Q3 2022 ICU Medical Inc Earnings Call
Good afternoon.
And welcome to the ICU Medical's third quarter 2022 earnings conference call.
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I would now like to turn the conference over to John Mills with ICR. Please go ahead Sir.
Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the third quarter of 2022.
On the call today, representing ICU medical is the Beck Jain Chief Executive Officer, and Chairman and Brian Bonnell, Chief Financial Officer.
We have a presentation accompanying today's prepared remarks to view the presentation. Please go to the Investor page and click on the events calendar and it will be under the third 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 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 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 when 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's my pleasure to turn the call.
Paul over to go back.
Thanks, John Good afternoon, everybody and we hope you are well once again, it's been a quick 90 days or so since the last call and our legacy ICU business unit revenues were again very predictable in Q3, and we did have operational performance improvements for the businesses that came with Smiths medical the external economic volatility in the supply chain around.
In fuel that we've been describing since mid 2021 surpassed even the Q2 2022 levels, which was hard to believe as we said previously Q2 was the highest peak for any time our team has been in the industry. However, the issues around raw material availability are narrowing from a customer perspective, we.
U S Hospital census was stable and international underlying demand was good in all geographies in Q3 like everyone in our industry. We wanted to start first by thanking all of our customers and their frontline workers for trusting us to serve you during these times.
While Q3 revenues were generally in line with our previous comments for legacy ICU medical our revenues for Smiths Medical were ahead of our expectations that we laid out on the last call.
Since everyone has now talking about items, they would have never imagined describing that our earnings call.
I'll join that group and wanted to use the time today on the call to comment on the year over year drivers of the three main legacy ICU businesses.
Explain the Smiths medical revenues, we achieved in Q3, and how that bridges with our comments on the last call.
Provide a status update on the Smiths medical two buckets of challenges we've been highlighting all year.
Go a bit deeper on the specific items that have really hurt gross margins. This year because of the scale. So astounding and it answers the question of where has the profit gone this year.
Foreshadow and it's subject to change how we might report next year as we realign our reporting business units.
Highlight the continued challenges with the strong U S dollar and why we're taking our medicine today and it's most up to date impact in the near term and lastly note a few important strategic items. We've now finished as they will impact the base of 2022 going forward. As these were the first must do strategic items that they were negative situations and we will skip the standard.
Long term value creation comments is that as after we get the self help items secured in the near term.
Q3, 2022 was our third quarter of joint reporting and finally, the story is getting a bit shorter I'll.
I'll quickly summarize the whole company results and then discuss each segment of the business. We finished the quarter with $582 million and adjusted revenue adjusted EBITDA came in at $93 million and adjusted EPS was $1 75.
We had a softer quarter of investment into the business and it was largely about inventory builds that Brian will describe again it was a less clean quarter in the cost of goods as we spent at a very high rate to improve the service levels of Smiths medical and we had restructuring and integration costs that we remain focused on reducing next year as they impact cash flow.
The strong dollar and current and FX impact are worse in Q2 worst in Q2 at the moment.
So let me start with legacy ICU medical which is a relatively straightforward story.
In Q2 legacy ICU had $320 million in revenue, which was flat on a constant currency basis and minus two reported we had small growth on a year over year basis in our most differentiated businesses with negligible Covid impact and as previously discussed Q3 2021 had a strong covered search nothing was dramatically different than that.
Underlying demand in Q3, but there was some inter quarter slowdown during the quarter and bounce back in September the public hospital companies validated our view on their recent calls that surgeries were up and long stay high acuity admissions were down.
Our U S sales were flat to down year over year due to the strong COVID-19 comp in Q3 of 'twenty, one and all the growth came from the 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 $141 million, which was a 1% increase on a year over year constant currency basis, and minus 3% on a reported basis we.
We had growth in the O U S markets in the U S market was slightly down in core IV and helped by the specialty categories, which foots with the strong COVID-19 comp in the summer of 'twenty one.
<unk>, we've been a bit constrained due to some raw material challenges that should abate by the end of this year. We're happy the international markets are holding up in the U S is a little harder to judge right now.
