Q2 2022 ICU Medical Inc Earnings Call
[music].
Okay.
Good day and welcome to the ICU Medical Inc. Second quarter earnings.
Conference call.
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Our first question by pressing the star key followed by zero.
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Got it.
I would now like to turn the conference over to John Mills with ICR. Please go ahead.
Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the second quarter of 2022.
The call today, representing ICU medical is Vivek Jain Chief Executive Officer, and Chairman and Brian , but now 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 second quarter 2022 events.
Before we start our prepared remarks I want to touch upon any forward looking statements made during the call, including beliefs and expectations about the company's future results.
Please be aware they are based on the best available information to management and assumptions that are reasonable such.
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'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 Good afternoon, everybody and we hope you're well, it's been a quicker 90 or so days since the last call and our legacy ICU business unit revenues are on track in 2022, and we have now seen weekly improvements over the last eight to 10 weeks through today and our operational performance for the businesses that came with Smiths.
Paul.
The external economic volatility in the supply chain around freight and fuel that we've been describing for a while and its highest peak in Q2 for any time our team has been in the industry. However, the issues around raw material availability are narrowing but still remain volatile from.
From a customer perspective, we felt hospital census was stable and underlying demand was good in all geographies like everyone in our industry. We want to first start by thanking all of our customers and their frontline workers for trusting us to serve you during these times.
While Q2 revenues were generally in line with our previous comments for legacy ICU medical while results for Smiths medical where again different from our original expectations. So we wanted to use the time on the call today to first comment on the year over year drivers over the three main legacy ICU businesses.
Given update of the current inflation in the market and how it has negatively impacted legacy ICU profits, which is really just about fuel.
Explain the Smiths medical revenues, we achieved in Q2 and bridge to how that fits with our comments on the last call.
Provide a status update on the Smiths medical businesses current challenges and opportunities in the two buckets. We have highlighted on the last two calls.
Again to talk about the Smiths medical revenue sequentially and describe what we think the next few quarters could look like in the individual segments.
To try to narrow the range of outcomes for the balance of this year and lastly to illustrate how we see revenue and profitability in the short and medium term and how we think about value Q.
Q2, 2022 was our second quarter of joint reporting and given some of the challenges on the Smiths medical businesses and the current environment. It continues to be a bit of a longer story.
Quickly summarize the whole company results and then discuss each segment of the business. We finished the quarter with $547 million and adjusted revenues adjusted EBITDA came in at $85 million and adjusted EPS was $1 37.
We again had a heavy quarter of investment into the business with inventory builds et cetera that Brian will describe it was a 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 costs and we are focused on reducing those costs next year as they impact cash flow.
A strong dollar and currency have also been a bit challenging.
So let me start with legacy ICU medical which is a relatively straightforward story. The good story in Q2 legacy ICU had $324 million in revenue, which was growth of 6% on a constant currency basis, and 4% reported we again had good year over year growth in our most differentiated businesses with negligible COVID-19 impact and as previously discussed.
<unk> have been normalizing our operations on a more predictable basis, there's nothing dramatically different on underlying demand from previous comments on a macro level. The public hospital companies validated our view on their recent calls that acuity was decreasing and at least U S hospitals in electives are okay.
Specifically the legacy ICU business grew at 7% in the U S and at 6% constant currency and international markets.
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 $144 million, which was a 9% increase year over year on a constant currency basis and 6% reported.
Growth was most driven specifically by core IV therapy, and some specialty items in the U S again.
Oncology, we've been a bit constrained due to some of the remaining raw material challenges that should abate by the end of this year we.
We have talked on previous calls about feeling positive in the U S market and our growth products setting up well.
The rest of the World opened which is what happened there is nothing new on the outlook here just to mention the base in infusion consumables did materially step up in Q3 2021 due to pandemic ordering and it is our largest ICU O U S business, so currency impact is meaningful.
