Okay, good morning everyone. My name is Vic Chopra. I'm one of the medical device analysts at Wells Fargo. I'm pleased to introduce management from Masimo for this session. Joining us for the company is Eli Kammerman, Vice President, Business Development and Investor Relations. Eli, thank you for being here. Thanks very much for inviting us, Vic. This is our first appearance at the Wells Fargo conference, and we hope to be here for many years. Great. In terms of format, it's a fireside chat, so we'll have a question and answer. If anyone has any questions, please raise your hand, and we'll get to you. So, Eli, thanks for coming. Maybe we can just start with some few big picture questions. I wanted to start with the macro and the operating environment. I think a lot has happened with Masimo. So just talk about what's changed in the macro front from last year, what's gotten better, and sort of what's gotten worse. Well, compared to last year, while hospitals are seeing decent growth in hospital admissions, the admissions aren't anywhere close to where we thought they would be relative to 2019. And that is something that was surprising to us. Things are pretty level, rather than having grown at about two percentage points per year as they normally do. That's the main deviation in patient traffic. And for us, the other significant difference against 2022 is that the demand for capital has softened somewhat. However, we are optimistic about the outlook based on the unrealized contract revenues that we've accumulated, which have grown by 12% year over year. Just in terms of capital, are you seeing that improving anytime this year? And just remind us, what% of your sales are from capital? Yeah, our outlook for 2023 assumes that the demand for capital persists as we've seen it through the second quarter, and approximately 15% of sales from the healthcare segment are derived from capital in the form of either circuit boards that we sell to our OEM customers like Philips, GE, Dräger, and Nihon Kohden, or Masimo brand monitors. Got it. I wanted to touch on guidance. You decreased your guidance after your Q2 earnings call on both the top line and the bottom line. Just remind us what's contemplated and get into the low end versus the high end of that range. In our guidance for 2023, at the low end, we've assumed that the admissions growth rate seen in inpatient and outpatient that we saw in the second quarter persists through the year. At the low end and the high end, we've also assumed that there's continued expansion of our installed base based on the efforts of both our OEM customers as well as our own Masimo installation team. The high end of guidance assumes contribution from those large orders that slipped out of the second quarter and should materialize in the second half of the year. Got it. So just looking at the math, the guidance implies a pretty steep ramp in the fourth quarter, both on an EPS basis. I think it works out to about 40% of your total EPS for the year at the midpoint. And then on the operating margin, it's about 700 basis points above Q3 at the midpoint again. So I guess, how confident are you in achieving the Q4 guidance and the targets? And do you think Q3 guidance is too low? I can't comment on our guidance for Q3. The numbers stand as they are. For the fourth quarter, we're expecting the typical seasonal increase in elective surgery procedures. And we expect to regain some scale as a result of the higher revenues in terms of margin improvement. The other element of the fourth quarter increase would be the steady increase in the installed base between now and then, which leads to additional sensor sales. Okay. How should we be thinking about operating expenses in the back half of the year? Just help us understand why they would be going up after the second quarter. Operating expenses, of course, scale with revenues to some extent. We will have significant business in the fourth quarter if historical patterns hold for capital purchases. That is part of that expense burden. You also talked about reducing your expenses by about $100 million. Just remind us where those reductions are targeted? Yeah. When we issued our second quarter results, we talked about significant expense reductions in order to preserve profitability. The total amount of expense reductions is $117 million. $71 million of that is related to incentive compensation for the senior executives in the form of both cash bonuses as well as performance shares. And then we've got an additional $46 million reduction in cash expenses coming out. And that is related to headcount, hiring freeze, headcount reductions of bottom end performers, as well as a reduction of $18 million in marketing and promotion spend for our non-healthcare segment, the audio business. Okay, that's helpful. What's the latest on OEM equipment availability, Eli? Are you still seeing extended lead times for equipment installation? There is still a backlog that exists with our OEM partners. We're doing everything we can to help solve that. The installed base today isn't as big as you would expect it to be because of the extended delays in installations related to supply chain issues that persisted over two years. Right now, our shipments have not matched the growth in unrecognized contract revenues, which, as I said, have gone up 12% year over year. We do expect the pace of installations to drive that installed base