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

Good afternoon, everyone, and thank you for joining us to discuss ICU Medical's financial results for the fourth quarter and full year of 2023. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Brian Bonnell, Chief Financial Officer. We wanted to let everyone know that we have a presentation accompanying today's prepared remarks as well. To view the presentation, please go to our Investor page and click on Events Calendar, and it will be under the fourth quarter 2023 events. Before we start our prepared remarks, I want to touch upon any forward-looking statements made during the call, including beliefs and expectations about the company's future results. Please be aware they are based on the best available information to management and assumptions that are reasonable. Such statements are not intended to be a representation of future results and are subject to risk and uncertainties. Future results may differ materially from management's current expectations. We refer all of you to the company's SEC filings for more detailed information on the risk and uncertainties that have a direct bearing on operating results and financial position. Please note that during today's call, we will also discuss non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into ICU Medical's ongoing results of operations, particularly when comparing underlying results from period to period. We've also included a reconciliation of these non-GAAP measures in today's release, and provided as much detail as possible on any addendums that are added back. And with that, it is my pleasure to turn the call over to Vivek.

Thanks, John, and good afternoon to everyone. I'll walk through our Q4 revenue and earnings performance, highlight and provide some commentary on the main topics of 2023 and then turn it over to Brian to recap the full Q4 and fiscal 2023 results and provide our 2024 guidance. After that, I'll come back with some brief comments on our medium-term outlook and the actions and opportunities in front of us to improve our performance. Revenue for Q4 was $576 million for total company growth of 2%. Adjusted EBITDA was $86 million and EPS was $1.57. We added $56 million of cash to our balance sheet as a result of the actions we've been taking on inventory, combined with modest growth. As we had anticipated, we had sequential growth in all the segments and a larger inventory reduction in Q4 versus Q3. The broader demand and utilization environment in Q4 was the most positive since 2021 across almost every geography. The capital environment was status quo, and it does appear investments that customers need to get done do get done. There were no additional macro headwinds or tailwinds as compared to earlier in the year, but the inflationary labor environment in some of the larger production countries continued. Getting into our businesses more specifically, our consumables segment grew 4% in constant currency or 5% reported. The legacy ICU product families of IV therapy and oncology combined, again hit a record level in absolute sales with 11% growth, which is probably a few points overstated due to the Italian tax accrual in Q4 of '22. But more importantly to us, all four product lines in this segment grew well sequentially, with Vascular Access finally turning around and at least reaching Q4 2022 levels. The sequential growth was driven by new global customer…

Thanks, Vivek, and good afternoon, everyone. Since Vivek covered the Q4 revenue for each of the businesses, I'll focus my remarks on first, recapping the full year revenue performance compared to our original expectations; second, discussing Q4 performance for the remainder of the P&L, along with the Q4 balance sheet and cash flow; and third, providing guidance on our expectations for 2024. So to recap our full year 2023 revenue performance, consolidated adjusted revenue was down 1% on a reported basis and flat constant currency. At the business unit level, consumables revenue for the year was down 1% reported in flat constant currency compared to our original expectations of mid-single-digit growth. The shortfall was due primarily to the vascular access product category, where the decline was larger than anticipated, along with a few other variances within the business unit. But Q4 was important because after three previous quarters of stability in Vascular Access, we finally saw sequential improvement. Infusion Systems revenue for the year was up 2% on a reported basis and up 4% constant currency, in line with our original guidance of mid-single digits, driven by a combination of the LVP and syringe product lines. And Vital Care was down 3% reported and down 2% constant currency for the full year, which is at the low end of our original guidance range of flat plus or minus a little. Here, IV Solutions was the largest gap to our expectations, offset partially by solid growth within the temperature management and critical care product categories. Moving on to Q4 results and further down the P&L. As you can see from the GAAP to non-GAAP reconciliation in the press release, gross margin for the fourth quarter was 34%, which was in line with our expectations and reflects the impact from lower manufacturing…