Moving to infusion systems, which is primarily our LDP pumps and associated dedicated sets. This segment did $88 million and adjusted revenues, which was an increase of 1% on a constant currency basis were minus three on a reported basis. We did have a decent level of installs in Q3 and here we had some dedicated set declines on a year over.
Year basis in the U S. Due to Covid in 'twenty, one, but the segment grew due to better international performance on.
On the last call. We said, we felt that customer retention was back with bandwidth have real discussions and some of the fatigue from Covid is passing and the acceptance of inflation in the cost of nursing et cetera, being internalized, yes. The stresses of the current environment do make it a bit bumpier for decision, making but we don't believe over the medium term relative to our size there is any change.
Our competitive opportunity and we are focused on commercial execution here I have no change to our previous commentary on the segments.
Finishing the segment discussion with infusion solutions, we had $81 million in adjusted revenue or about the same as last year on a year over year basis.
No additional comments on the revenue side here the bigger issue for US is this is the segment that is disproportionately absorbed the majority of inflation at <unk>.
Legacy ICU, which has impacted 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 currency and to a lesser degree electronic components surge pricing through.
Through Q3 labor has been much more consistent this year and we budgeted those items properly, yes, theres 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, we've talked about believing in the markets and when capacity increases pricing should rationalize so for us it's.
Trying to run a stable and predictable operation in normal environment to get price improvement, where we can and to try to illustrate to customers. The need to have some of these cost index 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 how to separate the costing on some of these items for example, where transportation and logistics costs should be separate items no different than airlines.
Heat and baggage fees or next day delivery.
Given the historical margin structure of the health care industry and historical negligible inflation suppliers never had to think this way.
Okay. So let me move to the Smiths businesses first talking about aggregate revenues relative to our last comments and then to update the two buckets of issues have been talking about all year.
Smiths medical revenues came in at $262 million of infusion systems at $97 million vascular access at $95 million in vital care at $70 million. This was more than we expected and the short story on why this happened is a combination of a few more billing days that part we knew.
But with more stable operational processes in terms of it systems and labor all of which led to improved performance on clearing some of our back orders, albeit again spending freely to do so the.
The underlying performance for the domestic business has substantially improved with international performance still under repair.
On the last call, we talked about more confidence and predictability in the Smiths infusion systems line, we did better than we thought in Q3, as we supported existing med fusion customers and more importantly, all use back orders on CAD disposables were cleared which makes the competitive focus on new wins more actionable.
We had not anticipated a recovery until Q4, but regardless the entire unit is running better now with reliable production and fulfillment on the Smiths dedicated pump sets and some of the other items.
On the last call. We also said vascular access would have some improvement, but still a work in progress even with a strong Q3, we did benefit $5 million from the last Covid syringe order and here too we are very healthy from a production and U S distribution standpoint on all the major sub product lines, but our commercial execution remains a work in progress.
Smiths like Hospira did go backwards here.
Lastly, vital care remains an area, where some of the supply challenges remaining back orders continue to be worked as it was neglected the most.
We spent a lot of time airtime on our last two calls explaining the two buckets of issues, let me take them in reverse order today from the previous scripts.
On the quality related interruptions, we continue to make execution progress that supports the previous communication to both customers and regulators in our view of the path forward and have made some significant decisions those decisions just stopping sales for certain older generational 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 have also made progress in addressing the root causes of the warning letter that we 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 experience and our team is fully embedded into the operation. We would say the main difference since the last call is in Q3, we began to execute the various field actions in line with our commitments that we had made in the earlier communication.
Period.
As we said on the last calls the existence of a warning letter while undesirable is the regulatory agency trying to move the ball forward and we 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.
Regardless of where it appears on the P&L, we're spending heavily so making progress here is extremely important.
On the operational issues with regards to production. It can generally be said that the entire Smiths production network is producing at acceptable levels with a few minor interruptions.
Silicone availability, we described in the last call has resolved and now we're fully producing those items. We continue to work on securing the base of supply and in sourcing the key high margin disposable components with proper factory staffing levels from.
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 drag to gross margins.
In the vein of we can't believe we're talking about this we did want to give a little more detail on the largest gross margin variances from expectations because at this moment those are the largest buckets of addressable opportunities and the scale is so astounding and it goes a long way to answering where has the profit gone. This year, Brian will go through those in more detail.
