ICU Medical, Inc. (IC7.F) Earnings Call Transcript & Summary

Did you give me the disclosure? Did you say anything more? No. Okay. Perfect. Great. [indiscernible] disclosure right away. Peter Harrison from Morgan Stanley. I want to welcome Vivek Jain from ICU with us today. While we'll just get started right now, Vivek, as I look at the story, it's been evolving over time and it's hard not to notice that you bought stock personally for the first time in a long while recently. What was the impetus for buying stock, which shows some enthusiasm and momentum for the story more so than as you have restructured and integrated Smiths?

Sure. Thanks, Peter, and thank you to Morgan Stanley for once again including us in this great event. We have a terrific schedule upstairs. I appreciate it. I don't think -- just to be very direct on that, I don't think it was the first time in a long while. The year before, I've put up a lot of capital, exercising some options for cash effectively. It looks like a sale reported-wise. So there was some stuff in '23 and '24, too. So it wasn't quite so sporadic. I think it was just -- we have a sense of what the company is capable of earning and it's the thing we understand the best and it imputes a rate of return that I didn't think was achievable anywhere else. And there are moments where I did -- I held virtually every piece of equity I've received in my entire time here. All I've done over the years is exercise options when available and we did those at very different prices and we know to buy today. So it's all logical.

Great. Why don't we start with some of your business segments. Let's talk about consumables. It grew 4% in the second quarter and you expect sequential sales growth to average mid-single digits for the year. What is driving that business? And how durable do you see that mid-single-digit growth?

Yes. I think if you study our investor materials, you'd see that our consumables segment has compounded at 5% or 6% a year for more than half a decade. And there's a couple of different reasons. The first has not so much maybe a bit being luckier than smart. Our end market demand at our customers is pretty good. Volumes are still high, at least in the key geographies of hospital admissions. Demographics are in our favor. And independent of anything we've done, the rising tide has helped. I think that's sort of the first point. And then there's some specific things around the business, the quality brand, value prop of the products themselves, but even more specifically, there was a national shortage in IV solutions in this country last fall. We were able to obtain some business there that we'll have for the next few years. That's additive to that. There's some specialty markets within that IV in the consumables buckets, niche markets that we create out of whole cloth that are growing faster than the core. That's probably the second specific driver. Third one is to the extent we win pumps in the middle segment, which I'm sure we're going to talk about, sometimes when we win the pump, it pulls the consumables. So that's sort of the third lever. And the fourth has -- yes, we have achieved a little bit of price, probably more impact this year than next year. But as the GPO contracts reset over the last couple of years, we still haven't recouped all the inflation that we had over the period from '21 to '22, '23, but we started to get some back and that's helpful. Those are probably the 4 or 5 drivers.

Okay. You also highlighted some clearances with the FDA 510(k)s. Do those give you a competitive advantage? And how are those going to drive your consumables segment?

Yes. I mean, I think the discussion in our earnings script around new products, in general, we haven't talked about them unless they've actually been approved. But a lot of our energy in the last few years has been in the money we've allocated towards the new products in the infusion pump business. And we felt like we haven't allocated enough for our own taste to the core consumables business. And the innovation there isn't necessarily sort of breakthrough. It's the little things we do every day, the incremental things. But we did have an important approval on the core Clave family earlier this year. And that did 2 things: one, at least from an FDA perspective, the thing that's gotten all these infusion companies, including us into trouble from a regulatory perspective is that the product iterations over the years really meant that the product that one was selling didn't necessarily reflect what the original approval is about. And so this brought everything up to standard of our most important core franchise we make our money around. But it also referenced the study that showed the product, as we know and people know that's why we have the brand we have, significant clinical improvements and the ability now to say that and point to something in addition to being probably the most cost competitive, the best outcomes, best brand, et cetera, we think is additive to solidify it. And we were trying to say, money has been going down and consumables stuff will start to happen there, too, over the next year or 2, in addition to what has been pretty good growth over the last half of the decade.

Very exciting times for the business. Moving on to IV Systems, look, that's a business you've spoken about double-digit growth in your LVP revenue. What's driving that growth? And how do you think that compares to the overall market in that space?

