Earnings Call Transcript - ICUI Q4 2025

Operator, Operator

Good day, and welcome to the ICU Medical, Inc. Fourth Quarter 2025 Earnings Conference Call. Please note, today's event is being recorded. I'd like to now turn the conference over to John Mills. Please go ahead, sir.

John Mills, Moderator

Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the fourth quarter and full year of 2025. 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. To view the presentation, please go to our Investor page and click on the Events Calendar and it will be under the fourth quarter 2025 events. Before we start our prepared remarks, I want to touch upon any forward-looking statements made during the call, including beliefs and expectations about the company's future results. Please be aware they are based on the best available information to management and assumptions that are reasonable. Such statements are not intended to be a representation of future results and are subject to risks and uncertainties. Future results may differ materially from management's current expectations. We refer all of you to the company's SEC filings for more detailed information on the risks and uncertainties that have a direct bearing on operating results and financial position. Please note that during today's call, we will also discuss non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency in ICU Medical's ongoing results of operations, particularly when comparing underlying results from period to period. We've also included a reconciliation of these non-GAAP measures in today's release and provided as much detail as possible on any addendums that are added back. And with that, it is my pleasure to turn the call over to Vivek.

Vivek Jain, CEO

Thanks, John, and good afternoon, everyone. We are glad the call is earlier after year-end as the systems and processes have become more integrated within the company. I'll walk through our high-level revenue and earnings performance, provide some important housekeeping and operational updates and comment a bit on our near-term outlook. Then I'll turn it over to Brian to recap the full Q4 results and provide our complete 2026 guidance. After that, I'll offer a few thoughts on our longer-term outlook, capital allocation strategy and where we are in our mission of creating a comprehensive infusion therapy company. Revenue for Q4 was $536 million for total company growth of 2% on an organic basis or minus 14% reported, and we finished with 5% organic growth for the company for full year 2025. Gross margins were again above 40%, and we delivered EBITDA of $98 million and EPS of $1.91. As a reminder, the reported results are impacted by the mid-2025 creation of the Otsuka ICU Medical JV and resulting deconsolidation of IV solutions from our income statement. Both our consumables and systems businesses delivered record revenue quarters operationally, and Brian will explain the year-over-year decrease in EBITDA due to the deconsolidation and tariffs. Cash generation was again strong as we repaid additional principal and net debt is currently just below $1 billion. The broader demand and utilization environment in Q4 continued to be attractive across almost every geography with the U.S. having a sharper and faster flu spike towards the end of the year, which has normalized now. The capital environment is status quo, and it does appear investments that customers need to get done are getting done. On currency, while the weaker dollar does help revenues in our selling geographies, we are monitoring the Mexican peso, which is at its strongest point in the last year. Getting into our businesses more specifically, our consumables business in Q4 grew 6% reported and 5% organic. It was a record quarter operationally as Q3 had some revenue benefit from the Italian tax settlement. For the year, consumables grew 7% reported and 6% organic. Going into a bit more detail about how the business has performed over the year. Three of the product lines, infusion consumables, oncology and tracheostomy were all at high single-digit levels. And we believe going forward, we have both the operational stability and innovation to improve our performance in Vascular Access. Reflecting on our performance in consumables over the last few years, we grew organically 7% in 2024, 6% in 2025, and we continue to believe that mid-single digits is a good assumption for the medium term. Our IV systems business grew 3% reported and 1% organic and was again the best quarter in pumps even with some installations being pulled into Q3. As a reminder, Q4 2024 was a very large quarter for pumps, hence, why we foreshadowed the growth rate