Moving to infusion systems, which is primarily our LDP pumps and associated dedicated sets. This segment did $87 million and adjusted revenue, which is an increase of 5% on a constant currency basis or three reported.
We did have a decent level of installs in Q2, and do expect a better back half of installs globally than we had in the back half of last year.
It's still a bit bumpy on dedicated set utilization that's been inconsistent, but we're focusing on installing a larger amount of hardware.
It feels that the customer retention is back with bandwidth to have real discussions and some of the fatigue from Covid is passing and the acceptance of inflation and future cost of nursing et cetera are being internalized, we still believe relative to our size, there's solid competitive opportunity and we're focused on commercial execution here and there's no change to any previous call.
Ontario.
Finishing the segment discussion with infusion solutions, we had $80 million and adjusted revenues or an increase of 3% on a year over year basis, both constant currency and reported capacity constraints here are easing.
Additional comments on the revenue side here the biggest issue for US is this segment has disproportionately absorbed the majority of inflation at legacy ICU, which dovetails with our comments on legacy ICU profits.
The vast majority of unexpected inflation and earnings pressure relative to our view on 2022 legacy ICU profits is primarily about fuel and shipping costs and to a lesser degree currency.
Labor has been much more consistent this year and we budgeted those items properly. Yes, there has been some raw material surge pricing, but as we highlighted in the last few calls these items are not so much more inherently valuable over the long term, particularly with aggregate demand below historical levels.
We've talked about believing in the markets and with capacity increasing pricing when capacity increases pricing should rationalize.
For us it's about trying to run a stable and predictable operation in a normal environment to get price improvements, where we can to try to illustrate to our customers and the need to have some of these cost index and to ultimately just ride it out serve customers with a belief that supply and demand will balance overtime.
But there is a longer term tactical element to this in some of the businesses.
We listened to the comments on price actions from the larger players in the industry and we obviously support that but we're also focused in the next round of contracting and how to separate the costing of some of these items. For example are transportation and logistics costs should be separate items no different than airlines seat and baggage fees or next day delivery.
Given the historical margin structure of the health care industry and its historical negligible inflation suppliers have never had to think this fight.
Okay, Let me move to the Smiths businesses first talking about aggregate revenues and then how that fits broadly with the two buckets of issues with out of the last call, which did lead to a wider range of outcomes and on even a monthly basis in the first two quarters and that has to be incorporated into the full year now and then I'll give some updates on progress on the issues et cetera.
Starting with revenues the Smiths medical businesses contributed $223 million with vascular access at $77 million infusion systems at $78 million in vital care at 68 million.
So to try to make sense of this we need to go back and compare this to our comments on the previous call and then talk about each of the segments individually.
To make it extremely clear while we did pick up a number of shipping days. We also had a number of setbacks in the first half of Q2, which caused us to have to make more distinct fulfillment choices based on customer need and availability specifically.
Specifically, we had a number of down days due to reasons that are too detailed for this call, but at a generic level about the intersection of product.
Product availability in operations.
The net result of vessels was a fulfillment environment that was actually worse in the first half of Q2 versus even Q1 and so we did not get the full benefit of the additional days or claw back into the back orders as a result, we had to prioritize fulfillment on the most critical and clinical items, which are dedicated pump sets, which explains the sequential.
Improvement in Smiths medical infusion systems, but in the earlier part of the quarter. It came at the expense of the other segments.
What obviously matters is where we are right now and I'll get to that in a moment as it relates to the status of the challenges. We've described with the short story being it's better.
We spent a lot of time, we spend a lot of airtime on the last two calls explaining these two buckets of issues, how we wound up here and how we're trying to stop them. So we'd rather just cut to the status of each the first bucket of issues are around production and fulfillment operations with regard to production with the exception of a few items related to silicone availability. It can do.
Generally be said that the entire Smiths production network is producing at acceptable demand levels.
We continue to work on securing the base of supply and in sourcing the key high margin disposable components with proper factory staffing levels.
