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

Good morning. I'd like to welcome everyone to the first day of KeyBanc's Life Sciences and MedTech Investor Forum. My name is Matt Mishan, I'm our senior medtech analyst, and I'm pleased to be joined by ICU Medical, which is represented by Vivek Jain, CEO; and Brian Bonnell, CFO. For the audience, I'm going to start us off, but questions can be submitted directly to me by typing into the box below the video screen and I can then relay. Good morning, guys.

So Vivek, you laid out your macro picture a couple of weeks ago on your call. But there are just a lot of disconnected moving pieces out there, which is a challenge for investors. Just to level-set with this over...

And now is the time.

Yes. What's just -- what's most important for your business from a macro perspective? What drives you guys?

First, Matt, thank you for having us. We appreciate the support from KeyBanc and your coverage over the years has been much appreciated. I think from a macro perspective, it's really just the world getting back to normal a bit. And so there's been parts of our businesses that have benefited over the last 24 months with the surge in COVID, some of the pumps we saw in 2020, some of the other consumables that benefited from time to time, but there were also some troughs. And for us, it's been really hard to be a predictable normal manufacturing company through that type of volatility, plus the other things going on out there. And so the biggest macro driver for us is a bit of a return to normalcy, which is happening right now as we speak, where people can make decisions on hardware and allow time to make changes where we can have a consistent view of growth and predictability in consumables and solutions on like [ spend ] so we can be a good manufacturer and where we are running to all of the various fires that are happening on the supply chain right now with shortages, et cetera. And so it's really just a more normalized world, which is I realize everybody's request, but that's the biggest issue for us on a macro level.

What did you -- how are you thinking about the COVID impact in '22 and kind of what's captured in guidance? And then the follow-up, I'll ask that. It seems like you were more impacted by staffing shortages and general fatigue as the real gating factors for competitive conversions compared to COVID.

As it relates to 2022, the first part of your question, and Brian should chime in, too. It was hard to figure out all the drivers of our growth in consumables over the last 18 months. And so our consumables business is really materially bigger. And that growth has been driven partially by some of the new markets we're creating in oncology or some of the special [ state ]. So those are distinct and we think are here to stay. But in the regular IV therapy, we were having trouble pinpointing and justifying 100% of the growth. And therefore, our guidance for this year is a very different growth rate than what was actually achieved last year. And so -- as it relates to COVID, we've tried to take out what we believe was the impact of COVID meeting that's reflected off of a lower growth rate this year than we had last year. But it's hard to know with exact precision how much it was. We can't account for the last 5% or 10% of growth. I think in terms of the pump business is the one you're referring to there on the challenges we faced, it was more that the -- certainly in the U.S. market, hospitals were just buried with staffing shortages and work and influx of patients and everything we've all been exhausted with over the last 2 years. And it was difficult to really pay attention and make decisions. You can't fault them for that, as the number did, we did fine. And certainly, our pump business benefited in '20 and maybe the beginning of 2021. But we had regular old competitive wins in the balance of the year last year, and we see the world getting back to normal there in the ability to make decisions, allow for a constructive conversation. So people didn't have time for that conversation a year ago.

I wanted to move to Smiths first. What you guys do on your earnings calls, you always layout, this is what I'm going to talk about first, second, third, fourth. So I'm thinking about 5 key moving pieces for ICUI and Smiths. And we could just go through them. First, you need to work through some near-term headwinds. Second, you make decisions on core, noncore products; third, execute on cost synergies; fourth, long-term growth plan for the combined business; and then fifth, a manufacturing rationalization. Is that a fair way to think about the key moving pieces of Smiths before we just say we're going to walk through them?

