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's 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. 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 the patient that delivers medication through a device, ultimately through a catheter and into a patient.
Our original business was really the pipes only. 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, etc. The same thing, keeping the pipes open is the core of the consumables business. Those consumables attach to a pump and a series of hardware devices that are called our systems business. That's about 28% of our business. Those pumps have a lock-and-key disposable that's used with them. 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 a drug or other devices that heat up fluids as they come into the body. 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-$700 million. The remainder is the vascular access and tracheostomy areas. I'll talk about them 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, temperature management devices, are about $615 million. $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 healthcare markets. Two-thirds 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 a third OUS.
From a capitalization perspective, we have roughly a $4 billion enterprise value today, which is down, just under $1 billion for debt and $2.4 billion of equity value. To really try 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 usurped. The manufacturing assets have high capital intensity to build, to get off the ground, and 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. We get paid for safety. And those guidelines are incorporated into the design of our products. And our products, particularly our new products, have tailwinds with the emerging guidelines in some of the core areas, 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. install base.
That is a very distinct opportunity for us over the next two to three years. Our company, the way we exist in that ecosystem, there's sort of two other primary U.S. suppliers and two European suppliers and one Japanese supplier. Our role is we're the focus player. We're supposed to be more innovative, move faster, demonstrate a 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 two-year period. We are sort of out of the clouds on a lot of those issues. 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. The core of it is we believe we're under-earning relative to our peer set. 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. Obviously, it creates a lot of value if we can deliver those incremental earnings. 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. We believe if you read the proxy doesn't lie. If you read our incentives, our interests are aligned with shareholders.
We've benefited and suffered as things have emerged over the last couple of years. 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%-7% a year on the revenue line for the last five or six 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. We took that little device, and we offered it to the customer in the most unique ways where the technology was conserved but minimized 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 sterilization. Like the small guy, we had to deliver it in 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. 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. 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 and a patient. 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. It should get back to the historical growth. We've integrated it into a series of hardware products that enable its adoption. Ultimately, one of the values of the Smith transaction we did was taking those parts and pieces and plugging them into the Smiths products to differentiate them. 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. Those are the vascular access and tracheostomy categories. Vascular access was a difficult business the first two years as we lost some market share. 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. 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, etc. 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 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. Trachs 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 90% of our revenues in consumables. I'll talk a little bit about the pumps. 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. The businesses we bought were market leaders because they addressed a very specific clinical problem. 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.
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 order, 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. The market is hungry for new technology here.
We've tried to drive the conversation back to a safety conversation and a clinical conversation. That tech with the Plum Duo is the first in a series of products that will roll out. Going forward, kind of 2024 and beyond, we will bring all of these devices, and I'll show the roadmap in a second. But the goal is to have the most modern fleet of infusion devices for each circumstance. 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 a come into the sunlight on that a little bit. That's the hardware philosophy about clinical workflows, safety. Software is a part of this. The software opportunity is emerging. There's table stakes software like EHR interoperability.
If you look at the slide, I would say everything sort of to the left on the slide is basic. So where's my device? How many of ours are in use? What drugs am I delivering? Our new LifeShield software is a cloud-based system that allows multi-state 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, etc., get linked. And each one of those features appeals to the many constituents that 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, etc. We think our technology checks all of those boxes. 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. With the Smith acquisition, we walked into the number one home care pump in the market. That's where a lot of the high-value drugs are getting delivered. One informatics offering across all the different hardware types in all locations over time. In terms of what is the hardware roadmap, 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, etc.
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 conserved 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, the 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 for a device called Plum Solo. That'll 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 six or seven or eight years. And you still have a business refreshing those. Most of our devices in the market are new over the last six or seven or eight years.
They're finally aging out. The Solo gives us an opportunity, in addition to market share capture, to also start to refresh our own install base, which we haven't had the opportunity to do for the last number of years. With Smiths, we walked into also the number one syringe pump, freestanding syringe pump in the market. That's a product used largely in pediatrics. The number one home care pump in CAD. CAD 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. 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.
Ultimately, we want to go to a customer with kind of a turnkey solution of all the pumps you need, all the types, the right tool for the right job in each location. That's a different setup than some of the other industry participants. 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 or the pump. That's the starting point that's often mixed with a drug. It's important but sort of misvalued. 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.
So each one of these, not exactly IV, but good market structure, unique assets, logical adjacencies for us. Getting back to the under-earning 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. We're starting to articulate the value of those. We didn't commit to how long they 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 and tackling integrating logistics networks, service centers, using IT as we integrate to a single ERP to remove some redundancies and duplication, got some excess office space, etc.
A big value driver is we had pre-transaction maybe five manufacturing sites of consequence. With Smith, we went up to 20. There's a real effort over the next two years to get back down to 10. A lot of value. And ultimately, for us, when we send the call, it shows up in our gross margin line. And the factory consolidation drives a lot of value in the gross margin line. This is independent of growth, price, all the other things that we should be doing. And so over the next couple of quarters, we'll talk about this more and more. On the call, we said most of these activities should be fully deployed by the end of 2025. The biggest chunk actually gets deployed this year for realization next year over this year. But some items, like factory consolidations, have a long tail that'll carry forward.
So very tangible, very real. It's pure execution. It'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 air freight, improved our operations. The innovation got delivered on the started to get delivered on the pumps. We've earned our right to compete against, 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 was 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 2024, it's about revenue growth first and foremost. And so 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 happen 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, etc. We need to improve our free cash flow. 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. It's going to take a little bit of time, but the pieces are there to clearly do that. So that dovetails with the under-earning comment. That's really the story of ICU Medical for the next 12-24 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, etc. And so I think in that portion, we certainly think we're entitled to above-market growth because we're delivering innovation and finding new markets. On the vascular access and trach 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 in the pump business, which are normally about census, but there's so much refresh needed because of what's gone on with the whole market that the pump market could essentially double up historical growth for the next two or three years as people have to figure out the replacement cycle for 500,000 devices in the country. Vital care is purely census, 2%-3%.
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, from all US market participants, there was probably on the order of pre-pandemic, $600 million of capital sold a year. That would represent kind of one-eighth every pump lasting 8 years. And the one-eighth that's refreshed every year kind of equaled $500-$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?
Yeah. I mean, I think the early reaction as we had on this 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 2026. 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 so you can cut into the IT schedule, training, etc. 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. It's kind of under-indexed relative to most of med tech. 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's been talking about is on China. We're way under-indexed to that. And it is a small business for us. Profit's very good. And even with VBP and some of the things coming from the market, it's 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 2025. It'll 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 2026. 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 than we have right now.
Maybe the last question here. Just what is your target leverage ratio? At kind of 3.5-4, 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 Smith's. I think we always said for a mid-single digit grower, whether it's healthcare or quasi-industrial company, should have two, 2.5 times 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, the inventory rationalization we're doing, right? We feel comfortable getting there. We'd like to have been there already.
Right. But in terms of portfolio optimization, you kind of or 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. 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.