Film and process, while still challenging and as we said on the last call was quickly becoming our main focal point has made progress since mid may with June better than May and July better than June et cetera.
We still have bumps, but on certain key it systems issues et cetera. It has been recently more space.
From an expense perspective, we've been spending carte Blanche to improve customer service levels with an ICU mindset and with factories only getting to scale recently there continues to be a huge hit to gross margin in the short term.
Lenny of demand none of this really has to do with product features. This is about cleaning up the self inflicted harm and the basics of blocking and tackling with a good focus on operations.
The second bucket of items, we talked about work quality related interruptions and again, we previously described how we got here since the last call. We've made significant progress with communication to both customers and regulators on our view of our path forward and have made some significant decisions those decisions such as stopping sales for certain older generation products and.
Committing to a deliberate and timely remediation plan have allowed us to begin supporting existing med fusion syringe pump customers in early Q3.
We've also made progress in addressing the root causes of the warning letter received in late 2021.
This part feels very similar to Hospira and our previous experience and we have the right people have been through the exact same experiences and our team is now fully embedded into the operation.
As we said on the last call the existence of a warning letter while undesirable is the regulatory agency trying to move the ball forward and we've talked about how these regulations give us the right to participate.
We're making progress on solidifying the foundation and hope to be in a position, where we can demonstrate further progress as soon as possible.
Again, regardless of where it appears on the P&L, we are spending heavily so making progress here is extremely important.
So now haven't updated the main two issues, let me come back to the segments and tie this back to short term and longer term profits and value.
It's important to start describing the Smiths segment sequentially as they will get folded into the legacy ICU segments in 2023.
Given better production and fulfillment on Smiths dedicated pump sets and some of the other items. We can now see continued sequential growth for the foreseeable future in Smiths infusion systems segment Smith.
Smith's vascular access is now getting more attention and again, we would expect to see sequential growth here in the near term, but we need to commercially execute estimate lost the focus on it on its market positions here in.
And lastly material improvements in Smiths vital care, probably will not be seen until Q4. After the other two segments vital care is the most international segment of Smiths on a percentage basis, and probably was the most neglected but there are some valuable sub segments in there going back to our previous comments on the original portfolio construction.
If we add up what we think the Smiths business. It will do over the second half of 2022 and combine those with legacy ICU. We believe will be very close to exiting 2022 at the original $2 4 billion annual revenue run rate after taking some large pressure on currency.
Operational performance is improving but we're choosing to spend now in order to be healthier and more stable next year to improve profit. We believe we can earn a $180 million to $200 million and adjusted EBITDA over the back half of 'twenty, two and that probably is a bit more Q4 weighted.
Obviously that implies a full year that is different than our original expectations and that weighs heavily on us.
But we did try to say after Q1 that the steeper ramp for the back half was tougher there was a wider range of outcomes and after what the situation was through mid may.
We knew we needed to be realistic.
We also said that we're very focused on material sequential improvements through the year as each month goes by to make sure. We have the right exit run rate heading into next year.
To talk about revenue and profitability in the medium term and to simplify the numbers a bit.
If we said we could have around $600 million in revenues in Q4 and approaching $100 million of EBITDA that is basically where we thought we would have been towards the end of Q1 or early <unk>. This year. So we have gotten knocked down a few quarters, which has been tough to deal with and everyone competes in the same environment.
But to that run rate and to be clear, we're not making a call on exact timing of these items. We know that there are positives that exist.
The biggest item is obviously revenue growth, but there are also spots just like with the Hospira transaction, where we have negative margin situations and while not huge they do make an impact.
In addition to those two items, which we control there are other things we control like the operational performance leading to all of this expedited fulfillment.
We are realistically spending over $25 million in 2022 on expedited fulfillment above base fuel rate increases through the year and we need to bring this number down.
And we control the remainder of our synergies, which don't come as quickly as the year one items, but we know were out there.
And while we don't technically control fuel costs, though we need to address the tactical item and how it should be incorporated to certain products over time.
