Q1 2022 ICU Medical Inc Earnings Call
Ladies and gentlemen, thank you for standing by our conference will begin in about two to three minutes again. Thank you for standing by our conference will begin in about two to three minutes.
[music].
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. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a 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.
Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the first quarter 2022.
On the call today, representing ICU medical.
<unk> Jain Chief Executive Officer and Chairman.
And Bryan <unk> 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 of them.
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.
Such statements are not intended to be representation of future results and are subject to risks and uncertainties.
Actual 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.
Thanks, John Good afternoon, everybody and we hope you're well, it's been a hectic 70, or so days since our last call as our legacy ICU businesses have continued to progress well and we have been consumed with trying to improve the performance of the businesses that came with Smiths medical the.
The external volatility in the supply chain that we've been describing for the last year continued primarily around fuel freight and raw material availability, while hospital census for our customers was more balanced throughout the quarter than it has been in a long time.
Underlying demand in Q1 was good in all geographies with the exception of Asia.
Everyone in our industry, we want to start first by thanking all of our customers and their frontline workers for trusting us to serve you. During these times and it's been great to meet so many of our international Smiths Medical colleagues live as we've now been to just about every single country with the exception of those on total lockdown.
While Q1 results were generally in line with our previous comments for legacy ICU Medical Ah results for Smiths medical was slightly different than our expectations. So we wanted to use the time on the call today too.
Comment on the year over year drivers of the three main legacy ICU businesses and reiterate our view of expected growth for the upcoming year.
Give some sense of the current volatility in inflation in the market and how it may positively or negatively impact the level of legacy ICU profit growth.
Explain the Smiths medical revenues, we achieved in Q1 and how that compares to historical levels over a long period of time with some color on the variance.
Abide a status update on the current challenges and opportunities with the Smith businesses as we see them now with a few more weeks into our ownership and articulate our priorities and criteria for success in the near term state.
State again, why Theres, a wide range of outcomes for the first few quarters and lastly, and briefly look in the scenarios, we see post deal and recap our views of value creation, but just a few words on the medium and long term.
Q1, 2022 is our first quarter of joint reporting and given some of the challenges on the Smiths medical business. It is a bit of a longer story.
I'll quickly summarize the whole company results and then discuss each portion of the business. We finished the quarter with $532 million and adjusted revenue adjusted EBITDA came in at $85 million and adjusted EPS was $1 82.
We have a little more cash on hand than originally modeled with net debt just over $1 3 billion and had a heavy quarter of investment into the business with inventory builds et cetera. It was less clean quarter as were spending at a very high rate to improve the service levels of Smiths medical and we had restructuring and integration cost step up as we closed the trans.
<unk> and Brian will walk through the full P&L of those items the growth comparisons are more relevant when looking at the individual portions of the business.
So let me start with legacy ICU medical which is a more straightforward story in.
In Q1 legacy ICU had $317 million in revenue, which was growth of 6% on a constant currency basis. We again had a good year over year growth in again, we again, a good year over year growth in our most differentiated businesses and perhaps the most important point is that we did not see any pandemic related ordering and we believe some of the excesses that we're in.
The channel is starting to come out.
This gives us a chance in certain areas pending other supply chain challenges to normalize our operations on a more predictable basis.
When looking deeper at the results and comparing the year over year results versus the rolling sequential trends a few observations are clear.
First as we always say legacy ICU is most tilted to the U S market, where we're dependent on admissions in electives and we saw procedures, improving and admissions consistent with Q4, while inventory was easing in the channel, which tells US that there are less COVID-19 spikes and lower acuity patients and maybe thats obvious given the public hospital company results.
Second with the exception of Asia International markets are really back to normal it's hard to show clearly with the strong dollar impact but sequentially. They were improving on a unit basis, which we were talking about last year in getting back to normal we believe our global customers being back to some baseline in managing less COVID-19 spike has substantial benefit to our aggregate portfolio.
So we still don't know the real use baseline with high comp with a high confidence interval, but it felt more normal in Q1.
