Earnings Call Transcript - ICUI Q4 2020

Operator, 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, Managing Partner, ICR

Thank you for joining us today to discuss the ICU Medical financial results 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. To view the presentation, please go to our Investor page and click on the Events Calendar, and it will be under the Fourth Quarter 2020 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 full 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 into 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. 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. 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. We will also provide our opinions on 2021, the transition to reopening, and timing for a return to a more normal environment; update on the new effects of the pandemic on ICU Medical; the recent weather disturbances; outline our near-term 2021 financial expectations; and lastly, articulate how we feel about our positioning in this environment. The short story on Q4 is as follows: we did see revenue growth in all of our lines of business, which supported 4% total company reported growth year-over-year for the quarter. Specifically in the US market, we had 8% year-over-year growth, which was the net effect of utilization still being down from our view of baseline offset by higher temporary COVID admissions, new customer onboarding, hardware sales, and the addition of Pursuit Vascular. Europe and LatAm saw some sequential improvement, though we did have some declines in selected South Asian markets. We finished the quarter with $309 million in adjusted revenue, adjusted EBITDA came in at $60 million, and adjusted EPS was $1.77. Profit was impacted slightly by our Austin maintenance shutdown being in October and additional costs for sales compensation and bonus accruals. We had our best quarter of free cash flow generation in the last 2.5 years and added $60 million to our balance sheet as operational improvements have materialized and restructuring and integration costs have dramatically reduced. When we reflect on the full year of 2020, which started out quite solid for us and then experienced turbulence in Q2 and Q3, we found stronger footing again in Q4. We believe at a minimum volumes were down from normal levels at least 10% in Q2 and Q3 in 2020. Q4 is a bit harder to triangulate as while procedures and admissions were still down, there was an incremental amount of COVID-related admissions in the system. Each of our lines of business is directly dependent on admissions, including the majority of sales in the Infusion Systems segment as dedicated pump sets represent the majority of sales. In the face of these dramatic utilization shortfalls, our Consumables and Solutions segments were essentially flat on a year-over-year basis and our Infusion Systems segment was up double-digits for most of the year, helped by competitive share wins and expansion orders directly related to COVID. So we feel optimistic that we still grew in the face of this environment and believe in our ability to continue when a normal environment returns. Profitability was impacted from our original expectations most acutely by our mix, with less consumables and utilization of dedicated pump sets contributing more profit than Infusion Systems hardware. While painful earlier in the year, currency did give some back in the back half on a translational basis. Starting with Infusion Consumables, we had revenues of $123 million in Q4 2020, a 3% increase year-over-year on a constant currency basis and 2% on a reported basis. We had the strongest quarter in the US region for consumables in a few years. For 2021, we believe this segment gets back to mid-single-digit growth with oncology being a strong driver. Moving to Infusion Systems, this segment did $92 million in adjusted revenue, which was growth of 8% on a constant currency and reported basis. We believe we have enough demand and expansion to eventually offset declines in non-LVP products. Most important to us is as vaccinations roll out and the customer base eases on COVID cases in-house, it should allow for improved focus on new technology. We do not see capital as a constraint and we still believe there is solid competitive opportunity here. The Infusion Solutions segment had $82 million of adjusted revenue in the quarter or 1% year-over-year growth. We are healthy on safety stock and our new national distribution center is running in Texas to help improve our supply chain costs. Regarding recent weather impacts, we have invested nearly $100 million in CapEx into our Texas site. We had no infrastructure damage during the deep freeze. However, due to impassable road conditions, we did face a few days of unplanned shutdown. We will not penalize our employees due to the unforeseen weather and we will have to spend a bit more in overtime over the next few weeks. Moving on to some general updates, we have seen sequential in-person customer calls picking up. We continue to make progress on new regulation guidelines related to EU MDR. Operationally, our manufacturing network and logistics systems are all running well. In terms of the Pfizer discussion related to the calculation of an earnout payment, it is more likely than not we will enter an arbitration process. We feel very comfortable with our position and are prepared for the matter, but we do assume it will take possibly up to another six months for an arbitration result. In Q4, we believe US hospitals had a high level of ICU utilization with COVID patients and we saw that trend continue through January. There is capacity freeing up in the system now with drops in infections. We think it's prudent for now to take the view that adjusted EBITDA would be in the $245 million to $265 million range, depending on how many hardware installs we can achieve. Overall, we believe we can improve our position in our most differentiated businesses of IV Consumables and IV Systems and have proven stability in our less differentiated businesses such as IV Solutions. We are focused on execution and emerging stronger from all these events.

