Q2 2023 ICU Medical Inc Earnings Call
Conference Operator, please standby at the KOL begin just a few minutes. Please continue to hold thank you.
[music].
Good afternoon, and welcome to the ICU medical second quarter 'twenty twenty-three earnings conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw.
All your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to John Mills managing partner at ICR. Please go ahead.
Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the second quarter of 2023.
On the call today, representing ICU medical is Vivek Jain Chief Executive Officer, and Chairman and Brian , but now Chief Financial Officer.
Wanted to let everyone know we have a presentation accompanying today's prepared remarks.
The presentation. Please go to our Investor page and click on the events calendar and it will be end of the second quarter 2023 events.
Before we start our prepared remarks I want to touch upon any forward looking statements made during the call, including beliefs and expectations about the company's future results. Please be aware they are based on the best available information to management and assumptions that are reasonable.
Such statements are not intended to be a representation of future results and are subject to risks and uncertainties.
Results may differ materially from management's current expectations.
We refer all of you to the company's SEC filings for more detailed information on the risks and uncertainties that have a direct bearing on the operating results and financial position. Please note that during today's call.
Also be discussing non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into ICU medical's ongoing results of operations, particularly when comparing underlying results from period to period. We also include a reconciliation.
Filiation 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 go back.
Thanks, John Good afternoon, everyone, and we hope you're well even with the volatility in the economic environment and some revenue variance in a few of our product lines. We are enjoying 2023 year to date more than last year.
A few medical it's operationally serving customers well and finding the proper balance of time between commercial focus and internal self help which is become most acutely about supply chain efficiency. The macro environment was broadly fine for Q2 with consistency in freight and fuel pricing and some increasing pressure from currency.
Currencies in our production geographies.
International demand was consistent throughout the quarter in the U S was a little choppy for us with lower acuity census admissions in April but improved through the rest of the quarter like everyone. In our industry. We want to start first by thanking our customers and their frontline workers for trusting us to serve you during these times.
We will use the time today to discuss the Q2 revenue performance of our business units provide more color below the business unit level due to certain of the results.
Update on the normal housekeeping items, including our quality remediation the separation from Smiths group systems, and our next steps towards integration and synergy capture explain our profitability and margins halfway through the year and outline the actions we need to take near term to ensure we optimize for the medium and long term.
Reiterate in check our progress against the key short term priorities, we outlined to start the year and take stock of where we are 18 months into the acquisition in the broader environment.
And again, we will skip any comment on longer term value creation, but did want to make clearer view of what we want to be.
We finished the quarter with $535 million and adjusted revenues adjusted EBITDA came in at $98 million and adjusted EPS was $1 88 <unk>.
Revenue growth was down 1% on a constant currency basis minus two and minus two on a reported basis and we had improved gross margins versus Q1, we finally had a slower quarter of inventory investment into the business and believe we have peaked on that and have adjusted output to bring inventory more in line with historical levels.
As we are sustaining appropriate to surface in the supply chain is more stable and we have a better sense of the actual underlying revenues.
Relative to Q1, the operational impact of currency is becoming more of a headwind as both the Mexican and Costa Rican local currency strengthened meaningfully against the dollar.
On the last call. We said, we feel better about revenue growth for each product line, where we've been historically stable, meaning legacy ICU and revenue recapture where we are now stable, meaning legacy the legacy <unk> portfolio. The majority of the acquired product lines are growing year over year, but we specifically have delays in bringing back the vascular acts.
<unk> revenues to the level we wanted.
The legacy ICU portfolio of pumps and consumables has grown fine but in Q2, we had some shortfalls in IV solutions with a weak April combined with some of the lingering issues. We had on the one product we source from Pfizer the vascular access recapture which is ballpark about 20% to $25 million less in revenues for the year does impact profitability.
The IV solutions less so.
So let me start with our consumables business unit, which is our largest and most profitable unit.
$237 million in revenue, which was down 1% on a constant currency basis and down 2% reported.
Obviously, we need to explain a bit more here the legacy ICU IV therapy product lines, which is the largest component of the business unit had a record quarter again in Q2 with the business being the largest it's ever been the.
The growth was driven by new customer implementations. Good census in May and June and increased capacity and ability to serve the market with focus on clinical differentiation and the creation of niche markets.