So let's go through the businesses quickly and then come back to discuss the current environment, starting as usual with infusion consumables, which is our largest business infusion consumables had revenues of $141 million, which was a 13% increase year over year on a constant currency basis of 11% on a reported basis, both core IV therapy and oncology grew in the low teens with Abbvie.
Both looking a bit inflated as we had lower volumes in Q <unk> Q1, 2021, we've talked.
On the previous calls about feeling positive in the U S market and our growth product setting us up well for the rest of it as the rest of the world opened up which is what happened.
We would offer the same general comments on the drivers first we're benefiting from the annualized <unk> of the new business, we implemented last year.
Second we've gotten back to our core clinical marketing building on the good press, we talked about on the last call around the UK based nice guidelines for a clearer guard product. We now have in presenting some interesting analysis and data sets on infection reduction for our core consumables business and continue to expect additional evidenced based evidenced.
Evidenced based data on our broader portfolio.
Lastly, we did see some relief in the pandemic ordering as COVID-19 spikes waned and wholesalers and direct customers could ease up on hitting the order button more than normal.
We've always said, we'd rather talk about this now versus customer Destocking later for.
For 2022, we continue to believe this segment is capable of mid single digit growth, which had incorporated some of the just mentioned channel behavior.
Moving to infusion systems, which is primarily our LDP pumps and associated dedicated sets. This segment did $87 million and adjusted revenue, which was an increase of 5% on a constant currency basis or 3% on a reported basis we.
We did have a good level of installs in Q1, which is what we talked about on the last call as installations were pushed out of Q4. It is likely that the same underlying trend is IV consumables applied here with some softening on the U S ordering levels of dedicated pump sets and us installing a larger amount of hardware, which will be new competitive pumps utilized utilizing new sets in the future.
Sure.
It feels like the customer attention is back with bandwidth have real discussions and capital still does not feel like a constraint even if customer P&L was likely quickly becoming one it does seem some of the fatigue from Covid is abating and the acceptance of inflation and future cost of nursing et cetera are being internalized, we still believe relative to ours.
Size, there is solid competitive opportunity and we're focused on commercial execution here and continue to see this segment as a mid single digit grower in 2022 and infusion systems will be the largest it has been under our watch.
Finishing the segment discussion with infusion solutions, we had $77 million in adjusted revenue or a decrease of 4% on a year over year basis, both constant currency and reported this segment was different than the others due to more specific industry issues of general shortage.
IV solutions was flat sequentially and again, we could have sold more if we had excess inventory on hand on the last call. We talked about Q1, having exposure to the hit from <unk> for a few weeks in late December and January and the weird weather in Texas in February we're past all that now and production has improved versus the December January timeframe. We continue to believe this.
This annualized is a plus or minus $80 million in the quarter.
Okay. So what does this all mean in the context of EBITDA and profits for legacy ICU before we turn our comments to Smiths.
On the last call, we sketched out the specific math on the impact of inflation and the rollover effect into 2022 and highlight the impact of a strong dollar instead, we could still deliver meaningful EBITDA improvement with a range of $265 million and $285 million for 2022 ICU Standalone.
While it is harder to measure this exactly as expenses between the business have become co mingled. We continue to believe this is true with the only new information since the last call being the volatility in fuel and freight and the continuing saga of ensuring proper raw material availability we.
We had budgeted for a cautiously for legacy ICU to start the year, but the recent recent events make it hard to predict what the actual cost will be everything else is the same as the last few calls where we find ourselves asking the question of why some of these raw materials or transportation services already haven't really so much more valuable over the long term than they were before the pandemic, particularly.
The total utilization for health care end markets is still below historical levels. Obviously some of these costs are indexed to CPI, but we believe in markets and when capacity increases pricing should rationalize so for us it's about trying to run a stable and predictable operation in a normal environment to get price improvements, where we can and to try to illustrate to customers the need to have some of these.
Cost index and to ultimately to just ride it out to serve customers with a belief that supply and demand will balance overtime.