to the right level over the rest of the year. Okay, great. Just, we're in September now. I'm sure you're planning for 2024. I know you won't provide any guidance, but just how are you thinking about the outlook for your end markets next year, and what are your expectations for Masimo's performance versus those end markets? On our core market of Pulse Oximetry, we don't see any change in the growth rate there. In fact, as developing countries continue to build out their healthcare infrastructure, we could actually see an increase in overall demand. The Pulse Ox market is growing at about 3%-4%. We expect that growth rate to persist. Consequently, we think that we will benefit from that tailwind in combination with our market share gains next year. Overall, the end user demand should be very healthy as we move through 2024. You see a rebound in inpatient admissions and inpatient surgeries. Sound United, how are you thinking about that as you head into next year? The audio business itself is very susceptible to overall economic conditions. So any outlook for 2024 would have to be colored by an expectation on interest rates. Interest rates affect housing transaction volumes, which in turn play into demand for home entertainment systems. So at this point, it's really too early to provide any kind of specific color on 2024 because the interest rate environment is very uncertain at this point. Got it. And just thinking about sort of macro events that you guys are keeping an eye on and tracking for next year, just highlights kind of what you're focused on. Macro for 2024, beyond the interest rate environment for the audio business, we'd also be looking at things like new business formation, the unemployment rate, and of course, stock market performance as a generator of wealth. For the medical business, the main things we'd be looking at would be inpatient admissions and inpatient surgery procedures. What about inflation, supply chain? How are we thinking about those for next year? For next year, well, first of all, our 2024 budget is actually being worked on right now, and that'll be finalized by year-end. So I can't give you specific color on that, but on macro, it looks like a lot of the supply chain issues that we suffered over the past two years have eased up. There's been some relief on overall shipping expenses as well. So we're now moving beyond the negative impacts of those. And for 2024, it would be reasonable to expect a very low impact from supply chain challenges. Got it. That's helpful. And I just want to kind of go back to your comment on inpatient volumes. So is your expectation that those recover in 2024 over 2023? And you think you can get back to normal healthcare growth next year? Our expectation now is we'll get back into that 2%-2.5% growth rate for inpatient admissions in 2024. Things have been somewhat softer than that this year, but that's just an expectation. Okay. And then just how should we be thinking about margins as we kind of go into the back half of this year and into 2024? Is there potential for margin expansion? And can you expand operating margins? And is the driver gross margins, or is it SG&A or both? Yeah. On the healthcare side, we will see expansion of gross margins in 2024 as we move some of our manufacturing out of Mexico and into Malaysia. That is an ongoing process now that'll be about halfway done by the middle of next year and should be complete by the middle of 2025. That will, of course, also help operating margins. On the audio side, we've been able to hold our pricing to help preserve gross margins. And we've got the potential for price increases, which might resume in 2024, which could also help margins there. Just remind us how much of your manufacturing is in Mexico and how much you're moving over to Malaysia? Yeah. Right now, over 90% of our manufacturing is in Mexico. And we're going to be moving a very large portion of that into Malaysia over time. For the audio business, manufacturing is spread between China, Vietnam, and the UK. Got it. So just switching gears to Sound United and the non-healthcare business. I think you touched on this earlier, but how are you thinking about the softness in the premium and luxury audio categories? And when do you expect that to rebound? It doesn't sound like you have a lot of color on that yet, but just any additional thoughts you can share on that? We've suffered a little bit as some of the competitors in the audio space have come back onto the market with inventory after being constrained from supply chain factors. As they've come back onto the market, they have implemented discounts on their products. Those are companies like Onkyo, Klipsch, Sony, and Sonos. We are not matching their discounts, and we don't plan to. That is something that's intensifying the competitiveness and likely is affecting our sales there. If those companies stop discounting, of course, that would help. Beyond that, it's tough to say when the business is going to see a rebound. As I mentioned, interest rates are affecting housing transactions, which affects demand for home entertainment system upgrades. Right now, I'd say it's a moving target. Got it. So it sounds like these competitors are still discounting, and you expect that to continue for some time. Yeah, we do. And we have premium products at a premium price. The brands are very well recognized as being at the top of their class, brands