But like Q1 that growth was offset by the vascular access portion of the business unit on the last call. We said we were at the bottom here as losses occurred throughout last year and that felt very similar to the IV consumables and pump losses, when we purchased Hospira when customer losses were still felt in the four to six quarters post deal.
We did not back track at all in Q2 versus Q1, but the new business adds did not bring any meaningful net improvements so revenues were flat.
Relative to our own expectations as I just mentioned our best estimate is that will be about 20% to $25 million short here for the year relative to our plan.
And to be clear, our confidence and right to win here has not changed but its just taking time the losses from 2021, and 2022 were primarily due to supply chain issues in those core issues have been addressed by our team to.
To be even more transparent our medium and longer term expectation was only to get back the minority of what was lost over the last two years. The other components of the business unit, our oncology and tracheostomy ultra both of which are okay over the balance of the year and aided from increased capacities.
On the last call. We said in the near term we believe all four underlying lines are improving commercially and operationally with the losses predominantly out in improved capacities and we saw that on the revenues over the first half of the year on three of the lines and believe we will see sequential improvement in each line for the balance of the year, but the vascular access delays do make.
It to jump over the back half comps of last year, which included some of the Q3 operational catch up and had meaningful COVID-19 related syringe sales. So the overall business unit growth rate will be impacted and we're going to have to keep talking about the individual lines until it's rectified.
Moving to infusion systems, which is the combination of the legacy ICU RVP pump business and the syringe in ambulatory pump businesses. This business reported 153 million in revenues, which equated a 5% growth constant currency or 3% reported Q2 of 'twenty two started to get more normal last year. After the miserable start of Q1.
'twenty two the ambulatory and syringe product lines continued to be moving towards historical levels similar to last quarter. We saw good hardware improvement for both ambulatory and syringe pump hardware, which is offset by decreases on a year over year basis on ambulatory disposables as in the latter part of Q2 last year and through throughout.
Q3, 2020, we shipped so many ambulatory disposables to catch up on back orders as we improve production mid Q2 last year, it'll make Q3, a tougher comp, but regardless of that we feel fine with our previous commentary on the business unit for the year on.
<unk>, we've talked about how it was bumpier for decision, making over the last two years, we hope the recent market events allow customers to move forward with evaluations and akin to some of the large non infusion capital vendors.
We don't see capital availability is a massive impediment to our types of products, we're starting to see some commercial benefits of having a full infusion device portfolio with our combined portfolio positioned differently versus other participants again, we believe over the medium term relative to our size our competitive opportunity solid and we're focused on commercial execution here in a more.
<unk> oriented market.
Finishing the business unit discussion with vital care, which had 145 million in revenues or a decline of 7% on a constant currency basis. The entire decline in the business unit was due to IV solutions on a year over year basis really three primary drivers here first just an unusually light April which have not yet made up for over the balance of the quarter.
Second as we mentioned in the last two quarterly calls we've been a little short from Pfizer on the last remaining category from Rocky Mount which has been hurting us for a few million a quarter and lastly, a little light on some specialty skus at least for June and July orders look closer to normal, but the Pfizer shortage will continue to drag on given the Rocky Mountain news.
All of this impacts profitably slightly is IV solutions currently deflate, the corporate gross margin by ballpark 500 basis points. The rest of the business unit was generally flat as expected with temperature management up a little.
The short story message has not changed for us our differentiated legacy ICU businesses are doing well and we're focused on regaining a portion of the lost revenues in the acquired categories that are outlined in our investor presentations of the five product families. We highlighted in that slide ambulatory pumps syringe pumps vascular access tracheostomy temperature management.
All except vascular access are improving year over year and all are still below historical pre COVID-19 levels, we need to get all five improving consistently.
We stated on the last call how we're impacting the self inflicted challenges on many of the businesses and we believed in Q2, we would have all three business units growing year over year and hit the bottom of the acquired products that were going backwards. We came up a few million dollars short on revenue and vascular access to deliver that for consumables and we add more variance in IV solutions and <unk>.
<unk>, however, we become more reliable for customers with very minor exceptions and are able to engage in rebuilding trust and service is the products have always been well liked and any improvement in underlying demand and improving census work in our favor.
But improving that service level to the customer which was exacerbated in the broader environment last year has increased our inventory levels to more than what's required to run the business day to day similar to some other health care categories or even other industries as we mentioned on the last call we need to focus here to get back to the cash generation, we want that bring some short term.