I think those are the right items. I'm not sure that we would say those are exactly in the right order based on what we know today. So I'm not sure I remember all of them. But let me start with the near-term stuff we tried to lay out on the call. And I think we were trying to say it's near to medium term, and there were 2 buckets of it. One is it's sloppier frankly, than we thought in terms of just running a good operation in terms of having plans to run well, understanding supply chain, having a distribution network that's running well, et cetera. And that's led to some customer dissatisfaction. And we're cleaning that up rapidly the way we did with Hospira, but it takes time, and it takes longer when the world is kind of upside down in a lot of these topics right now. And then the second part of the medium-term items were -- they also -- one of our core lessons in infusion is stay in business and be reliable from a quality, safety and regulatory. We learned that over many years at the previous place we worked in here. And it's easier said than done. And I think we have our arms around some of the issues that we're playing in. We have a point of view on how to address them. But there's -- that takes time. And we're really in the thick of that right now. And so those issues are not going to solve themselves in 30 days or 60 days or 90 days, right? It's going to take a little bit of time. The second point you made on deciding what's core, what's noncore, I would probably say that's -- while I certainly hope that's this year's activity, it's probably lower down the order of priority from the list you went through because it's not really a conversation that one can react on it and realistically engage in, unless you are running yourselves well, right, because that means you won't maximize things. And so you want satisfied customers and you want a reliable and predictable business before you can kind of contemplate such things. The third one, I think, was synergies. I would say that's a higher priority. And so we've been very focused on that, much like we were with Hospira. And we've taken a number of pretty concrete steps already for the U.S. commercial marketplace that's starting -- the work is happening in some of the international opportunities, and we're trying to be very quick and decisive there, much the way we've been on previous transactions. I think for us, whether we like to admit it or not, the business is a little bit more challenged than we thought and the way you have to mitigate that is by kind of accelerating or overdelivering on the synergy topic. So that's -- the second and third ones, you said probably flipped a bit. And then can you remind me what were the fourth and the fifth ones you said?

Fourth one was the combined growth platform with the 2 companies, and the fifth one was an opportunity to rationalize the footprint.

Okay. On the fourth one, I think our view is our pump -- our Infusion Systems segment is better positioned today than any moment in the history of our company. And so we have our own Plum platform that we've ran for years that had a great rating with KLAS again for the fifth year in a row. And we've added kind of the #1 freestanding syringe pump to that and the #1 ambulatory infusion pump. And so -- and in the international markets, we added kind of a traditional rack and stack system via another acquisition last fall. And so I think we feel like we have all the parts and pieces there to be competitive. Now we need to get them all right from a quality perspective and we need to drive some innovation around both next-generation platforms and connecting those things from an IT perspective. But we have to believe that, that combined portfolio is capable of growing at an attractive rate over time. That is the core why we justified taking on all this work. From the consumables business, I think we feel the same way where our legacy consumables was doing okay and Smiths consumables were largely troubled, mostly due to poor service levels to the customers, not anything specific to the product. And so a little bit like our Hospira analogy where Hospira lost share because of the way they treated customers, I think we can make the same sort of analogy here was if we could serve customers well, people like the products and will come back to us for the right clinical and economic value proposition. And so our -- if you look at our slides that we've always shown those kind of 3 columns, certainly column 1 and column 2, I think we see a path to growth over time once we sort out these issues and really find the right baseline. The third one is a little bit hard to say where some of those categories are new, and those are having both the 2 issues we described, they're having some supply chain disruptions and some legacy quality issues which we're remediating, but that's led to some more volatility there. I think we believe in the categories knowing exactly when they're going to grow. It depends on how a few things break this year and get the products fixed.

All right. So just a quick follow-up on a couple of those. How much progress can be made on the back orders over the next 3 to 6 months?

I think the challenge we have is the systems aren't perfect right now. So we don't have the same kind of visibility we have at legacy ICU on how we're improving each day. I think over the next 6 to 9 months, we can make some real progress. I think it's going to be hard to show that progress in the first 60 or 90 days of ownership. It's multiple issues. I mean, some were related to just absolute production output in staffing and factories. We've addressed those very, very quickly. Similarly more to the macro logistics and supply chain challenges going on in the U.S. market, those are taking a little bit longer than we would like to fix. So it's somewhere over the next few quarters, but it's probably not -- certainly not in Q1.

