ICU Medical, Inc. (NASDAQ:ICUI) Q1 2023 Earnings Call Transcript May 9, 2023

Operator: Good afternoon and welcome to the ICU Medical Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Mr. John Mills, Managing Partner at ICR. Please go ahead.

John Mills: Thank you. Good afternoon, everyone and thank you for joining us to discuss ICU Medical’s financial results for the first quarter of 2023. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Brian Bonnell, Chief Financial Officer. We wanted to let everyone know we have a presentation accompanying today’s prepared remarks. To view the presentation please go to our Investor page and click on Events Calendar and it will be under the first quarter 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. 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, during today’s call, we will also be discussing non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and grander 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.

Vivek Jain: Thanks John. Good afternoon, everybody and we hope you’re well. Even with the volatility in the economic environment, we are enjoying 2023 to date much more than last year. ICU Medical is operationally running well and largely back to playing offense and serving and expanding customers with the proper balance of time between internal self-help versus commercial focus. The macro environment eased a bit with finally some relief in the supply chain as freight, fuel and foreign exchange were all at their best levels in a while in Q1 and the rollover and labor inflation did materialize predictably. Global demand was healthy in Q1 with the US having improving admissions. 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.

We hope today’s call is shorter and we’ll use the time to discuss the Q1 revenue performance of our reporting segments as we said we would define them starting in 2023. Give the best color on revenue performance for these segments in the near-term, explain our profitability in Q1 and outline the items in the near-term that impact this level both positively and negatively, characterize those items in the context of the comments from the year-end call on what comes back in the medium term and long-term and what is permanent. Update the normal housekeeping items including quality remediation integration and separation status. And reiterate and check on our progress against our key short-term priorities that we outlined on to start the year and we’ll skip any comments on longer term value creation and self-help and just get to the financials.

We finished the quarter with $556 million in adjusted revenues. Adjusted EBITDA came in at $102 million and adjusted EPS was a $1.74. Revenue growth was 7% on a constant currency basis and 4% growth reported, and we had just over 200 basis point sequential improvement in gross margins, largely due to having a healthier supply chain with better service levels and the improving macro landscape. We did have a comparable quarter of inventory investment into the business and believe we are near peak on that to sustain the appropriate service levels. Relative to Q4, currency eased a bit, but did not materially improve earnings as both the Mexican peso and Costa Rican local currency strengthened meaningfully against the dollar. At the highest level, we feel better about revenue growth for each product line where we’ve been historically stable, meaning legacy ICU and revenue recapture, where we’re now stable, meaning legacy — the legacy Smiths Medical portfolio.

Near-term profitability is impacted with some duplicative IT costs as we separate from Smiths IT systems and by decisions we’re making to improve working capital and cash flow like we did relentlessly for many years. So let me start with our Consumable segment, which is our largest and most profitable segment. We had $236 million in revenue, which was up 1% on a constant currency basis, and minus 2% reported with customer demand good across all product lines. Going a bit deeper, there were a few different drivers that will become clearer over the balance of the year. The legacy ICU IV therapy product lines, which are the largest component of the segment, had a record quarter with the business being the largest — its largest its ever been. That growth was driven by new customer wins, strong underlying census, and increased capacity and ability to serve the market.

We continue to focus on clinical differentiation and there was a publication in April’s Journal of Infection Control and Hospital Epidemiology, which highlights the favorable infection control features of our Clave needlefree connector technology. The growth in IV therapy was offset by the Vascular Access portion of this segment having the lowest level of sales in the five quarters we’ve owned the business. This low level was driven by customer losses that were still occurring until recently. We believed this to be bottom and it feels 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. The other components of the segment are oncology and tracheostomy, both of which had year-over-year improvements, and both those businesses will be benefiting over the balance of this year from increased capacities.