Headwinds, but it's the right thing to do from a value perspective, very specifically, we have been building inventory, both raw materials and finished goods since the beginning of 2022.
The rate of build finally slowed in Q2 with the more recent months showing improvements.
Ian will go through the specifics, but we have tried to do this in the right way without disrupting the supply chain and without significant capital to restructuring here.
Okay, Let me get through the housekeeping items and I'll bring it back to results and our priorities.
Quality as we've mentioned on the previous earnings calls were completely engaged and our teams are working hard to resolve the FDA warning letter in our acquired company and related inspection observations our efforts to complete related quality system improvements and associated remediation are on track, we've made heavy investments into remediation and believes majority of remediation.
The work we've done over the next few months and spend will ramp down.
Same speech on the warning letter 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 regardless of where it appears in the P&L, we're spending heavily so making progress here is extremely important.
In Q2, we did transition away from Smiths groups. It systems and are fully separated from all TSA with better stability.
We're now focused on the eventual ERP integration standing on our own is the first step towards a real integration next year to capture the next wave of synergies and manufacturing supply chain and functional support over time.
It's also important to the extent, we want to be able to make any decisions on the underlying portfolio.
Over the first six months of the year, we've taken the first steps towards certain manufacturing consolidations and real estate adjustments and there is likely more to come all of which will be additive to gross margins medium and longer term, but it takes some time to get implemented moving.
Moving the ERP integration forward is important because it allows us to optimize some duplication in our physical logistics and service networks.
In terms of the balance of the year and being 50% of the way to the midpoint of our EBITDA range, given what we need to do to improve inventory efficiency and having less vascular access sales than we'd like we didn't want investors to think we have the flexibility realistically towards to be towards the higher end our previous guidance range.
While gross margins have been improving year to date, they will be impacted as we slow down the factories below current demand levels. So we're tightening it up a bit we need to run a smoother operation even if customer service levels are high we can't run an inefficient production environment and Brian will go through the details.
18 months into the acquisition and the broader economic environment. We have work we have resolved production logistics operational stability delivered operational stability have growth in most of the businesses and are working hard to ensure a clean bill of health on quality.
Our priorities for 2023 remain unchanged deliver revenue growth as expected and our differentiated business units, who are progressing the key product platforms progress our quality remediation to ensure quality for patients and high compliance for regulatory authorities respectively.
Focus on cash flow again by improving working capital and addressing the available items on the P&L, whether above or below the line.
Lay the groundwork via separation and then integration for capture of the remaining synergies and rationalize the portfolio, which becomes easier after separation and being stable.
Just to be extremely clear on the medium term state we're looking for.
We want our consumables and systems businesses to be reliable growers with an industry acceptable profit margin with a tightest and most optimized manufacturing network and each with a multiyear innovation portfolio over the last few years, we took an innovative component supplier and have scaled it to a global leading player where those.
<unk> should be available to us over time at our size.
There is no confusion within the company in the pursuit of that goal and we'll maximize the remainder of the portfolio as the individual contractual our strategic situations arise.
The core premise of the acquisition was to enhance the product offerings for the categories that drive our returns as well as add logical adjacencies predicated on the same characteristics sticky categories low capital intensity single use disposables and are produced to innovate and participate in a logical industry structure. These portfolios make sense together and we're working on how to it.
Great them, either literally or economically sensible and we're focusing on all lines to show up with improvements on the P&L.
While the pandemic introduced substantial volatility strategically we do think the weaknesses. It 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.
We produce essential items that require significant clinical training hold manufacturing barriers named general are items that customers do not want to switch unless they must the market needs ICU 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're getting closer to the top of the hill to drive value out of the combination. Thank you to all the customer suppliers and frontline health care workers as we improve each day our company appreciate throughout each of us must 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.
So starting with the revenue line, our second quarter 2023, GAAP revenue was $549 million compared to $561 million last year, which is down 2% on a reported basis or 1% on a constant currency basis for your reference the 2022 and 2023 adjusted revenue figures by business unit.
It can be found on slide number three of the presentation.
Our adjusted revenue for the quarter was $535 million compared to $547 million last year, which is down 2% on a reported basis or 1% constant currency.
Adjusted revenue for consumables was down 2% on a reported basis or 1% constant currency infusion systems was up 3% reported or 5% constant currency and vital care was down 8% reported or 7% constant currency as you can see from the GAAP to non-GAAP .
