macro items were some uptick in fuel pricing and continued pressure from currencies in our production geographies. Like everyone in our industry, we want to start first by thanking our customers and the frontline workers for trusting us to serve you during these times. We'll use the time today to; discuss the Q3 revenue performance of our business units and hopefully, we've reached the point where this is the last quarter with unusual year-over-year comparisons; provide more color on some of the product families that have been good and some that have been challenged; go into a bit more detail on the actions we've been taking in aligning our inventory with demand, its impact on the P&L and explain why we're making this temporary choice; update our next steps towards integration and synergy capture as there are no other meaningful housekeeping updates; check our progress against key short term priorities we outlined to start the year and quickly frame up some of the items on the strategic agenda and make clear where we want to be. We finished the quarter with $547 million in adjusted revenues, adjusted EBITDA came in at $90 million and adjusted EPS was $1.57. Revenue growth was minus 6% on a constant currency and…

Thanks, Vivek, and good afternoon, everyone. To begin, I'll first walk up the P&L and discuss our results for the third quarter and then move on to cash flow and the balance sheet. Along the way, I'll provide any relevant updates for the full year outlook for each of these areas. So starting with the revenue line. Our third quarter 2023 GAAP revenue was $553 million compared to $598 million last year, which is down 7% on a reported basis or 8% constant currency. For your reference, the 2022 and '23 adjusted revenue figures for the total company and by business unit can be found on Slide number 3 of the presentation. As Vivek covered in some detail, the Q3 year-over-year revenue declines reflect a combination of growth in the legacy ICU businesses, offset by the impact of the legacy SM backorder recovery that occurred in the third quarter of last year. But on a sequential basis, adjusted revenue increased by $12 million or 2% relative to the second quarter as we again saw growth in the legacy ICU portfolio combined with stabilization in the legacy SM product lines. Moving on to gross margin. As you can see from the GAAP to non-GAAP reconciliation in the press release, for the third quarter, our adjusted gross margin was 36%, which was in line with our expectations and reflects the impact of two specific items that we have discussed on the past few calls. The first is the scheduled plant shutdowns during the second and third quarters as part of the IT TSA separation from Smiths Group as well as the annual maintenance shutdown of the Austin IV solutions manufacturing plant. The second and more meaningful impact is from lower manufacturing absorption as we reduced production volumes in the plants. As Vivek…

[Operator Instructions] The first question comes from Larry Solow with CJS Securities.

I guess first question is just on the sort of the gross margin and revenue outlook. So it sounds like if we use like 36% as the baseline for gross margin for this quarter, it sounds like you'll actually dip a little bit over the next couple of quarters as you continue to increase sort of the -- or decrease the amount of manufacturing, maybe even below current production or demand levels, I should say. Any sort of visibility as we look out into '24? Obviously, you'll need revenue growth, I guess, as the [quarter improves] the gross margin. So what's your confidence level as you look out the next few quarters that you can actually grow top line year-over-year and that can actually drive bottom line growth?

Your question about kind of gross margins and how we think about Q3, I think you summarized it correctly. And we believe the Q3 gross margin level generally reflects production levels, I would say, fairly consistent with underlying demand. And that the fact that we will be more aggressive in taking inventory levels down over the next several quarters will put additional pressure on the margin line relative to where Q3 came in. On the revenue -- Larry, go ahead.

I was going to say just like in order to get back to like this 38% -- to get a long term growth 38% to 40%, I guess, revenue will have to kind of -- if I just do the math, you're kind of running 10%, you were manufacturing 10% above sort of current demand, right? So in order to get back to that level, you'll need revenue to grow 10%. Is that math correct?

I think -- certainly, we don't see current demand levels being what we would expect in the future, whether that's 10% more or something a little bit higher, I think it's to be determined. But that's clearly an opportunity that we have for, I mean in addition to the other items we've talked about.