In the near-term, we believe all four underlying lines are improving commercially and operationally, and with the losses predominantly out and improve capacities in, we should start seeing the benefits of this in Q2. We have the right to win in all these categories and are focused on the innovation between the legacy Smiths products and the legacy ICU products. Moving to Infusion Systems, which is the combination of the legacy ICU LVP pump business and the legacy Smiths syringe and ambulatory pump businesses. This segment reported $162 million in revenues, which equated to 21% growth constant currency or 17% reported. Q1 of 2022 was obviously miserable last year, which made an impact. But the core message is each of the product lines is expected to increase on a year-over-year basis.

The legacy Smiths product lines, we expect to be getting closer towards historical levels, meaning they’re still down from what we would deem normal levels, but improving quickly. We see that most directly in the hardware sales were both ambulatory and syringe hardware improved quarter over quarter. Regarding the legacy ICU portfolio of LVPs, we’ve had a good signings year-to-date, increased our install base again in Q1, also increased our number of EHR integrated customers. We continue to believe our LVP line of infusion pumps addresses the most important clinical issues and in addition to being recognized as the — in addition, being recognized as the best-in-class smart pump in EHR integrated pump for the past six consecutive years. Additionally, we’re starting to see some commercial benefits of having a full infusion device portfolio between Smiths Medical and the ICU Medical portfolios.

We continue to believe, as we said in the previous few calls, the customer attention is generally back with bandwidth to have real discussions as some of the fatigue from COVID has passed and the acceptance of inflation and the costs of nursing, et cetera have been 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’s any change in our competitive opportunity. And we’re focused on commercial execution here in a more action oriented market. Finishing the business unit discussion with Vital Care, which had $158 million in revenue with growth of 6% on a constant currency basis and 3% reported. IV solutions, the largest portion of Vital Care improved sequentially and was close to flat on a year-over-year basis, which was the net effect of some undersupply from Pfizer being tight on inventory on certain SKUs, both offset by some price improvement that we received.

The growth in the segment was driven by the combined critical care product lines and the temperature management franchise. That temperature management product line does go hand in hand with our infusion and anesthesia oriented businesses. It’s important to get that right as it contributes attractive margins and is still meaningfully below historical levels. The short story message here is our differentiated legacy ICU businesses are doing well and we’re focused on regaining some of the lost revenues in the Smiths categories that are outlined in our investor presentations. We’re operating with better service levels for customers and believe in Q2 we’ll have all three of the segments growing year-over-year and have hit the bottom on the Smith’s product lines that were going backwards.

We’re already impacting the self-inflicted challenges on infusion pumps, temperature management and tracheostomy. And now I’ve had more time with stable Vascular Access supply under our watch to begin to improve there. As a result, we’ve been more reliable for customers and able to engage in rebuilding the trust in service as the products have always been well liked and the reasonable underlying demand and improving census work in our favor. On the last call we tried summarizing the various headwinds to earnings last year in 2022, their impact on gross margin rate and which of the items were possible to recoup over the near medium and longer term. As a reminder, two of the largest three buckets were freight and logistics, currency and obviously mix as we lost revenues in some of the higher margin categories.

We focused on driving improvements on expedited freight and domestic lane costs as we increased inventory levels and we see some relief in fuel surcharges. However, no meaningful profit improvement was really related to currency as the dollar weakened in our core manufacturing sites. Brian will go through the sequential improvement in gross margin in more detail. We just wanted to note as it came in higher than our target for the year, that we just can’t roll that through the full P&L yet as the continuing and rollover inflation is real. And we don’t want to make a mistake given what we went through last year. And we still have work to do to offset inflationary effects and the impact of lower production as we address working capital. But clearly we spared no expense last year in the supply chain, raw material procurement, et cetera.

And in the medium to longer term, there’s clear opportunity for improvement. Just a few quick notes on the housekeeping front and then I’ll come back to our priorities for the year. On quality, we had a long list of normal notified body inspections during the quarter. We did have a thorough FDA inspection in Q1 at the legacy Smiths corporate office, which was mentioned on the last call a bit earlier than we had anticipated. We had a few fair and manageable comments from the inspection that were in line with the work we’ve been doing to address the root causes of the Smiths Medical warning letter. We’ve made heavy investments into remediation and believe the majority of remediation work will be done over the next few months and spend will ramp down over time.