We have already seen our ability to manage our costs across operating expenses and our focus obviously needs to be on growing revenues, but it's equally important to improve our gross margin performance.
One area I'd highlight is our freight and logistics costs, which will approach $250 million this fiscal year that.
That is orders of magnitude more than any historical level par.
Part of that is diesel cost part is ocean freight rates part is expedited shipping costs not only to our customers, but also to ensure we have the right raw material supply to our network. This is not something we intend to talk about regularly but it's hard to understand the profit shortfall without some huge drivers as it's not like ASP is going down anywhere in the business.
This area along with other large items like improving the quality system and reducing remediation costs are all large areas for self help and cash flow generation.
In terms of next year, we did want to foreshadow and it's subject to change how we might report as we realigned our reporting business units, it's likely that will aggregate revenues into three segments. The largest would be a consumable segment that would contain the legacy ICU IV consumables most of the legacy Smiths medical.
<unk> access and a few other consumable slides.
We think production and operations for most of that pillar should be improved in 2023 with work needed on the vascular access commercial execution as previously mentioned.
The second segment would be a systems segment, which was all the legacy ICU IV pumps combined with most of the legacy Smiths Medical IV systems segment and the associated dedicated disposables.
We think service levels and quality for most of that pillar should be improved in 2023.
This segment would have almost all the capital sales of the company and as a reminder, we published in previous Investor presentation capital sales are less than 15% of the total company and that includes a large amount of software service spare parts accessories et cetera.
The remaining segment would be a vital care segment, combining legacy ICU IV solutions critical care and most of what it is in the legacy Smiths medical vital care segment will provide some schedules when ready and.
Just to note there are a few strategic efforts that would adjust the base year of 2022. Some examples are items. We just finished recently such as an agreement to exit India as a direct selling organization via distributor and exiting other negative margin situations, if pricing or costs cannot be rational. So these may be a small hit to <unk>.
<unk> revenues, but are being done to improve a negative profit situation to a neutral or positive.
In terms of the balance of this year from an earnings perspective, the only real difference from our last from a previous call is currency, even though the euro has been a more stable range. The last few months, our largest direct countries are Canada, Japan, Australia, which have all had additional currency weakness for what it's worth we.
Only carry the legacy currency hedges inherited from Smiths. This year ICU always ran unhedged so to speak as a result, we've really taken our medicine today and its had a large impact on the year.
From a revenue standpoint, we felt Q3 showed what we can do when fulfillment operations or more stable, even if more expensive we did catch up on some of the back orders faster than we thought so that may impact Q4, depending on where this underlying market settles.
Guarding longer term performance I'm not going to repeat the comments from the previous calls as we feel we have been transparent here on the size and scale of the self help opportunities.
But we want to get back to after the challenges of this series to 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 with the Hospira transaction, we need to change the conversation from the historical perception to demonstrate.
Our value through innovation and service.
These portfolios make sense together and we're working on how to integrate them either literally or economically when sensible and we do believe more doors are being opened as a result of having a broader set of our broader set of items that are mandatory for care. We get 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 offering 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 participate in a logical industry structure.
Even though we've been consumed with basic operations. We still believe this is all of the strategic case and the big opportunity over the long term is using this combined portfolio to improve our position in existing markets and also moved to the right areas as the value shifts into new spaces.
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 stabilize and improve the operations, we could presented be presented with more opportunities here.
While the pandemic introduced substantial volatility strategically we do think the weakness it is 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.
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 of the events over the last few years, we've gotten knocked down a bit but we see the Hilda run up again together with our new colleagues 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 to 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 third quarter, and then move onto cash flow and the balance sheet, along the way I'll provide our updated outlook for the full year for each of these areas.
So starting with the revenue line, our third quarter 2022, GAAP revenue was $598 million compared to $336 million last year, which is up 78% on a reported basis, reflecting the impact of the Smiths medical acquisition.
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 adjusted revenue for the quarter was $320 million compared to $328 million last year, which is flat on a constant currency basis and down 2% on a reported basis infusion consumables was up 1% constant currency and down three <unk>.