In the press release for the second quarter, our adjusted gross margin was 39% compared to the first quarter gross margin of 38%. This represents a sequential improvement of one percentage point driven primarily by the mix benefit from lower sales of IV solutions.
Similar to the first quarter of this year the second quarter gross margin reflects the benefits from one reductions in expedited freight along with lower diesel prices in lane rates to the impact from recently implemented price increases and three higher manufacturing absorption from recent increases in finished goods inventory.
Levels.
As we mentioned on our last earnings call. There are a few items that will affect gross margin over the back half of the year that will partially offset the improvements we realized during the first half.
The first is the impact of lower manufacturing absorption as we continue to reduce production volumes over the remainder of the year during the second quarter, we made progress in slowing the build of inventory levels as the Q2 increase of $27 million was roughly half of the recent historical average increase of approximately.
$50 million per quarter.
Over the back half of the year, we expect a further slowed the build of inventory levels, and then maintain or even slightly reduce those levels to help drive positive free cash flow.
As a result, the benefit from higher production levels as we increased inventory will not continue for the remainder of the year.
The second item is the impact from scheduled plant shutdowns during the second and third quarters as part of the team.
TSA separation from Smiths group as well as the annual maintenance shutdown of the Austin IV solutions manufacturing plant as contemplated in our original guidance. So while we are pleased to see the positive trajectory in gross margins for the first half of the year the combination of lower volumes and recent plan.
Shutdowns will impact the rate over the remainder of the year and as a result, we expect the full year gross margin rate to be approximately 37% consistent with our original guidance.
On previous calls we've talked about our desired long term gross margins and the primary drivers towards that improvement continued to be one manufacturing absorption benefits from volume increases towards historical levels for our acquired product lines plus continued growth for the legacy ICU.
<unk> products.
Two price increases as our multi year contracts renew and three synergies from the integration of our manufacturing and distribution networks and service.
And it's also worth noting there is a high degree of variability in the gross margin rates of individual product families across our portfolio.
Adjusted SG&A expense was $110 million in Q2, and adjusted R&D was $22 million the.
Adjusted operating expenses were down 2% year over year and generally in line with Q1 and reflect acquisition synergies as well as our usual focus on SG&A cost management, which has more than offset inflationary pressures 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 $12 million in the second quarter and related primarily to integration of the acquisition.
Adjusted diluted earnings per share for the quarter was $1 88, compared to $1 37 last year, an increase of 37%. The current quarter results reflect net interest expense of $24 million, which is an increase over the prior year of $9 million and equates to just.
Under 30.
On a per share basis.
For the full year, we continue to expect net interest expense of approximately $100 million.
In the second quarter, but the adjusted effective tax rate was 8% and includes benefits from the release of tax contingencies. As a result of the expiration of various tax statute of limitation periods, which contributed approximately <unk> 25 per share we expect the second half.
The tax rate to be more in line with our normalized tax rate of 23%.
Diluted shares outstanding for the quarter were $24 4 million.
And finally, adjusted EBITDA for Q2 increased 16% to $98 million compared to $85 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, which reflects our continued investment in the three key areas of the business that we highlighted for the past several calls the first is higher levels of inventory to bolster safety stock and allow for Onboarding of <unk>.
Customers, where as previously mentioned, we invested $27 million in additional raw materials and finished goods inventory during the quarter, which is approximately half of the recent historical average.
The second was quality improvement initiatives for legacy SM and during the quarter, we spent $13 million on quality system and product related to remediation and the third area was acquisition integration, where as previously mentioned, we spent $12 million on restructuring and integration.
<unk>, we spent $18 million on Capex for general maintenance and capacity expansion at our facilities as well as placement of revenue generating infusion pumps with customers outside the U S for the remainder of the year the aggregate level of spending on these items will decrease with the largest decrease coming from the continued moderation of inventory.
He builds additionally, we should see slightly lower spending in the back half of the year for both quality remediation and restructuring and integration while capital expenditures will likely increase over the remainder of the year compared to a light first half with total capex spending for the full year estimated to be in the range of 80 to 100.
Million.
And just to wrap up on the balance sheet. We finished the quarter with $1 6 billion of debt and $198 million of cash and investments.
With our usual cadence we are updating our full year guidance for adjusted EBITDA and adjusted EPS.
