Thank you for 7:00 A.M. Appreciate it. We were in the room next door, looking at ourselves and watching, like, watching the shot clock go down, and there was nobody there. I was like, "Yep, that's what I thought." So appreciate people being here so early.
Great. Well, I appreciate you all showing up. Real quickly, Peter Harrison from Morgan Stanley. I think I have to say the disclaimer. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that, why don't we get started? With us today, Vivek Jain, CEO of ICU Medical. Thanks for joining us, early on a Friday morning. As I think about and step back, kind of big picture, two and a half years ago, you acquired Smiths Medical. Truly a transformative transaction for you all. I think it's been a challenging first two years, as you expected. Maybe a little bit more challenging than you expected. But from an outside-in perspective, really seems like a lot of momentum over the last six months.
Business is more stable and even frankly, upward trending. Is that a fair assessment of how you and the team think about the situation today?
Yeah, I mean, first, Peter, it's nice to see you. Thank you for Morgan Stanley. Thanks to Morgan Stanley for having us. I'm joined by my colleague, Dan Wilson, who runs our pump business, which I suspect will be a lot of the conversation today in the breakouts. To the question, is it getting better? It's certainly moving in the right direction. You know, I guess as I reflect on the last two years, I felt for what we were going through, we were almost getting the benefit of the doubt or too much credit, right? And when we had really revenue deceleration and margin deterioration, that's when it sort of got relatively unpleasant. The opposite has happened now, where we've had a little bit of revenue growth and improving margins and cash generation, and a more stable balance sheet.
I think those are all signs of stability. It's only been one or two quarters. I don't want to say it's a perfectly orderly line from here, but yeah, there's more right. There's a lot more gone right than wrong.
Right. And what were the biggest challenges you faced in the integration?
I think we walked into a situation that we knew was gonna be challenging, but it was more challenging than we had expected, and the issues over a twenty-four-month period, it was sort of the tail end of COVID, or the middle of COVID, I guess, when we walked into it. There was a lot of just sort of the orderly blocking and tackling of supplying products, reliability, the things that customers count on you for. Then there was a series of issues around the quality, quality systems, and nothing fundamentally wrong with the products that we acquired, but just the processes and the management of the quality system itself was kind of broken, I would say the second thing.
And then the third, the most important thing, and that's the thing that takes time, and sort of what we went through when we did Hospira five or six years ago, weakened customer relationships-
Mm-hmm .. right?
As a result of the first two things. And those have. It takes time to solidify those, right? Smart customers want to see. And, in the other situation, it took us 24 months to turn around a lot of things, and, that's kind of where we find ourselves.
Great. You do compete in a competitive space, particularly on the pump side. Yeah, how do you think about where you all are positioned versus your global competitors today? And why is that set up such as it is, and what's the future look like, you think?
I mean, it's a very consolidated market, which makes it attractive on the pump side. And there are a handful of competitors all jockeying for kind of market share gains over the next number of years, because of some unique events in the industry. We feel like when we look in the mirror, for the most part, we like what we see, and the difficulties of taking on Smiths will be worth it to us because we believe having a full line portfolio-
Mm-hmm. ... right?
All the modalities was the first most important box to check on why we did that acquisition. And then the second thing is that the value we've added is to make sure we drive innovation across that portfolio. And a number of the largest market products have already been approved by the FDA and Plum Duo. We've talked about filing Plum Solo, a syringe follows that, and ultimately, the home care pump follows that. But we think we're the only person who plays in the most high acuity critical care environments for delivering medications, to med surg, to step down to infusion clinics, and ultimately, with the CADD franchise that came from Smiths, all the way into the home.
Mm-hmm.
And so relative to competitors, it's about innovation, breadth of portfolio, agility, all, all those types of topics.
Great. Lastly, before we jump into kinda some of the businesses and the specifics, you know, how do you see the big picture today from a hospital environment? You know, what is the environment? How's admissions, procedures? And then over the last two years, the macro environment of supply chain inflation has obviously been challenging for you and others. Where do you think that's trending, and where is it right now?
