ICU Medical, Inc.
Q4 2020 Earnings Call Transcript

Published: 26 Feb 2021

[Operator:]

Good afternoon, ladies and gentlemen and welcome to the Fourth Quarter 2020 ICU Medical, Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Mr. John Mills of ICR, Managing Partner. Thank you. Please go ahead.

[John Mills:]

Thank you for joining us today to discuss the ICU Medical financial -- for the fourth quarter of 2020. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Brian Bonnell, Chief Financial Officer. We wanted to let everyone know that we have a presentation accompanying today's prepared remarks.

[Vivek Jain:]

Thanks, John. Good afternoon, everybody, and we hope you and your families are well. We are happy 2020 is over and we look forward to our hospital customers stabilizing after much volatility and our company continues to adapt well in a challenging environment. 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 them during these times. And we would like to thank our employees a number of whom had to again deal with weather-related challenges as our largest domestic employee bases are in Texas around our production and distribution sites. On today's call, we wanted to comment on our Q4 results; explain our view on the full year fiscal 2020 and what drove revenues and impacted earnings and assess our performance in a volatile market; provide our opinions on 2021, the transition to reopening our build and timing for a return to a more normal environment; update on the new effects of the pandemic to ICU Medical; the recent weather disturbances and our normal housekeeping items; outline our near-term 2021 financial expectations; and lastly, articulate how we feel about our positioning in this environment any strategic implications and reflect on the criteria by which we are judging ourselves and our belief that each of our business can continue growing into 2021 and beyond.

[Brian Bonnell:]

Thanks Vivek and good afternoon everyone. To begin I'll first walk down the P&L and discuss our results for the fourth quarter including a recap on full year performance for the businesses. I'll then move on to cash flow and the balance sheet before wrapping up the discussion with our guidance for 2021. So starting with the revenue line. Our fourth quarter 2020 GAAP revenue was $320 million compared to $316 million last year which is up 2% or 1% on a constant currency basis. For your reference, the 2019 and 2020 adjusted revenue figures which exclude contract manufacturing sales to Pfizer can be found on Slide number 3 of the presentation. Our adjusted revenue for the quarter was $309 million compared to $297 million last year which is up 4% or 3% on a constant currency basis. Infusion Consumables was up 3% or 2% on a constant currency basis. Infusion Systems was up 8% on both a reported and constant currency basis. IV Solutions which we sell primarily in the U.S. was up 1% on both a reported and constant currency basis. And Critical Care was up 6% or 5% on a constant currency basis. When looking at full year 2020 adjusted revenue on a constant currency basis, the business in total was up 3% compared to 2019 and we grew total adjusted revenue in every quarter during the year. Infusion Consumables which was the business most impacted by lower hospital census, finished the year down only 1% while Infusion Systems was up 10% due to competitive wins in COVID-related expansion. IV Solutions was flat and Critical Care grew 7% for the year. Overall we were pleased with this level of performance given the volatility and other challenges presented by COVID. As you can see from Slide number 4 of the presentation for the fourth quarter our adjusted gross margin was in line with our expectations at 39% compared to 40% for the fourth quarter last year. The year-over-year decline of 1 percentage point reflects the timing of the annual scheduled maintenance shutdown of our Austin manufacturing facility that was completed in October, as compared to the summer months in prior years. Sequentially adjusted gross margins improved by one percentage point compared to 38% in the third quarter as a result of improved mix as our Consumables volumes during the fourth quarter approached more normal levels. SG&A expense of $74 million in Q4 was up 4% year-over-year and reflected a $3 million increase compared to the third quarter, driven by higher commissions expense primarily in our Infusion Systems business along with year-end adjustments to incentive compensation. R&D expense was $12 million for the quarter, down $1 million year-over-year but up $2 million compared to the third quarter. The changes compared to both prior year and the third quarter are primarily driven by timing of project spend. Restructuring, integration and strategic transaction expenses were $6 million in the fourth quarter versus $11 million last year. The fourth quarter 2020 spending related primarily to the transfer of manufacturing lines for certain products currently produced in Pfizer's Rocky Mount facility as we prepare to exit the MSA along with other onetime restructuring costs. Adjusted diluted earnings per share for the fourth quarter of 2020 were $1.77 compared to $1.94 last year. This year's Q4 results were favorably impacted by a lower tax rate that contributed approximately $0.15 of benefit to adjusted EPS. The lower tax rate was the result of excess tax benefits related to equity compensation. Diluted shares outstanding for the quarter were 21.6 million. And finally adjusted EBITDA for Q4 decreased 2% to $60 million compared to $61 million last year. Now moving on to cash flow and the balance sheet. For the quarter free cash flow was $55 million and Q4 was another strong quarter of cash flow generation driven by a combination of solid earnings, declining restructuring and integration spending and further reductions in working capital. Net working capital at the end of the fourth quarter was down $37 million compared to the end of the third quarter, due mostly to improvements in accounts receivable. The strong Q4 cash flow allowed us to end the year with $424 million of cash and investments on the balance sheet which is well ahead of our $350 million target communicated at the beginning of 2020. For the full year 2020, the company generated $137 million of free cash flow after investing over $90 million in CapEx and an additional $28 million in restructuring, integration and strategic transaction expenses. We are very pleased with our cash flow results for 2020. Looking forward, we feel we have now mostly optimized our levels of working capital and don't expect to further benefit from large onetime reductions like those we generated in 2020. But we do continue to believe that annual free cash flow of $100 million or more, exclusive of any acquisition-related payments, is appropriate, based on our current profile. In the fourth quarter, we spent $30 million on CapEx for general maintenance and capacity expansion at our facilities, as well as placement of revenue-generating infusion pumps with customers outside of the U.S. This was in line with our expectations and brought our total CapEx spending for 2020 to $92 million. Moving forward to 2021, Vivek already provided some guidance related to our expectations for each of our businesses, so I'll cover the rest of the P&L. For 2021, we expect adjusted gross margins to be in the range of 38% to 39%, which reflects the benefits from improved consumables mix, offset by the impact from higher Infusion Systems hardware revenues, as we implement competitive wins. In terms of operating expenses, we expect SG&A to increase in the low- to mid-single-digit range, as selling, marketing and travel expenses returned to more normal levels over the course of the year. In 2021, we will prioritize R&D investment, which should increase approximately 10% compared to 2020. We anticipate further declines in restructuring, integration and strategic transaction spending, which we estimate will be between $15 million and $20 million for the year, mostly related to the Pfizer MSA exit and improvements to our customer-facing systems and processes. For the full year 2021, we expect adjusted EBITDA to be between $245 million and $265 million and adjusted EPS to be between $6.50 and $7.20 per share. The adjusted EPS guidance assumes a tax rate in the normalized range of 21% to 23%. And for modeling purposes, you can assume average diluted shares outstanding during the year of 21.8 million. And finally, we expect to see our CapEx requirements decline for the third year in a row to around $80 million in 2021. To emphasize Vivek's earlier comments, similar to revenues, we expect earnings in 2021 to reflect a steady ramp over the course of the year, driven by

