ICU Medical, Inc.

Good day and welcome to the ICU Medical Inc. Q1 2021 earnings call. Today's conference is being recorded. At this time, I will turn the conference over to Mr. John Mills. Please go ahead, sir.

Hey, thank you. Good afternoon, everyone. Thank you for joining us today to discuss ICU Medical financial results for the first quarter of 2021. On the call today representing ICU Medical is Vivek Jain, CEO and Chairman, and Brian Bunnell, Chief Financial Officer. We want to let everyone know that we have a presentation accompanying today's prepared remarks. To view the presentation, please go to the investor page and click on events calendar, and it will be under the first quarter 2021 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 full representation of future results and are subject to risk and uncertainties. Future results may differ materially from management's current expectations. We refer all of you to the company's SEC filings for more detailed information on the risk and uncertainties that have a direct bearing on operating results and financial position. Please note that during today's call, we will also discuss non-GAAP financial measures, including results on adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into ICU medical's ongoing results of operations, particularly when comparing underlying results from period to period. We've also included a reconciliation of these non-GAAP measures in today's release and provided as much detail as possible on any addendums that are added back. And with that, it is my pleasure to turn the call over to the vet.

Thanks, John. Good afternoon, everybody, and we hope you and your families are well. It's hard to believe it's May 2021, and we feel the approaching normalcy in our business and operations and are happy to see our hospital customers improving activity monthly as vaccinations have progressed. Like everyone in our industry, we want to start first by thanking all of our customers and their frontline workers for trusting us to serve you during these times. and we look forward to seeing our own teams around the world face to face in the near future as local conditions permit. It's been too long. Today, we hope for a shorter call as results were generally in line with our comments just a few weeks ago and not that much has changed, but we did want to first comment on the broader trends in the customer market and the geographic flows of our business. Second, provide any updates on our normal housekeeping items. Third, Highlight our improving cash flow metrics. Fourth, explain the drivers that will allow us to deliver improving sequential profitability. And lastly, articulate how we feel about our positioning in this environment and comment on the specific criteria which we are judging ourselves. The short story on Q1 is as follows. As we described on the last call, we did see sequential revenue growth in our consumable segment and slight sequential decreases in our IV systems and IV solution segments. On a year-over-year basis, this resulted in a reported sales decline of 4%, which we expected due to the pandemic surge ordering in Q1 of 2020. We finished the quarter with $304 million in adjusted revenue, adjusted EBITDA came in at $58 million, and adjusted EPS was $1.62. Profit was impacted by the weather challenges in February in Texas, and some of the carryover from the Austin maintenance in Q4, and Brian will add additional details. We had our best Q1 of free cash flow generation ever and added $31 million to our balance sheet as operational improvements have materialized and restructuring and integration costs have dramatically reduced. When looking deeper at the results on a year-over-year basis instead of sequentially, It were really specific international markets which had year-over-year declines due to the surge pandemic ordering in Q1 2020. At the current moment, Asia and ANZ are back and open for business. Europe and Canada have been sequentially improving, but were large negatives on a year-over-year basis, and LATAM continues to be challenged. We are most tilted to the U.S. market, where we're dependent on admissions and electives, and again, there were some shortfalls in utilization to the pre-COVID baseline in at least acute care facilities. We can't tell the exact level of shortfall, but it is likely somewhere around 5% below historical levels. Even within the quarter, it was different with the COVID patients leaving hospitals in late January, leading to lower census in February and weekly improvements since then. But again, we did well in the U.S. market in the face of less utilization, and I'll describe some of this in the segment discussion. So let's go through the businesses quickly and then come back to discuss the current environment. Starting as usual with Infusion Consumables, which is our largest business, Infusion Consumables had revenues of 126 million in Q4 2020, which was a 2% increase year over year on a reported basis and flat on a constant currency basis. We had 5% growth in the U.S. market and that was offset by large year-over-year declines in Europe and Canada due to the pandemic ordering last year. The oncology market was back to double-digit growth in the U.S. market, which is extremely important to us. We felt positive about U.S. performance in the face of utilization shortfalls, and our growth products and performance in the market sets us up well for the balance of the year. The rest of the world opening up could be additive to this, but we are cautious as important geographies for us continue to be delayed in opening. Just as a reminder, Q2 of 2020 was severely impacted in the U.S. market downward, so the growth we will report in Q2 will be unnaturally high, but we do believe we can again deliver some sequential improvement. Moving to infusion systems, which is primarily our LVP pumps and associated dedicated sets. This segmented $84 million in adjusted revenues, which was a decline of 5% on a reported basis and 7% on a constant currency basis. On a year-over-year basis, the downdraft was essentially completely due to the international market and pandemic ordering in Q1 of 2020. So in the U.S., just like consumables, we held our own even with utilization declines that impacted the dedicated pump sets and with continued expected deterioration in the non-LVP products. That math works because we had more of our pumps pumping and active in the U.S. marketplace than last year. For Q2, the year-over-year declines in the international markets are expected to be larger, as late Q1 and Q2 of 2020 is when we had many of the international pandemic orders, but we expect the U.S. business to continue to improve. Live customer conversations are increasing, and the installation calendar is much better for Q2 than