<unk> reported infusion systems was also up 1% constant currency and down 3% reported and IV solutions was down 1% on both the constant currency and reported basis.
Overall, we were pleased with the results for the legacy ICU businesses as compared to a very strong Q3 last year.
For the third quarter Smiths medical contributed $262 million in revenue compared to the second quarter. This represents a sequential quarter increase of $39 million.
It is worth noting that Smiths medical's historical financial reporting calendar resulted in five additional business days during the quarter as compared to legacy ICU.
We estimate that these five additional business days accounted for approximately half of the $39 million sequential increase in revenue with the remaining increase due primarily to improvement in customer order fulfillment and reductions in back order levels, most notably within the legacy.
Smiths medical infusion systems and vascular access businesses.
During the quarter, we completed the systems work to align the Smiths medical financial reporting calendar to that of ICU and going forward. The number of business days will be the same across the combined company.
As you can see from the GAAP to non-GAAP reconciliation in the press release for the third quarter, our adjusted gross margin for the combined company was 35% <unk>.
During the quarter, we continued to experience the impact from the same items as the second quarter and largely to the same degree with the exception of foreign exchange, which worsened during the third quarter. As a result of the continued strengthening of the U S. Dollar.
For the full year, we expect adjusted gross margin to be around 36%.
Coming into 2022, we originally expected adjusted gross margins to be 40% or four percentage points higher than our current forecast. So let's recap the drivers of this difference which fall into a few distinct categories. The first category is operational inefficiencies.
Being driven by the current supply chain environment here, we're seeing a two percentage point impact to gross margin from a combination of the continued effect of lower manufacturing absorption from reduced volumes plus additional expenses related to airfreight.
And other forms of expedited shipping to customers, which has been incurred to address the legacy Smiths medical operational challenges.
The second category is higher market prices for fuel and diesel as well as certain categories of raw materials.
Higher freight rates are disproportionately driven by the legacy ICU solutions business, while the higher raw material prices are spread more broadly.
These higher freight and raw material costs reduced adjusted gross margins by approximately two percentage points.
And the final category is foreign exchange, which will have a one percentage point negative impact to adjusted gross margin for the year as a result of the strengthening U S dollar.
Recently, we have seen some improvement related to manufacturing absorption as we continue to increase manufacturing output and improved customer fulfillment, but this benefit has been largely offset by the impact of foreign exchange from the continued strengthening of U S. Dollar. Additionally, our willingness to expedite shipments to ensure product availability.
The ability for customers along with the lag between manufacturing improvements and the cost recognition in the P&L, we don't expect to see a meaningful improvement to adjusted gross margin during the fourth quarter.
Adjusted SG&A expense was $107 million in Q3, and adjusted R&D was $23 million total operating expenses in Q3 declined compared to Q2 by approximately $6 million from a combination of continued realization of synergies lower personnel costs and timing.
Restructuring integration and strategic transaction expenses were $14 million in the third quarter and related primarily to the integration of the Smiths Medical acquisition. This was the same level of spend as the second quarter and we anticipate we will maintain a similar level of spending in Q4.
Adjusted diluted earnings per share for the second quarter, but for the third quarter was $1 75 compared to $2 <unk> last year. The current quarter results reflect an adjusted effective tax rate of 18, 5% and basic and diluted shares outstanding for the quarter were 23.
$9 million.
And finally, adjusted EBITDA for Q3 increased 29% to $93 million compared to $72 million last year.
Now moving onto cash flow and the balance sheet.
For the quarter free cash flow was a net outflow of $18 million sequentially. This was a meaningful improvement compared to a net outflow of 86 million in the second quarter.
Due to a combination of improved earnings and lower working capital.
And we saw this improvement in cash flow while at the same time continuing to invest heavily into the three key areas of the business that we've highlighted for the past several calls the first is higher levels of inventory to bolster safety stock and allow for Onboarding of new customers here, we invested $52 million.
In additional raw materials and finished goods inventory during the quarter most of which was related to the Smiths medical product lines in order to protect our manufacturing operations from supply disruptions and to replenish our distribution channels 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 $19 million on quality system and product related remediation work.
Additionally, we spent $21 million on Capex for general maintenance and capacity expansion at our facilities as well as placement of revenue generating an infusion pumps with customers outside of the U S.