So now let me move to the Smiths businesses first talking about aggregate revenues and then how that fits broadly with the two buckets of issues. We laid out in the last call, which we said could lead to a wide range of outcomes in the first few quarters and that is what's happening now.
And then I'll give some updates on progress on the issue synergies et cetera.
Starting with revenues the Smiths medical businesses contributed $215 million with vascular access being the largest at $79 million infusion systems at $66 million and with vital care in between at $70 million to.
To try to make sense of this the first question is how does this compare to historical levels not just year over year or sequential as were the same people that had been saying these are sticky categories, where there's inertia and things move slowly et cetera et cetera.
Going back 10 years, and taking out the COVID-19 related items. These businesses have typically been in the $280 million to $300 million a quarter range. So let me try to explain the bridge from that range to Q1 in three buckets.
The first item is really mass and accounting as we closed on January six and the Smith system's closed the quarter a few days before the calendar ended the quarter. So we didnt capture about seven days or $25 million in revenue.
The second item is about being a reliable supplier with a strong supply chain and we shipped about $20 million to $30 million less than we targeted in Q1.
And back orders actually went up through the quarter.
The third bucket is due to the quality related interruptions described on the last call, which equals about $15 million across the portfolio.
The answer to how do we find ourselves in this position and what are we doing fixed it dovetails with the two main categories of issues described on the last call.
The first challenge stated was just around the poor execution of the basics on being a reliable supplier.
It's akin to the Hospira situation, where we used to say they forgot they were a manufacturing company and lived in some alternate universe of technology partnerships and distribution et cetera.
A very same similar.
<unk> here, but at a moment when the entire supply chain has been very weak we.
We find ourselves in this position because actions were not taken to solidify the Smith's supply chain is the volatility grew in 2021, and we walked in to find inventory down production down in a week fulfillment network in plain English the buffer stock got sold over the back half of last year, but.
But we bought the business, we did the deal and it's our problem and fix it and it starts with a high level of intensity and understanding of the end to end business and it fundamentally starts with being a reliable manufacturer. Our folks are now in charge of all of these areas and bringing that focus.
We have made significant progress since the last call on production output levels, particularly of the most critical and highest margin items. This has meant staffing up the factories, which we have made real progress in securing the base of supply what.
What we need to do now and there is a lag time is to move that increased production through the global fulfillment network, which has been the primary focus for a few weeks to be extremely clear a few things happened here that impacted Q1 results from a revenue perspective, we did not ship as much as we wanted and that was a hit to revenues.
I'm an expense perspective, we've been spending carte Blanche to improve customer service levels with an ICU mindset and the factories were running at lower absorption levels in Q4, and early Q1 and the combination is a huge hit to gross margin in the short term.
There's plenty of demand none of this has to do with product features it is self inflicted harm on the basics of blocking and tackling and absolutely none of it requires any significant capital where technological innovations just pure focus on good operations.
The last item of $15 million in revenues is related to what we call the bucket of quality related interruptions. When you change people and strategy. So frequently it's hard to run a consistent quality process.
It is public information that Smiths received a warning letter in 2021 and with all of the twists and turns of what was happening with the company they were essentially frozen.
Just like being a good manufacturer running a compliant quality operation ensuring safety is what gives us the right to participate in these markets. The existence of a warning letter while undesirable is the regulatory agency trying to move the ball forward. We entered a similar situation, we acquired Hospira and our team worked under an even more stringent framework at the previous.
Infusion company many of US came from.
It's the same story here know what business you're in the compliant with regulators investing your quality management systems, which we have and have the people that can make decisions and deliver on the commitments made to regulatory agencies and just like the first challenge. None of this requires groundbreaking technological innovation, it's just the basics.
Since the last call we've made significant progress on getting unfrozen, we have communicated to both customers and regulators on our view of the path forward and have made some significant decisions. Those decisions include moving aggressively in identification of all known product issues communicating them clearly with an action plan for remediation it.
It is also included making decisions to stops supporting older product generations and that information too has been relate to customers I don't want to get into more specifics in that other than the decision and remedies are in flight as we speak but we know we have the right people have been to the exact same experiences and our team is now fully embedded into the operation we've tried to get on frozen.