This part feels very similar to Hospira and our collective previous experiences, and we have the right people have been through the exact same experience and our team is fully embedded into the operation. Same speech on the warning letter, the existence of the 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. Again, regardless of where it appears on the P&L, we’re spending heavily, so making progress here is extremely important to us. In addition to the quality improvements, another current topic is our separation from Smiths IT systems as we bear some duplicative costs this year, and successful execution is important as we’ve seen the challenges in the industry from systems cutovers.

Over the next few weeks, we’ll fully separate from Smiths and should exit all TSAs within 18 months of closing. Standing on our own is the first step towards real integration next year to capture the next wave of synergies in 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. Broader production and logistics operations in the quarter improved again, and really the current challenge and opportunities optimizing the interplay between production output, the right level of inventory and working capital as we were scrambling for most of last year, and it takes time to get this right. We wanted to reiterate our priorities for 2023 that we outlined in the last call so investors can assess our progress in light of the comments we’ve made today.

Our key goals for the year were as follows. Deliver revenue growth as expected in our differentiated business units while progressing the key product platforms; progress our quality remediation and ensure quality for patients in high compliance for regulatory authorities respectively; focus on cash flow, again by improving working capital and addressing all 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 lastly, rationalize the portfolio, which becomes easier after separation and stability. To close, we’re getting back to normal operations and the customer logic that underpinned this project continues to make sense. Like with the Hospira transaction, we’re changing the conversation from the historical perception of Smiths to demonstrating our value through innovation and service.

The core premise of the Smiths transaction is to enhance the product offerings for the categories that drive our returns, as well as add logical adjacencies predicated on the same characteristics of sticky categories, low capital intensity, single use disposables, where there’s opportunities to innovate and participate in a logical industry structure. These portfolios make sense together and we’re working on how to integrate them either literally or economically when sensible. More doors are being opened as a result of having a broader set of items that are mandatory for care and it’s slowly starting to show up on the P&L. While the pandemic introduced substantial volatility, strategically we do think the weaknesses it exposed in the healthcare 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 must. The market needs Smiths Medical to be a reliable supplier, and the combination positions have 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 customers, suppliers, and frontline healthcare workers as we improve each day. Our company appreciates the role each of us must play. And with that, I’ll turn it over to Brian.

Brian Bonnell: Thanks Vivek, and good afternoon everyone. To begin, I’ll first walk down the P&L and discuss our results for the first quarter and then move on to cash flow and the balance sheet. So starting with the revenue line, our first quarter 2023 GAAP revenue was $569 million compared to $543 million last year, which is up 5% on a reported basis or 7% on a constant currency basis. Our adjusted revenue for the quarter was $556 million compared to $532 million last year, which is up 4% on a reported basis or 7% on a constant currency basis. For revenue by business unit, as we’ve previously mentioned, for the first year after the acquisition, we maintained the historical ICU and Smiths Medical business unit revenue reporting structure to provide transparency and insight into underlying performance and the individual legacy businesses.

But now that we have a full year of operating as a combined business, we have migrated to our new three business unit reporting structure of Consumables, Infusion Systems, and Vital Care. Slide number three of the presentation highlights the key product lines that comprise these three business units and provides the quarterly revenues for 2022 and year-to-date 2023. As shown on the slide, adjusted revenue for Consumables was down 2% on a reported basis or up 1% constant currency. Infusion Systems was up 17% reported or 21% constant currency and Vital Care was up 3% reported or 6% constant currency. As you can see from the GAAP to non-GAAP reconciliation in the press release for the first quarter, our adjusted gross margin was 38% relative to the fourth quarter gross margin of 36%.

This represents a sequential improvement of two percentage points driven by one lower logistics expenses from a combination of reductions in expedited freight along with lower diesel prices and lane rates. Two, the impact from recently implemented price increases; and three, favorable product mix. This was the second consecutive quarter of gross margin improvement and provides us further confidence in our previously stated full year guidance of 37%. However, it is worth noting that there are a few items that will impact gross margins over the remainder of the year that will partially offset the improvements we realized in the first quarter. The first is lower manufacturing absorption as we reduce production volumes over the remainder of the year.