And then when you think about how you -- the guidance range for your EBITDA guidance range, the low end would it encompass you guys not making much progress on those backorders. Is that sort of -- is that sort of the right way to think about it and those extending out for a longer period of time?

I think we just made an assumption we weren't going to make material progress on that. I mean, the only things that are really new since the call is just a fuel -- really the fuel changes and some of the more choppiness in the supply chain. That's a little different than when we had the call, but it's back to synergy conversation, et cetera.

And when do you think you'll be able to layout your plan for remediation of the FDA warning letter and some of the background on the FDA concerns?

I think we certainly have a full understanding of the issues today. So we come up to speed very quickly. And I think we have a point of view on how to address the issues and the staff in place now to do it. The warning letter itself is a multiyear journey, just like it was at Hospira. And I think, as we said on the call, we've operated under -- in this framework before and it's uncomfortable, but it's really the regulatory trying to move the ball forward in the right way. And we have to do our part by feeling rock-solid about the quality and operational performance of the products. And when there are issues, our ability to address those issues with conviction in a timeframe that we can frankly achieve or overachieve as we tell the regulators, and Smiths didn't do that. And so I don't want to get ahead of ourselves on a date or anything. I think we understand the issue. We have a plan of attack. We're ready to start working on a plan of attack. And soon as we feel like it's largely done, we'll come back and talk about it. The last thing we want to do is get ahead of kind of the challenges because they disappointed people. We walked into that Hospira, we cleaned it up. We've got to do that again.

I think that's fair. But it does sound like something that you guys have a little bit more control of is the pace and the realization of the cost synergies. How should investors think about the broader total of those synergies, the at least $50 million by year 3 at this point? Are you confident in being able to beat that number now that you've had a couple of months?

So I think -- I mean, we certainly -- we have probably further confidence in hitting the $50 million target that we set out there. And so we do feel good about that. And I think we've said we could see $25 million of that $50 million in year 1, and I think there's even better line of sight to that as we sit here today. And in terms of sort of exceeding that, I know that you might say that perhaps relative to comps, that feels a little bit on the low side, but I do feel like that $50 million reflects the realities of the business that we have, which on the Smiths side, tends to be a little bit more broad in terms of portfolio or on the products as well as locations around the globe. And so -- so I'd say we feel confident today in our original guidance.

For us, Matt, it's not like -- we try to stay away from these percentages of revenues or stuff like that. It's -- for whatever that core group of items are, right, the stuff that sits with Infusion Systems, stuff that sits within consumables, what are some of the really differentiated items in what was called vital care, our job is like we have with our own business to maximize the profitability of those items. That's what we're focused on. Whether that comes through manufacturing [ isolation ] or cost synergies or increased revenues, which is really the most valuable part of it, right, our job is to maximize that to an appropriate level of profitability. That's the score. That's how we'll get judged.

So you're not cutting your way to profitability. You have to -- what do you have to do to make that -- to make their portfolio more profitable? Like what can you do to make their portfolio more profitable?

I mean, the most direct way I could say it is, is our mentality needs to be -- we've acquired a series of products that fit into our infrastructure with the addition of some new geographies and a set of manufacturing assets that needs to line up well with what we do. And so we can improve profitability by saying it rides on the back of our existing infrastructure. We can improve profitability by improving market share and growth, which drives volumes in factories and that's the best way to do things. And we can do it by being relentless on costs, right? And that's -- we have to as the small [ guy ].

Okay. And then growing this business, I guess start with the continuum of care around oncology and why that's a good vertical for ICU plus Smiths.