Brian Bonnell, CFO

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. 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, 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. Overall, we were pleased with this level of performance given the volatility presented by COVID. Our adjusted gross margin was in line with our expectations at 39% compared to 40% for the fourth quarter last year, with the year-over-year decline primarily due to the timing of the scheduled maintenance shutdown of our Austin manufacturing facility completed in October. Adjusted diluted earnings per share for the fourth quarter of 2020 were $1.77 compared to $1.94 last year. The Q4 results were positively impacted by a lower tax rate that contributed approximately $0.15 of benefit to adjusted EPS. Free cash flow was $55 million, driven by a combination of solid earnings, declining restructuring and integration spending, and further reductions in working capital. Looking forward, for 2021, we anticipate adjusted gross margins to be in the range of 38% to 39%, reflecting benefits from improved consumables mix, offset by higher Infusion Systems hardware revenues. 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 return to more normal levels over the course of the year. We estimate restructuring and integration expenses to be between $15 million and $20 million for the year. For the full year 2021, we expect adjusted EBITDA to be between $245 million to $265 million and adjusted EPS to be between $6.50 and $7.20 per share. The adjusted EPS guidance assumes a tax rate between 21% to 23%. We expect to see CapEx requirements decline for the third year in a row to around $80 million in 2021. Overall, we believe earnings in 2021 will reflect a steady ramp throughout the year, driven by continued recovery of volumes to pre-COVID levels, implementation of Infusion Systems pumps, and addressing costs related to recent weather events.

Matthew Mishan, Analyst

Hey. Good afternoon Vivek, Brian. How are you doing?

Vivek Jain, CEO

Hey, Matt.

Brian Bonnell, CFO

Hey, Matt.

Matthew Mishan, Analyst

So, I think these two questions actually come together. First, can you give us a sense of the backlog of installations you have in systems heading into 2021? And then, 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 Systems 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 margin benefit from moving the manufacturing from Rocky Mount to Austin. So what am I missing in regards to the gross margin guidance being flat year-over-year?

Vivek Jain, CEO

For the systems, I don't think we are in a place where we would quote a backlog number. We have more competitive wins that we haven't installed yet than we've ever had before. A year ago, we said we thought we had gained a point from our pretty low place on LVP. I think we're in a better place competitively. I'll let Brian comment on the margin.

Brian Bonnell, CFO

Your question on the margin is a good one. What we're expecting for 2021 is margins to be a little bit negatively impacted due to a higher mix of Infusion Systems hardware installations related to competitive captures, which tend to be lower margin initially at the time of implementation. But there is a timing difference between the installations and the subsequent dedicated disposables.

Matthew Mishan, Analyst

Okay. And then, last question for me. Can you talk through some of the new products that you'll be focusing on in 2021?

Vivek Jain, CEO

We have a number of things getting on the filing docket in 2021. The majority of dollars we've been putting in over a three-year period have been on the systems side. This means finishing the software products we've been talking about and getting those into the market along with different ideas on the hardware side that we've been working on. I think we've been pretty transparent on this.

Larry Solow, Analyst

Hi. It's Pete Lukas for Larry. Just to clarify on the margin side, in terms of margins for Solutions, do you see increased volume as being able to help?

Vivek Jain, CEO

It's been a bit of a wash there. We can't obviously state margins were higher when we were selling more Solutions previously. The distribution center has added some efficiencies, but we've also extended many of the contracts. For us, it's safer to say Solutions is what it is right now.

Pete Lukas, Analyst

Can you discuss what you're seeing in terms of M&A from sellers in this environment?

Vivek Jain, CEO

It's a balancing act, depending on where you are in the market. Folks who've had COVID impacts on their operations can have constructive dialogue. The market is challenging, and I'm not sure COVID has made the M&A environment easier.

Jayson Bedford, Analyst

Good afternoon. I wanted to get back to the gross margin pump dynamic question. Are you expecting to sell more pumps in 2021, than you did in 2020?

Vivek Jain, CEO

It's not only the number of pumps. It’s also the class of trade they are going into. We’re saying pumps could be down a little, meaning we wouldn't sell as many pieces of hardware as last year.

Brian Bonnell, CFO

Yes, that was a negative impact for Q4 due to the plant shutdown. It was about a percentage point on gross margin for the quarter.

Vivek Jain, CEO

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

Operator, Operator

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