During our last earnings call, we said we expected to slow the build of inventory levels over the first half of 2023 and then maintain or even slightly reduce those levels during the second half to help drive positive free cash flow. The first quarter gross margin rate continued to benefit from higher production levels as we increased inventory by approximately $50 million, and that benefit will not continue for the remainder of the year. Now that inventory levels have reached appropriate levels. The second item is the impact from the scheduled plant shutdowns during the second and third quarters as part of the IT TSA separation for the legacy Smiths Medical plants, as well as the annual maintenance shutdown of the Austin IV Solutions manufacturing plant.

So while we are pleased to see the recent positive trajectory in gross margins, the combination of lower volumes and scheduled plant shutdowns will impact the rate over the remainder of the year. Over the long-term, we expect to be able to return to our historical gross margin rate of over 40% from a combination of price increases, operational synergies from the Smiths Medical integration, and the return to a more normal macroeconomic environment. And it’s worth noting that this includes an approximate five percentage point drag are consolidated gross margins from the solutions business as a result of current contract pricing, as well as permanent labor inflation and above average logistics costs. Adjusted SG&A expense was $113 million in Q1 and adjusted R&D was $19 million.

Total operating expenses were generally in line with Q4 of last year and reflect favorability from timing of R&D project spending, as well as our usual focus on SG&A cost management. We expect a slight uptick in operating expenses during the remainder of the year as we invest in R&D and incur overlapping expenses related to the exit of the Smiths Medical IT TSA. Restructuring integration and strategic transaction expenses were $11 million in the first quarter and related primarily to the integration of the Smiths Medical acquisition. Adjusted diluted earnings per share for the quarter was $1.74 compared to $1.82 last year. The current quarter results reflect net interest expense of $23 million, which is an increase over the prior year of $9 million, which equates to just under $0.30 on a per share basis.

The first quarter adjusted effective tax rate was 24.1% and includes a one percentage point negative impact from a discreet item related to equity compensation. Diluted shares outstanding for the quarter were 24.4 million. And finally, adjusted EBITDA for Q1 increased 20% to $102 million compared to $85 million last year. Now moving on to cash flow and the balance sheet. For the quarter, free cash flow was a positive $27 million, and included a one-time benefit of $58 million related to the implementation of an accounts receivable sale program that provides enhanced liquidity at a lower cost of capital. During the quarter, we continued to invest in the three key areas of the business that we have highlighted for the past several calls. The first is higher levels of inventory to bolster safety stock and allow for onboarding of new customers.

As previously mentioned, we invested approximately $50 million in additional raw materials and finished goods inventory during the quarter in order to protect our manufacturing operations from supply disruptions and to replenish our distribution channels to better serve customers. The second was quality improvement initiatives for Smiths Medical, and during the quarter we spent $17 million on quality system and product related remediation. And the third area was the integration of the Smiths Medical business, where as previously mentioned, we spent $11 million on restructuring and integration. Additionally, we spent $14 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 US.

For the remainder of the year, the aggregate level of spending on these items will decrease, with the largest decrease coming from the moderation of inventory builds, as we’ve already taken a number of the operational actions that will ultimately impact inventory levels as they work through the supply chain cycle. 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 quarter. And just to wrap up on the balance sheet, we finished the quarter with $1.65 billion of debt and $224 million of cash in investments. In summary, while 2022 was a difficult year, the first quarter of 2023 started to feel more normal, a lot of hard work and sizable financial investments have been made to stabilize the operations of the legacy Smiths Medical business.

And the results are reflective of this progress as we’ve improved adjusted EBITDA each quarter since the acquisition. And while this work is not yet complete, our progress here has allowed us to shift some focus during 2023 to recapturing loss business and the deeper operational synergy opportunities. Our progress also allows us to remain convinced of a longer term opportunity, financial returns and our ability to tackle the remaining issues. We look forward to providing updates on our progress, along with a more formal update on our full year guidance during the second quarter, which is consistent with our usual cadence. And with that, I’d like to turn the call over for any questions.