I mean the brain damage that we've put our shareholders through and ourselves through since the last transaction we did was to really try to create the world's best infusion hardware platforms. And we felt like the core rationale for undertaking the Smiths transaction, the #1 reason was to get the best pump in every single pumping modality. And so we wanted the best LVP pump, which we had developed on our own, the pump family. And the acquisition brought the #1 syringe pump and the #1 ambulatory infusion pump. Our goal long term was to have all of those products modernized, meaning -- and by best, or most accurate, easiest to use, easiest to repair, best software, best cybersecurity and have all of them connected with a single instance of IT. Anybody who implicitly was using a legacy ICU Hospira pump or the other players' pump, not the market share leader, had to run 2 separate drug libraries, 2 separate software systems, et cetera. They now have a chance to get all of that integrated into a single solution, and that's a very different competitive footing for us to be on. LVP -- to answer the second part of your question, market share, market growth and our growth rate, it's really hard. Obviously, most of these markets in a normal census environment are 3% to 4%, and we'd be happy with 4% underlying growth markets. I'm not sure they've quite been there yet. We've been growing faster because the infusion pump market, particularly the LVP market, has had a lot of kind of self-inflicted harm that's led to a faster refresh of the market over the last 2 years as vendors have had to remediate their own devices and that's creating an acceleration for us.

So when you think about Plum Duo, then what is replacement upgrade cycle kick in versus competitive share gain right now for you, given the backdrop of recalls, et cetera?

Most of our efforts to date have been on the competitive front, right? In the infusion pump industry, on a quarter-to-quarter basis, most vendors or certainly the other 2 large vendors, when they report results are getting the benefit of devices they sold to existing customers, right, because that counts in period-to-period revenues, I think we would argue that it doesn't necessarily create NPV because you're already getting the consumables, the dedicated sets to flow that. But obviously, it helps, right? And it's margin and cash in a given quarter. Our results for the last few years haven't had the opportunity for that because we stepped into this business in 2017, 2018, as Hospira was just launching the Plum 360. And so we've never really had refresh in our pump numbers. Our devices finally become 9 years old next year with sort of a useful life cycle. Unfortunately, we built some of them like tanks of 9 to 10 years. And the efforts to date and for the -- I think, the early part of next year are 100% focused on the competitive opportunities. We benefit from that same incumbent inertia we talked about in our earnings calls in the infusion industry for our own installed base. And as the year progresses next year, the replacement cycle will start more earnest.

How would you classify the kind of regulatory landscape for pumps right now? It's a challenge. Do you think it gets harder from here, easier? Any sense where the FDA is?

I mean, I think everybody is, to some degree, learning on the job and trying to do the right thing. And we appreciate the high regulatory barriers to entry because it keeps the refresh out, right? And it requires that manufacturers are committed and serious. And it's fair because that pump, that pipe is the last mile of delivering a drug to a patient, right? If that little event doesn't go right, bad things happen. And so I think the regulatory scrutiny is fair. I don't think anybody has been spared. I think we all live in a glass house. And so we're very sensitive to making sure we are leading in that area.

Okay. As I think about innovation, we talked about in the consumable space, I think innovation is driving in the IV systems business. You filed a 510(k) for Medfusion syringe pump, an update for the CADD ambulatory pump and some software updates. How important are each of those filings as growth drivers? And what's your expectation on approval timing for the products?

Yes. I mean back to the regulatory question, it is real-time dialogue, right? And things evolve there as new information on these devices comes out. On the LVP, the large-volume pumps, the Plum Duo and Solo, Dan, who's sitting here in the front row, ran the business for years. We received first pass approval, which means from the original submission date, everything happened on the exact time line 9 months. Now it took us 1.5 years longer to file because we wanted to do more testing for the submission, but that turned out to be a good use of time. We filed these other devices, the Medfusion 5000 syringe pump and the CADD ambulatory pump on July 1. Best case that we could stick to that same first pass in 9 months, but it's subject to the give and take of the process. Strategically, we think it's incredibly important because the -- again, in the difficulties over the last few years, there were moments we looked at ourselves as we undertook this huge project bringing these pumps together, are we seeing the benefits from a customer perspective? And I think now for the last year, we've really seen the benefits. And particularly at this moment with what's going on LVP, it brings together a much more holistic discussion that all of your infusion can be solved with one IT system, one set of user interfaces, a common user interface across devices and ultimately, a vision around that even 1 day that stuff will connect to patient home and home care, right, in the same connected fashion.