Okay. Thanks, Brian. And that's the reality of where we are right now. But what's not lost on us is the reality of where we should be. Profitability in parts of this industry has obviously been impacted by the lag between inflation and pricing and the underlying competitive dynamics and differentiation in each category. But even with all that, we think most reasonably efficient companies in these types of markets now are somewhere in the low 20s EBITDA margin level. We do not think this can apply to our IV Solutions business, which has its own unique competitive dynamics and with a general misvaluation of the product in the market. But we do think the rest of our portfolio is capable of achieving such a margin over time. Given what we have been through the last few quarters, we are not willing to commit to a certain date of being there, but our experience in time in the category makes us believe that, that's a fair metric. For our lean type of company, achieving this metric is all about revenue growth and our gross margins, which for us include all costs related to logistics and many other areas. And most of the improvement opportunities with these items should be directly under our control. We still need to prove that we're capable of predictable, sustained revenue growth, which has not been the case as certain lines were going backwards, but we are on more solid footing now. Our original model for a number of these products and our goal was to just get back to near historical sales levels, and we will need additional price given some of the share losses. But in the background, we've been actively refreshing the portfolio to ensure we're capable of either creating new markets or…

[Operator Instructions] And today's first question comes from Jayson Bedford with Raymond James.

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

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

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

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

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

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

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

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

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

I think, Jayson, it's a traditional manufacturing industry. And I think we try to find the right balance between ensuring high quality and reliability to the customer. There are areas for opportunities in terms of one, how the value chain works for the customer. Specifically what type of service model, what type of service delivery, logistics costs, et cetera, which are a huge component of the products. There is improvements available on the factory floor. There are improvements potentially available if we put CapEx into the business, but we've - we try to think about that very clinically. So it's sort of more normal manufacture - outside of long-term price and trying to get the category revalued a bit, it's really more traditional manufacturing operational improvements.

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

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

Okay. Thank you.

Thanks Jayson.

And the next question comes from Larry Solow with CJS Securities.

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

I mean, I think, Larry, what we would feel - the short answer is yes. But I think we would feel comfortable right now saying all the cost savings aspect of those activities, the network consolidation, system will largely be fully implemented by the end of next year, with the biggest step-up in value actually next year over this year. So some of the things take time to get in, but there's some big stuff happening balance over this year. Then to get through the last couple of points, it's about revenue growth, and that's where I think you're saying is we don't want to put a line in the sand on - most people's LRPs rarely come exactly in the way they think. We'd prefer not to do that on revenues, but the part that is clear to us is all the synergies that are still out there for us to get.

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

I mean, look, we're giving guidance for this year, and we're giving it with at least two years - the last two years of some struggles under our belt. So I think we do feel that way, certainly about '24 revenues. We do feel that way for the synergies and expense items out there. The short story is the company is running the best it has in a long time for customers, for patients with innovation, we're just under earning. And the margin talk is saying there are moments in our history where we overearned. But right now, a moment is frankly where we're under earnings, and we need to work to get that in line.

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

I tried to say it up front, I mean I really - I think our view is it's as reliable as it's been in a long time. It seems like the lag time between reimbursement changing and labor utilization sort of sorting itself out has all happened, like it feels like it's getting back to normal. So we don't really have anything negative to say on the customer environment, right? It's really under our ability to execute.

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

Thanks Larry.

Thank you. And the next question comes from Kristen Stewart with CL King.

Can you guys hear me okay?

Kristen, as a first-time caller.

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

Yes. I guess thinking about gross margins in the context of the EBITDA margin improvement that Vivek laid out. First is, I think we would expect most of that EBITDA margin expansion to also show up within gross margins, given the nature of the items that will drive that. And then, I guess, thinking about gross margin rates kind of over the near term, we did say '24 full year rate is at 35%, and we expect improvement throughout the year, which means we'll probably exit '24 slightly above the 35% rate. But I do think it's important to note that where we exit '24, it won't be at the same level of gross margin that we saw in Q1 and Q2 of 2023, because those quarters very much benefited from manufacturing volumes that were in excess of underlying demand. But for us to get back to those levels does require some of the cost savings that Vivek talked about as well as some revenue growth on top of it.

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

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

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

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

Okay, perfect. Thanks so much for the question.

It's nice to hear you. Welcome to the call. Thank you. Thanks for the interest.

Thank you very much.

Thank you. And the next question comes from Brett Fishbin with KeyBanc.

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

Yes. Also, welcome, Brett. It's nice to hear you. I think it's an incredibly important line you referenced there. It was really one of the key value categories that underpinned the acquisition. And it's, until maybe Q4 of this year has been pretty bumpy, because of the operational challenges we've had. And those operational challenges, meaning not being able to necessarily supply all the dedicated sets in the first couple of months of the transaction led to lower utilization of those pumps and/or potentially a little bit of customers looking for alternatives. That has finally been very stable over the last two quarters, three quarters or so, and that product still continues to hold a global leadership position in medication delivery, certainly in the home care environment and many other spots. It feels better today, it's still selling reasonably below historical levels with an aging fleet. And so we have multiple opportunities there in our minds. One is the normal capital refresh that happens in the pump business as the world is opened up - starting to open up more, there's an opportunity for more of that as the fleet has aged. And two is just driving utilization of the pumps, the pumps that are out there, making sure they're all pumping. And so I think there's been three or four reasons ambulatory has been challenging; that is, all of the operational challenges are gone and there's real opportunities to improve there, really important line.

