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

All right. Good morning. Welcome to the 45th Annual Raymond James Institutional Investors Conference. My name is Jayson Bedford. I cover med tech here. It's really our privilege to have Vivek Jain, the Chairman and CEO of ICU Medical. Vivek has been a loyal participant at this conference, not all 45, but he's been loyal. But we really do appreciate Vivek coming here. And certainly, at this wee hour West Coast time. So starting us off on a Monday morning flying in from the West Coast is a quick turnaround. So with that, I'll hand it over to Vivek.

Good morning, everyone. First of all, thanks to Raymond James as always for having us. Jayson has been a great friend and colleague and partner over the last number of years, been the longest tenured analyst, I think, on our company, has been there through a lot of our very high moments and some of our tougher ones, and we appreciate the candor and support. Okay. So about ICU Medical, we are an infusion therapy-focused company in the Medical Device space with a few adjacencies. And what that really means, if you think about medication delivery in a hospital, if you've seen a TV show, you see a patient in a bed, we are essentially involved in that device you see next to the patient and the pipes you see next to patients that delivers medication through a device ultimately through a catheter and into a patient. Our original business was really the pipes only and that's the core of our Consumables business, which is about 45%, 44% of our company, that's where we drive the majority of our earnings. In the Consumables segment, I'll talk about a bit more in a second, there's also other access devices, some airway access products, et cetera. But the same thing keeping the pipes open as the core of the Consumables business. Those Consumables attach to a pump and a series of hardware devices that are called our -- that's called our Systems business, that's about 28% of our business, and those pumps have a lock in key disposable that's used to them. And so while we call it Systems, the majority of sales in that category are also single-use disposables, they're just dedicated to the device. And then we have a series of ancillary products that wrap around the infusion therapy area, either the water that flows through the pipes, that mixes with the drug or other devices that heat up fluids as they come into the body, and that's called our Vital Care segment. In aggregate, last year, we were a $2.2 billion revenue company with $970 million-ish of that being in our Consumables area. The core of our Consumables business is our infusion therapy and oncology areas. That's our historical business before our latest transaction. That's about $650 million, $700 million, and the remainder is the Vascular Access and Tracheostomy areas, and I'll talk about that a bit more in a second. The Systems segment is about a $630 million segment. That is really all the different modalities and types of pumps that deliver medications to a patient largely in the hospital, but a growing amount at home. And our Vital Care segment, which was the ancillary items, the solutions and respiratory access devices, temperatures management devices are about [ $615 million ]. 75% of what ICU Medical does are single-use disposables, 10% is hardware and 15% is IV Solutions. With the exception of hardware and software, which are obviously capital investments and significant cost, everything else we sell is less than $5. And so we have really billions and billions of pieces we sell annually in kind of core categories into the hospital and health care markets. 2/3 of our revenue is U.S. and Canada. The majority of profits come from those two regions, probably in excess of its revenue mix, and the third, OUS. And from a capitalization perspective, we have roughly a $4 billion enterprise value today, which is down,, just under $1.4 billion of debt and $2.4 billion of equity value. So really trying to cut to the chase, why should somebody be interested in ICU Medical right now. There's a lot of very interesting industry drivers. It's a consolidated industry structure where there are a handful of participants, both in the U.S. and international markets, a very narrow set. There are very high regulatory barriers that make it difficult to have your market position you served. The manufacturing assets have high capital intensity to build to get off the ground, they're hard to reproduce. Most of the items, as I just talked about, are really ingrained in the workflow of delivering care and so they're very sticky. They're hard to move unless there's some exogenous or external event, either self-inflicted or regulatory-wise. There are a series of guidelines across our entire portfolio. This is really clinical guidelines and workflow guidelines that are at their core about delivering safety. But we get paid for safety and those guidelines are incorporated into the design of our products and our products are, particularly our new products have tailwinds with establishing -- with the emerging guidelines in some of the core areas of less like infusion pumps. Profit comes from a very -- concentrated set of countries, so it's easy to figure out where your returns come from. There's an emerging software opportunity that