By breaking the items into smaller manageable pieces with clear decision, making.
The other part of value and M&A deals or synergies.
From a complementary product and logic perspective logic perspective customers get it and we'd like to see all parts of the portfolio executing well towards them.
Specifically, we continue to feel confident in our year $1 $25 million synergy target and see many opportunities in the medium term, but we cannot focus on them until we stabilize and get the basic operations running well and prepare for our it systems cutover.
We've moved very quickly and the full U S. Commercial integration happened within 90 days of closing with all relevant cross training is happening as we speak.
The actions for Europe , and Latam have been aligned around an implementation is starting now and then we faced some common sense decision in Asian markets common sense decisions in Asia markets. We certainly expect to have all commercial facing integration globally finished within this calendar year.
So where does that leave us for the full year, we started the year, saying Theres a wide range of financial outcomes in the near term as we sort through the operational cleanup and achieve synergies and that's still true today.
With Q1 being a little less than we wanted it does create a harder steeper ramp for the balance of the year at the same time, we do see many addressable issues and frankly, just open orders that if we can produce and ship that can make a substantial positive impact we would like as usual and because things are so fluid right now to update our view of the year as we usually do on <unk>.
Q2 call, we're trying to balance being logical serving customers well, while spending somewhat responsibly.
And we're also very focused on sequential improvements for the year as each month goes by to make sure. We have the right exit run rate heading into next year.
But what we don't know yet is when we can call an all clear on supply chain or a complete quality and regulatory compliance or all the complete quality regulatory regulatory compliance related improvements to be as predictable as we tried to be in our legacy ICU visits.
Just a few words on the medium and long term here as we're head down on the immediate term right now.
For legacy ICU, our returns have been driven by our most differentiated businesses, which will end 2022 larger than ever with appropriate profitability levels. The core premise of the Smiths transaction is to enhance the product offering for these exact categories that drive our returns as well as add logical adjacencies predicated on the same characteristics of sticky.
<unk> low capital intensity single use disposables with opportunities to innovate and a logical industry structure, even though were consumed right now with basic operations. We still believe this to be the strategic case and the big opportunity over the long term is using the combined portfolio to improve in existing markets and also move as a value shifts into news.
Spaces, the construction of the Smiths portfolio was logical and frankly wide survived over the years.
The priorities, we outlined to start the year also the same in the very immediate term. Our goal is to progress on the issue as described and stabilize the customer base and act with transparency, while realizing the low hanging synergies, which all exist.
In the medium term, it's about focusing and delivering a few key areas of incremental innovation connecting all the pump platforms that and finishing some of our own projects and a few iterations on the combined consumables portfolio and then using the combined portfolio to increase our value and relevance to customers and focusing on the higher hanging synergies after we integrate core it systems and processes.
And in the long term it justifies all the effort expended here is to be able to broaden the available markets that we can participate in inside and outside of the hospital environment.
From a value creation perspective in the short to medium term at Smiths medical just like Hospira, we see two basic bookend scenarios for this acquisition.
In the best case, we'll have better execution to improve Smiths topline performance drive operational improvements and focus on cash conversions and returns in the worst case, we continue to fight headwinds on Smiths Medical's topline, but we still can drive operational improvements and generate solid cash returns over time.
Either one of those cases is value, creating relative to the transaction math and the bare minimum standard is to get the core revenues of Smiths medical to a profit level that aligns with our differentiated businesses.
We do that along with understanding what incremental Capex is really needed post integration returns could be generated quickly.
But over the long term the same compound and criteria that we always talk about applies are the business is bigger or smaller and more profitable and our team understands that point, yes. We are doing all of this in an unusual time in an unusual framework when we have a normal operating business and legacy ICU and a p/e like situations side, but we will get it sorted out as quickly as possible.
While the pandemic introduced substantial volatility strategically we do think the weakness it's exposed in the health care supply chain add to the argument for all participants to be healthy and stable, which has been our commentary since we became a full line supplier Smiths medical also produces essential items that require significant clinical training capital expenditures in <unk>.