All right. Super helpful. And then maybe a follow-up kind of on a similar topic around pumps. Definitely understand you're still pretty early in the cycle of Plum and talking to customers. But just curious how the initial customer reception has been in the early conversations? And then maybe just a little bit of a broader question around the competitive opportunity in pumps and how you see demand coming off of several years of the Becton recall and a couple of years of limited capacity to implement upgrades and just how you see that progressing through the year?

Yes, yes, it's the right - it's also a really insightful question in terms of the value picture. There is more pumps in the United States right now that need to be addressed, both either through the age of the devices or the various recalls than there has been in many years. And my comment in my opening remarks saying choices that - or investments that do need to get done, do get done, customers actually have the capacity to buy and implement. As it relates to - and are almost forced to on a reasonable time line. As Brian tried to reference, we didn't put a lot in for the Duo in 2024 because things - even though it's a period of activity, installs, contract signings do go slowly, and we just want to make sure we're doing that properly. And we're just getting into the general release phase. I think big picture, the tone of the pump market is good, all players are sort of armed and it's competitive, which is - we take that right now. People have to make choices.

All right. Great. And then last question from me. I think you guys gave a bunch of really good figures. Just think about the inventory drawdown and absorption topic for 2024. Just thinking you were able to wind down about $60-plus million in this past quarter. And you put that in context of a $100 million total opportunity, your goal. So is it fair to think that most of the remainder of that takes place in 1Q based off of kind of the pace you're on? And how do we think about the tell, understanding like the 4Q drawdown impacts 1Q margins? Just how to think about like once that drawdown is completed, how long the tell is where that's impacting gross margins?

Yes, Brett, I guess thinking about kind of the pace of further inventory reductions, the work that we have to do around that, you do tend to be able to capture the easiest stuff first. And I think we saw that phenomenon happen in Q4. And why it was such a big number. But I think what happens is sort of each incremental reduction becomes more difficult. And so the remaining $40 million is probably going to be spread out over the first two or three quarters of '24 as opposed to kind of coming all in Q1, just because it does get a little bit harder, the further you get into it.

All right. Got it. Just - I'll just clarify like the last point. So assuming more of like a midyear 2Q to 3Q time line. Just how to think about like the tell where that inventory drawdown is impacting the gross margin of future quarters? And thanks so much for taking the questions.

Yes, just that delayed impact showing up on the P&L is probably kind of a 1 to 1.5 quarter lag, generally speaking. So there will be some ongoing impact.

No, that's super helpful. All right. Thanks so much for taking the questions, guys. Appreciate it.

Thank you, Brett.

Thank you. And the next question is a follow-up from Larry Solow with CJS Securities.

Just a quick follow-up. Thanks. Just on the free cash flow, you gave - Brian, you gave some pretty good guidance this year. Essentially, it's about even with last year. What about just longer term, I would think - is it just a remediation of the expenses that are holding you back and at least getting free cash flow somewhat near net income. And in the future, is that something that you guys hope to target getting to over the next couple of years as remediation expenses ease off?

Yes. The two items are spending on the remediation work. That's the largest bucket, and then followed by the spend on integration.

That's why - and it was inventory, right? So we got that one done. Now we have to get the remediation finished, and we've got to get the integration done and the remediation finished. Those are exactly the items.

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

Thanks Larry.

Thanks. And the next question is another follow-up from Jayson Bedford with Raymond James.

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

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

Okay. And then just on the whole EBITDA margins ex IV solutions, where are we today? I was kind of doing back of the envelope at about 19%, but that seems a little high. So I'm just kind of wondering...

That's high, Jayson. That's high. I mean I think it's - again, we don't segment report the individual business units on the EBITDA level. But ballpark, I think I'd say somewhere in the 17% range, 16.5%, somewhere like that on EBITDA margins ex IV Solutions. It is low, that's why I said we're under earning.

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

So again, I'm approximating. We don't carry it all the way down to that level.

Thank you.

Thanks Jayson.

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

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

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