surrounds the hardware, I'll talk more about that in a second. And there's some very unique things going on in the infusion pump market that is going to lead to an acceleration of a large portion of the U.S. installed base, and that is a very distinct opportunity for us over the next 2 to 3 years. Our company, the way we exist in that ecosystem, there are sort of two other primary U.S. suppliers and two European suppliers and one Japanese supplier, where our role is we're the focused player. We're supposed to be more innovative, move faster, demonstrated track record of clinical improvements that's really focused on making life easier for the hospital customer. We've done a series of acquisitions, some out of defense and some out of offense, both required us to rebuild our credibility with our customers. We've been able to do that. It has been a messy 2-year period. We are sort of out of the clouds on a lot of those issues and our operational platforms are very stable. That's easier said than done for the efforts over the last two years. 2023 was really what we believe kind of the final revenue-wise baseline year to start to grow off of and the core of it is we believe we're under-earning relative to our peer set. And the question is how fast can we get that in line. We're 4 or 5 or 6 points below what we think appropriate margin levels are for our type of company and obviously creates a lot of value if we can deliver those incremental earnings. And with our portfolio relative to our capitalization leverage, there's some optionality. We don't have to do anything. If we were able to do something value creating, we would, but there are different pieces that we can play with. And we believe if you -- the proxy doesn't lie, if you read our incentives, our interests are aligned with shareholders, and we've benefited and suffered as things have emerged over the last couple of years. So to talk a little bit about our product specifically. The core of that Consumables segment is our legacy businesses around infusion therapy and oncology. Those businesses have compounded at 6% or 7% a year on the revenue line for the last 5 or 6 years. They're really based on our original product called the Clave, which was a clever device to keep the pipes I've been talking about between the patient and the pump open. And we took that little device and we offered it to the customer in the most unique ways where the technology was conserved but minimize training, workflow changes and really speed of adoption of that device into the hospital. We were relentless about owning every piece of the process ourselves. We're deeply vertically integrated all the way through our own [indiscernible]. And like the small guy, we had to deliver it to a more customized fashion. So we had the broadest set of individual items for any unique clinical circumstance. That's how we got here to date. Going forward, that business is about to have a series of products come through on the innovation front and alongside that, we've made significant CapEx investments in manufacturing and supply. So we have invested in a way that allows us to continue to grow and we've improved our service levels to the customer through all the supply chain stuff over the last couple of years. The oncology portion of Consumables is really fancy devices that sit between expensive drugs in a patient. And so thinking about that that's really the plumbing between pharmacy, nursing and ultimately the patient. So a lot of drugs are very hazardous. If you have clinician exposure, patient exposure, there's negative consequences. There's a lot of guidelines around that. This was a double-digit business for us growth-wise for a number of years. Through the supply chain challenges, we fell back a little bit. We're back and fully up and running in this category. We've seen it start to turn in the back half of last year and it should get back to the historical growth. And we've integrated it into a series of hardware products that enable its adoption and ultimately, one of the values of the Smiths transaction we did was taking those parts and pieces and plugging them into the Smiths products to differentiate them, and so this has really been a very solid and good story. It's where we make most of our cash. It's the largest piece of our Consumables segment. The other portion of the Consumables segment are products that came from our Smiths acquisition, and those are the Vascular Access and tracheostomy categories. Vascular Access was a difficult business the first two years as we lost some market share, but it's a very logical place for us to play where Vascular Access is the catheter that literally attaches to that pipe we make and to the connector we make, and so we absolutely have a right to be there. The Smiths product families were well established in the market, but they didn't do a great job of production supply, et cetera. We've turned around a lot of that. We started to see it in the quarter we just announced, Vascular Access is set up to grow this year, which starts to deliver better growth across our entire Consumables segment. Ultimately, it's very much about just calling on customers with the consistency, getting back the market share that we lost and leveraging our position in the core Consumables area to win where we