[Operator:]

Your first question comes from the line of Matthew Mishan with KeyBanc. You may ask your question.

[Matthew Mishan:]

Hey. Good afternoon Vivek, Brian. How you’re doing?

[Vivek Jain:]

Hey, Matt.

[Brian Bonnell:]

Hey, Matt.

[Matthew Mishan:]

Hey. So, I think, these two questions actually are -- actually kind of come together. First, can you give us a sense of the backlog of installations you have in systems heading into 2021? And then, secondly, every piece of your guidance makes a lot of sense, but the gross margin. You're coming off a quarter in which Infusion Systems was elevated, coming off a year where Infusion System was elevated. Next year Consumables are going to be a higher mix of the volume. And I'm assuming there's going to be some kind of margin benefit from moving the manufacturing from Rocky Mount to Austin. So what am I missing as far as the gross margin guidance being flat year-over-year?

[Vivek Jain:]

Why don't I do the first one and Brian will do the second one, right? On the systems, I don't think we are in a place where we would quote a backlog number, something like that, I think, we tried to say in the script now, which is we have more competitive wins that we haven't installed yet than we've ever had before. And I think a year ago, January, we said we thought we had gained a point from our pretty low place we were on LVP and I think we thought we're in a better place than that today, competitively. So that's probably all I want to say on the backlog. And I'll let Brian comment on the margin.

[Brian Bonnell:]

Matt, your question on the margin, it's a good one and it relates actually back to your first question around Infusion Systems hardware and backlog. And really, what we're expecting for 2021 is, margins to be a little bit negatively impacted, as a result of a higher mix of Infusion Systems hardware installations related to competitive captures. Those tend to be much lower margin initially at the time of the implementation and revenue recognition on the pumps, followed by improving margins from the dedicated disposables that follow afterwards. But there is a timing difference between that initial installation and the subsequent dedicated disposables.

[Matthew Mishan:]

Okay. And then, sort of, last question for me, because I think you explained everything very well. Can you talk through some of the new products that you'll be focusing your attention on in 2021?

[Vivek Jain:]

Sure. I mean, I think, we have a number of things getting on the filing docket in 2021, as I said, that's why spend is going up. As you would expect, I mean, the majority of dollars that we've been putting in over a three-year period have been, certainly, since we have the full freedom to do so on the systems side. And that, obviously, means finishing the software products that we've been talking about and getting those out of kind of the LMR phase and really into the market and then some different ideas on the hardware side that we've been working on. So as usual, we want to talk about those more when they happen, but I think we've been pretty transparent and it's easy to figure out. Historically, our spend on the consumables-related business is very much what ICU used to spend and the rest has been on the systems side, since we did the acquisition.

[Matthew Mishan:]

All right. Thank you very much.

[Operator:]

Your next question comes from the line of Larry Solow with CJS Securities. Your line is open. You may ask your question.

[Vivek Jain:]

Hello.