So you have been -- you purposely built everything and it takes some time on a single platform. Like how big a competitive advantage? You talked a little bit about it, but how big a competitive advantage is that? And where are your competitors on that spectrum also?

I think, again, it's different for each of the other competitors, right? I think the market share leader has offered an all-in-one system with enterprise-wide software with different pumping modalities integrated into a single software package. At a minimum, we're now on parity, and we can debate the merits of our software package or our devices. And it's a little bit of a different setup where the competitors have an all-in-one system, and we're saying we're a little bit -- we have the right tool for the right job, right, and deliver precision and accuracy for the specific clinical use case that's needed. And ultimately, the -- it's like phones, right, the pumps, while accurate, inherently, the pumps will be dumb and the smart set of and the software layer above it, right? And our job is to make sure that, that's very effective in helping people run a better enterprise.

Great. The CADD Connect and Home Care is an interesting business you're developing. It's a differentiated offering from your competitors. Who are -- talk a little bit about the business and then maybe frame who the competitors are in that space?

We thought the crown jewel of the acquisition was the CADD infusion system. And there's 2 parts to the CADD infusion system. Part of it is about the hospital that we just talked about, which is really for postoperative pain management, right? We got a hip or knee replacement or something, right? You're on one of our ambulatory pumps, you can move around with it or the time you're in the hospital and you can leave the hospital with it. The other part of that business is the delivery of the majority of anti-infectives or biologics in the U.S. Home Care environment. And we are the market share leader there. And even we don't know exactly what that means, right? Today, we provide a device, a tool and a pipe to deliver that medication. That pump operates today in someone's home without a radio, without connectivity. And there's obviously competition for that real estate, right, and the right way to grab that real estate. But could the pump be the backbone whether wireless or Bluetooth-enabled ever? Could that pump also gather patient-specific data vitals, other monitoring during the infusion event? Would a payer care to know that the drug was taken? Would a hospital system like to know what happened to the patient during that, right? And so I'm not sure we know it completely yet. We have high market share. We're sitting in the middle of very expensive drugs and a very fragmented end customer. We're kind of focused on, first, how do we get the IP to connect that and say, what other revenue streams can we build and create out of that.

Is growing more in the home one of your strategic imperatives in the next half of years? Or how do you think of that versus the acute space?

I mean, I think the opportunity that you talked about, just in consumables and pumps is in front of us today and is in front of us for the next 2 or 3 years. And we have to execute to create value. We have to execute on that. We're very focused on it. I just think in other countries around the world, we've seen home care grow faster than the core hospitals, and we can't ignore it. And we think in our core infusion business, it's the next natural adjacency for us where we're already holding the real estate market share.

Yes. Makes sense. So pivoting to the final business, Vital Care, maybe give a little bit of flavor how that business is performing and how you're thinking about the second half of this year with the backdrop of organic growth of about 4% in Q2 and flattish in 2025?

With Vital Care for us was about a $600 million division until we announced the joint venture with our Japanese pharmaceutical company called Otsuka last fall, which we closed this year. And our priority was really to figure out what to do with IV solutions because it was -- it just didn't look like the rest, right? At some level, not only was it a pharmaceutical business, it was more capital intensive and sort of in need of more technology and maintenance, and we thought we could feasibly deliver, right? And I guess we felt very lucky that we were capable of finding a really good partner who brought more technology and more innovation and hopefully more capital to the party than we could think on our own, i.e., the kind of the classic better owner discussion. That left the remainder of Vital Care is about a $300 million segment, obviously, very different than the other 2 big segments. And I don't think it was positive for -- I think it was minus 4%. I think that's the issue. It was minus 4% in Q2. I think even in our guidance that the business would be flattish, I just think if you look at our track record and our history, I mean, for all these things we've done, it's clear to me that in those businesses, either we need to have more scale and more innovation and more differentiated or maybe we shouldn't be participating, right, which is easier said than done, but nothing was more important than figuring out IV solutions first. And we did that, and now we have a little bit of mental capacity to exert on figuring out what to do with those pieces.