I mean, two different questions there. The first was on the broader hospital environment. The broader hospital environment is pretty solid all year. It's at some point. I've been with a number of customers over the last 10 days, two weeks, here on the East Coast and out West, and people are busy. It's an active time, which is great. Again, I don't think we're sitting here drawing, and it was reflected in our guidance and comments in the year. I don't think we're drawing long conclusion it's gonna stay that way forever, but it's pretty good right now, and then there's lots of explanation, lots of hypotheses as to why.
Mm-hmm.
But it isn't just a domestic phenomenon, so globally, right? We have low exposure to Asia, but at least Europe and the other places. We play Canada, we play bigger roles in. Those are very active markets, too. So good, right?
Yep.
Much rather have it this way. The macro was exceptional in the journey of what could go wrong, went wrong for two years. The macro items, which I would call, currency, interest rate. It was for us, it was very specific, dollar against peso, dollar against yen, as well as the overall cost of funding in the transaction, all sort of broke in the wrong direction, as well as commodity fuels, et cetera. At the moment, it's only been a few weeks, those appear to be going in a much better direction.
Mm-hmm.
Yes, we had a lot of operational challenges, but it deteriorated so quickly. Part of that was due to kind of the external world.
Great. Any questions on big picture for anybody? If not, I'll jump into the three businesses you have. All right. So starting with Consumables, looked great in the recent quarter, you know, after mixed results with the legacy ICU products, you know, strong and, you know, maybe Smiths products a bit weaker. Is this business going in the right direction, and, you know, why should investors believe it's kind of turned around?
I mean, the ultimate proof is the consistency of results. For the last two years, the legacy ICU businesses in the consumable stack, which is probably 60%-70% of that pillar, have been clicking along very nicely for the reasons we described in the last call, which are about creating new niche markets, innovation, wins that happen on the pump side, dragging consumables and finally getting a little bit of price internationally, on the biggest chunk of that, which is infusion therapy. Oncology, which is the other legacy ICU business, we had some self-inflicted challenges last year, but it feels like the underlying market there, back to your previous question, is improving. And I don't really know whether that's more screening or diagnosis-
Mm.
or I haven't looked at drug scripts, et cetera, lately, but, volumes seem pretty good there for the people in the system, et cetera. So those two businesses have been growing, will continue to. The challenge of the last two years is they were masked by what was going on in the Smiths portion of that consumable stack, which was vascular access and tracheostomy. And all that really happened in Q1 was that finally flipped, which is last year we were saying, "Okay, vascular access, we're getting stable, we're getting stable after a year of losses," and now we've started to grow off of that base. And that growth, all of a sudden, you see the whole picture a little bit differently. And I think we continue to feel good about the growth, not at the level it was last quarter, for every-
Mm
... kind of base was easy, right? But at least sustained this year into next year, et cetera.
Great. Moving to infusion systems. You've had some recent share gains in the LVP pump market. You've got a new pump out there with the Plum Duo pump and the LifeShield Safety software. You know, maybe talk a little about the landscape, and then also talk about, would be helpful, kind of early feedback from the customers on that new pump.
The pump market is a valuable market. That's why everybody's talking about it. It's a large TAM, and because of some of the unique dynamics with the players, there hasn't been a lot of a refresh in that market. The next number of years is gonna be basically a doubling up or greater of what would be a normal market, and that's why there's sort of this land grab going on.
Mm-hmm.
That's why we wanted to have a full portfolio, and that's why we wanted to have the innovation. It is a good time to be a customer because there's lots of things to review out there. I grew up in this business when there was a monopoly player, and it's much easier to operate in that environment, and so it's good to be a customer, you can evaluate all the technologies, meaning the products have to win on the merits of their technology. The feedback we've received in our new technology is great, right?
Mm-hmm.
I think people like it, and that for us. You know, there's a big incumbent advantage in this business, where just the power of inertia is very strong.
Mm-hmm
And accretes to the existing player. But there are folks who want new technology, and frankly, believe in what our value prop is, which is very much around safety, accuracy, clinical excellence, workflow, speed, cybersecurity, interoperability. Like, those are all of our sort of code words, and we see people embrace those topics, we find ourselves in a very good position. If people are just sort of doing a market check and not interested in the safety aspects of the device, the thing that made volumetric pumps the market share leader in this country originally, we probably won't get it. And so I guess we look at it and say the majority of the market in this current situation will stay with the incumbent, but there is gonna be enough change that can create a lot of value for us, too.