here a bit on the prior call. Going into more detail about how the product families performed over the year, LVPs were low double digits for the year, syringe pumps were high single digits, and these were offset by negativity in the ambulatory line, which was 100% due to a single OEM customer that's been decreasing for the last few years and will finally fully exit in 2026. Reflecting on our performance in this segment over the last few years, systems grew organically 7% in 2024, 5% in 2025, and we continue to believe that mid-single digits is a good assumption for this segment for the near term, and I'll comment on the product road map shortly. Just wrapping up the businesses, Vital Care decreased 6% on an organic basis and decreased 35% reported due to the deconsolidation of IV solutions and was essentially flat both sequentially and for the year. As Vital Care now makes an impact on the overall company growth rates, we'll give a little bit of background on what we've been doing with these businesses. There are a limited number of low or negative profit SKUs within Vital Care, and we've essentially been harvesting those as they have positive cash flow and a finite life or we've been discontinuing the loss-making SKUs in accordance with various customer contractual or regulatory requirements. Most of that work should wrap up over the next few months with the biggest year-over-year impacts to be felt in Q1. Mathematically, we believe the right revenue assumption for the near term for these businesses is flat to slightly down in the face of our decisions to improve profitability. We do have some important housekeeping and operational updates that have transpired over the last 90 days, all of which dovetailed with our priorities from late 2024 and 2025. First, we've received official closure of the broad FDA warning letter received by Smiths Medical just prior to us closing the acquisition. In addition to validating the work we've done, we believe when combined with the profit and growth improvements within Vital Care, we should have more strategic choices available to us. Second, we continue to make progress in the pursuit of our new 510(k)s for Medfusion 5000 syringe pumps and CADD ambulatory pumps and the related LifeShield safety software. This work is important as it underpins the core tenet of our systems business to have the most modern infusion hardware devices all connected on a single software solution for customers. And this work is important also because we believe it addresses the primary concern of the warning letter we received in early 2025. Third, we've generally finished the manufacturing integration of 2 large legacy Smiths Medical manufacturing sites and will begin to reap the benefits as bridge inventory is depleted towards the end of this year. And lastly, a bit in real time, we've gone live this quarter with a full order to cash conversion for Europe, and it's proceeding smoothly and the entire company, except for a limited amount of legacy Smiths Medical Asia Pacific regions are on a single instance of a modern ERP that will lead to future synergies in logistics and customer service. Over the last 6 quarters or so, we've been outlining our medium-term goals on these calls, which started with the overall commentary about a belief that we were under-earning and describing the actions we needed to pursue to improve. In our view, the medium term we were describing has become the near term of the back half of this 2026 calendar year. I'll try to explain how the list of items I just went through make their way into the financial statements in the back half of this year. The first item for revenues is that we will lap the creation of the solutions JV in May, which, while just optics, does require significant explanation around the large reported negative revenue growth rates. Second, the vast majority of pump unit growth in the back half will be from Plum Duo and Solo products, which carry higher ASPs that are more meaningful to revenue growth. The gross margin line, which has been steadily improving, should benefit from manufacturing and logistics optimization. Even though the manufacturing integrations are largely completed as of today, it still takes several months to sell out the existing pre-costed inventory. The work around the quality remediations, IT system integrations, plant closures and logistics consolidations have consumed significant cash, and that should materially change after the second quarter, leading to improved free cash flow in the back half. We know it's taken time to get this work done and appreciate investors' patience but believe it is now within the near-term horizon.