The reason we made the words in the script, Larry, was, one, of course, you're right, revenue growth is the most valuable thing over time, right? And I think we have a high degree of confidence that we're through the twists and turns and can be more predictable. The second piece that there's lots of components of gross margin, right? Price is obviously a component in revenue but also what is your ultimate production network and what are the efficiencies can you seek out in the running of your operations, and we've had a ton of variance there. And we have a number of sites that we're running substantially below capacity because the [revenues materialize], right? So you have to deal with those things. So revenue is the biggest chunk of it, but it takes a little bit of time to get the house in order and it's obviously a big logistics component that’s overstuffed.

And just to break out, what's sort of your confidence level? You definitely -- I get you're confident, you could still kind of get back to even those EBITDA targets maybe a couple of years later. But in terms of revenue, do you feel like 2024 could be growth over '23 but maybe margin improvement doesn't come until '25 as you get better pricing and revenue kind of -- you get to a point where gross margins could kind of rebound a little bit?

I mean, generally speaking, this is not a time to be a hero, right, after we've put everybody through. I think we would measure ourselves again, we're trying to say in the script, we have to foundationally deliver these items one by one and we have to start with showing that we -- there's been a lot of revenue growth and a lot of valuable lines here. It hasn't shown up in earnings on the P&L. And so we need to, one, show that we have revenue growth in all the lines. The second thing is we generated more cash per quarter before we did the transaction that we've been doing since we did the transaction. And so the second state in the ground for us is, can we generate cash given using some of the work down on the balance sheet to do that and does that buy a little air time to get the rest of the house in order and finish the integration to make sure we can get where we want the margins and then the contractual items, you talked about at '25. That's probably the batting order of how to measure it.

And then just lastly, if I just -- stepping back, even with some of the -- obviously, you missed expectations that you had a couple of years ago, but the stock price has basically been cut in half, you lost $2.5 billion in market value, I think, since Q1. I guess it's my job to value the company and what the right valuation is. But just how do you think of this? And I know maybe perhaps some of your end markets speak about your customers, your hospital customers and their financial health and -- or any other concerns that we should have?

I mean there's a lot in that. It's kind of just piecing it up a little bit. I think, generally speaking, the health care systems in this country and around the world that we participate in are stable and increasing. So there's no concern about that. Obviously, it's been a hit parade of issues for us. I guess, we look at it and say the companies pre-transaction, the enterprise value of the company was the same as it is today. But obviously, the cost of capital changed and we used to be more predictable and generate a lot more cash than we have recently. And so I look at it, I think and say our consumables business is 30% bigger over the last couple of years or our pump shares, 20-ish percent improvement over what we started pump share a couple of years ago. I believe those assets are worth more, but the reality is the whole -- all the business lines have to deliver, et cetera. And so to me, it comes back to, I can understand the skepticism, because it's hard to be able to pinpoint whether it's revenue growth, cash generation that's been consistent, and we need to get back to that consistency. It doesn't matter what we believe, or the industry logic or the underlying assets that are impaired together if they don't grow or create cash, I can understand the skepticism, independent of all the macro [substances]. But there are enough opportunities here at 2.5-ish, whatever 2.3, 2.4, whatever amount of revenues we can see over the next short and medium term to profitize that appropriately. But it just takes a little bit of time to get all that work done.

The next question comes from Jayson Bedford with Raymond James.

Maybe just to go along with the gross margin strain of questions here. As you can appreciate, there's a lot of moving parts to this equation. So I just want to just simplify it. I don't think I heard a gross margin -- an updated gross margin guide. What is the expected gross margin in the fourth quarter, or you can give me the year and I can back into it?

I think for the year, we'll be in the 36% to 37% range for adjusted gross margins. And what that will imply is a little bit of a step down in Q4 relative to Q3 for the reasons we talked about, primarily related to accelerating the rate of inventory reductions.

And then you mentioned that the inventory kind of drawdown, if you will, will last, I think, into mid-'24. Is the expectation that gross margin bottomed sometime in mid-'24?

I think we don't want to say something we will regret positively or negatively on the rate there, Jason. It is a function of how fast we can get some of the other activities done and the revenue growth rates, et cetera. I think we're trying -- we don't want to mislead anyone that it is going to take a little bit of time to caught up. I don't think we could tell you what month or quarter precisely it stops, but it took us five quarters, six quarters of -- we were building for five to six quarters. Probably it will take a little bit shorter than that to get through it, but not a lot shorter than that, right? We've been into it for a while.