When do you start seeing revenue flow through from the new platform, in your mind?
I mean, these pumps, these pumps are complicated items. They're, they require a lot of technical evaluation on the front end, which is why there's a long time between a conversation starting and something closing. And then there's a long time between signing a contract and actually implementing it. That whole journey could, from start, first conversation to actually installing, could take 18 months.
Usually, it's half-half. It takes, like, six to nine to get somebody signed up, and it's a minimum of six to nine to get it installed. So middle, back half of next year, or something like that.
Okay. Very helpful. Last division is Vital Care. You know, that business has been a bit flat recently. Half of its segment is IV solutions. You know, how do you think about the pricing in that space? Both you and your competitor have important GPO renewals upcoming. What is the status of those renewals, and what are your expectations for price increases to help offset some of the inflation you've absorbed?
I mean, it's a very important item, right? If you try to unpack what happened to us over the last two years, there's really three different things. One was the macro items we talked about, which at least feel better. The second was, we bought something that was 10, 15%, 20% underperforming-
Mm-hmm
... the revenue side. And the third, a huge chunk of it, was the inflation we absorbed. And our issue has been that we haven't been able to recoup the value of that inflation from the customer, and that takes time to do that. And so it's hard to follow the logic in a essential item concentrated market. Why is that hard to do? But it's because we sell under these long-term- we had historically sold under these long-term fixed price contracts.
Mm-hmm.
The new contracts have been updated at the GPO level, but that's really only a hunting license. You still have to go down to the individual customer and make the deal, and the individual customer has lots of opinions that, sometimes start with, "Hey, what inflation? There's no inflation. The stuff we got was permanent," right? You have to re-educate. And so I think certainly, the majority of market participants are feeling that pressure-
Mm-hmm
A nd we kind of believe logic should prevail on an essential item, in our own model. And in the guidance we've ballpark roughly, you know, acknowledged out there for next year, implied in that is some price improvement for us.
All right. Great. So moving on from revenue, you know, from a customer service standpoint, you guys are operating better than at any point since the acquisition, per your recent comments. Do you think you're under-earning relative to your peers today?
I think for the last three quarters calls, we've sort of said, by any benchmark, if you write down the numbers on a piece of paper, we would be 400-500 basis points lower EBITDA margin than the comparable group, right? Not that there's necessarily a perfect comparable group.
Yeah.
And we came from the industry, right? We came from the company that was the leading player. We knew the profit margins, and the markets change, but it still should be better than where we are. And that's a function of all the things that we've been trying to lay out on the calls, which starts with recouping some of the hits we took on inflation, synergizing the manufacturing network, getting on a single instance of Oracle, fixing the quality, which is taking a lot of expense and cash. Obviously, some is below the line, some is above the line. But we tried to make it simple and say, we think we're under earning by five points. We didn't say how long it takes to get those five points. You know, we tried to schedule the items that are in that bucket.
And unfortunately, that was supposed to be the gravy on the original transaction. It's the stuff we have to pull out of our back pocket to get where we want it to be.
And can you be a little bit, if you're able to, a little bit more specific on that timeline to close that gap and get to where you want to be?
I mean, I think it's gonna take at least the earliest that you might see it is the end of next year. The safe assumption would be a year after that, so somewhere in the, you know, 15-24-month time frame to get everything done.
All right. The other driver of the transaction was, you know, synergies. You know, you've always talked about two waves of synergies, which are worth about $50 million. Maybe talk about where you stand in, you know, that journey of getting those synergies. How are you tracking versus your original expectations? And, you know, how much opportunity is there still out there?
Yeah. I think embedded in that comment on under-earning and getting to where we think we should be, is recognition or achievement of that wave two synergy, so it's sort of embedded in that number. To me, it's like people spend a lot of time on synergies, and they put numbers out there, like, if we achieved our round one synergies, but we missed our earnings by $100 million, who cares? Right. It's what you should be doing every day. And so I think we've done a good job of removing cost, certainly in the first twenty-four months on, you know, everything from quality to facilities to sites, et cetera. But if you're still not getting where you're supposed to be, it doesn't really... Who cares, right? It doesn't matter.