Brian Bonnell, CFO

Thanks, Vivek, and good afternoon, everyone. Since Vivek covered the Q4 revenue for each of the businesses, I'll focus my remarks on recapping the Q4 performance for the remainder of the P&L, along with the Q4 balance sheet and cash flow and then provide guidance on our expectations for 2026. As you can see from the GAAP to non-GAAP reconciliation in the press release, adjusted gross margin for the fourth quarter was 40.5%, which was in line with the guidance we provided on the Q3 call of 40% to 41%. Unlike the third quarter, there were not any discrete items worth calling out in Q4 other than tariffs, where we recognized $11 million of expense, which represents a sequential increase of $2 million compared to Q3. And the Q4 gross margin rate continued to benefit from the deconsolidation of the IV Solutions business and the ongoing capture of integration synergies. Adjusted SG&A expense was $113 million in Q4 and adjusted R&D was $21 million. Total adjusted operating expenses were $134 million and represented 25% of revenue, which is 0.5 percentage points lower than the previously provided guidance of 25.5%, driven mostly by deferred spending and general cost controls. Similar to gross margin, Q4 was mostly a clean quarter for operating expenses, and we didn't have some of the unique items that we called out for Q3. Restructuring, integration and strategic transaction expenses were $20 million in the fourth quarter and related primarily to our IT systems integration and manufacturing plant consolidation projects where both the level of activity and the amount of spend peaked in Q4 as we approach completion of several of these projects in the early part of 2026. Adjusted EBITDA for Q4 was $98 million, a decrease of 7% from $106 million last year. The year-over-year decline of $8 million was driven by two items. The first is the deconsolidation of the IV Solutions business, which contributed higher-than-normal earnings in Q4 2024 due to additional volumes from the U.S. market shortage. And the second item is the impact from current year tariffs. Combined, these two items had a year-over-year impact on adjusted EBITDA for the fourth quarter of approximately $25 million. And finally, adjusted diluted earnings per share for the quarter was $1.91 compared to $2.11 last year, which is a decline of 9%. The current quarter results reflect adjusted net interest expense of $18 million, an adjusted effective tax rate of 23% and diluted shares outstanding of 25.2 million. Now moving on to cash flow and the balance sheet. For the quarter, free cash flow was $44 million, and it was another solid free cash flow quarter, especially when taking into consideration the cash impact from higher tariffs. During the quarter, we invested $17 million of cash spend for quality system and product-related remediation activities, $20 million on restructuring and integration and $25 million on CapEx for general maintenance and capacity expansion at our facilities as well as placement of revenue-generating infusion pumps with customers outside the U.S. And just to wrap up on the balance sheet, we finished the quarter with $1.3 billion of debt and $308 million of cash. During the quarter, we paid down $30 million of principal on our Term Loan B, bringing total debt principal payments for the full year to $303 million. Moving forward to the 2026 outlook and beginning with adjusted revenue, we expect full year 2026 consolidated organic revenue growth in the low to mid-single-digit range, and we expect the organic growth rates for each of the underlying business units to generally be in line with the longer-term outlook that we've provided the last several years, which is mid-single digits for both consumables and infusion systems and flat to down slightly for Vital Care. Consumables growth is expected to be driven mostly by volume increases from continued share gain in our core infusion lines and the benefit of higher growth markets for oncology and other niche categories. Historically, the consumables business has experienced a sequential step down in absolute revenue dollars from Q4 to Q1 each year. And given the higher demand we experienced in late December from the strong but short-lived flu season, we would not expect this year to be any different. The Infusion Systems guidance reflects accelerated growth in our LVP line driven by implementations of Plum Duo and Solo from competitive wins, which will be more weighted towards the back half of the year. This will be somewhat offset by lower volumes in the ambulatory line from the wind down of an expiring OEM arrangement. Based on current foreign exchange rates, we expect currency to be favorable to reported revenue growth rate in the first quarter of '26 and closer to neutral for the remainder of the year. In terms of calendarization, we would expect the quarterly growth rates at a consolidated level to be higher in the back half of the year due to the IV systems implementation schedule. Moving further down the P&L, we expect adjusted gross margin for the full year to be around 41%. The 41% gross margin reflects the benefit from continued synergy capture being partially offset by higher manufacturing costs from inflation and the recent strengthening of the Mexican peso. It also assumes tariff expense of approximately 2% of revenue based on tariff rates and available exemptions that are in place today. We expect the gross margin rate to improve throughout the year as we complete the manufacturing consolidation and supply chain integration projects and begin to realize the benefits with the gross margin rate as we exit the year higher than the 41% average. We are planning for adjusted operating expenses as a percentage of revenue to be approximately 25% for 2026, consisting of 21% for SG&A and 4% for R&D. The SG&A rate of 21% is a slight decrease compared to Q4 of 2025 and reflects integration savings offsetting the negative impacts from inflation and currency. The R&D spend of 4% of revenue represents a modest increase to fund various initiatives expected to drive long-term revenue growth. Net interest expense is expected to be approximately $70 million based on current interest rates as well as the roll-off of a portion of our interest rate swaps. The adjusted tax rate should be around 25% and diluted shares outstanding are estimated to average 25.3 million during the year. Bringing these components together results in a 2026 adjusted EBITDA range of $400 million to $430 million and adjusted EPS in the range of $7.75 to $8.45 per share. It's worth noting that the 2026 EBITDA range reflects the impact from the annualization of two items. The first is the full year of tariff impact and the second is the deconsolidation of the IV Solutions business and associated earnings, which combined are worth approximately $25 million. Now on to cash flow. We ended 2025 with $100 million of free cash flow for the year, which was slightly better than our original 2025 guidance after considering the unplanned cash flow impact from tariffs. For 2026, we expect free cash flow to improve relative to 2025, driven by the combination of higher earnings and reduced spending for restructuring and integration and product-related remediation. In terms of calendarization, we expect free cash flow generation to be weighted towards the back half of the year, consistent with earnings and also reflecting the reduction in integration spending as we complete a number of the manufacturing and supply chain projects over the course of the year. In terms of capital allocation, after paying down over $300 million of debt over the course of 2025, we ended the year with $1 billion of net debt and a net leverage ratio of just under 2.5x. Any free cash flow generated during 2026 will continue to be prioritized towards debt paydown. And we've stated previously that our long-term leverage target is 2x. And once we reach that level, any free cash flow will then be available for share repurchases. Our expectation is that we should reach our targeted leverage by the beginning of 2027 based solely on organic cash flows with the possibility to accelerate this timing from proceeds of any potential transactions.