And look, you've throughout your career, have been good stewards of the portfolio, obviously looking at all time. Can you talk a little bit about your perception of the buyers' appetite for Vital Care and how they think about those businesses? Do they all fit in one package? Or are they different buyers to different businesses? What do you think about the landscape there?

I think first and foremost, the reason it hasn't had -- something hasn't happened because it takes 2 to tango, right? And there hasn't been the right situation to make happen yet. So that tells you something yourself, plus the fact we haven't had that much time. I think it's a bit situational, right, in -- if you are a purist, I think one would say, I feel the team feels very proud about what we were able to achieve with the Japanese on the IV Solutions joint venture, where we were able to thread a very narrow needle of something that we did a transaction that was accretive to revenue growth, accretive to gross margins, accretive to EBITDA margin and EPS breakeven, whatever that means going forward, right? I think if you're unable to monetize something on a breakeven basis, you spend the next portion of your life talking about stranded costs, et cetera, unless it materially changes your growth rate or materially changes your gross margins. There has to be some compelling reason to do it. We obviously haven't found that reason yet at a place where value and strategy kind of intersect. And so we'll keep looking until we find it. In terms of appetite, it hasn't been a particularly robust thing, but it feels like it's changing, the rest of it matters.

So some of your competitors do have IV solutions in-house. And I think historically, there might have been a perspective as a competitive advantage to have it in-house. Why is it not a competitive disadvantage to have [ Jenison ] in a smart deal with Otsuka?

Again, to the customer in the United States, we are still the business. We are the distributor. We're the contractor. We contract for it, we fulfill it, we bill it, we distribute it, right? It comes on the same trucks that our other products come with for direct customers. And so to them, it really feels seamless. We're just not necessarily the 100% manufacturer. We're a partial manufacturer. And for me, it's just about other -- allowing other people who have other products and a vision of what they could bring to the party into the manufacturing network, which accelerates their own strategic demands is a good thing. It doesn't mean from a customer's perspective, we're not in the business. We're still the owner. And we can be owner for the next 10 or 15 years.

Got you. Do you see other competitors potentially in this space following suit?

I'm not sure we really have thought about it, right? For us, it's just -- it's hard. Part of this conversation is around home care, cybersecurity, software, pump hardware, electronic components, consumables, new category and consumable innovation. It's really hard for us to do all of that and deliver the resources and innovation to drug manufacturing, packaging, nutrition, all these other markets where just sometimes you have to admit what you're not.

All right. So moving on to the financials, starting with 2025, you updated your guidance with the Q2 report. Obviously, a lot of moving parts with the JV, tariffs, et cetera. Can you highlight the key changes to the guidance and what you said about high versus low end of the guidance ranges?

Yes. And obviously, whatever we did, didn't go over it particularly well. But we didn't actually -- people called and said, you overthought that. Actually, we didn't think about it that much. We've really had 2 changes that happened from when we laid out our original guidance in February. One was we closed our divestiture, and there was an adjustment to -- we gave up $17-ish million of EBITDA this year for the 7/12 of the year that we don't have the business. And so that was kind of a factual adjustment. And the other adjustment was we had $30 million of tariffs in the back half of this year. We get some FX benefit. It doesn't cover all of it. We have some cost savings on activity, but it left a little bit of a gap. And we felt like we were updating our range to say, on the Q1 call, we said the impact of all those items will put us towards the bottom end of our range. On the call, we said actually, we can be a little bit better than that. And oh, by the way, we had a bunch more headwind come towards us with Costa Rica, where we have the biggest tariff exposure, had a 50% increase in their tariff rate on August 1. But we can absorb all of that and still do a little bit better. I think however it was interpreted, it was a change, an officializing of the change or whatever the word is the hind of the range. We didn't dwell that much. We're very much like we know what we should earn. We know how much cash we should generate. We're focused on those items.