It's much more about now we have to use the second wave of stuff to get to the right operating margin.
Okay. Recently, we've seen people struggle with IT systems and ERP, et cetera. You know, you, you've brought together, over the last handful of years, three different businesses. You know, where are you in that IT journey of integration of the systems and
Yeah, not recently, always, right? We are in the midst of our ERP conversion of Smiths, the Smiths acquisition, Oracle to ours. We cut it over in the early part of August for North America, U.S., Canada. Like all your peer conversions, it was bumpy, not as bumpy as we went through with Hospira, and we're sort of cleaning up today. I don't know what the right analogy is. Think about it like changing your library. Every book in your library needs a new number-
Mm-hmm
... right? With a new card catalog system or a new electronic system, or every whatever year you're born in, and doing that for all of your products and all your sites, and all your systems and all your registrations, all your licenses, all at the same time. And things don't always transfer right, and you spend a lot of time cleaning that up, and that's sort of what we're in the midst of. I think it takes a couple of weeks. I suspect customers are doing okay because we notify them in advance. Probably, they buy ahead a little bit. Shipments were a little sluggish in August, and we catch up over the next one. That's why you do it early in the quarter.
Mm-hmm. All right. On free cash flow, obviously, you've been making some significant investments since the acquisition. I don't know if you view that as kind of one-off the acquisition or not, but how should we expect, you know, that spending to wind down, and how do we think about, you know, ICU's ability to generate cash, you know, material cash over time?
Yeah. I mean, the numbers are permanently etched into our memory, what we had on the initial slide of the transaction, right? What we thought revenues were gonna be, what we thought EBITDA was gonna be, what we targeted for free cash flow, and it went the other way. We had to invest more.
Mm-hmm
... at the outset, right? And that investment to a large part went in two areas. It went into inventory, and it went into quality. The inventory investments are over, outside of any inventory needed to grow the business.
Sure.
That inventory excess, which was about making sure you didn't lose any business with a customer, having adequate inventory end-to-end, trying to prepare for what was delayed ultimately in that EU MDR , that inventory is largely out of the system. There's $2 million in there, and that's reflected in our increasing cash balance.
Mm-hmm.
The other part, quality, is waning. We're still spending money on it. It was half in 2023 of what it was in 2022. I don't know if 2024 will be quite half, but at least that line is going in the right direction. And, you know, the management team's incentives are about cash, so we don't care whether it's dumped. People dump a lot of things below the line, just that, but it's still cash, right? And that cash can go to help the equity-
Yep
Shareholders. So we are focused on free cash flow. We're not at the level we wanted to be originally, but it is improving, and now it has to come more from the synergies and operational side than just the balance sheet, which was helpful over the last year. It was only helpful because it was problematic.
Right. On the problematic side, I don't know if the regulatory environment is tougher or just, as you talked about on IP, same as it ever has been, but what is the status of your various open regulatory items, including the Smiths Medical warning letter, FDA inspections, et cetera?
We've made a lot of investments, and again, the issues around the things we acquired. ICU had a very clean, you know, very clean bill of health, right? After Hospira, it took us a few years to clean that up. Very stable. Smiths had a warning letter that was really about three cardinal, common sense, whatever you want to call them, things you don't do in a medical device world, right? If you make a commitment about remediating your products in the field-
Mm-hmm
... meaning if you have a product problem and you've said, "I'm gonna," to the agency, "I'm gonna go fix it," you have to go fix it. It doesn't have to all be fixed in one day, it doesn't mean you have to start that process. Two, you have to make sure you're adequately tracking complaints, so there's no patient harm, right? So if you, if you have a adverse event, you need to document it, you need to investigate it, you need to understand it, you need to make a decision based on it.
Sure.
Very fair request.
Sure.
And the third is, you need to prove that your processes around changing things, and particularly in a world where you're short everything in twenty twenty-one, twenty twenty-two, and you're changing raw materials, components, some of these regulated devices, you have to document your changes and test before you put something to the market. And I think the business we bought fell down in those three areas. And we've invested heavily in all of them, heavily in fixing it at the customer site, heavily in migrating the Smiths' quality system to our legacy system, and then redesigning and retraining on all the various processes in the factories. And this isn't just like an office thing. This ultimately touches human beings that are assembling something on a floor.