it was in Q1. We continue to not see capital as a constraint, and we still believe, relative to our size, that there is solid competitive opportunity, and we're focused on commercial execution here. Finishing the discussion with Infusion Solutions, we had $80 million in adjusted revenue or a decline of 12% on a year-over-year – on both a reported and constant currency basis year-over-year. Demand was softer for February as the COVID patients came out of the system and ticked back up in March. We continue to believe the quality of our customer book has improved with us holding the best list of sustainable relationships versus the day we bought the business, and the entire industry has moved forward into renewals of longer-term contracts. The largest impact to our profitability in Q1 was due to operational aspects of the IV solution segment, as we highlighted in the last call because it was happening real-time. We knew we would have rollover impacts into Q1 of undertaking our maintenance shutdown later in 2020 than normal due to the pandemic, but the weather events were really expensive for us, both in terms of unexpected operational shutdowns and the excess freight and service costs to serve the customer and to ensure no operational setbacks. And we did not penalize our employees due to the unforeseen weather, and so we spent a lot more than we expected here in Q1. But these items will not repeat, and therefore will make a material difference on Q2 gross margins, as Brian will describe. No change here in 2021, as we continue to believe this is an $80 million average quarterly business. Also, a reminder here, Q2 of 2020 was impacted in the U.S. market downward due to the pandemic, so the growth we will report in Q2 will be unnaturally high and will not be reflective of underlying trends. Moving on to some of the housekeeping updates. Commercially, in all regions of the U.S., except the Northeast, Slightly more than 50% of our customer calls are now in person, with a sharp uptick in March versus a 30% or so we stated in the last call. Internationally, again, Asia and ANZ are open for business, with Canada and Europe mostly still being a remote business. On quality, there's not very much new. We had some successful smaller notified body audits that went fine. Operationally, the manufacturing network, logistics, and systems of the company are all running well. We had solid global fulfillment rates to our customers, even with the weather challenges. We also renewed our contract manufacturing arrangement with Pfizer for another three years with minimum volume and tiered pricing terms. On the Pfizer discussion related to the calculation of an earn-out payment, we have now entered an arbitration process pursuant to our agreement. Pfizer has been a solid partner, and we've worked with them to cooperate in all aspects of our relationship. Pfizer was obviously an equity participant here and on our board of directors, and we've tried to treat them well at every step as we addressed a litany of issues that came with Aspera. We feel comfortable with our position, but we don't control the final decision and expect that it will resolve by the end of Q3. Okay, on to other items. We are pleased that we have gotten back to strong cash flow generation. We've had a solid focus on the high-hanging fruits from our integration that we talked about in 2019. Those have been about improving working capital and efficiencies and how we run. But it has been hard to square that up with underlying profitability levels, and in particular where cash generation was really good but profitability less so. Q1 was unusual due to the Austin items I mentioned. EBITDA margins should look different in Q2, even with utilization below historical levels, as we get to our view of what normal profitability should look like. It has also been hard to follow the growth and value creation within the segments as the hangover from the IV solutions changes moved right into the COVID environment and combined with some unique intra-segment issues like the shift away from non-LVP pumps. So we are also looking for a normal environment. To be clear on how we judge ourselves, we've said for a while we can grow our valuable items of consumables and dedicated sets on a year-over-year basis. And that's exactly the standard and criteria where we are judging ourselves in the medium term. We believe our consumable segment will be the largest ever in 2021, and we believe our U.S. and global install base of LVP infusion pumps and related disposals will be the largest under our ownership. The model is to essentially find normal profitability in Q2 and have the growth of those higher margin items create value into the future. And we think that is the case without talking a lot about improving utilization dynamics or new products, which could be additive. The score ultimately gets measured by us through the lens of, is each business actually bigger and more profitable in absolute dollar terms? We're finally getting close to jumping over some of the items that made this harder to measure. While the pandemic introduced substantial volatility, strategically, we do think the weaknesses it's 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. We make essential items that require significant clinical training, capital expenditures, and in general, items that customers do not want to switch unless they have to. We are a U.S. manufacturer that's deeply vertically integrated and has core redundancy in products that we do not produce domestically between Ensenada and Costa Rica. We do believe that the market broadly defined does not want a winner-take-all setup in these essential item categories. And that's before each category is addressed on its own innovation, clinical outcomes, et cetera. In the new normal or post-COVID world where supply chain resiliency and diversity matters, we believe our essential items logically benefit and our most differentiated items are still differentiated. So we focus on what we can control in these moments, having the best list of supportive, healthy customers, winning important new customers, and waiting for volumes to normalize. We focus on keeping our employees safe while delivering the best operational stability for our customers. We ensure that we drive differentiation and quality in our most valuable categories. We want to have the best liquidity we can for our company, our size, and we want to use all of those items to be prepared for whatever realignments or opportunities may arise and to ultimately focus on our own execution. Our company has emerged stronger from all the events of the last few years. Thank you to all the employees, customers, suppliers, and frontline healthcare workers. Our company appreciates the role each of us has had to play.