frankly have a right to win. [ Traches ] on tracheostomy is a little bit different. It's also an access device, but it's not an IV access device. It's a respiratory access device, but it shares a lot of the same features as our core IV business with a lot of customization, very attractive market structure with a limited number of players, frankly, neglected for many years and it participates in a chronic disease, chronic patient population that people can be on these devices for 20 or 30 years. A lot of value here, a lot of customization and a lot of opportunities for innovation against a large company that's probably not as focused on it as we are. So that's [ $900 million of ] our revenues in Consumables. I'll talk a little bit about the pumps. And the pumps are a complicated story, but to try to make it simple, most players in the pump industry in the U.S. market, the other large players have chosen a path to say I have a device that integrates all the different ways you could deliver a drug into one single device. We grew up in a clinical mindset and the businesses we bought were market leaders because they addressed a very specific clinical problem. And so a simple way I would say is we want to have a business where we have the right tool, the right hardware for an individual job, make sure that hardware is the most precise and the most accurate. And ultimately, that device needs to connect with a common software architecture that connects all the devices regardless of where they may be operating. We were the originators in IV-EHR interoperability that has sort of become table stakes. That is where a hospital or a pharmacy can control a pump outside of the room where that pump can be programmed in the pharmacy and a clinician has to just walk in, validate the auto hit start and go. That sounds fancy. It's sort of rudimentary today. We've now incorporated that to a new piece of hardware that I'll talk more about called Plum Duo. The Plum Duo was approved in August. It is very timely because of the unique industry circumstances going on the replacement cycle in the U.S. and the market is hungry for new technology here. And we've tried to drive the conversation back to a safety conversation and a clinical conversation. That tech with Plum Duo is the first in a series of products that will roll out. And going forward, kind of '24 and beyond, we will bring all of these devices, and I'll show the road map in a second, but the goal is to have the most modern fleet of infusion devices for each circumstance. And we kept it kind of quiet for a number of years, getting the Duo approval was the first step that allowed us to kind of come out of -- come into the sunlight on that a little bit. That's the hardware philosophy about clinical workflow, safety. Software is a part of this and the software opportunity's emerging. And there's table stake software like EHR [ and operability ]. If you look at the slide, I would say everything sort of to the left on the slide is basic, so where is my device, how many of are in use, what drugs am I delivering. Our new LifeShield software is a cloud-based system that allows multistate IDNs to easily sit in one location and see that across their entire network. As you get farther and farther to the right, it becomes more technical, which is third-party connectivity, all of these hospitals are running multiple applications. Your devices have to operate within their network. There's a cybersecurity conversation, and there is a data and analytics conversation where some of these clinical dashboards on outcomes, et cetera, get linked. And each one of those features appeals to the many constituents and make a pump purchasing decision. A pump is bought by not a single individual in a hospital, it's bought by a consortium of the IT team, the nursing team, the med safety team, procurement team, et cetera. And we think our technology checks all of those boxes. And ultimately, that software, the holy grail is connecting that software in the same EHR to the pump at home. That's a couple of years out. But with the Smiths acquisition, we walked into the #1 home care pump in the market and that's where a lot of the high-value drugs are getting delivered, and so one informatics offering across all the different hardware types in all the patients over time. In terms of what is the hardware road map, we have approval on a new large volume pump. That pump addresses a lot of the perceived limitations of our current Plum 360, offering those limitations again perceived are largely about multiplexing of drugs, the user interface, screen, et cetera. We were able to get rapid approval here from the FDA because we took extra time to get the testing done, but also because we can serve the same motor, the same workflow format, what we really optimized was and the same cassette for delivery, what we really optimized were the Boards in cyber rating and the user interface. That device is essentially going to get cut in half over the next couple of months and file with the FDA per device called Plum Solo. That will be a single channel or a single cassette version of the Duo. Most of the pumps we have in the market, once you sell a pump, it lasts for 6 or 7 or 8 years and you still have a business refreshing those. Most of our devices in the market are