And we continue to expect total capex spending in 2022 of approximately $100 million.
For the fourth quarter, we will continue to invest in the Smiths medical integration and quality system improvements along with higher levels of inventory across the combined company. However inventory has been the area of greatest investment with a $152 million spent through the first three quarters. This year and we believe.
<unk>, we are nearing the point of stabilization and expect inventory levels to peak by Q1 2023.
And just to wrap up on the balance sheet. We finished the quarter with $1 7 billion of debt and $249 million of cash and investments.
Since our last call the macroeconomic.
Factors that.
Impact our near term earnings outlook remained mostly stable with the exception of foreign exchange, where the U S. Dollar has continued to strengthen relative to foreign currencies in markets, where we have a meaningful presence.
As a result of the foreign exchange impact on our P&L for the second half of this year, we expect to end the year at the lower end of our previously provided guidance ranges for adjusted EBITDA of $350 million to $370 million and adjusted EPS of $6 20 to $6 80 per share.
For modeling purposes for Q4, adjusted EPS guidance assumes interest expense of $21 million, a non-GAAP tax rate of approximately 23% and diluted shares outstanding of $24 1 million.
In summary, we're pleased with the meaningful progress we made during the third quarter to address the operational challenges of the Smiths medical business, while profitability will remain constrained as we invest to repair the legacy Smiths medical business and deal with the current macroeconomic pressures.
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 providing updates on our progress.
Along with our 2023 outlook during our call early next year.
And with that I'd like to turn the call over for any questions.
We will now begin the question and answer session.
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At this time, we will take our first question, which is coming from Jason Bedford with Raymond James. Please go ahead.
Hi, Good afternoon can you hear me okay.
Perfectly hey, Jason.
I always feel like I need more time to digest all of the information given it on these calls, but let me take a stab at it here.
On the legacy.
Infusion systems business good set of installations.
Did mention you are seeing a benefit from the Smiths combination.
Are you seeing some selling synergies as a result of Smiths.
I would say, Jason if you kind of look the way the market's lined up.
Historically.
Every place that used as Smiths product was using either our lv pumps or someone else's. So we had a very good sense of where ours.
We're I think on the <unk>.
Where it was being used in other spots those are doors at least we have a reason to be in now where we didn't necessarily have a reason to be there before so I would say it's.
It's forcing us to have some conversations that.
Or allowing us to have some conversation we may not have had access to before.
And the environment for capital.
<unk>.
<unk>.
I think thats, what I tried to address in the script.
It was it felt pretty good 120 days ago. It is still pretty good it's a little bit taken a little bit longer just given the the week to week drama in the world right now that I was saying it could.
Slow down some decision, making so we haven't seen anything material. The other point I was trying to make there is if you look at kind of the stuff we published.
Capital, what we called capital for the combined company is 15%, but if you dig a little bit deeper a chunk of that is software license annual software licenses and service contracts and spare parts actual capital's not not such a huge part of the company important obviously, because it drives future dedicated.
Disposable share, but it's.
The vast majority of the company's single use disposables.
Okay.
And on the legacy consumables business growth slowed I realize you have you had a tough comp here.
I think you alluded to some supply chain constraints I think in the past you've called out oncology is there any way to either kind of quantify the impact of the supply chain constraints or at least just kind of frame the current situation and well when it will be resolved.
Yes, I think theres, probably two two issues that happened.
And that's why we're trying to say there was a little bit of intra quarter.
Volatility it was a little bit.
Soft out there in U S hospitals kind of mid July early August maybe I don't know if it was holiday travel or what but it was a little bit less than we had expected.
And that's part of what happened in Q3 and the other part is being short some of these items on oncology and one or two other areas I would say I don't want to give a precise number around that but it's certainly more than a million bucks over the balance of the year.
Over the balance of the year the quarters.
Well.
We're seeing a lot of it happened in Q3, so a million bucks in the quarter is probably.
Okay.
Just on gross margin you kind of called out the $250 million impact I think you cited diesel ocean freight expedited freight.
I also mentioned that there's areas of self help within that is there any way to kind of walk us through where you see the opportunity in <unk>.