such as Bowers & Wilkins, Marantz, as well as Denon. And as I mentioned previously, we actually implemented price increases for our products, and we don't plan to reverse those. Just overall, how are you feeling about your competitive positioning in this market? I know it's a fairly new business for you guys, but I mean, these are established brands. So just talk about your competitive positioning. The competitive positioning is to have the most advanced feature set with the best-in-class performance. You can see the advantages of that from a competitiveness standpoint with the success of the hearables product line across Denon and Bowers & Wilkins. Those are the earbuds and headphones where those products now comprise double the portion of sales that they did a year ago. They're now comprising 7% of total revenues for that non-healthcare segment. They've doubled year over year for the past two quarters. That's the kind of competitive edge that allows us to succeed. Got it. And then just on the launch of the PerL earbuds, I think that was back in June. What impact do you expect this launch to have in 2023 and in 2024? That's a very important product launch for us. The PerL earbuds are the first product on the market today that have an active customization feature, and it's fully automatic. What they do is they send a sound signal into the ear, measure the reflection, which determines where your hearing deficiencies are, and then automatically adjust the equalizer settings for the sound spectrum for each user. That's all done through an app. We do expect very good success from that product. We've had strong initial demand from distributors around the world, especially in Japan, where Denon is especially strong. I can't give you a specific revenue forecast, but I can tell you that if things track as it's looking like they will, that product line will be material to revenues in 2024. Okay, great. And then these are just targeted for audio at this point. Are there plans to evolve these into a product for over-the-counter hearing aids? Yeah. That Denon PerL earbud is the core form factor for a second-gen product, which will be an over-the-counter hearing aid. And as opposed to the first-gen product, which is customizable for music listening, the second-gen product will be customizable for conversation. So we will be able to apply the same technology so that people will be able to have the benefit of optimized hearing without the stigma of a true hearing aid. We're going to be able to adjust the capabilities of the product and to have it self-customized as it does for music. And at the same time, we could be working on next-generation versions, which have even more features and have different sizes and form factors. When do we hear more about this evolution? I think you'll hear more in the next 12-24 months on that product. So stay tuned. Got it. I wanted to switch gears to consumer health. What's the latest with the FDA approval for both Stork and W1? And just explain why it's so important for you to have FDA approval. Yeah. Stork and W1 both have 510(k) applications pending at the FDA. Those applications have been in process now for about a year. And it is important for us to get those approvals because it expands the marketability for the products. For Stork, the 510(k) is related to activating the alarm feature on the product. And we have it set up now through the app where you can read the absolute value of the blood oxygen or oxygen saturation reading. And a 510(k) would allow us to actually activate different types of notifications if blood oxygen breached a certain safety threshold. So that's still pending. We're hopeful we'll get it by the end of the year, but there's no promises from the FDA. Then the 510(k) for the W1 would allow us to expand the marketing of that vital signs watch from just being a consumer product to also being a medical product. It's important for us to get that because it will allow us to sell it to hospitals for use for preoperative, postoperative, and chronic disease patient management. Right now, it's only available as a DTC product to consumers, but if we can get that 510(k), we can greatly expand the target customer base for the product and then have the medical claim associated for the data being useful for managing diseases. And then potential timeline for approval for the 510(k) application for W1? Yeah. For W1, it's the same situation. We're hopeful for approval by the end of the year. And as I mentioned with Stork, there's no promises or commitments from the FDA on a timetable. Got it. So just sticking to Stork, you commercially launched the product recently. Just speak to the opportunities in the retail channel with Stork. How many stores do you expect the product to be in eventually? Yeah. Stork is doing very well out of the gate. As you heard in our second quarter call, the product will be in Best Buy, in Target, and will also be available on the largest online baby registry known as Babylist. So we're seeing good initial uptake into the retail channel. Now we're waiting to see what happens with consumer uptake. And of course, it's very early because the product just got out onto the market in August. I can say that with Stork, we do have very positive expectations for the product. The Stork appearances will be in the hundreds. I can't get more specific than that because of competitive reasons. But you will be able to