And is there a right level or what is the right level of inventory here, either on an absolute or a ratio of sales, however you want to depict it?

Jason, I think -- we believe that the right level is probably somewhere between where we started 2022, which was less inventory than what we needed but not as much as we have today. And I think it's kind of somewhere in the middle. And if you were to put a value on that, it's probably could be somewhere -- something that rounds to $100 million.

Just maybe up the P&L here. On revenue, I think there was a lot of noise in the year-over-year comparison, which you identified, and I think you said sequential growth in the fourth quarter. But can you just comment on your ability to grow revenue on a year-over-year basis in the fourth quarter?

The fourth quarter starts to look better from a year-over-year perspective, right? I don't think we expect these wide swings. They may not be wide positive but it's a much more normal comparator in the fourth quarter. And demand is okay out there right now. Again, we've said a few things we've regretted here over the last number of quarters, we don't want to put ourselves in that position again.

And then, Vivek, maybe about -- if you could talk about Plum Duo. You mentioned the limited market release. Are you taking orders now? And is that -- I'm wondering is that impacting pump sales or has does it have the potential to pause pump sales in advance of kind of a full market release?

I mean I think it's -- it takes time -- I can't remember we talked about it. It takes time to get these new devices seasoned in the market implemented with and integrated with all the various IT vendors, et cetera. And we didn't want to set the expectation that all of a sudden immediately, there's going to be Plum Duo sales, that's not going to be the case. Nothing happens fast in the pump business, but the product life cycles are incredibly long as evidenced by the market share leader. And what new innovation does and a vision around the different pumping modalities and how they come together, gives us a reason to have a lot of conversations and gives people a reason to listen. And hopefully, there's been a couple of drivers of breaking through that inertia and I think people now have to make choices. And we have a very credible choice that can be an anchor product offering for many years. And so I think we feel pretty good about it. But it does take time, you got to get it on patients,yu learn things along the way, regardless of approval and just make sure it's rock solid and we're in the process of doing that.

And then maybe lastly for me, and I can jump back in queue. Vivek, you mentioned PLUM SOLO as well as a refreshed syringe pump. What's the time line on those two?

I think it would be -- the goal would be to talk about them like we did with the Duo when it's approved. Obviously, we can't be as -- we can't act exactly the same way now. I think if we could get them on file with our regulators in the next 12 to 18 months, we'd be happy with that time frame. It could be inside of that, could be outside of that, but that would be a safe window as fast as we can. But I think we feel pretty good that we cleared a lot of the regulatory hurdles in the base architecture of Duo here, which maybe makes some of those other things in the software side of it bit easier.

And just to be clear, just on cash flow generation, it's earmarked for debt pay down. Is that fair?

Yes, that's still priority number one for us, Jayson.

I think on your revenue question, Jayson, I mean, it's a little bit of the previous commentary there too. There, it is very, very messy this quarter with what happened in 3Q catch up next year. And so the standard, we certainly are expecting ourselves is to be able to grow all three of our lines of business year-over-year, right? This requires way too much explanation, way too many words to describe what's going on in the revenue. And so your direct question, just to have a very direct answer [indiscernible] that’s certain…

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

Thanks, operator. I guess I'd make one comment on behalf of ICU Medical here. We did have one less participant on this Q&A portion of the call today. We wanted to acknowledge the passing of Matt Mishan, a tendered analyst we had from KeyBanc, we would offer our condolences to his family and his colleagues, and he was a critical thinker and a supportive partner and brought a smile to our face when we interacted with him. So just a moment to recognize that. Back to ICU, we understand the situation we're in. We feel like we are finding some stability on the products that we've acquired, continue to get good growth on our legacy businesses, and we just sort of need to bring the pieces together here and show that with evidence of revenue growth, cash flow generation and ultimately, margins. So we appreciate folks' interest, and we are -- obviously, Brian and I are available for anybody who would like to discuss further. Thanks very much.

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