When we will see an impact on gross margin.
Just to be clear, we were just saying two.
<unk> hundred 50 is the absolute spend right and by any historical measure spending 10% of your revenues on.
Moving stuff around us.
And not sort of a normal level.
So it's not it's not saying thats all incremental pain.
There's lots of pieces of that you can pick at.
One piece that we've been very focused on we knew we were going to have some expedited freight.
When we did the transaction and we were behind that even some of our own production, which had more expedites.
So I don't know I'd say that the number of expedited freight costs. This year was somewhere north of $20 million 25 million box. That's a very tangible thing that we need to go after it's not all going to get solved in one quarter. It takes time to get it but it's it's fully under our control and we need to we need to do that.
A chunk of variance relative to our original plan for the year.
Okay.
Clarify spend.
I realize we're not in a normal environment, what is normal meaning if $2 50 is what it was this year in a normalized environment for a business. This size what would be the normal level.
I think we'd want a separate IV solutions I don't want get too granular, but we'd want to separate IV solutions from everything else.
Historically those.
Costs were in the 4% to 5%.
Range for outside of solutions.
We see a much higher percentage right now.
Okay.
I'll jump in queue, and let someone else jump in.
Thanks, Jason Good tuck ins.
Our next question will come from that in the Shannon with Keybanc. Please go ahead hey.
Hey, good afternoon, and thank you for taking the questions.
Vivek.
I don't want to get too granular around like a single quarter.
But I know a lot of people are focused on like the exit rate.
For this year and running that out to next year. So as I think about the low end of guidance I'm thinking receptivity to the 360 and the range that takes you down to 350 is if you can step back.
Some of the progress you made this quarter and three getting closer to 360 and took another step forward and moving towards.
2023, well, how should we think about it like that.
That range of outcomes for the fourth quarter.
I'm looking at Brian Sorry, Matt.
Everywhere.
I think we just.
It's been a difficult year, Matt and we just don't want to make.
Mistake I think your question is 100% fair I mean, we were pretty transparent on the last call script, we got a little ahead of that from a revenue perspective, there is room to improve.
Margins.
I would feel better just saying we stay within their will address next year when we get there.
If revenues Didnt come through and currency got worse. There is a chance you said what you just said could be right.
<unk>.
But there is an equal chance that if we do what we're supposed to do.
We land, where we intend to land so.
I get the question I don't want to pick at any one quarter either given what we've put people through and what this years felt like.
Okay, I think Thats fair.
And then you talked about.
These strategic efforts you are making how are you thinking about like the timing of portfolio rationalization at this point.
There was some there are there were there are a few countries, where we have lines of business.
<unk> are truly money, losing.
And we should address those first if they're actionable.
And so we've been doing that some spots, where we had to change pricing in the market in some spots where it just makes sense to have a different different go to market model.
<unk>.
And so we've been focused on those because those are true negatives.
And then in terms of is there something else on the portfolio rationalization front, it's not exactly the best sellers market of things in the World, which I don't think is a ground breaking news to anybody. So I think right now our focus is to get the assets running well in order and kind of see what the road brings right.
If they are positive cash flow.
Contributing to the overall enterprise, we don't feel under any pressure or rush to do anything other than to maximize value.
Okay.
Well I don't know I'm not sure if Jason hospitals or not how much was oncology could spread circle all that you can quantify that.
I mean, I think I think the answer we gave there was about a quarter, which you could say it was 1 million bucks or something I don't think it would be.
Unrealistically assumption to say, if you annualize that number.
That was the impact of oncology constraints this year.
Okay got it alright.
Alright. Thank you thanks, Brian .
Thanks Pam.
And our next question will come from Larry Solow with CJS Securities. Please go ahead.
Hey, guys. Good afternoon, just a couple of follow ups.
The slowness in the U S July and August because that also be sir.
Here are a couple of companies a little bit of a return to some seasonality.
Due to that.
Do you feel that one impact for you guys as well at the hospital level or.
Possibly possibly.
Looked more like the world did pre COVID-19, but.
Right, even a bit less than that so it's hard to say.
Okay, that's fair.
You mentioned, it's still a little bump even in the fourth quarter right. So I was trying to say well.