Vivek Jain, CEO

To wrap up, we're pleased with the business performance during 2025. The improvements we've made over the past several years brought us back to more predictable and consistent revenue growth and improved profitability, which are reflected in the 2025 results. For 2026 and beyond, we're focused on continuing to deliver at or above our long-term revenue targets, expanding our margins by capturing some of the remaining 2 percentage points of opportunity that we've discussed and improving free cash flow generation. At the time of the Smiths Medical acquisition four years ago, we anticipated the combined organization would generate $500 million in EBITDA after the integration was completed. Certainly, the integration has been bumpier and taken longer than we expected. And while our 2026 EBITDA guidance is still short of the $500 million target, the difference of $70 million when compared to the top end of the 2026 EBITDA guidance range can be attributed to the $25 million of earnings related to the IV Solutions divestiture, along with $40 million to $50 million in unanticipated tariffs. So we feel the underlying business performance is now within reach of our original goals at the time of the acquisition, but tariffs do present another hurdle that we are focused on overcoming to achieve those original targets. And with that, I'll hand the call back over to Vivek to discuss some of the initiatives to get us there. Thank you, Brian, for the clear update. We want to emphasize that our revenue guidance for this year remains consistent with the last few years, reflecting our improved ability to deliver more predictable revenues. It's important that our position relative to our original transaction targets is understood. We've seen healthy revenue growth in our unique core product lines over the past few years, and maintaining that growth relies on consistent execution and ongoing innovation to update our portfolio. Our strategy has been to create the most comprehensive and innovative company focused on infusion therapy. We've invested significantly in research and development, innovation, and capital for our manufacturing capabilities in both consumables and systems. Our collaboration with Otsuka in the joint venture aims to modernize the IV Solutions business. Consequently, we believe our IV systems provide a complete platform solution that will support this segment for over a decade, given the lengthy product life cycles. In infusion consumables, we possess scale supported by leading brands and compelling clinical data, with additional innovation to enhance our core offerings and related areas. We anticipate that these investments, combined with effective marketing execution, will help us sustain favorable revenue trends in the long run. Specifically, we foresee opportunities for our Infusion Systems business, both in competitive spaces and through the planned refresh of our pump installed base starting in 2027. We expect to roll out our latest devices this year, including the Plum Duo, Plum Solo, Medfusion 5000 syringe, and CADD ambulatory pumps, which will be the most recently FDA-cleared and modernized, each offering unique clinical benefits and all integrated through a single software solution that we're actively enhancing. This portfolio positions us better than ever, providing additional value to our current customer base. In our consumables sector, we'll continue to develop niche markets that have fueled our growth while expanding our capacities and introducing incremental innovations, which will become more apparent in the upcoming quarters. For our customers, this will be economically coupled with a more reliable and innovative IV solutions business, underpinned by a partner offering significant value. While we can now clearly connect back to our original transaction forecasts, we still face challenges from tariffs and rising interest rates, meaning we haven't quite reached our expected targets in real dollars. We highlight the long-term sustainability of revenue to demonstrate that we have ample opportunities to navigate the impacts of tariffs over time. This will be supported by the annual realization of operations and logistics cost savings through 2027, along with additional margin prospects as discussed by Brian, and more time to adjust for tariffs through pricing and operational choices. Our balance sheet and overall portfolio strategy are essential for maximizing revenue growth and earnings per share. As Brian mentioned, our aim has always been to maintain a leverage ratio of two times or less, which is suitable for a mid-single-digit growing manufacturing company. We're close to achieving that, either through organic cash flow generation this year or through strategic initiatives. It’s clear that Vital Care is not synergistically aligned with our core businesses, and it dilutes our overall growth rate, but our team has the creativity to identify the most logical strategic solutions. Regardless, we strive to enhance the organic profile of that business while maintaining the safest balance sheet we've had in a while. Since we've been here, we've worked to protect our shareholder base, with the notable dilution stemming from shares used in the Hospira and Smiths acquisitions. We recognize that returning capital can be appealing with a limited share base, and our external M&A requirements are minimal as we have sufficient organic innovation on hand. We're clear on our course of action. While fluctuations in tariffs and interest rates are unpredictable, we feel equipped to manage these challenges. Overall, we're in a good position with our strongest businesses showing growth, both expected to reach record revenues in 2026, and numerous projects nearing fruition. We believe our consumables and systems divisions will continue as reliable growth sources with profit margins that meet industry standards, an optimized manufacturing network, and a multi-year innovation pipeline. Ultimately, our objective is to shift value from debt to equity. There is no ambiguity in our company focus as we pursue these targets, and we do not engage in unnecessary activities. We manufacture essential items that require extensive clinical training and create barriers to switching, as customers typically prefer to stick with what they know. The market relies on ICU Medical as an innovative and dependable supplier, and our company has emerged stronger after recent challenges, thanks to our dedicated team members and customers who help us improve daily. Now, we’ll open the floor for questions. Thank you, Stephanie.