<unk> items that customers do not want to switch unless they have to.
The market need Smiths medical to be a reliable supplier and the combination positions us better.
Our company has emerged stronger from all the events of the last few years. Thank you to our shareholders were patient with the time it took to deploy capital and use our liquidity, thanks and advanced our teams and our new colleagues from some misses were running up that hill again to drive value out of the combination.
And thank you to all the customer suppliers and frontline health care workers as we improve each day our company appreciates the role each of US has had to play with that I'll turn it over to Brian .
Thanks, Vivek and good afternoon, everyone to begin I'll first walk down the P&L and discuss our results for the first quarter and 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 three 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 confusion.
Infusion consumables was up 11% recorded were 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 Swiss medical businesses contributed $215 million in revenue.
As a reminder, the Smiths medical acquisition closed on January six and our first quarter results include the impact from Smiths Medical's operations, beginning on January 7th and continuing through March 26.
As the fiscal period and 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 reflects 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 third quarter and cutoff.
As you can see from slide number four 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 loss absorption from lower production volumes, along with additional freight costs from expedited.
Shipping to customers, both of which are related to supply chain constraints.
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 loss absorption from lower manufacturing production volumes in our Austin plant, otherwise, we were able to offset year over year inflation pressures with the benefits.
A favorable product mix coming from faster growth in our consumables business as well as higher L. V. P 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 remains.
$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.
Favorable tax rates contributed approximately <unk> 20 in the current year and 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.
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 was quality improvement initiatives for Smiths medical.
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.
The 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 total over $100 million of discrete cash items for the quarter.
Going forward, we don't expect the 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 as a wide range of potential outcomes in the short term, we remain convinced of the longer term opportunity financial return.
<unk>.
And our own 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.
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Paul for your question.
Our first question comes from the line of Jayson Bedford with Raymond James. Please proceed with your question.
Alright good.
Good afternoon.
Lots to unpack here, so I guess, maybe just to start on the first quarter EBITDA.
Came in a little lower than expected, we would expect it sounds like you expected revenue was largely in line.
I realize that it's tough to tease out what was ICU profitability from a margin standpoint, similar to 2021 levels.
Jason Yes. It was the legacy ICU businesses were generally in line.
With last year.
Okay.
Okay.
You mentioned.
So that the $280 million to $300 million.
In quarterly revenue.
What needs to happen to get back to that level.
You mentioned, a few things, but if you had to kind of when it went down to the punch line what needs to happen here, maybe get back to that $2 80 to 300.
Yes.
Hey, Jason how are you.
We tried to give the actual Brigham and were the same people that said things I'll move that fast in this industry for.
For years, we've been saying that and they don't move that fast so why such a spread one piece was just math that should happen.
Alright, as long as Theres been some bumps and stuff along the way too as long as the it platforms remained stable that should automatically happen then.
Second and third issues are related to the two big buckets. One is just clearing the back orders and producing enough stuff and getting into the channel.
We didn't make as much progress as we wanted on that in Q1, we thought we would get an extra five or six days out the door, that's the difference and thats $20 million to $30 million.
And we're trying as hard as we can to get all of that out. It's just been tough with a very inconsistent supply chain. So that's kind of item one that has to happen to get back to normal and then some portion of it to small portion is associated with the quality related interruptions and we're working those issues.
It's really the same three buckets I went through on the script. The punch line is run a good operation right. The first thing happens on autopilot cycling is running a good operation whether it relates to quality or our production.
Is the expectation that the backlog will come down in <unk> versus <unk>.
I think that is our expectation, but I don't want to quote an amount because it's really been the it's only started to improve frankly over the last seven to 10 days, even we didnt make progress in January February or March we were really buried.
And it's hard if you go and $24 seven anyway.
Or Mac shift anyway to increase beyond that.
We're certainly trying but.
No we're spending like.
Orders of magnitude more on solving that then we had started and so we're trying to balance the right value in there all the time too.
Okay, and not to get too granular but.