<unk> increases and currency have probably been between $40 million to $50 million above our starting budget this year.
I'm sure there'll be offset dis synergies and other negatives in the future that will find but there is a large self help list that as we get more stable. We can start to work down we'll skip the bookends feature today, but a number of those items are independent of revenue growth.
And to close with tying that desired income statement back to value a bit.
We have not talked about the aggregate positioning of the combined portfolio and its relevance for customers and their reactions. Yes. The situation is harder than we expected, but the customer logic continues to make sense like hospira, we need to change the conversation from the historical perception to demonstrating our value through innovation and service. These portfolios makes.
Together and we're working on how to integrate them, either literally or economically sensible and.
And we do believe more doors are being opened as a result of having a broader set of items that are mandatory for care.
Get that this needs to show up on the P&L to prove that value.
For legacy ICU, our most differentiated businesses will end 2022 larger than ever with appropriate profitability levels.
Core premise of the Smiths transaction is to enhance the product offerings for these exact categories that drive our returns as well as add logical adjacencies predicated on the same characteristics sticky categories low capital intensity single use disposables opportunities to innovate and participation of logical industry structure.
Even though were consumed basic operations, we still believe this is 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 new spaces. The construction of the Smiths portfolio was logical and frankly why it survived over the years the other.
Part of value is maximizing the opportunity with each piece of the portfolio. We believe as we clean up and stabilize the operations, we could be presented with more opportunities here.
There is no change from the previous call and our near term priorities are in our usual bookends.
While the pandemic introduced substantial volatility strategically we do think the weaknesses at X. It has 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 hold manufacturing barriers and in general are 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, we've gotten knocked down a bit but we see the Hilda run up again together with our new colleagues to drive value out of the combination. Thank you to all the customers suppliers and frontline health care workers as we improve each day, our company appreciates the role each of US has had.
Play and 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 second quarter, and then move on to cash flow and the balance sheet.
Along the way I'll provide our updated outlook for the full year for each of these areas.
Starting with the revenue line, our second quarter 2022, GAAP revenue was $561 million compared to $322 million last year, which is up 74% 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 by business unit can be found on slide number three of the presentation.
For the legacy ICU business, our adjusted revenue for the quarter was $324 million compared to $311 million last year, which is up 6% on a constant currency basis, and 4% reported infusion consumables was up 9% constant currency and 6% reported.
<unk> systems was up 6% constant currency and 3% reported in IV solutions was up 3% on both a constant currency and reported basis. Overall, we were pleased with the results of the legacy ICU businesses.
Okay.
The second quarter was the first full quarter of Smiths medical under our ownership in the business contributed $223 million in revenue as Vivek mentioned this was less than we expected.
As the operational challenges, we discussed on our last call have taken longer to address.
However over the course of the second quarter revenue per billing day improved from April to May and May to June and we expect this trend to continue for July as we finalize those results.
The June revenues when annualized we're still not back to historical levels, but we have now seen multiple months of sequential improvement since the closing of the transaction.
As you can see from the GAAP to non-GAAP reconciliation in the press release for the second quarter, our adjusted gross margin for the combined company was 36%.
This was lower than we had expected due to the impact of several specific items, which fall into a few distinct categories.
The first category is operational inefficiencies being driven by the current supply chain environment here, we saw a two percentage point impact to gross margin from a combination of the continued effect of lower lower manufacturing absorption from reduced volumes.
Thus additional expenses related to air freight and other forms of expedited shipping to customers.
Most of this expense relates to the legacy Smiths medical operations.
The second category is higher market prices for freight and diesel as well as certain categories of raw materials.
The higher freight rates were disproportionately driven by the legacy ICU solutions business.
The higher raw material prices were spread more broadly.
These higher freight and raw material costs reduced adjusted gross margin by approximately three percentage points.
Final category is foreign exchange, which had a one percentage point negative impact to adjusted gross margin for the quarter as a result of the strengthening U S dollar.