Sure. I mean, I think we believe, and we tried to put it in the original presentation, and it justifies all the kind of work that's required around this thing. The hospital is largely a mature market, right? And so all the competitors are racing to create whole cost markets, whether it's software, connectivity, et cetera, in these markets, right? Because the underlying market there is in growth. So for us, the valuable parts have been really in the clinical trenches and those clinical trenches for us have been around dialysis, the specialty IVs and consumables, oncology, et cetera. And some of those verticals we highlighted, oncology, we'll talk about here, and pediatric, some of those areas. That's where preference is strong, differentiation is high and patient staying attached with patients across the continuum matters. For us in oncology, we started out as a nursing-oriented company with IV set. We moved backwards into the pharmacy on our own. With Hospira, we got closer with the pumps because the pump certainly outside the US is really the preferred oncology pump. And Smiths brings the #1 position in ambulatory pumps, which are used largely in oncology delivery or in home care settings. And so over time, that gives us an opportunity to stay with patients longer to participate in maybe those drugs in different ways and to have a system that can offer safety all the way through with kind of workflow standardization and training, et cetera, that stays in that one kind of clinical area. And the same you could argue in some of the areas on pediatrics or anesthesia or some of the other spots, right, trying not to deal in the commodities every day.

Okay. And then when you think about the assets you've acquired, how broad is the portfolio review of core, noncore? There's a sale of some assets that could potentially be done or just kind of SKU rationalizations.

It's both. I mean, it's boring for investors, but just this -- certainly in the core consumables infusion and SKU rationalization is very valuable, right? If you could swap products we'd make in our own factories that we are using in-sourced or not as vertically integrated as us, that's very valuable. So we're super focused on that. In terms of portfolio rationalization, I mean, I don't think there's anything to talk about in infusion systems or in infusion consumables. I think there are some pieces of vital care back to the opening comment, which went healthy, I think it's worth a debate, but we're not really healthy there yet. So that will come over time.

Okay. And then what about assets from ICU like that aren't discussed a lot, like critical care?

I mean Critical Care actually has some synergies with the Smiths portfolio. And so they ran a quasi-similar portfolio outside the U.S. that we didn't really have in our business, and that's an exact example where some of the product SKUs may be substitutable for items we make on our own, which creates value. And so if there's an opportunity to further profitize the business regardless of where anything winds up to, we're going to do that in the short term, right? That one actually has some direct synergies.

Okay. And then the manufacturing footprint, can you just remind people what is ICU's manufacturing footprint compared to Smiths?

Sure. I mean, I think one of the things we did a reasonable job of post-Hospira was whittling ourselves down to a pretty rational manufacturing structure. And so in the U.S., we have 2 kind of super sites, one in Salt Lake City, where the guts of our consumables business originates, and those pieces and parts get sent to Ensenada, Mexico or Costa Rica for inclusion in the pump set, a pump manufacturing dedicated set manufacturing site in Costa Rica, and an IV solutions facility in Austin with some redundancy from some of the international players. Smiths' network is far more diverse, 10 to 12 places around the world. And I think we'd apply that same mentality over time, right? What -- there are some things that are rock-solid and core will never change. And there are other things that I think are open for a discussion, right? But it's not -- it's not a discussion you can have in this supply chain environment until we're reliable, stable, predictable with excess on hand, et cetera, and you can take on some of those items.

Medium- to long-term opportunity down the road once things stabilize.

I mean, I think back to Brian's comment on synergies, that's -- I think on the cost side, we could see it pretty well, and then the next piece takes a little bit of time.

Okay. Moving to ICU and your core business momentum, I think you hit on it in infusion consumables. You had an exceptional year. It didn't seem like it was easy comps. And where are you winning new business and kind of what's driving that? I get the sense it's much more than just some COVID-related tailwinds. There's some good things going on there.