Operator, Operator

And we'll take our first question from Jayson Bedford with Raymond James.

Jayson Bedford, Analyst

Maybe a few questions. Let’s start with systems. There’s been impressive double-digit growth in LVP this year. Can you comment on the current environment? Are customers actively making decisions right now, or is there any pause in the market?

Vivek Jain, CEO

I think from a capital perspective, Jayson, the words have been the exact same, I think, the last six quarters, which is the capital environment has been very stable, nothing different than historical behavior. Deals are getting done. I think the industry challenges historically are well known, and there was some backup in refresh cycles. And I think it's coming to fruition. I'm not sure I'd call it accelerated. But again, we were starting from a place where our share base after Hospira had gone backwards, from here was very low. And so these improvements are very meaningful to our P&L.

Jayson Bedford, Analyst

Okay. And just the comment on the second half, can we assume that the vast majority of pump business you're doing today on the LVP side is Duo and Solo?

Vivek Jain, CEO

Domestically, in the United States for the U.S. portion of our business, absolutely. Internationally, 60 continues to be placed.

Jayson Bedford, Analyst

Okay. Just on the syringe and ambulatory side, are the pending clearances having an impact on infusion system sales, meaning is there a pause there as folks may wait for the newer approved products?

Vivek Jain, CEO

No. I mean syringe of the four years that we've owned the syringe business last year was pretty close to the top. And any customer who is serious about the platform is very interested in what the future roadmap looks like and wants to engage on it and it hasn't been slowing anything down.

Jayson Bedford, Analyst

Okay. And just timing on the clearances, is it safe to assume 2Q midyear?

Vivek Jain, CEO

I mean I think we would leave it as, one, we are incredibly pleased that we have seen no change in the regulatory response in this time. Responses are just as prompt as ever, and the quality of the dialogue is just as good as ever. We received a first pass review on the Plum Duo. We felt these were high-quality filings. It's never over until it's over, and there's the normal back and forth going on. So we're doing our part, and I think they're doing their part the best they can.

Jayson Bedford, Analyst

Okay. Maybe just one last one for me, and then I'll let someone else jump in. But just congrats on closing out the warning letter. Just along that vein, you mentioned it would open up some strategic choices, I think was the word you used. Can you just comment on the appetite for these types of products out there?

Vivek Jain, CEO

I mean I think we all read the same newspapers and see the same things happening from a transactional perspective. I think there's capital we put to work in some situations. For us, some of the assets that we've beaten around the bushes that we'd love to figure out what to do with have been the exact assets that were either covered under the open warning letter or we're in the midst of being integrated via their manufacturing sites were moving or their IT systems that ran were moving. And a lot of that work is behind us now. So we just feel like we're in a better place to explore some of those opportunities.

Operator, Operator

We'll now move on to Brett Fishbin with KeyBanc Capital Markets.