As we consider the outlook for the remainder of the year. We believe we have the opportunity to improve on the first category of operational items as we continue to increase manufacturing output and improved customer fulfillment.
But given our willingness to expedite shipments to ensure product availability for customers along with the lag between manufacturing improvements and the cost recognition in the P&L, we don't expect a meaningful improvement to adjusted gross margin this year.
As it relates to the categories of freight and raw material cost increases as well as FX. The outlet outlook. We have assumed current levels for the remainder of the year. Therefore, we expect second half as well as the full year adjusted gross margins to be in the range of 36 to 37.
Sure.
Adjusted SG&A expense was $114 million in Q2, and adjusted R&D was 22 million after adjusting the first quarter close timing of Smiths Medical total operating expenses in Q2 declined compared to Q1 by approximately $7 million from a combination of cost synergies.
And lower personnel costs.
Moving forward, we expect total adjusted operating expenses as a percentage of revenue to remain around Q2 levels for the remainder of the year.
Restructuring integration and strategic transaction expenses were $14 million in the second quarter and related primarily to integration of the Smiths medical acquisition going forward, we expect restructuring integration and strategic transaction expenses in each of Q3 and Q4 to be around the same level as Q2.
Adjusted diluted earnings per share for the second quarter was $1 37 compared to $1 88 last year. The prior year results were favorably impacted by a lower tax rate due mostly to excess benefits from equity compensation, which contributed approximately <unk> <unk>.
Basic and diluted shares outstanding for the quarter were $23 9 million.
And finally, adjusted EBITDA for Q2 increased 27% to $85 million compared to $67 million last year.
Now moving on to cash flow and the balance sheet for the quarter free cash flow was a net outflow of $86 million.
We're a number of discrete items.
During our last two quarterly earnings calls, we said, we would invest heavily this year in the three key areas the.
The first was higher levels of inventory to bolster safety stock and allow for onboarding of new customers here.
We invested $64 million in additional raw materials and finished goods inventory most of which was related to the Smiths medical product lines in order to protect our manufacturing operations from supply disruptions and to better serve customers.
The second area was the integration of the Smiths medical business and as previously mentioned, we spent 14 million on restructuring and integration.
And the third was quality improvement initiatives for Smiths medical and during the quarter, we spent $17 million on quality system and product related remediation work.
Additionally, we spent $24 million on Capex for general maintenance and capacity expansion at our facilities as well as placement of revenue generating and fusion pumps with customers outside of the U S. And we continue to expect total capex spending in 2022 of approximately $100 million.
In future quarters, we don't expect the same aggregate level of spending as inventory levels will stabilize.
But we also don't anticipate meaningful cash flow.
No.
Generation for the remainder of 2022 as we will continue to invest in the Smiths medical integration and quality system improvements.
And just to wrap up on the balance sheet. We finished the quarter with $1 7 billion of debt and $271 million of cash and investments.
Given the results for the first half of the year along with recent changes in the macro environment for freight expense foreign exchange and interest rates, we are updating our full year guidance for adjusted EBITDA and adjusted EPS.
For full year adjusted EBITDA.
We are updating our previous guidance range of $450 million to $500 million to a range of $350 million to $370 million.
For full year adjusted EPS, we are revising our prior guidance range of $9 to $10 50 per share to $6 20.
$6 80 per share.
For modeling purposes for the back half of the year. The adjusted EPS guidance assumes interest expense of $40 million.
The non-GAAP tax rate of approximately 23% and diluted shares outstanding of $24 2 million.
In summary, addressing the operational challenges of Smiths medical business and the current operating environment.
Knocked us back a few quarters.
However for the operational challenges, we saw meaningful improvement in the back half of the second quarter and as Vivek mentioned this improvement gives us line of sight to exiting 2022 at a total company revenue run rate of close to $2 4 billion annually, which is consistent with.
Our original pre closing assumptions.
<unk> ability of the business will remain constrained as we invest to repair the legacy Smiths medical business.