And tariffs longer term, how do you think about the -- you've updated your guidance at $10 million given some offsets. So like how do you think about that moving into '26, if you could predict it, if at all?

We said, please don't annualize the $30 million. And like all companies, we've been trying to just figure out what's permanent and what's temporary, et cetera. And there are some offsets to what we've been dealing with today. The examples are where things -- certain products aren't qualifying for USMCA because we buy some componentry overseas. Of course, we could make those parts ourselves. But there's a reason we're buying it from somebody over because they make it well, cost competitive, high quality, whatever it may be. And you can't ask that person to cut their price in half, so you qualify, right? So you have to bring the work inside and bringing the work inside takes quarters. And I think until a couple of months ago, we weren't ready to make those moves. Some of them now were investing capital to make those. And it makes sense. If you can invest $200,000 to save $1 million in tariffs, you'd do it. I don't really necessarily think it's productive work because it's not necessarily adding a lot of people in manufacturing, it's buying a machine, which probably doesn't even originate here. But we'll do it economically. And so that's why we're saying, please don't take the $30 million and annualize it because there are offsets and then there's a whole other situation on the pumps where pump pricing has been adjusted, but it will not be reflected in our P&L until we start implementing the pumps we're selling today, and those pumps are something they won't be implemented until the back half of next year.

Okay. Helpful. So look, I think it ties nicely into thinking about 2026. Can you think of -- talk a little bit about the key tailwinds, headwinds heading into 2026, both sales and gross margins?

I think for us, I think we have the opportunity to grow, serve customers well, innovate almost independent of what's going on in the census side of the market, right? Even if there's a little bit of employment compression or unemployment increases, which obviously pressures the bigger system, it's been pretty good out there demand-wise. And we think we have innovation in consumables for the 4 or 5 reasons I went through first that will carry on into next year. And then the pump business has some very specific issues with the remediations and replacement cycles happening. And our new technology, we believe, will carry a higher ASP than the historical technology. And so the combination of market share gains and then ultimately supplanted or supplemented with a replacement cycle of a device that should be carrying a higher ASP can power that business and then it's sorting out that Vital Care piece, you have been done. But the goal -- I mean, I know it's a medical conference, but I think we don't have a lot of shame in saying we'd be very happy -- dovetails with the conversation happen before we started. We'd be very happy being a reliable mid-single-digit grower, generating real cash and returning that to shareholders, right, for the next number of years. We don't -- for all the pain we put people through the last 2 years, we didn't skimp on CapEx in the factories, and we didn't skimp on R&D. And we have enough new stuff to keep us busy for a number of years. We don't have to take on risky M&A, right? We've done that. We took a part supplier and turned into this multibillion-dollar infusion company, and we have enough to power us for a while if we can be a reliable grower and make sure we generate the free cash flow we're supposed to generate.

It does feel like you're at the start of an innovation cycle and consumables and IV systems. Any reason -- or anything keeps you up at night that why those businesses can't continue to grow mid-single digits?

I mean, I think, again, back to the regulatory comment you made, right? We live in a glass house, and you'd like to make sure that we are the best we can be from a regulatory compliance perspective. I mean if you just reflect on the infusion industry, that is the area that set people back. So we'd like to make sure there's no surprises there. And then I think anything else in the macro, right, if there were other changes or tariffs or something like that, that could change our very competitive cost position, and we would be sensitive to that. I think as the things are under our control, what can we innovate, sell, make, commercialize, we feel pretty good.

How do you see pricing in the rest of 2025 and 2026?

In '25, we're getting -- we were able to amend some of the GPO contracts to try to recoup some of the inflation at all that we took in the previous periods. Some of that accrued to the benefit of our IV Solutions business, that we only own a portion of that. I think there's probably less price candidly in '26 than there is in '25 and then it picks up again in '27. That was the way the contracts were structured. But again, our job is to grow enough that, that's a non-discussion.