Brett Fishbin, Analyst

Maybe just one on consumables since systems was just touched on. So I think for this year, you're pointing to mid-single-digit growth, which is pretty in line with what you've seen in the last couple of years, maybe 100 bps or so lower. But I'm just curious kind of like what you're seeing from an underlying volume standpoint across hospitals and your other end markets six weeks into the year. I think we've picked up on some signs that maybe baseline hospital utilization volumes might be decelerating a little bit. So just curious if you've seen anything like that and just like how you're thinking about that as it pertains to the guidance for '26.

Vivek Jain, CEO

That's a great question, Brett. To clarify, our guidance for consumables remains unchanged from the last two years. We stick to our mid-single-digit expectations. Regarding our observations, we mentioned previously that the latter half of the year showed a significantly lower growth rate compared to the previous year, and we believe that trend is ongoing. While the growth may not be at the same rates, our underlying demand remains positive, and we haven't noticed any impact on utilization at this time. There is some seasonality to consider, especially regarding flu-related factors and the typical fluctuations in our consumables business, but I don’t attribute that to a decline in underlying demand. I wouldn't have made the usual comments in the third paragraph otherwise.

Brett Fishbin, Analyst

All right. Perfect. Perfect. And then just one follow-up. And I think I know we're all kind of ready to move past this tariff topic. But just to start the year, just thinking about the guidance, I think giving the 2% metric as a percent of sales makes a lot of sense. But just wanted to ask if there's any changes in how we should be thinking about exposures geographically? And then just what you can tell us about any mitigation efforts that you've undertaken since the last call in November.

Vivek Jain, CEO

Sure. Brian, do you want to grab that one?

Brian Bonnell, CFO

Yes. I mean I don't know if there's really much in terms of changes in terms of exposure and things like that. We'll kind of see what happens here in the near future, if anything, and who knows what could result from that. But I think we have done some things structurally to try to mitigate the tariffs as much as we can. We saw a little bit of that favorability Brett, in Q4 coming in a little bit less than our previous guidance around some expense there. So I think that helps, and that kind of gets back to the point as to why Vivek was saying earlier in '25, don't annualize what we were seeing at that point in time. So yes, I think there's still a little bit more work to be done on tariffs, but maybe those benefits won't come until a little bit later in the year because some of those are, let's say, heavier in terms of lift.

Operator, Operator

We'll take our next question from Mike Matson with Needham & Company.

Michael Matson, Analyst

So when I look at your slide and kind of the bar chart in there for the Infusion System business. It looks like the syringe pumps are a pretty small slice of that business. So is that really just because the overall market is smaller? Or is it a sign that your share is maybe lower in that category? And does that mean there's maybe more opportunity to take some share when you launch the new syringe pump?

Vivek Jain, CEO

Yes, Mike, let's begin with the market sizing. The market is significantly smaller than the LVP market in terms of units produced, perhaps around 10% to 15% of the overall LVP market, with a maximum of 20% depending on which metrics we consider. So, the market size is indeed much smaller. In contrast to our position in LVPs, we actually have a higher share in syringes, particularly in freestanding syringes, compared to LVPs. This highlights the reasoning behind our previous transaction; even though this market only represents 10%, 15%, or 20% of the overall market, it remains crucial for customers to have an integrated perspective. Having an integrated system enhances safety, and establishing a presence in this area was necessary, which is why we made that move. While syringes are a minor part of the segment, they hold significant importance for our customers.

Michael Matson, Analyst

Yes, that makes sense. Regarding Vital Care and the discussions around a potential sale of that business, could you share what the EBIT or EBITDA margins are for it or how much of your corporate earnings come from this segment? This would help us evaluate the potential trade-off between a loss of earnings and share repurchases, considering that the exact impact would vary based on the selling price, and it's uncertain whether the sale will actually take place.

Vivek Jain, CEO

Yes. I think if it were simple, we would have already accomplished it. The infrastructure is quite intertwined in many areas, which makes it challenging to navigate. Until we can organize IT and manufacturing independently, it has been difficult to evaluate that accurately. Regarding your question, it’s reasonable to assume that most of Vital Care is likely below the corporate gross margin. Additionally, looking at our history, we have managed to improve our revenue growth rate, enhance our gross margins, and aim for breakeven EPS in the solutions joint venture. That remains our goal. It’s important to approach this carefully, as giving things away can be detrimental to value. Patience is required to ensure we do things in the correct order and form to avoid negative impacts.