Mm-hmm
... 1,000s and 1,000s of miles south of the border, right? And everybody has to be moving in the same direction. We feel pretty good about it. We're kind of in a wait and see mode, right? Each day that goes by, we get stronger. My generic comment was, most good companies have these things cleaned up three years after issuance.
Mm-hmm.
Even Hospira had it cleaned up three years after issuance.
Yep. Perfect. So we've talked a lot about the business side of the equation. Shifting a little to the financial side, despite the positive momentum we've seen, you were recently downgraded by Moody's, I think, due to a view of sustained elevated leverage. You know, how do you think about that move? What is your plan to pay down debt, and how do you think about priorities of capital allocation?
I think the Moody's thing, I'm not sure I fully understand it, because cash was going up and then leverage was going down, but that's, it's not worth sort of, you know, bickering with City Hall, right? Our job is to deliver the results. I think we said in the call that the biggest item in the last eighteen months was: What's the right amount of cash to feel secure on if you had to invest more in quality or... And the infusion industry is kind of littered with landmines. And I think we got down to under $200 million of cash, right? We were feeling that's very, very tight.
Mm-hmm.
With what we've been able to do in January, we were back up above $300 million, and that's probably a safe amount of cash to run the business globally with, and therefore, net debt was $1.3 billion.
Yep.
Against an improving EBITDA outlook, we felt like we're getting to a better place, where if there is excess cash, which is why these quality and remediation costs need to come down, that excess cash should go to debt pay down. That money, obviously, we didn't do the right type of financing in the transaction, and the term loan funding is, like, eight and a quarter.
Mm-hmm.
Eight and a quarter, all in, and trying to make that go away is obviously very valuable, so we're focused on it.
Is there a leverage level you're focused on, or how do you guys think about the right balance sheet composition?
You know, it's hard for us as a company that, until we did this, sat with excess cash-
Right
... and no leverage, and no one ever said a word about it. But as a quasi kind of industrial, should be mid-single-digit grower, right? There should be some leverage on the business. I think that number certainly has a two in front of it, right?
Mm-hmm.
Two, two and a half or something. Not, you know, the high threes where we were. So it's not that, it's $200 million away. It's, like, $300 million away.
Yep.
Which, you know, if we can resolve through other means or strategic stuff, we would obviously do if it was available to us, but it's the gap isn't that big.
Okay. You just referenced that, but I'll-- I was gonna ask the question. There are businesses in your portfolio that I think are perceived as less core than others? Or maybe even non-core, how do you all think about monetizing those, or what's the plan with those assets?
I mean, there are. We've been relatively transparent. There are a few things that if the right situation or became available, we would explore it. One, it takes two to tango, and two, I think it hasn't really been a seller's market.
Mm-hmm
... of assets until kind of more recently as rates, the prospect of rates come down. And, you know, if you have all these scarlet letters of a warning letter and other things, right? It's nice to maybe get some of those things resolved, to look a bit cleaner, have a few quarters, particularly under your belt, and then maybe have a better conversation. So if it's available to us, we would explore it. It hasn't been... I don't wanna make anybody think it is. It has to be also, it can't be value destructive. Right? That doesn't actually solve anything.
Right.
So.
Right. On the flip side, going back to your days at CareFusion, obviously, at ICU, you've been, I don't know if the word serial acquirer is fair or not, but you've been an acquirer of assets over time. Are you happy with the portfolio you have today? Are there gaps you'd like to fill through M&A, or how do you think about that tool in your toolkit?
I think with what we've been through, it's certainly not on the agenda to pursue anything, of, you know, scale. For the most part, everything we need is in-house, right? To your portfolio question, we have our eyes on a few little gaps in the consumables area. There are always people innovating stuff that we didn't figure out on our own, to grab some of those, if possible. But I think we feel pretty good about what we have, and we'd rather say, "Okay, maybe we have to up organic R&D a little bit," 'cause there are some of the stuff in Dan's world, and IT, and software, it costs a lot.