For the full year adjusted EBITDA, we are narrowing our previous guidance range of $375 million to $425 million to a range of $3 $75 million to $405 million. This reduction in the top end of the previous guidance range reflects lower vascular access revenue relative to our original expectations.
Some operational flexibility as we work through aligning production with demand and the impact of lower volumes in the IV solutions business.
For the full year adjusted EPS, we are narrowing our prior guidance range of $5 75 to $7 25 per share to $6 to $6 85 per share which includes the same drivers as adjusted EBITDA plus the previously mentioned 25 tax benefit recognized in the second quarter.
In summary, we feel good about the earnings we delivered for the first half of this year and we're seeing progress on inventory levels to improve free cash flow on the revenue line. The majority of our businesses are increasing in size, but we recognize that the score as measured on the total and our focus is on eliminating the negative for gross margin we have.
A number of opportunities to drive improvement over the long term and on SG&A, we've demonstrated our ability to operate efficiently.
We remain convinced of the longer term opportunity financial returns and our ability to tackle the remaining issues and with that I'd like to turn the call over for any questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.
At any time your question has been addressed and you'd like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Jason Bedford with Raymond James. Please go ahead.
Good afternoon guys.
Maybe I'll just.
<unk> is a bit more on the revenue line, where I think most of the discussion will be.
On the consumables.
You kind of parsing through some of the commentary there. It seems like you expect it to increase sequentially over the next couple of quarters, just on an annual basis.
You assume that or be down kind of low single digits as the math or assumption there correct.
Yes, I think Jason Hi, I don't think we expect it to necessarily be down year over year. I think we would have a hard time, saying right now that it's going to be.
Mid single digits like we said, we've got obviously, a 25 off of that right. So we want to have some caution around that right.
I don't know that we have at perfect or we'd say it's.
What the exact number is but I don't think we think it's negative for the year. Okay. That's very helpful.
On infusion systems.
Yes.
Add on that I mean, so there's no secrets right the legacy ICU consumables piece.
Was up five ish.
<unk> for the quarter and the Smith's stuff was down.
And.
Consumables line.
Vascular access.
Okay.
Vascular access was flat sequentially is that correct correct. Okay. Okay.
Just on infusion.
It was a little unclear as to just looking at it sequentially it was down.
$9 million ish.
Was it just kind of the timing of capital or and I realize this.
Segment can be a little bit lumpy, but was there anything that really weighed on the.
The growth there.
No sequentially I think it was we had a little bit of catch up in Q1 on hardware placements and we had good hardware get in Q2, but we started to ship more last quarter of the hardware there was some.
Historical back orders that I think we cleared a little bit more last quarter, and we said that on the call script that there was going to be it was a high quarter for our pumps.
Okay. Okay.
Then just on IV solutions.
It looks like it was down what $12 million year over year.
Depending on the assumption on the rest of the pie there.
Is this just a timing dynamic I can't imagine, you're either losing share or seeding on price. If you can just.
As a.
Add on to that can you just comment on the impact of the tornado and Rocky Mountain on your business.
Sure.
I don't think we've seen any real change in.
Long term committed customers over the last bit of time really through the pandemic today things have been pretty stable. That's why we said it was just a weird a chunk of it was the biggest challenge was a weird April that Didnt really come back in May or June another chunk of it has been rocky has been hurting us it's been evident in the results.
$334 million a quarter, we had anticipated it hurting us.
And we have some substitutes there but we.
Can't imagine, it's going to get better we haven't had a final disposition from them.
<unk> on the tornado, but it was a very small amount of our sales anticipated this year, but it's but it is a couple of million Bucks a quarter.
We don't really have a better <unk>.
The answer than that.
<unk> because your other points were right that you started the question with it.
Okay.
Okay I'll jump back in queue.
Others jump in thanks.
The next question comes from Matthew <unk> with Keybanc. Please go ahead.
Yes, good afternoon, thanks for taking the questions.
I wanted to if we get.
Two pieces of guidance.
First I guess, just the midpoint of the guidance comes down by about $10 million is that just simply the vascular access piece the $25 million at a decent contribution margin it kind of break that down and then the second piece of it I also wanted to ask was what hasn't happened.
Next year.
It enables you to get to the higher Ed.
Your guidance.
That's a great. It's a great question Matt.
On the first part, yes, you're generally directionally right on that right.