Operator, Operator

We'll now move on to Jason Bednar with Piper Sandler.

Jason Bednar, Analyst

Congrats on the quarter here and on the Smiths warning letter being lifted. Vivek, I wanted to go back to the systems business where the other Jason started. I'll ask a few here. So you did mid-singles for the full year of '25. You're guiding to something similar for '26. I guess I wanted to ask, maybe it's just being prudent to start the year, but you do have a competitor deal with challenges with their pump system. You have a new product cycle you can take advantage of maybe some early contribution from the replacement cycle opportunity with those old Hospira pumps. So I know you're saying that's maybe more of a '27 event. What's the good case scenario here for this year? If '25 was a normal year at mid-singles, couldn't '26 be a bit stronger just given some of those factors I mentioned. And then maybe just in the response, if you could help us quantify the impact of that OEM wind down that was referenced in the prepared remarks.

Vivek Jain, CEO

Sure. There was a lot in there. I guess I'd start by saying right now, starting this year, we feel good about what we think of almost as our backlog, our transactions that we've contracted for and a large portion of our revenue growth assumptions here is just making sure the installations happen. And so upside to that was if we actually could sign more and install more in the same year. So I think from a place of safety, I think we feel we're starting in a better spot. As it relates to competitive stuff, the second part of your question, as I've said before, we all live in a glass house. This whole industry has been ripe for challenges. We've essentially worked at two out of three players. I think we'd be cautious on making assumptions about how other people get their house in order. We've all been through it. And then on the OEM piece, that is a piece of business that has been declining for the last two years. So the good growth of 7 and 5 in LVPs has been jumping over that anyway, right? We never really wanted to speak about it so transparently because we didn't want anybody to feel that bump. I don't think they really felt it in '25, and we think we have the ability to grow through it again in '26. I don't think we want to be precise on exactly how many points of headwind, but it was certainly a headwind to the business in the last two years, and the business still did well.

Jason Bednar, Analyst

Okay. That's helpful. I appreciate that. And then I know you highlighted the stronger ASPs on Solo and Duo. I think that's helping the growth rate or should help the growth rate here in systems, maybe more in the second half of the year. What kind of ASP contribution or uplift should we be thinking about from those? Is it material?

Vivek Jain, CEO

I believe the challenge and opportunity for this industry lies in the value creation, which has several components in the pump business. The primary components include the razor and razor blade model with dedicated sets, software and service offerings, the ability to expand into adjacencies like regular consumables, and the hardware itself. We feel confident in our positioning regarding the first three components, especially with our new products enhancing our software capabilities compared to our previous offerings. However, historically, our pump business has faced challenges in generating sufficient margins from hardware. We are optimistic that our new pumps, equipped with advanced technology and features, will enable us to achieve a more favorable gross margin on the hardware, which is significant for our long-term success.

Jason Bednar, Analyst

Okay. So safe to assume that it's improving gross margin and it's material enough on the revenue line, too.

Vivek Jain, CEO

Correct.

Jason Bednar, Analyst

Okay. Perfect. Last one for me. Just I thought it was pretty clear just from a lot of comments, even how you started the call that operations for the business are just in a much better state today than where we've been in the last few years. A lot of confidence around cash flow, seeing benefits from some of the common systems, facility consolidations, et cetera, that you've been going down. Maybe if you could or Brian, to jump in, if you can unpack that a bit more. Does that show up? Do we see that across gross margin and SG&A lines. Is that a dynamic that just builds throughout the year? Just any more color there would be helpful.

Brian Bonnell, CFO

Yes. I believe we discussed areas for improvement, such as gross margin and free cash flow, which represent opportunities that may take a few years to fully realize. These areas will benefit from ongoing projects, including the IT system integration and the consolidation of our manufacturing plant and supply chain network. Much of this work will be completed this year, allowing us to continue to gain advantages. Our aim is to reach a steady run rate by the end of 2027, aligning closer to the targets we've previously mentioned for both gross margin and free cash flow.