To finish that, if we could get the balance sheet to the ratios we talked about, and we could come out and say, "Oh, we'd love to return capital to shareholders and some other means," with the optimal amount of leverage on the business and do things organically, I think that's a good, good formula. Again, we're $200 million away from that target.
That makes sense. I think it's mostly been resolved, given they sold down recently, but maybe give the group, the investors, a little update on where Smiths Group's ownership stake in ICU resides today, and how does their ownership stake, if at all, impact their earn-out opportunity under the merger agreement?
I suspect the people in the room may know more about that than we do. We just sort of get a note at the end of the day saying, "We've exited." And so, and mostly I hear it from people, like, akin to the people in the room. So I think, I believe they're out, fully, and, you'll see in the 10-Q, the language changed, that as a result of them being out, they're not entitled to the earn-out anymore.
Okay. Helpful. Yeah, as we wrap this all up, how do you think about the second half of twenty-four and into twenty-five? You know, any specific concerns or, on the flip side, things that get you particularly excited about the next year and a half or so?
I mean, I think from a business standpoint, in the very short term, we need to make sure this ERP gets finished properly, right? Which we're very close to doing. The normal, you know, bumps and bruises of trying to make sure we deliver on our commitments for the balance of the year. I think bigger picture for next year, it's very much about that billion-dollar consumable, billion-plus consumable stack, making sure all four pieces are going in the right direction. I think we feel pretty good about that. And then, a lot of value comes down to what happens in this pump market, and what value can we grab and create, because that is very each opportunity there has a very high amount of NPV associated with it.
Mm-hmm.
What's fun? Well, while you know, obviously complicated, stressful, all that other stuff, what's fun about it is it's a large addressable market where there's a lot of action going on. We're in the game with what we think is novel, new technology with a good portfolio. I think that's the thing we're most excited about: is are we capable over the next, 'cause that action is largely gonna go down over the next thirty months.
Yep.
Right? And that's that. Even though thirty months sounds like a long time, it's a relatively narrow window.
It'll come fast.
It's gonna come fast.
Yeah.
It's been thirty months, right, since we did the transaction. Well, it felt very long, and I think we're excited about what's our. That's the opportunity.
Yeah. I think you've summarized it, but I'll leave with, unless there's questions from the audience, I'll leave with one final question. You know, your company, to my perspective, seems to be on, you know, real momentum right now. You're integrating well, you're getting some of the issues behind you. You know, why should an investor care to invest in ICU today, and why is now the opportunity to really get in there and experience the upside that you and the management team see?
Yeah, I mean, I think that's the core of the question of all these meetings, right?
Yep.
A couple of months ago, we were hosting one of those bus tours, and I said, "I think this..." And I kind of did it with my own checkbook at some level, right? I said, "I think the upside is better than the downside." I mean, the valuation's changed a bit, right? Since then. But I think we still have to have that belief, and we have that belief because we can see the items that are under our control, the synergies-
Mm-hmm
... the quality stuff, the integration items, right? The real estate, and the list is long, right? And again, I'm not specifying a date, but we know those things are out there for us to do. Second, we feel like finally, and it's only been three weeks, four weeks, some of the macro stuff is at least at our backs instead of our face. And then the third is, we have innovation and then shots on goal in this big market race that's gonna go on over the next two and a half, three years. And the combination of those three things, I think, does yield something that's materially superior than we are today. Can't guarantee what day, can't guarantee what time, et cetera.
Mm-hmm.
But you know, when I reflect on a lot of mid-cap device names, which has been a tough investment class, us, you know, maybe we've been worse or whatever, but it's there hasn't really been a lot of crown jewels in there, right? I think we look at our portfolio and say, our. For all of the difficulties of the transaction, our portfolio makes logical sense.
Mm-hmm.
We've created one of the world's largest sets and pumps companies, the only pure-play company, and that should be valuable. In a big game, with a lot of stuff going on, where we have innovation and some self-help. That's why I think we're excited about the next 24-30 years.
Great, and I think you should be. So thanks for that, unless there are any questions from the audience. Appreciate the time, appreciate you joining the conference, and, you know-
Yeah, great
... have a good Friday.
Thanks for coming out at 7:00 A.M. I know it's painful on Friday, it certainly was for me.
Thank you very much.