Contribution margin, maybe isn't quite as robust as.
<unk>.
Piece of the infusion consumables market, but it's still pretty good. So it makes a difference and that was important if we wanted to be at the high end to as Brian said in his prepared remarks.
Yes.
This notion of getting everything perfect on inventory production and demand has been challenging and so even if even if we.
Okay about the aggregate gross margin I think it's on our minds, it's been hard to predict everything perfectly right.
And then we always I think believed to get all the way to the high end also was everything on the macro had to work right currency.
Broader supply chain costs et cetera, and.
Some of the currencies, particularly what's got out of the peso.
And.
Costa Rican colon it hurts a little bit right. So there are some headwinds coming there I think it's more of a macro than the stuff we operationally.
Planned for.
Okay, I think Thats fair.
And Thats why we came in it was both and it was both reasons. We gave a wide range right. We had that conversation at the time and remember we had a conference. So what has to do to get all the way there. So everything has to go right and the macro has to go.
Alright.
And then there's still a lot that's still left to do as far as as far as the integration goes I was just hoping you could help us with that.
<unk> of the ERP integration because it does seem as if you need to get that piece finished or at least further along before you get to that that next wave of synergies, but it's like footprint.
Supply chain.
Brian you want to do that one Brian or.
Yes, I mean the.
The <unk> integration is a multiyear project that we are starting work on.
But it's not something that happens necessarily quickly I would say, Matt that as it relates to synergies you don't have to wait until all of that work is 100% complete in order to see some of the benefits. So there are there are some things that we can.
There are some areas, where we can reduce costs as were doing the it integration and there's the other things that aren't necessarily predicated upon that work in order to.
In order to see the benefits in the case of the <unk>.
Pfizer transaction.
We were under a shot clock, where Pfizer was no longer going to provide our systems and we had to make all of those moves in 18 months, which I think ultimately took 21 months or something it off.
Here, we're kind of in month 18, and we're starting the journey. The first action was to separate.
And specifically, where the ERP just to give us some examples of where it is very valuable as things like <unk>.
What's our long term warehousing and distribution model, where we have our.
Our service service.
Repair model, we have a lot of duplication not only domestically, but around the planet.
When you have everything on a common order to cash infrastructure, you can kind of deal with some of those things and an easier fashion to bind.
We have to have it but it just makes it easier operationally, it's the right sequence of events and there and we tried to give the laundry list there.
Whether it was manufacturing network distribution.
Functional support if there is a bunch of other stuff right.
Real estate, we haven't gotten all of it yet.
Is that is that a 2024 timeline by the time you get to that that impact is 25 or is that something which you can kind of get to at the end of this year start to get to that could all that could also start to benefit you by 'twenty four.
I would say some of it there are some announcements we've made on production that will impact 'twenty four I think some of the items like real estate or the long term distribution.
Costs are probably more of our earliest late 'twenty four more 25 type of item, but theres a lot of stuff there.
Okay.
Yes.
Potential for portfolio rationalization, one of the things that we have seen.
From some other peers, who has been in mobility.
To sell a couple of assets.
And then the markets do seem open to that how are you kind of looking at.
The portfolio and thinking about.
Potentially.
Positive cash flow event.
From a potential asset sale like accelerating the debt pay down.
I mean of course in our in our.
In our ideal scenario all of those options would be available to us right.
But I think first.
We feel good about.
And most of the businesses, we have stability right things are easier to do when you can prove the business stability and things are easier to do when you have the ability to separate it and manufacturing systems and we've really just gotten to that point, where it's service level is very high to the customer.
There is some business stability and the majority of lines and that gives us a little time to be introspective on it obviously, if the right situation was available we would explore such an opportunity but.
We haven't had so much time a deal to deal with.
Yet today.
And then last question I have been pretty good about asking questions last couple of calls.
Sure Todd.
We're not going anywhere.
So without it without talking about like timelines.
Submission of a new LDP pump.
Through the FDA I think you've seen other large players.
And then competitors obviously.
Had some success there and how do you think they've kind of laid down the pathway.
For you, where do you kind of know what it takes to get through the SBA at this point and it could be a little bit more streamlined.
I mean I guess.
Without trying too.
B.
Indirect about it we have it.
$650 to $700 million pump business, where a reasonable sized player and obviously a chunk of our R&D spend goes into that area.