Yes. I mean, I think if we looked at the consumables business, what we think our guidance was in '22 versus where the business was in '20, 20% bigger or something, right? It's materially different. And the components of that growth have been sort of 1/3 oncology, 1/3 some specialty items, which is back to that clinical niche conversation, and 1/3 in regular IV therapy. The piece in the IV therapy was probably aided a little bit by COVID. It was also aided by just getting back to the clinical features and benefits of our product, a little bit of industry shortage, and ultimately winning on some of the capital business where we can also sell the consumables or have the right to sell the consumables in some of those spots. I think going forward, what's been hard to predict and it goes back to your opening question on the COVID impact, how much excess was in there. And we tried to handicap that properly in our revenue guidance for the segment for this year, but we don't really know with extreme precision. The game is to keep winning in the differentiated stuff, the same thing we said in the script quarter after quarter. The differential stuff is working. And it was -- it's just the inflation challenges have made it a little bit harder to get the commensurate profitability. That's the bummer for us. But in the short term, we can't do anything other than to focus on just trying to get as much share as we can.

Okay. You still have a pretty decent window of opportunity with Becton remediating its Alaris platform and Baxter extending its time to market with no [ home ] pump, and now there's a recall with things like with Spectrum. And just how do you think about that opportunity in '22? Are you guys going hard at that, knowing that at some point, it's going to come to an end?

I'm not sure that we would -- we think it's just some binary event because competitors are smart and customers are smart. And I think everybody knows all the information that's out there, and these are decisions a customer makes for the next 7 or 10 years. And so it's not just what you have today. The customer expects to have a vision on future technology and where you're headed. And we still have to sell today whether the products are on the market or not against inertia, history, products coming back, et cetera. So I don't think the competitive landscape is that different, whether they're in or out of the market. Our view is we sell in the features and benefits and merits of our product and their -- ranking its clinical use and workflow and ease, et cetera. And whether they're here or not here, it's the same conversation because they're there telling the customer, here's how easy or good our stuff is, right? We still think it's like the same way.

Okay. And then moving to inflation. You laid out the cost over '21, '22, $30 million to $40 million. It sounds like oil prices and sanctions, it's a little bit worse or -- how should we think about oil prices and your -- and the impact on your business of oil prices?

I mean, that's the most correlation with freight -- and for us, because solutions is a largely domestic business, there's a lot of trends and trends costs have gone up. And legacy ICU didn't have so much over the water, but over the -- Smiths has more over the water or more expedites if you're bad in manufacturing and some more air is more expensive. So there is a knock-on effect, and that is a little bit different than when we had our call, but there are so many moving pieces right now. We haven't focused on it that much. There's not much we can frankly do about it right now. But that -- we try to be super transparent on the call saying the exact amount of inflation we took and what were the components of that inflation. For us, transportation, legacy ICU was the third. It's a bigger chunk for Smiths because they're more international than more diverse manufacturing footprint network. So we're feeling some pain there.

So solutions are mostly contracted business for you now. Just how accepting would customers be in that business of price increases? How difficult are those conversations?

There's a great article, yes, Dan, the Journal of Health care contracting for those who skim that kind of stuff that was actually kind of very honest and transparent about what's done on out there. And I believe in the market, I believe in economics and costs have gone up for everybody. And so if there was ever a moment to have a constructive conversation, I think all parties are trying to do that. Really, it's never easy, but I think we have to do on what we believe is fair. And if costs for all manufacturers go up over time, in normal markets, pricing goes up, too, right? So it may -- it depends on contract cycles, et cetera, but I don't think -- I don't think anybody should be an irrational actor here.

Okay. With that, we're pretty much out of time. Vivek, Brian, thank you very much for joining us. Appreciate it and good luck with all the moving pieces.

Thanks, Matt, for the support and the pay -- and we appreciate patience. It is a bumpy thing right now. I think what we take pride is our core business is very stable. We've got this kind of difficult private equity deal on the side we're rapidly addressing, and much of it is very sticky and needed by the customer. We just got to make it run better.

Yes. I think -- I don't think anyone is going to think that ICU is going to be in the worst place 2 years from today when you combine those 2 businesses. It's worth the patients and the effort.

Yes. Agreed. Thanks, everybody. Thanks for including us, Matt.

Thank you.

Back to the schedule. See you, everyone. Bye.