And fulfillment to our customers and deal with the current macroeconomic pressures.
But we remain convinced of the longer term opportunity to improve the financial performance of the combined organization with the list of items under our control strategically we have broadened our available markets and we're working to get all portions of the business on the same trajectory as legacy ICU, we look forward to pre.
<unk> updates on our progress during next quarter's earnings call and with that I'd like to turn the call over for any questions.
Okay.
We will now begin the question and answer session.
A question you May Press Star then one on your debt.
Colin Powell.
Are you going to speaker Paul.
You had said before Brad Syndicate.
Okay. Thanks, Brian Your question has been address.
To withdraw your question. Please press the Star then two.
At this time, we will pause momentarily to assemble our host.
And our first question comes from Jayson Bedford with.
Raymond James.
Okay.
Okay.
Good afternoon I guess.
Few questions here.
It's a bad quarter increase in <unk> versus <unk>.
It did hey, Jason how are you you were a little bit choppy in there.
Different answer for different regions. The U S back order actually has started to come down now.
It's been longer to get the products or U S. O U S back orders went up a little bit net net probably holding in the same place.
Okay.
And I think you've described it but just can you.
Can you walk through the sequential decline in sales.
Normalized.
Paul <unk>.
If I said.
Set it right Smith infusion systems went up Q2 over Q1.
Vascular access wind down I think $2 million sequentially.
Brian do you have the vital care number.
Memory vital care was down I think.
About the same amount of about the same at those before four so up in infusion systems down and the other down in the other two minimally down in.
Vascular access and swinging for Brian to confirm the Medicare number.
Is that demand or supply related.
We didn't ship as much of.
We didn't ship as vital care was too also we didn't ship as much Jason we are focused on getting the dedicated pump sets out for the infusion business in legacy Smith the first.
Kind of essentially four five weeks of the quarter.
And we paid the pricing on those two items and that's what I'm, saying sequentially now with the things that have happened we can see.
And it still feels early to ask but I think we can say and I think we feel like we can show consistent growth sequentially for a while now on the Smith's pump segment.
We can see that in kind of the medium term in vascular access. So we still got to execute better and I think you wont see meaningful improvement in sequential on the third segment of vital couch at the end of this year, it's sort of Alaskan bit last.
Okay.
I think early on in the year you had talked about.
Potential contribution from the legacy business.
I'm just curious within the $3 50 to 370.
On the 22 EBITDA guide what is the expected contribution from Smith.
Jason we can't it's harder now that we're almost six months.
The integration to really break that out.
Between the two businesses on the earnings line, but clearly the majority of that of the shortfall for the full year.
Related to the legacy system.
I think Brian tried to Directionally say adjacent where he said there was.
Three points on increased freight.
And raw material purchases the majority of that not all but the majority was on solutions.
So you just took that percentage against the legacy ICU.
Business, you can make some extrapolation, but I don't want to paint a picture that it's 100% on some of the inflation Edison transportation solutions business.
Okay, and then maybe last one and then ill give.
Sure.
You mentioned med fusion and kind of the reintroduction of that product.
I think you also mentioned Youre, serving current customers are there any restrictions in terms of your ability to fulfill demand there.
No I mean, I think again, we've reached the point, where we feel solid reliable on the on the testing that we've done it's sort of our choice, how we bring things into the market.
Think we feel like the vast majority of given the history of the product a huge portion of the market is holding the product plenty for us to keep ourselves busy with and.
Where people have experience with the technology et cetera, we can remediate some of the stuff that's out there.
On a timely basis. So I think it's more we're starting there than anything else.
Okay. Thank you.
Thanks, Ken.
Our next question comes from Paul Newsome with Keybanc.
Hi, good afternoon.
Hi, Brian .
Yes.
First question for me.
To get in you should take the low end.
Your guidance sort of implies very little improvement.
Something.
Need to happen.
Im here control for you to get to the low end or is that something where you can.
Or is that a real outcome.