find the product very broadly. And based on the early commentary that we've heard from retailers, things are looking very good. Great. So just on the back of that, are you still confident in being able to achieve your targets in consumer health this year of about 1% of healthcare sales still? Yeah. There's no change in our expectation there. The bulk of the contribution for that will be coming from Stork. Okay. Just getting the audience any questions if anyone has anything. Okay. Just switching gears to Freedom. What's the status of Freedom? Are you still on track for a launch later this year? Yeah. The Freedom Watch is our second-generation watch. It's a full-fledged smartwatch that'll be based on the Android operating system, which will give it a lot more functionality than the more basic W1 watch. And we do feel that we're on track for a fourth quarter launch of the Freedom Watch this year. That product will be a companion product to W1. It'll be significantly more expensive, about double the price at $1,000, but it will do a lot more. And it'll be positioned as a luxury-type product, a vital signs watch with a full complement of smartwatch features that will have a high-end feel and look and will be available for people who want to track their vital signs in a way that's more stylish. Okay. And what's your view on how quickly this product can grow in 2024 and beyond? Our expectation for the consumer health initiative overall is that it can add one percentage point to the growth rate for the healthcare segment. That's the contribution from all the products together. I can't give you a specific product forecast, but you can put that into context against the one percentage point incremental contribution we expect this year and just extrapolate that out. Okay. I wanted to switch gears to litigation. What's the status of the Apple litigation, and what's the update you can provide? Yeah. That's a complicated answer, so I'm glad we still have some time left. The Apple situation involves three different battles in this war. The first one is the ITC complaint, and that's the one that has the nearest term milestone coming up. There's a decision due from the ITC by mid-October on whether or not an exclusion order should be implemented against importation of Apple watches into the U.S. based on patent infringement of Masimo patents. We've already received the first positive decision in that, that there was, in fact, patent infringement. And now we're waiting for the full ITC to issue their determination regarding patent infringement as well as the impact on the U.S. economy and the U.S. population of an importation ban. If that occurs on time, and it's already been delayed three times, then from mid-October, that would start a 60-day time clock whereby President Biden would have to weigh in and either approve, passively accept, or veto the ITC recommendation. So by mid-December, we should know whether or not there's going to be an exclusion order that blocks importation of Apple watches into the U.S. The second thing going on with Apple is the theft of trade secret court case in the district court. That's the one that resulted in a mistrial earlier this year. And that is on track for retrial sometime next spring. Okay. The third thing going on with Apple is the patent infringement lawsuit where that's on a slower track. Apple filed multiple IPRs against the patents we asserted against them and other patents. Some of those resulted in negative decisions from the PTAB, the Patent Trial and Appeal Board. We're appealing those negative PTAB decisions. And once those appeals are heard through the district court, that will allow the patent infringement case to resume, and the judge will know which patents to assess for infringement. So that one is on track for an initial hearing sometime in the first half of next year. Okay. Thanks for that comprehensive update. So we've heard that Polyton has potentially dismissed its lawsuit against your CEO, Joe Kiani. We haven't seen the filings yet, but can you confirm that this is the case? Yeah. That lawsuit by Polyton against Masimo Corp and the directors has now been dismissed. So that eases some of the tensions on the board between Quentin Koffey, the Polyton representative, and the other board members. Okay, and what should we read into this, or how should we look at this? I mean, it clearly sounds like Joe is they want him to stay. They want to work with him. How should we think about this, or what should we read into this? I think the way you should look at it is as a positive development that will facilitate more productive interactions on the board. Okay. And then just speaking about the board, remind us of the next steps as it pertains to the selection of the two additional board members. Where are you with that? The board has a new head of the nominating committee. That's Craig Reynolds, one of the legacy board members. It also has a new member on that committee, Michelle Brennan, one of the people elected back in June. That committee is now engaged in evaluation and screening of potential new members. As Joe Kiani said in our second quarter earnings call, they're working to get seats number six and number seven filled as soon as possible. Can you put a finer point beyond that? Would it be sort of by the end of this year, or does that kind of go into 2024? I can't elaborate further on what the chairman said. He's the