Okay. Your gross margins have been improving. Can you continue to get the 100 basis points plus of underlying gross margin expansion into next year?

Certainly, the actions that underpin that are all in flight, and that's really about finishing our plant consolidation and our logistics consolidation, which together probably power a point. I don't think we see the benefit of that, particularly from a plant perspective, you finished selling out all the inventory you've made at the old factories. And so it'll take probably 2 quarters for that to kick in. But I think we said our goal pre-tariffs was to look like closer, not even closer to a normal medical device company, right, in the mid 40s. Part of that is aided by the JV, but there was a bunch of operations actually make cash that still need to happen. And we think those will still happen. Tariffs obviously claw some of that back. There's a -- if you look at our investor deck that was posted for last week's conference, in addition to our gross margin side, there's a dotted line on that say there's the impact of tariffs.

You've always, in my mind, run a pretty tight ship and manage OpEx well. Any reason that won't continue to get leverage on the OpEx side of the ledger as we move into '26?

I mean, again, I think we're asking questions like a lot of these R&D programs are reaching fruition. Can we actually reallocate the spend into other areas? Meaning can you move things from systems into pumps fast enough to make a difference? Or can you put some of that back in the pot to offset tariffs, et cetera? And so those are the things we're working through. I think it's more a question of, we found a lot of commercial and other synergies in the early days of the transaction, who cares if you're not earning what you're supposed to earn. But there were more coming in other areas, and we're finally at a point where things are integrated now, we can try to deliver those. So hopefully, those are all helpful to offset. Some IT vendors still extract a lot of value from us. They still have price increases, right? Mexican labor is still going to, obviously, the COGS item. But so there are other offsets we have to keep fighting.

Okay. As we think about where consensus is for 2026, are those numbers you're kind of comfortable with today? I know it's early days, but is there anything in your mind that The Street is missing as you continue to execute?

I don't think we've studied them that carefully, but I don't think there's anything at first pass that concerns us. I think the challenge for us is going to be really understanding the tariff number. Operationally, the revenue line, I think we get the pieces we get, it's the tariff impacts on earnings and what's the best we can do to mitigate that.

And if I think about the -- obviously, you talked a little bit about M&A. You've been -- you've acquired a handful of companies. How do you think about -- and you mentioned it, but how do you think about the priorities for capital in 2026? Is it continue to delever? Is it returning capital to shareholders? Is it M&A? How do you think about where you want to allocate capital in 2026 and onwards?

I mean it's a much more fun discussion than when you're feeling over-levered. So hopefully, you have that opportunity. I meant what I said before, I think we have no shame in saying it doesn't sound very aspirational, but to be a reliable mid-single-digit grower with improving gross margins, generating more cash and returning that to shareholders, we have enough -- we didn't skimp on our own R&D. We had enough innovation to keep ourselves busy. Unless it's something super compelling, I don't necessarily see us stepping into a new opportunity.

When do you think about getting to sub-2x leverage or it's about 2x leverage? What is the trajectory of that? And how important is that to you?

I think it's important. And again, you can debate this and obviously, rates and the cost of funding matters in this somewhat. It's an industry where people have been penalized on the regulatory front and not that we see anything brewing or concern there, but it maybe requires a little bit of extra caution. And so that might be the difference why we keep saying 2 versus other people's opinion on this situation. I think if we believe our own cash flow forecast, right, we have a view of getting -- certainly, you look at it, as you know, better than I do, you look at leverage on a historical basis, right? In the positive talk track, we'd say, okay, but some quarter next year, we assume we'd earn enough to imply that, but it wouldn't add that way on the back 4 quarters.

Let's close. Any questions from the room? With that, any closing remarks? I do think it's an exciting time for ICU and at the cusp of innovation that you've been invested in the business. So any closing marks you'll make?

Yes. I'd say, one, it's early in the morning. Thank you for making it out on the last day of conference. We appreciate it. Thanks, Morgan Stanley, for having us. And we're happy and available here all day or online to answer any questions you may have. Thanks very much for the interest.

Thank you.