Yes.
Levels of manufacturer.
Okay.
I don't think I don't actually think right now manage the manufacturing piece so much for the back half, it's all about fulfillment costs.
And.
I think we've gotten burn currently from January six two which is January six to mid.
Mid may we felt like we really really got burned and we don't want to over estimate any rate of improvement here right. Yes. Its Greg we've had 10 weeks have gotten a lot better its still expensive in 10 weeks doesn't make a long term trend. So I think we're just trying to be mindful of the journey, we've put everybody through.
<unk>.
I think that makes sense and then last quarter you bucket is the quality.
She was on our minds.
Quarter in revenue what does it mean in relative to that 60 million to be back supporting existing customers.
Okay.
It means a portion of that 15, I think we feel like we can we can participate in now not all of that was related to just a comment on med fusion, so range or some other products in vital care. Some other self inflicted European quality holds et cetera.
But there is a portion of it that comes back online.
That's where we're going.
And then just.
We do continue to get better is there.
From a manufacturing absorption on the inventory.
As we work through the P&L things continue on a trajectory and you could actually see it.
Better sequential improvement.
I'll go first and let Brian go I mean, the pain, we're feeling right now is right. If you make the product today and your factory is not as productive you feel that pain later when you sell that product right. Now we are feeling the pain of unproductive factories.
In Q1 and in part of Q2 and to the extent product was moving in from the fall of last year.
Those factories are much more productive today and those products are just starting to make their way into the market. So we would be at minus whatever inflation labor raw materials.
Cost increases have come through.
Certainly we're trying to be more efficient going forward, but I'll pause there and let Brian .
And Matt maybe to your question there is a little bit of a.
Lag.
In between the actual operational improvements from a manufacturing standpoint, and when do you see those benefits come through the P&L and that's.
It can be one five quarters or so before you see it.
Okay.
And I asked the question last quarter. This is the last one.
Alright, and have you have you lost any customers.
You get a sense of it but.
Theyre now happier with the overall process of remediation and moving forward with ICU and Smith.
Yeah.
I think.
To give a very.
Market oriented answer would be.
Where there was lots of multiple choice in the market.
I think we do believe we've lost some share and we need to turn that back very similar to some of the analogies. We lived through in Hospira, where the products were maybe a little bit more limited into the market.
Or were there were heavy capital outlays and people have.
Equipment, that's running fine, where they just need a predictable disposable to shop, they've hung in there. So it's a little bit of a different answer if it's a if it's not related to a piece of capital equipment. It's truly a single use disposable that has lots of choice in the market at some point brand matters less if you can't supply.
There are spots where brand matters, a lot safety matters lot quality matters, and if it's correlated hardware and it's even more sticky so.
I think that my story my opinion on this stuff for all all participants these products last and are a lot longer than anybody expected and are stickier than a lot longer than anybody expected alright, and we've seen that in.
And multiple versions of the story.
Okay. Thank you guys.
Thanks, Dan.
Okay.
Ladies and gentlemen, if you would like to pose a question.
One.
Omar one more question.
Hello.
Okay.
Okay.
Thank you and good afternoon.
Just a couple of quick follow up question, maybe asked a different way on the I know, it's hard to break out.
Legacy from some Smiths these days.
Sort of $45 million to $50 million incremental impact of inflation from the start of the year that you guys called out that's across the company I assume not just legacy is that is that correct.
Yes.
Across the company Larry Sorry, that's what I was trying to say yes.
And then that 'twenty like yes, that's okay.
It was all in that $25 million is right in that $25 million of expedited freight would mostly be Smiths right is that correct, that's what Brian alright.
$25 45 to 50 million.
Could eventually come down.
Inflation comes down, but that's a number that's.
We can talk about in a second but my follow up question on that but the 25 inevitably if you.
If you're a fulfillment and production is.
Optimize then that number should really go to zero inevitably right.
And there is always there is always job, we always thought there's something happening somewhere right at a few million dollars a barrel under 10 certainly right.