[Peter Lukas:]

Yes. Hi. It's Pete Lukas for Larry. So just to clarify, sorry on the margin side, in terms of margins for Solutions, do you see increased volume as being able to help you out with that? Should we think about that as a positive given, Austin and the new distribution plant?

[Vivek Jain:]

I think, I would say, it's been a bit of a wash there Pete. We can't -- obviously margins were higher for the company when we were selling more solutions two years ago 2.5 years ago. The distribution center has added some efficiencies, but we've also extended a number of the contracts et cetera and a lot of activity happened around that in late 2019 and through most of 2020 and it gobbled some of that back up. So I think for us, it's much safer to say solutions is what it is right now, and it's not going to be driving a lot more incremental margin. It's not going to be getting worse it just kind of exists.

[Pete Lukas:]

Perfect. And you guys covered a lot most of what I had here, just one more just a general question in terms of M&A. Can you discuss just broadly what you're seeing in terms of -- from the sellers in this environment? And they're willingness to engage given all the impacts of COVID?

[Vivek Jain:]

Yeah. I mean, I think, it's a balancing act, depending on, where you -- where -- what part of the market you're playing in there. Certainly, folks who have had COVID make an impact on their business or say of operations there is a constructive dialogue. Otherwise, I mean, I think the market is challenging as everybody's seen on that front. So I'm not sure that I would say COVID has made the M&A environment easier, if that's where you're going.

[Pete Lukas:]

Yeah, very helpful. Thanks. I'll jump back in queue.

[Vivek Jain:]

Thank you, Pete.

[Operator:]

Your next question comes from the line of Jayson Bedford with Raymond James. You may now ask a question.

[Jayson Bedford:]

Good afternoon. Thanks guys. I wanted to get back to the gross margin pump dynamic question. And I appreciate there's a lot of moving parts here. But just I guess simply are you expecting to sell more pumps in 2021, than you did in 2020?

[Vivek Jain:]

I think, Jayson it's not only the absolute number of pumps. It's what class of trade are they going into right? Whether it was maybe pandemic surge in some of the international markets versus some of the competitive situations that's, probably a bigger factor than the absolute number of pumps. In terms of the absolute number, I think we're saying, pumps could be down a little which means we wouldn't sell as many pieces of hardware as we did last year. That there is an outcome where that happens if we can't get all the installations on it and when, still some things we want to win and get in this year.

[Jayson Bedford:]

Okay. And just, I guess, just to follow on the pump side, you mentioned the government orders in the spring and summer kind of inferred that you didn't see any kind of government orders in the fourth quarter. One, is that correct? And was there anything exceptional on the pump side here in the fourth quarter?

[Vivek Jain:]

That is correct. There was real no material government business really from August, September onward, nothing very unusual in Q4 in the pump business. Uptick probably a bit due to acuity on some of the dedicated sets hard to triangulate exactly and a little bit of maybe accelerated add on expansion at a few customers, but nothing out of the ordinary.

[Jayson Bedford:]

Okay. Gross margin in the quarter the 39%, was that negatively impacted by the plant shutdown? I'm just wondering the impact of that.

[Brian Bonnell:]

Yeah. Jayson, that's right. It was negative impact for Q4. And if you compare it to prior years in prior years we -- the shutdown was typically in the summer months.

[Vivek Jain:]

We usually did it in June. And it rolled in over the next two or three months of the summer quarter, if you went back on the scripts and with the pandemic kind of in full flight last year we made a call to keep producing and just delayed it until October.

[Jayson Bedford:]

Okay. And I don't want to be greedy with the question, but is there a basis point impact to that? Or is there a way quantify it, on the 39%?

[Brian Bonnell:]

Probably around a percentage point, somewhere in that neighborhood.

[Jayson Bedford:]

Okay. And then, just a clarification on the commentary around 1Q, I think you mentioned quarter-on-quarter growth in Consumables -- pumps may be slightly down. I was a little unclear whether that's quarter-over-quarter, year-over-year?

[Vivek Jain:]

Sequentially, quarter-over-quarter.

[Jayson Bedford:]

Okay. Okay. Okay sequentially. And then similar, the other comment I think with respect to 1Q was a 10% increase in R&D. I assume that's, quarter-over-quarter sequential?

[Vivek Jain:]

No, I don't actually think -- I don't know if I have the right number -- I don't think it's...

[Brian Bonnell:]

I don't think -- know if there's even a difference.

[Vivek Jain:]

Over the balance of the year -- over the balance of the year, most things probably be back half weighted on the spend side this year.

[Jayson Bedford:]

Okay. So that was an annual. Okay. Okay. That's it for me. Thank you.

[Brian Bonnell:]

Okay. Thanks, Jayson.

[Operator:]

I am showing no further question at this time. I would now like to turn the conference back to Vivek Jain, for any closing remarks.

[Vivek Jain:]

Great. Thanks everybody. I appreciate the time you made for us today. We at the company are pulling for all of our employees that had deal with a lot of things in the last couple of weeks. And for everybody on the phone and to the company, we hope you have a great 2021. And we look forward to speaking to you later in the year. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. And have a wonderful day. You may all disconnect.