One lesson of having been in the infusion industry for a long time, we understand is it is unpredictable whats happens at.
Regulatory agency and so we would like to focus on our own product quality.
Our own innovation and we'll talk about it when we have something.
Thank you.
Yeah.
Again, if you have a question. Please press Star then one for.
The next question comes from Larry Solow with <unk>.
CJS Securities. Please go ahead.
Okay.
Great. Thanks, so much.
I guess, just a few follow ups.
I guess just following up on the question just about the pumps.
What you can or can't say, but.
Does your operation do you operate.
Currently now.
The large competitors back in the market or is there any.
Change in the competitive environment I'm, just trying to get any feel for what that does to you.
How you react to that if at all or anything you could say.
I think the customers.
The customers have had a belief that all market participants would be on the market eventually and.
To some degree that that has certainly our belief is we've said when asked very directly.
Sure.
And to some degree that likely stalled peoples decisions on making a purchase or.
We're not all choices where available and so.
We did okay.
Last time, and we always said, we don't need that much and we've clawed back a chunk of.
What hospira had losses that made ICU do the transaction in the first place, but there is continued opportunity available for us. So we just help people get on with making decisions.
Because there is really no reason to not make a decision anymore. So we're kind of.
Probably a bit more optimistic about it then concerned because the message to the customer as it shouldn't be from all participants was very consistent.
Our philosophy is that every everybody was going to be there, but everybody has their partner.
Time to get on with it.
Okay. That's fair can you just on the <unk>.
The shortfall in basketball.
You mentioned sort of 2000 $25 million for the year.
I think maybe you said it was delayed so can you just kind of.
Help us.
Tell us why it's been slower.
Is it timing is it just your ability to.
To get new contracts and I guess part two of that question would be.
Sure.
It doesn't feel like your confidence has changed too much in and getting to where you never really want to be there. So can you just kind of help us through that.
Yes, I mean.
This particular.
These particular lines, which are in the acquired vascular access category have been in the market for many many years with until recently, a very consistent share position.
But they really didn't get a lot of focus last four or five years and with some of the supply chain interruptions in production.
Failures.
Customers were not served well and moved away from them, we never assumed that that would all come back we assume that some portion of it would come back and it's only been a year in earnest because we only combined our commercial org a year ago, or so 14 months ago and it just takes time, we thought a few more things would come in then did and it was really the difference between.
And what we thought for Q2 and this is you were talking a couple million Bucks.
Which means we know that there were pieces of business in the hopper.
It just takes longer to get them in and implemented.
But we're not talking about some assumptions over the long term that are huge shifts in market share is more subtle shifts in market share in a category that we literally connect to with our largest and most core business. So I don't think.
I don't think were sitting here with some outlandish set of long term market share recapture assumptions just takes a little bit of time to have a few points come back in.
Got you Okay, Great and then just last question maybe for Brian just on the gross margin.
He was better this quarter than expected.
Most of the mix related.
Some of the I don't know.
Certainly slowed your inventory production, but.
You initially expected to slow production, even more in this quarter I think.
The original assumption was gross margin was going down sequentially on the pipes.
Instead of going up 100 bps. So.
I guess part of it was mix that was part of it just a slower.
Oh down in production, that's going to kind of be picking up more in the second half and then.
I guess the other question would be just to clarify your guidance kind of assumes a.
<unk> Popcorn third department of 5% gross margin in the back half is that right.
Yes, I guess.
Two questions there taking the last one first.
Yes, I think just the math works out such that it's around 35% gross margins in the back half of the year.
To get to the full year of 37% and then as it relates to the to the improvement why we didn't see a decline in the second quarter. We did take action I would say consistent with what we had planned to do around the slowdown it's just that the.
The P&L impact of that there is a bit of a delay because that.
Lower absorption as it occurs gets capitalized on the on the balance sheet as inventory and then rolls out over our inventory turns which these days are a little bit longer.
The kind of four to five month range. So.
That's the reason why youre not seeing it in the second quarter, but we will see it in the back half of the year.
Got it okay, great. Thanks, Thanks for that color I appreciate it.
This concludes our question and answer session I would like to turn the conference back over to Jane for any closing remarks.
Thanks, everyone for participating in <unk> Q2 call, we're making progress on a lot of fronts. There are a few negatives that we need to flip to positive and we look part of talking about it more over the balance of the year. Thanks very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
Okay.