Vivek Jain, CEO

So to be specific, Jason, there was a slide in the IR deck, which showed the target gross margin level and then the adjustment for tariffs, right? That's what we're talking about to where we get to. And basically, what happened, it was a spiral downwards in the first year or two as results weren't coming through and the business wasn't as healthy as we thought. We just get more value, we had to consolidate more, integrate harder that consumed capital. And those projects became big projects. We're finally coming out of them. Therefore, capital isn't consumed and things get back to normal. So it's kind of a spiral down and then the spiral back up, and we're at least on the better side of it now.

Lawrence Solow, Analyst

Just a couple of follow-ups. Most of my questions have been answered, actually. So on the margin improvement question, so the consolidation initiatives themselves, which I guess is just part of that 200 bps or so of opportunity and probably maybe the biggest part by itself. But it sounds like that activity is done and we'll at least get that benefit, not the full year's worth, but maybe by the end of this year, that run rate will be in the numbers already on the consolidation piece or most of it. Is that fair to say?

Vivek Jain, CEO

I think, Larry, thanks for the question. I think what we were trying to say, again, it can drift month-to-month. But in general, once the inventory that was made at the old factory leaves, we get the benefit of the manufacturing synergization. And we have a number of logistics consolidations also rolling in. We expect a lot of that to be in the run rate by the end of this year, and then that will annualize into next year, which is another benefit. And the components of the 2 points of margin, the missing still 2 points relative to our new targets are really those activities being fully implemented. The previous question, the benefit of better margin on hardware sales, overall pricing, et cetera, those all go into components of margin. And as the consumable business grows, that helps margins too. So there's a lot of things in the mix for both this year and next year that are all good.

Lawrence Solow, Analyst

When does the cash outlay occur? It seems like you have spent over $100 million this year, but this quarter alone, the expenditures for remediation, integration, and restructuring were $37 million. For the full year, I believe it exceeds $100 million again, averaging over that amount for the last three years. You have been maintaining a run rate close to $100 million in free cash flow. Therefore, it is reasonable to conclude that in 18 months, even with just a slight improvement in the core business by eliminating excess expenses, you should be generating well over $200 million in free cash flow, unless I am mistaken in my calculations.

Vivek Jain, CEO

Thank you for the vivid recollection of our shared experience. Yes, it was painful. That is the exact amounts that we've been putting at it. I think we were trying to say in the call, it's this year, it needs to end and hopefully by the middle of this year. There will always be some stuff on regular remediations that are happening, et cetera, but a materially different number in the back half. So that's the way free cash flow moves around and then growth long term on top of that.

Lawrence Solow, Analyst

Got it. If I could just sneak one more, just more just systems, a lot of questions on this one. But there's still, I guess, a lot of business up for grabs, right? I don't know if you can just kind of characterize where we stand without mentioning the competitors' name, but I know there was a lot of business up for grabs there. How are you doing in that? And just your comfort level on the refresh cycle because to me, that feels like competitive new business wins are great, but when you have all these in-house installed base that can just flip over to the new line, that should be a much greater opportunity for you. So just your confidence level that we could start to see your customers will want to switch or would be anxious to switch as we look out? I know it's still a little bit of ways, but any color on that would be great.

Vivek Jain, CEO

Sure. I mean, first, on the competitive piece, again, from a safety perspective, we feel like we have enough contracts in hand. As long as we can manage the installation schedule, we feel like what we see in the near term is pretty good. And there's plenty of competitive activity, just in normal course competitive activity that can keep us busy. In terms of the refresh of our own installed base, I mean, our journey here we went through some dark days where people had left the infusion hardware category, Abbott, Hospira, what we became at very different market shares historically. We stabilized that, clawed some back. And truthfully, that many of the customers that stayed, stayed because they believed in the core technology. And the pieces of that core technology have been conserved into this modern package of Plum Duo, Plum Solo and now enhanced with a syringe and CADD, all in the same software. And so I would argue that these customers went through some tough times, still were committed to the technology, and we believe we have a better offering for them today, and that's independent from the economic wrapper around the other accessories and solutions and other things that may or may not be part of any given conversation. So we think we're well positioned for that conversation, too.

Operator, Operator

At this time, there are no further questions in queue. I will now turn the meeting back to our presenters for any additional or closing remarks.

Vivek Jain, CEO

Thanks again for your interest in ICU Medical. We're glad a number of our projects are reaching completion, and we look forward to updating everybody on our Q1 call later this year. Thanks.

Operator, Operator

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.