Even in legacy ICU, yet a little bit of.
Of that here and there so I don't want to I don't want to say it doesn't happen, but none of us are very super centers like this so basically just to be super blood. If stuff you can get on the water again.
Sure Howard networks get fully replenished.
We're spending money now to try to get the forward networks fully replenish staff can stop going in the air It can go on boats.
Paul Raines opening up as we speak.
Right, Yeah, absolutely and then what about just I know you mentioned you think you can get that you can exit the year kind of getting back to that sort of run rate.
On revenue, we're close to X currency.
Obviously, the margins will be lower for one just because of expedited freight costs and whatnot and then.
No.
What about do.
Do you feel like.
Taking a step back from when you bought the Smiths to today anything has really the structural things that you didn't realize were there or is it just more going to take longer time, and obviously you guys always do youre going to have this higher inflation.
Other costs that maybe which is impacted not just <unk>, but your legacy business and many others too.
Yes, I mean, there's a lot in that statement Larry.
Right so.
Has anything really changed significantly or is it just more blocking and tackling.
Are those broken tackles here.
I'm just trying to figure out because it seems like you talked about the business moving this is a business that moves kind of slow and whatnot, but.
You're cutting guidance pretty dramatically.
From.
When we spoke in mid May right so iconic.
I think.
One <unk>.
As it relates to when we look back on the transaction.
Yes, we think it starts with revenues and so getting the revenues and Thats after a currency, which has been really Ralph So if you don't have the revenues and order you can't get the profits. We think the revenues are getting an order here each day and each week is getting better and so we think we'll be at Q4, where we should have been revenue wise not out of the box.
Soon thereof, and from a profit perspective, similar where we thought we'd be three or four months into this so yes, we got knocked down seven or eight months in this thing.
But on the other hand, we have a much bigger book of business and many more synergy opportunities together across the network, where if we were standalone dealing with some of this inflation on ourselves I think it would have been tough defined an equivalent amount of things to lay that off butter solutions to mitigate that and so there are merits.
Over time to being bigger here with a coherent portfolio.
And in terms of the guidance thing again back to the previous question I think.
There's no reason to try to squeeze blood and marginally disappoint a customer here for the next.
Two or three or four or five months right. What we said is holding the share serving people well and showing that we can fix this is more valuable data show that we can get the revenues there serve the customers run good factories.
Sure cost et cetera will stabilize.
And will we have a long list of self help items that we tried to schedule out there and a lot of detail that add up to a big number if we can get after all of them right as long as the customer absolutely absolutely no fluids and then just lastly, I mean, you never want to squeeze your customer.
Subscriptions, where you can't but just in terms of our pricing.
You've touched on it for several calls but.
A big question when you see most many industries companies.
Large market shares.
Such as yours are able to get price I realize your businesses.
<unk> contracted but so you spoke about.
Contract talks.
The renegotiations for future contracts do you feel like youll be able to get more price.
Why can't you have some kind of a surcharge in there that covers fuel and other things like many other health care companies do that have contracted businesses that sort of helps you in periods like this.
Thanks.
I would say Larry we are exploring all options. There is no renegotiation of anything going on I think we were trying to lay out we start thinking about.
The way, we believe the industry should maybe deconstruct value on some of these items because of the historical way of doing business doesn't necessarily apply.
In the short term certainly we will we're paying attention to what the competitive set is out there and we will we'll follow the lead if given the opportunities.
Okay fair enough I appreciate it thanks.
Okay.
Anything else Alex.
This concludes our question and answer session I would like to turn the conference back over to Vivek Jain.
Closing remarks. Please go ahead.
Thanks folks, it's obviously been an interesting six months, we really appreciate everybody's interest in ICU. Your patients the situation is improving and we look forward to updating you on our next call.
The call has now concluded thank you for attending today's presentation.
Now with Cornell.
Okay.
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Yeah.
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Okay.
Thanks.
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