But what we need to hold our market share gain market share create new categories. That's what we're focused on right. We're not going to change so much standalone just make sure of the portfolios in the right places with the right customers.
And Vivek you mentioned some of the strategic efforts.
And I think you said typically at the exit of India for one.
I imagine theyre, all kind of a small onesies and twosies, but can you give us an idea of sort of can you quantify anything just that you know.
Give us a little in a frame of reference.
All of these projects are telling what they're doing in terms of moving the needle at all.
I mean, I think they're all onesies and twosies, but theres a number of them right. So we will take.
That's where else we lifted right now so.
So we have to.
We have to grab them, if we can even if it's a low single digit type of help we got we got to do it.
Right right.
The gross margin pressure I see nothing new.
Great.
I think you said, Steve Bryan said, I expect sort of a 35% in Q4 as well.
What are you building in any kind of improvement on the prior expectations I don't think so I just wanted to clarify on that one.
No no we Werent Larry.
I think thats, saying, alright, so nothing's really changed FX has gotten a little worse.
Which has changed.
It feels like.
At least it's gotten a little better are you guys seeing or at least a little bit of an improvement there.
Not enough to really move the needle just yet, but you know maybe.
Maybe some lighting do you have a tunnel.
I believe the long term forecasts right.
Back half diesel price changing.
Next year, you would believe that but at the moment, we have not seen any right. There is still a strong disconnect between diesel pricing and regular fuel pricing in the U S and.
Ocean inbound to the U S from Asia Ocean is down, but we don't really use a lot of that.
Outbound.
To Europe and other spots for us in air costs have not changed at all for expedite So air expedite is still very paper.
Most of that stuff that drives that big huge logistics numbers.
This variance on an error in other expedites.
Okay. Just a couple more on the you mentioned I think on the Maryland pump it sounds like things are medline pumps.
So you're basically back in the market with all can you just kind of give us a little more color there.
Update.
I think you mean, the med fusion.
Excuse me yeah, yeah, yeah.
I think I'd leave it at our comments in the script, which are we've informed.
Customers regulators of the actions that need to be taken to support the product.
We are out in the field working on those actions and we are supporting existing customers and that answers it.
That's probably all I would all I would say right. They didn't have a lot of information a number of months ago.
They are getting real supported field.
Gotcha, Alright, just last one for Brian just on the on the on the cash flow I know this year has been a year to date.
Our youth usage of cash although it sounds like things are getting a little bit better.
As you look out to 'twenty through without giving numbers I know you said at least the inventory.
Should start hopefully, becoming even a good guy for you guys next year in terms of positive. So would you expect that I imagine a lot of the integration stuff in Kosovo will wind down. So hopefully do you expect to return to free cash flow positive next year and over the long run you know Ken free cash flow.
Approach.
10 years, I think I haven't heard of it but kind of free cash flow sort of get close to net income.
Yes, Larry.
Yes on inventory that's been the largest area of investment for US This year, it's $150 million to date.
We do see that.
Peaking.
By Q1 of next year, and then probably stable after that I don't know if it goes down but certainly stable.
And that alone should allow us to see some.
Positive free cash flow next year, and then I think.
While it will take a while since we are going to continue investing in the integration as well as the quality systems. Yes. Eventually at some point, we do get to where free cash flow is in line with our <unk>.
<unk> net income.
I'll pile on just two things one I think Laurie. It's also the type of inventory because of supply chain and so screwed up per share.
A lot more raw materials, so even though the numbers we have.
Finished goods everywhere.
And I'm sure that's the same for lots of companies.
Other thing is it's not lost on US right in the midst of Covid net income and free cash flow, we're pretty tight here at very good levels and sure of course, we want to get back to that and.
And the truth is the transaction, we had to use and go beyond even ICU.
Legacy ICU cash flow too.
All of this together this year that is what happened right and at a minimum transaction to fund itself and.
That's probably a halfway goal relative to getting all the way there.
Got it great I appreciate all the color thanks, guys.
Yes.
Okay. Thanks, everybody. We appreciate the interest in ICU medical we look forward to.
Seeing you at various conferences early next year and having a call with you in the not too distant future. Thanks very much bye.