Q&A Session

Operator: Thank you. We’ll now begin the question-and-answer session. First question comes with Jayson Bedford with Raymond James. Please go ahead.

Jayson Bedford: Good afternoon and congrats on the progress. Maybe just a few questions. First, just on revenue, can you comment on your backlog, meaning you exited 4Q with an elevated backlog, given all it went on last year, did the backlog exiting 1Q increase stay the same trend lower? Be curious.

Brian Bonnell: Jason, it’s Brian here. During the quarter, we did make progress as it relates to the back orders, both on the legacy Smiths Medical side as along with the legacy ICU side. But I think it’s probably in terms of progress, the most — in terms of the recent quarters, probably the one where there’s been sort of the least amount of progress just given the fact that most of the progress happened over Q3 and Q4 of last year. You’re we’re always going to have a little bit, there’s always going to be a little bit of back order out there. I would say ICU’s kind of close to normal levels. Smiths is still elevated, but it didn’t really have an impact in the results for the quarter. And it didn’t turn out to be some magic catch up if that was the real question, Jason. Right? That there wasn’t a bolus in addition, we worked through it last year and it was none of the losses too.

Jayson Bedford: Right. Okay. But it sounds like it’s still a little elevated on the Smiths side?

Brian Bonnell: A little bit, but not meaningfully. Customers are well served right now.

Jayson Bedford: Okay. And just Smiths revenue in the quarter, is there any way to kind of break out what was Smiths and what was ICU?

Brian Bonnell: I think we’re trying to talk at the segment level and that’s the way we manage the business internally. I think we tried to give color, Jason, in each of the segments. The pump portion of Smiths executed well, both syringe and ambulatory. And there was back order catch up there in Q3 and Q4, but it was a more normal kind of number this quarter. We tried to give the color that the Vascular Access, as we said in the last two or three calls, was the thing that needed attention. And it’s a very specific area, the Vascular Access that needs attention. That still was negative substantially year-over-year. And just about everything else was up year-over-year from the Smiths portfolio. Everything else that’s in the Consumable segment, meaning trachs and everything that’s in the Vital Care segment.

Jayson Bedford: Right. Okay. And then maybe Vivek, the state of the LVP market today. Are active decisions being made out there? Is there still some paralysis is as the other players in the market kind of await new FDA clearances?

Vivek Jain: I don’t know. It’s changed that much from Q4. I think everybody is kind of have the same story for a while. So, it’s more just stuff is getting older and so decisions have to get made. I felt like there were more decisions made in Q1 than there were in Q4. It’s still not near normal historical levels, but it’s enough for us to make a limit on right now.

Jayson Bedford: Okay. And then maybe just last one from me and I’ll let others get in queue. Vivek, you mentioned that results were in line with your expectations, but profitability was clearly well ahead of at least consensus expectations. And I realize you’re not changing guidance, but can we assume that your blessing the higher end of the range, or was did 1Q really turn out as expected within the framework of your original guide?

Vivek Jain: Jason, we’ve used the same words in the press release for five years. I think we didn’t hyper analyze those words that much. What we don’t have perfect — like, perfect view on is as we try to manage the interplay between inventory, cash, working capital, there are decisions that are probably good on a cash basis that can hit margins a little bit. And if you look at the raw — well, the in total inventory bill, but a lot of the things we did to ensure the supply chain last year, we can slow down a little bit that hits margins and therefore we may make decisions that help the balance sheet a bit more than the income statement. And so, I don’t want us — Brian, and I don’t want us to be pinned down on that right now. I think we’ll have a better sense. We have the Q2 call and we’ll try to keep things the same as we do and talk about it after the Q2.

Jayson Bedford: Okay. That’s fine. Thanks.

Operator: Thank you. The next question comes with Larry Solow with CJS Securities. Please go ahead.