new over the last 6 or 7 or 8 years, and they're finally aging out and the solo gives us an opportunity in addition to market share capture to also start to refresh our own installed base, which we haven't had the opportunity to do for the last number of years. With Smiths, we walked into also the #1 syringe pump, freestanding syringe pump in the market. That's a product used largely in pediatrics, the #1 home care pump in CADD. CADD is also used in acute pain. As we said on the call last week, we'll also have a syringe pump on file with the FDA by the end of this year. And following that, we'll get to work on a next-generation CADD. So we have a vision around what these devices should look like. We have a vision of where these devices should connect and how they should connect. And ultimately, we want to go to a customer with kind of a turnkey solution, all the pumps you need, all the types, the right tool for the right job in each location, and that's a different setup than some of the other industry participants. And just to close from a product perspective on Vital Care, these aren't necessarily all IV products. I would say, IV Solutions, which is half the Vital Care business is an IV product. That's the water that goes through the pipe that attaches to the motor, the pump. That's the starting point that's often mixed with the drug. It's important, but sort of misvalued and then some of these other products are either downstream of the pump like temperature management or adjacent to the pump like our critical care offering. And so each one of these not exactly IV, but good market structure, unique assets, logical adjacencies for us. Getting back to the underearning comment. When we did our transaction a couple of years ago, we had a certain expectation for earnings, which has been challenged. We also knew we had a series of additional synergies beyond that. And we're starting to start to articulate the value of those, and we didn't commit to how long it would take to get, but there's probably $50 million of available improvements across nothing transformational, right? There's not a fancy program or something we need to coin, but rather the basics of blocking type of integrating logistics networks, service centers using IT as we integrate to a single ERP to remove some redundancies in duplication, got some excess office space, et cetera. And the big -- and a big value driver is we had pre-transaction, maybe five manufacturing sites of consequence. With Smiths, we went up to 20, there's a real effort over the next two years to get back down to 10, lot of value and that are ultimately for us, what we said in the call, it shows up on our gross margin line and the factory consolidation drives a lot of value in the gross margin. This is independent of growth, price, all the other things that we should be doing. And so over the next couple of quarters, let's talk about this more and more. On the call, we said most of these activities should be fully deployed by the end of '25. The biggest chunk actually get deployed this year for realization next year over this year, but some items like factory consolidations have a long tail that will carry forward. So very tangible, very real. It's pure execution that's in front of us. And then to close with this is a duplicate of our slide from last year, just to reflect on what our goals were. Last year, we wanted to grow the legacy ICU Consumable business. We think we did that very well. What didn't happen was we didn't improve the legacy Smiths Medical businesses. They were essentially close to flat year-over-year and the decrease in Vascular Access hurt the overall Consumables business. We drastically reduced our need for airfreight, improved our operations. The innovation got delivered on the -- started to get delivered on the pumps. We've earned our right to compete against with -- again, with customers. We started to make cash, not as much as we wanted, really showed better in the fourth quarter, starting to overcome some of the inflation that we absorbed, which is significant through price, fuel and currency, not great on the currency front, but generally stable, and we haven't really rationalized the portfolio, but it stays very much on our minds. For '24, it's about revenue growth, first and foremost, since we want to get all parts of the portfolio growing. There's a series of important contract renewals in the U.S. market, both for GPOs and individual hospital accounts that happened late this year and early next year, that is about price and solidifying your business that is front and center. The supply chain is fully stable, but we want to get all the production and distribution networks consolidated. We do have those product approvals and filings ahead of us. The next round of synergies I just talked about on manufacturing, real estate, functional expense, et cetera. We need to improve our free cash flow. And we want to get back to the original intent of what we started with to turn value from debt into equity value and return capital once we get to a target leverage is going to take a little bit of time, but the pieces are there to clearly do that. So that's -- that dovetails with the under-earning comment, and that's really the story of ICU Medical for the next 12 to 24 months. Thanks very much.