What sort of allowed it to improve over the last seven to 10 days.
Just getting stuff out the door and so I mean this is basic warehouse operations receiving.
Clearing out space by shipping then getting stuff received into warehouse and moving it out literally focus on that.
Most acute customer back orders and the things that really impact patient care in a day to day basis getting that prioritization and first adjusting the it systems.
Workflows that you can actually run your business that way that wasn't necessarily happening.
Okay. So it sounds like and again my interpretation. So please correct me if I'm wrong.
Assuming there is 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 <unk> and beyond.
I mean, right now Jason I would say if we just had a normal quarter of sales put the backlog on the motions that we had a normal quarter of sales we would be happier than we are today.
Obviously, we want to make sure we want to fill that backlog because you don't want to evaporate right and Theres 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 will get a normal quarter sales and all the Blackhawk will get cleared on top of that right. Now we wouldn't say that we would just be happy if we get normal to normal quarter today, that's correct.
Thanks.
Okay. Okay. That's helpful. And then just maybe lastly for me Yes go ahead.
Youre on the right topics there.
Gross margin.
Thank you explained it away and it sounds like it's all Smiths, but pre.
Previously I think you've talked about a 40% bogey out there for gross margin is that still on the table.
Or does that come down a bit.
I mean, I think over over the long term certainly I mean, I think thats the long.
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 our Unabsorbed factory and buy.
It's dramatic it's dramatic and we'd rather take that pain right now trying to serve customers in ketchup.
Okay.
Helpful. Thanks, guys.
Brian would you I don't want start with Brian .
Thanks, guys. Thank you Jason.
Thank you. Our next question comes from the line of Larry Solow with CJS Securities. Please proceed with your question.
Great. Thanks, Good afternoon guys.
But can you.
Just to follow up on the revenue growth sort of Smiths, you mentioned as bookends, where one scenario your revenue sort of flat to.
Two value add other ways and then you have the other.
The opposite side, where your revenue growth could you sort of Smiths particular can you speak maybe a little bit historically.
Why it's been flat what has been growing and what maybe hasnt been growing.
What's going to change what could maybe won't be the growth drivers in the future that could maybe turn this into more of a growth.
Revenue grower than it has.
Yes.
I'll try to give a short answer there Larry because it's all in.
In aggregate if you just looked at it seems like Romania.
If you look at if you looked at a 10 year plot of revenues it would be almost <unk>.
Flat.
From 2011, 2021, something like that plus or minus 25 million Bucks probably currency currency adjusted.
Underneath that there were pockets that really went up like ambulatory infusion went up right because of all the drivers underneath that market and the inherent market structure some of the categories and vital care went up.
And we will probably continue to go up if if remediated properly because of the unique nature of the markets and the market structure.
Then there were categories like consumer of their version of consumables that went down.
We actually believe if we can focus on that both from a production and commercial standpoint, we can improve there and so some things should grow because the market structure.
Should enable it with the underlying dynamics and just with focus and some we actually need to turn around a bit more.
But the belief was even if it could hold flat at the revenues was we have synergies and duplication in lots of places and Thats value.
A little bit like the Hospira story right consumables, it took a year year and a half to get Hospira consumables, moving but it became very powerful once we did that.
Okay.
I think some of those categories.
Continue to have that belief and so it's a complicated answer because theres a lot of different lines of business, but.
Now, we will just take a normal quarter that normal quarter that equaled theyre flat historically, where we were adding value below the revenue line, we start with that.
And as the consumables piece that in the catheter and the vascular access mostly or is that sort of spread out. It's not just catheter is everything that vascular access.
Okay.
Right.
Which was the largest segment.
Yeah absolutely.
Just on pricing.
Boston significantly.
Significant inflation impact.
And I know you've been raising prices a little bit but it does seem like you saw a limited ability to raise price.
He was asking his question.
Just because there's.
It was only a few providers why can't you raised price.
Little more like I see.
Yeah.
One of it open and maybe you can't answer that question, but it seems like a lot of in a lot of industries people raising prices everywhere. So can you eventually raise pricing just that contract and stuff that you can't raise price on there is no kickers in them.