Lawrence Solow: Awesome. Great. Thanks. Congrats on — definitely like Jason said, good movement, forward improvement in just operational efficiencies. Just a couple follow up. Just on the revenue side, first, it feels like, I know you don’t break out legacy in Smiths, but just a couple of categories within Smiths. So the Vascular Access, I know you highlighted that Vivek is sort of a similar to the Hospira and the system side. You kind of acquired a falling knife here, but what kind of gives you the confidence that you have a right to win in this segment and when could we potentially see some return to growth? Is it going to take a while? Is there a lot of lifting, heavy lifting you have to do in there? What needs to be done.

Vivek Jain: It is in that area, Larry — and first thanks on both on the congratulations sentence. I mean, I think we’ve just feel like we are kind of getting closer to what we’re supposed to be. I don’t think we’re thinking this is some heroic thing so far. Right?

Lawrence Solow: Sure.

Vivek Jain: It was a difficult year. It’s finally gone in the right direction. On the Vascular Access products, it’s a hundred percent about commercial execution, right? We started life with some supply issues and there’s three or four sub lines in there. Each of them is producing fine now. It’s literally getting back the customers where Smiths made some short-term trades historically to get some government business, et cetera, and move volume away from long-term committed customers. You can imagine how those customers felt about that. We need to go back there and win those customers back, and they use these products for a long time and they use many of the other ICU products. We have a right to be there in making those calls.

And it’s a lot of the same clinical areas where the original consumables business started. So, I feel like we have scale, commercial breadth, adequate supply, and economic value across all the pieces of that portfolio that we — there’s no reason we shouldn’t be able to compete.

Lawrence Solow: Okay. And then just on the Smiths legacy pumps business, it feels like — I know you lost a little bit of sales last year, but longer term, now that you sort of back in the marketer or getting more normalized there, do you feel like you have some share ground to, did you lose any share? How’d you kind of maintain that share or what’s sort of the current state of those businesses, if you can help with that or really the syringe piece?

Vivek Jain: I think the value — Larry, value comes from the legacy Smiths pump market in two dimensions. One is it comes from actually gaining market share and placing more hardware. I think that is much more of the conversation today and going forward. The other part of that conversation is, are all the assets being used, meaning the pumps being used effectively in the market, and are they pumping as much as possible? And when we were short dedicated disposables for those pumps, a lot of the fleet wasn’t pumping at the historical rates. And so, as we’ve improved not only disposable supplies, service and repair, turnaround time, training, et cetera, the assets are getting better utilized. And so, there should be more pumping going on with pumps that are out there.

And then as those capacity is filled up with those pumps, there’s a reason for people to acquire new hardware. So, it’s a little bit self-fulfilling. We had to get the basics right. That’s most of what we’ve done so far is that.

Lawrence Solow: Got it. And then just a couple gross margin, on the price, some price benefit this quarter. Did you mention that you actually got some price increases even in the solutions piece? Did I hear that right? And I imagine that’s just a small, hopefully you’ll have a lot more in the next couple years, but is that — did I hear that correctly?

Brian Bonnell: Yeah. Larry, I mean, that’s correct. We mentioned three drivers of gross margin improvement in Q1 relative to Q4. Supply chain and logistics was probably the biggest contributor to that improvement. And then both pricing and mix, I would say were a close second and third.

Lawrence Solow: Okay. And that the sort of increase absorption or the better absorption this quarter or the drop off that you kind of guys feel you’ll have as your slow inventory down? I know it’s not an exact science, but is that — like, can you see gross margins declining just on that, like a hundred bps? Is that like a good place to start, just looking at that in a vacuum?

Brian Bonnell: Yeah. Larry, I think our original guidance around gross margins for the full year was 37%. And we don’t see a reason to deviate from that at this point. So, yeah, it’s probably something 100 to 150 basis points less than Q1 kind of over the course of the rest of the year.

Lawrence Solow: Okay.

Vivek Jain: We take it quarter to quarter. We see what trades are in front of us. What’s selling, what’s there on the shelf from an inventory perspective? But the decisions are real time right now, so we don’t want — we really don’t want to make a mistake on that. And that five points of gross margin that disappeared last year was the variance of where we thought we would be and where we wound up. So, we clearly know that’s where the value is and want to get it back. And we’re trying to illustrate in the script that there are a number of things that are still yet to come, but we need to optimize for absorption, cash, working capital service levels, everything in the calculation right now.