All right. Great job. Thank you, Vivek. We have time for a few questions. I guess just thinking of the top line. When you think of the portfolio and the end markets you're serving, what do you think the appropriate growth rate is in those end markets? And then where can you do better?

I think on Consumables, our Consumables growth obviously has been excess of market growth. The census for hospitals is 3%, maybe 4%. We've been creating these specialty markets around the core, whether that's in dialysis, oncology, et cetera. And so I think in that portion, we certainly think we're entitled to above-market growth because we're building innovation and finding new markets. On the Vascular Access and trade products, those markets are growing more in line with census. The only thing we feel in Vascular Access because we've lost so much and we're starting to come back, we have a chance to grow above market there at mid-single digits. It's difficult to say the Pump businesses, which are normally about census, but there's so much refresh needed because of what's going on with the whole market that the pump market could essentially double up historical growth for the next 2 or 3 years as people have to figure out the replacement cycle for 0.5 million devices in the country and Vital Care is purely census, 2%, 3%.

And just on the pump replacement cycle, you just mentioned double up normal growth, is that the best way to think about the opportunity? Or is there another way to kind of quantify the opportunity?

Well, in a normal year, there's -- from all U.S. market participants, there was probably on the order of pre-pandemic $600 million of capital sold a year. That would represent kind of 1/8 -- every pump lasting 8 years and the 1/8 that's refreshed every year, kind of equal $500 million to $600 million, maybe a tad less than that. Over the last four years, there's probably only been $300 million a year of capital sold for a variety of reasons and those devices have gotten older. And so that gap has to get filled, devices can't last infinite.

Okay. And you've introduced Duo, can you talk about when that really starts to hit the financials?

Yes. I mean, I think the early reaction as we had on the slide has been great. Nothing goes that fast in the pump hardware market. The interesting time right now is that customers are really forced to resolve the current pump situation by the middle of '26. Duo won't make an impact on our income statement until next year because even if we sell a pump tomorrow, you have to wait nine months or a year to get it installed, you can cut into the [ IP ] schedule training, et cetera. But the conversation with customers is happening, starting right now.

Okay. You mentioned that the industry and profit is pretty centralized from a geographic perspective. You're generating 30%, 35% of sales internationally, kind of under-indexed relative to most of medtech, is that an opportunity internationally to grow a bit faster?

I mean, there are some spots where they're still -- I mean, just pick the one everybody has been talking about is on China. We are way under-indexed to that. And it is a small business, where profit is very good. And even with VBP and some of the things -- the market, still a growth opportunity for us. And so there are pockets that are very interesting that we want to step on and invest that we probably didn't pay enough attention to. There are some spots that are very challenged. We have high market share in Latin America and the currency is just crushing us. And so it depends a little geography by geography.

You stressed both last week on the fourth quarter call, today, the under-earning aspect of the business here. And you alluded at the end here to the $50 million by the end of '25, it will be implemented. What's the time frame to kind of recapture that potential margin?

I mean, certainly, we want it as fast as possible, right? It does come down to also revenue growth and what happens over a year or two with the pump mix. I mean, I think the part that we feel absolutely rock solid on is the operational stuff that was on the slide. That will get implemented next year. And so that should all be realized through '26. We said the biggest step up will actually happen next year over this year. To get all the margin back is going to take at least two years of revenue growth. I mean, basically, we were trying to get back to our original estimates post our last transaction, which had $200 million more revenues [indiscernible]

Maybe the last question here. Just what is your target leverage ratio at kind of [ 3.54 ], it's a little higher than peers. You have good visibility into cash flow here, but you did mention kind of target leverage. I'm just kind of curious, what is that number?

We ran a company for many years that had no leverage and long cash and we took on leverage for Smiths. I think we always said for a mid-single-digit [ grower quasi health -- health care quasi ] industrial company should have 2, 2.5x leverage on it. We can debate what the form of that leverage should be, but probably a turn less than we have right now, which again, if we had some divestitures or we're able to improve cash this inventory rationalization we're doing, right? We feel comfortable getting there. We'd like to have been there already.

Right. In terms of portfolio optimization, you kind of -- sorry, you referred to it as optionality. You're comfortable enough where you don't need to do anything. You don't feel stressed or pressured with that leverage.

We tried to do some things. But when you look a little bit weaker, people try to take advantage of you. And I guess I felt like if it's not value creating even if it sounds nice, you should wait if you think you're going to get better values.

Okay. All right. We're up against our time here. Vivek, thank you. The breakout will be downstairs in Amarante 1. Thank you.

Thanks very much, everyone. Appreciate it.