authority. Okay, and then just curious as to how you expect your strategy to change with the addition of the two new board members and an expanded board from five members to seven members, and just thinking sort of both near-term and longer-term? That would be very, very speculative. The responsibility of the board is to chart the overall direction of the company. Throughout our 30-plus year history, they've been very successful in doing that. It wouldn't really be appropriate for me to speculate on what could or may not change with any new members because we don't even know who those people are yet. Got it. So stay tuned, I guess. Yeah. We talked about some of the new product launches. You've launched a number of new products this year as well, so I wanted to highlight some of the most important products that you sort of launched this year aside from consumer health that people may not be aware of, and then just maybe also talk about some upcoming product launches that you're excited about. Yeah. Sure. Well, one of the more significant new products we've launched this year is known as Radius VSM. VSM stands for Vital Signs Monitor. That's a wearable monitor. It's got an electronic module that's worn on the arm that has connectivity to multiple types of sensors that will be attached to different parts of the body. The Radius VSM essentially creates a fully mobile version of what would be a pole-mounted monitor next to a patient's bed. It has attachments for pulse oximetry, respiration rate, non-invasive blood pressure reading, the traditional cuff inflation type, as well as ECG, electrocardiogram. So for us, it's a very important product. It's the first product we've ever launched that has ECG capabilities. We think that it'll be very beneficial for patients in the low acuity setting who can get out of bed and walk around without losing the data capture abilities for all those different measurements. Another important launch we had this year was the Opioid Halo product, which is kind of a crossover product. It will be available in drug stores, and it uses the same exact technology used in hospitals to detect respiratory depression through low blood oxygen readings. That is a product that's been in the headlines quite a bit lately as part of a solution to the overall opioid crisis affecting the United States because Opioid Halo is able to sound an alarm when a person's blood oxygen gets too low and could enable an intervention before it's too late and a person slips away and dies in their sleep. So I'd say those are the two more significant introductions for this year. Got it. I wanted to talk about something you said on your Q2 call with regards to outpatient surgeries. You said that while outpatient surgeries are up over 2019, your consumable growth is limited due to the shift to ASCs. Just talk about that, and why are ASCs using reusable sensors more than hospitals? Yeah. With outpatient procedures, there's actually a mix of sensor usage. It's different than in inpatient procedures where all patients in the United States will get single-use disposables because of awareness of the risks of HAI, hospital-acquired infections, or the transmission of various bacteria, especially organisms like MRSA, methicillin-resistant Staphylococcus aureus, from patient to patient or patient to doctor to patient. The use of disposables avoids that problem. And that's very important, especially for invasive surgeries where you don't want to have the risk of a systemic infection coming from the skin. In the outpatient setting, you've got a mix. Some procedures get disposables. Other procedures get reusables. And it really depends upon the nature of the outpatient facility. If the outpatient facility is attached to a traditional hospital, chances are that they will be using the single-use disposable sensors. If the outpatient facility is freestanding and owned by some kind of independent operator group, then there's a pretty respectable probability they'll be using the reusable sensors. Oftentimes, the reusable sensors are used because they cost less on a per-patient basis. A typical reusable sensor will last about six months, so it could be used on every single patient who flows through that bed over that time period, as opposed to the disposable, which, of course, is only used with one single patient. The reusables cost about $150. So you can amortize that cost over however many different patients you can apply it to. The disposable sensors only cost $8-$10. So there is a pretty large difference in the overall cost per patient. However, the clinical considerations also have to be kept in mind here, and that is the risk of some kind of infection as well as the risks of needing to convert the surgical procedure from outpatient to traditional surgery, moving to a traditional operating room in the event of some kind of mishap. And if that were to happen, then the patient would need the disposable-type sensor for safety concerns. Got it. So we've covered a lot of ground here in the last 45 seconds. I want to turn it over to you for any closing remarks. My closing remarks would be that Masimo is accomplishing great things today in the medical field. We're also going to be accomplishing great things in the consumer health and wellness area. Stay tuned for some more exciting product introductions as we move through the year. Great. Thank you, Eli, and thank you, everyone, for coming.