Lawrence Solow: And clearly your idea is cut and capital usage improved for cash flow. Do you — I mean, do you expect 2023 to be — to working capital to be still a usage and any thoughts on what your free cash will be this year?

Brian Bonnell: For 2023, I think, overall working capital, when you include both inventory and kind of this one-time benefit that we got from the accounts receivable sale program, should probably be somewhat neutral, I would say over the course of the year.

Lawrence Solow: Got it. Okay.

Vivek Jain: Sorry, do you have one more — I kind of cut you off. Sorry.

Lawrence Solow: No, I just have the free cash flow number. If you have a thoughts on total net free cash flow. I guess you do seem you’ll be positive this year on the free cash flow side, but I don’t know if you …?

Vivek Jain: I think that’s what we said in the last call. Again on Q2 we’ll have a better sense of numbers.

Lawrence Solow: Okay. Okay. Thanks. No, I appreciate all the color.

Vivek Jain: I’m not sure we can say more in the script that we’re very focused on it.

Lawrence Solow: Gotcha. No, that’s fair. All right. Excellent. Thanks again guys.

Operator: Thank you. The next question comes with Matthew Mishan with KeyBanc. Please go ahead.

Matthew Mishan: Hey, good afternoon and thank you for taking questions, and I’ll echo my congratulations on a really nice quarter as well. Just first on the Consumables, it sounds — it sounded as if you expected Vascular Access to be down in the quarter. I think last quarter you said something around that you expected mid single growth for the full year. Is that sort of still — how you’re looking at that business?

Vivek Jain: Yeah. I think that whole story on Vascular Access has been going for six or nine months, Matt. So even on the summer call last year, we said, well, the good number of Vascular Access had too much catch in it and Q4 or the Q3 call — and the Q4 call, we said it’s going to start going down a little bit. I think we’ve known for a while and I think we finally got to the predominant amount of losses out. We have a sense of where they were and we secured the supply chain. I don’t think our comments on the whole segment performance is different than what we set out the year for was mid single digit Consumables. Obviously that means we have a steeper climb on some of the categories and we obviously need to make sure that the base is at the bottom like we’re saying, but we feel reasonable about it today. There’ll be five quarters by time.

Matthew Mishan: And then — and well, keep on going. I didn’t mean to cut you off there.

Vivek Jain: No, that’s really it. I think it just means the other stuff has to go and it needs to stabilize, right, to get to where we want and the other stuff. I think we feel very comfortable on the other main lines in Consumables going and we have to ensure that the Vascular Access at a minimum stabilizes, right?

Matthew Mishan: Okay. And then, could you just comment — and this happened through the quarter, but just comment on your interest in the Medtronic respiratory and patient monitoring assets, or parts of it.

Vivek Jain: I think we would never talk about any strategic thing. We were — I appreciate the question and it’s flattering that people would say things like that, including us with what we went through, but — and are still going through. But I don’t think it’s right that we comment on whether big, small, whatever it may be that we comment on a strategic situation. I’d prefer to not have anything to say on that.

Matthew Mishan: Alright. I think you guys wanted to keep this one short, so we’ll, I’ll stop it there. Thank you.

Vivek Jain: I hope you’re okay. Your voice sounds a little raspy, so get…

Matthew Mishan: Little bit.

Vivek Jain: You’ve had a long earning — sign of a long earning season. So anyway, thanks everybody for your interest in ICU Medical. We appreciate it. And we’ll turn it back over to the operator.

Operator: Thank you very much. This concludes our question-and-answer session. And I would like to turn the conference back over to Mr. Vivek Jain, CEO of the company, for any closing remarks. Please go ahead.

End of Q&A:

Vivek Jain: Thanks folks. I should have waited here. Thanks folks for your interest in the company. We look forward to updating you on our Q2 call in August. And thanks to everybody at the company who’s been working tirelessly to improve our situation and thanks to our customers have been very supportive along the way. Have a good summer, everyone. Bye.

Operator: This conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Have a great day.