Kind of what restricts you or can you maybe speak to that.
No.
I'll sort of I mean.
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 enjoying because we had zero 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 ICU certainly in many categories. It was a low price player.
And we've tried to address that wherever I had the opportunity to address that it's absolutely the right topic.
Difficult to implement everywhere and you have to do it in partnership with customers who have their own problems everyday right now as we're all reading about the journal had a greater than I guess, it's a long term it takes a long time.
Cost product that you have to change.
Slow.
But our competitive digital outwork our.
Our competitive position actually works and that's where we were participating mark that's how ICU carved out its original roll way back when it aside from the clinical.
So I think we're trying to be do everything we can possibly do there.
Thank you.
Just sneak one more in real fast so the guidance basically it sounds like that.
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 to middle part of the range or something.
Let me put it that words into your mouth.
And then Smith's I guess.
It sounds like it might be hard to get to your number but maybe your goal is at least equal to exit the year.
At the target you started with but maybe you don't get quite all of that.
EBITDA in this year.
That at least one scenario.
I mean is it got it.
Is that is one scenario, but there are so many moving parts going back to the stockholder like you can't just it's may because I'm playing for the back half right now right, but we just teed off like that doesn't that doesn't make sense, we're improving things each day and.
And there's so many pieces of moly in the regular business, even if you'd like to ICU.
There is every week, there's been challenges for the last 12 months on raw material availability components. This is not and we've done a pretty good job of bobbing and weaving in surviving all of those right because it was our core business, but there's just more stuff. So just it's hard right now with.
The random that come in each week to say it so we'd rather take our time, we're seeing what's happening each week do it the right way and.
Prove to ourselves that even with another 90 days, we can because it was a short time between last call and today, even with another 90 days, we can add real value and they will take stock of where we were.
Where we are right you can't Mallet at NOLA.
Right no I get it but you know look confident in maybe the exit year on what you do in 2023.
Then you are few months ago.
Barring something special.
I think the issues are all solvable nothing structurally changed in the market there is no.
Yes.
Okay, Great no I appreciate all that color. Thanks, thanks, so much thanks, Mike.
Thank you. Our next question comes from the line of Matthew Michel <unk> with Keybanc capital markets. Please proceed with your question.
Thank you for taking the questions and golf without Globus.
I guess my question is on the customers.
Customers have enough inventory to work through this baccarat issue.
Are they sticking with with Smith.
Yeah.
We think about that every minute of the day and that is absolutely the right question.
In certain areas it is.
Very lean out there, which is why we're spending like crazy to solve the issues.
And.
Going at it so hard so that answer is it universal in all categories. So our fear is if it if it goes onto long Youll lose you could lose the business and it goes out of your permanent book of business, We don't want that right and that's why we're trying to be transparent to the customer and it is again, it's akin to our last big situation was pretty ugly when we walked into it.
People have had the experience with us about fixing these things and where China would make it very clear, what's going on with real timelines and real commitments and show them wheel at some level like we did with Hospira, we put our money where our mouth is on a number of supply items and.
We're crossing the bridge on some of those topics.
It starts with.
Really being honest and transparent to everyone on what's going on with the real calendar when to fix it.
So the answer to your direct answers in some items of inventory is very thin out there. Those are the those are the ones, we talked about improving production on the fastest the critical items in the highest and they often are the highest margin items.
And getting those into the channel right now as well.
Okay excellent. Thank you that's all I had.
It's the right question. Thanks.
Thanks, guys. We appreciate the support and questions as always.
The answer anything else offline, if we need to.
Thank you we have reached the end of the question and answer session I would like to turn the call back over to Mr. Jain for any closing remarks.
Thanks Michelle.
Nothing else is that the team is working incredibly hard we appreciate the interest in ICU, It's a very unusual time out there and.
I think we're committed to improve what we got our hands around here every single day. So we will talk to you in 90 days and hopefully.
Constructive things to say that thanks very much.
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.
Yes.
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