All right, thanks everyone for standing by. I'd like to welcome everyone back to the KBCM Healthcare Forum. My name is Brett Fishbin, MedTech Analyst, and I'm pleased to be joined this morning by ICU Medical, who is represented today by Vivek Jain, the CEO, and Brian Bonnell, the CFO. I will start us off with questions, but as usual, we have a text box below the video screen, and anyone listening in can feel free to submit questions, which I'll then relay to management. Just to kick things off, you guys hosted your 4Q 2024 earnings call a few weeks ago. Maybe just to refresh the audience, you initiated EBITDA guidance of $395 million-$425 million. I was just curious if you could walk through some of the key moving pieces underlying that range and any of the bigger swing factors that you're thinking about that could drive results closer to the high end or low end of that EBITDA range.
Sure. Good morning, everybody. Sorry for a couple-minute delay. It was my first time using Zoom. And thanks to KeyBank for having us at this event, and Brett for your ongoing support. Jumping right into our guidance, I think we tried to contemplate the world as is, which is hard to do these days. But I think the biggest assumption to deliver our results were really no macro changes. And so no macro changes in underlying census in the U.S. healthcare system, which we did not expect it to certainly go up like it did last year, which was very profound. But we did not expect any major decreases and sort of just hit a new plateau.
The second was no macro items across currency moves that were sort of more than were contemplated or any negative consequences from some of our international sales from what may happen to us in other countries. It was sort of the elimination of negatives or the elimination of the volatility was the core assumption. In terms of doing better, obviously, the rising census last year lifted all boats. If that was to continue, that would be additive to what we thought that makes the biggest impact.
Currency and the other macros also makes an impact if those broke in our favor. The operational point, right, the stuff we control, commercial execution, winning more, even growing in the consumables case, growing at historical rates would be better than what the midpoint implied there. I think those are probably the three biggest items.
All right, great. I'm going to ask just a couple more questions on some of the near-term dynamics and set up for this year. I think we'll have a chance to hit on tariffs as well. Just looking back to 2024, we thought it was a really just good year and was a nice inflection, especially on the revenue side, improved to 7% organic growth relative to flat performance in 2023. You're currently assuming mid-single-digit growth in core infusion systems and consumables, and flat in critical care. It may be tied to the utilization topic, but why are you assuming just a level of deceleration this year in some of those core business areas?
I mean, I think that question is probably more specifically around consumables, right, where we guided below the historical growth rate. I suspected it, as I shouldn't assume that. I think the biggest reason is we burned investors over a couple of years since the last transaction. We don't want to overpromise. Last year really benefited from very strong utilization in census. It was hard for us to imagine that things continued at that kind of rate.
Obviously, we were helped in our consumables business by some of the shortages that went on in unrelated products in this country and our market share gains and some prices we achieved last year. I think that there isn't a better answer other than just trying to be a little bit cautious on what's happening in the macro environment there.
Yeah, no, yeah, definitely, definitely appreciate that. I think it makes sense. I mean, the core markets are growing kind of in that mid-single-digit range typically. It makes sense as a starting point. I just wanted to also ask, I think you alluded to pricing some benefit last year. I also believe there should be some benefit this year with some of the GPO contracts. Maybe just talk about that and clarify a little bit like the pricing benefit last year and what you're expecting this year?
Brian, you want to grab that one?
Yeah, I mean, I think for 2025, we said we were expecting about a one percentage point benefit to revenue growth as a result of price. And so that's roughly a little over $20 million. That is going to be mostly associated with the GPO renewals that we completed at the end of last year. And so that's going to be mostly solutions and consumables and maybe a bit tilted towards solutions. I would say the benefit that we got in 2024 was probably slightly better than that, just as a way of comparison. As we go from 2024 to 2025, a slight step down in pricing. I think 2025 is probably kind of the last big opportunity for contract renewals. I think anything going forward is just sort of part of our normal renewal and pricing cycle.
Yeah, I appreciate the caller. Just last question on kind of the guidance, and then we'll ask about tariffs. On an underlying basis, so there's kind of two sets of guidance. We have the pro forma, like apples-to-apples guidance versus last year, and then the expected impact of the JV Agreement, which will take effect mid-year. Just thinking about, call it like apples to apples, the guidance calls for around 100 basis points of year-over-year improvement to gross margin. Just curious if you could walk through the biggest drivers supporting that improvement that you expect this year?
Yeah, I mean, setting aside the impact of the joint venture transaction, which you had referenced, we had originally set targets for ourselves of eventually getting to 40% gross margins over time. That margin expansion would sort of drop through and yield 20% EBITDA margins. At the time we set those targets, we were at a normalized gross margin of somewhere around 36%. We're talking about a 4 percentage point improvement over time. The improvement of 4 percentage points was expected to be driven by a combination of really three things.
First and foremost, integration synergies, primarily around supply chain, manufacturing network consolidation, real estate, things like that, plus some benefit from price, as well as higher manufacturing absorption from higher volumes. For 2025, all three of those drivers really are contributing to that 1 percentage point of gross margin improvement that we guided to.
We also, along the way, have to offset the usual items such as inflation, especially Mexican labor, etc. In terms of progress and where we stand on that, if you assume we exit the year closer to the high end of that gross margin range, so say 38%, that would imply we're kind of halfway to our target as we get towards the end of this year.
Yep. And yeah, we can talk a little bit more about the JV in a little bit. Just wanted to finish the 2025 guidance discussion. One key variable that hasn't been included at this point is the potential impact of tariffs. Now that we've had a little bit more time since the earnings call, just curious if you'd be able to provide any more commentary on how you're thinking about the implementation of tariffs and how it could impact the results in the near term?
Yeah, it's a favorite topic of ours, of course. Maybe what I can do is share a slide. That would be helpful. By the way, this slide is also posted as part of the investor relations deck that you can find on our website. Obviously, the situation on tariffs is changing frequently. What we thought we could do is at least share the range of potential impacts based on what we know today. It's difficult to kind of figure out exactly how all this gets sorted out. The truth is, the range of potential outcomes is pretty wide. Operationally, we do have three manufacturing plants in Mexico, so a significant presence. They do produce product that represents almost $1 billion of our global revenues.
If you wanted to sort of assess a worst-case scenario without really any consideration of any product exemptions or mitigation actions that we could take, the cost of the product that comes across the Mexican border into the U.S. for us is worth about $350 million annually in terms of standard cost. If you just simply apply a 25% tariff against that, that would result in almost a $90 million of tariff exposure. Now, on the other hand, as of today, products that meet the USMCA origin requirements are being exempted from the Mexico tariffs. That exemption reduces our exposure pretty significantly by almost 80%. So that $90 million of exposure very quickly becomes less than $20 million. Now, the exemption is currently set to expire here in early April, but to the extent it became more permanent, we would obviously benefit quite a bit.
From there, independent of either of these two scenarios, with or without the USMCA exemptions, we do have a number of mitigation opportunities that are available to us that we can take action on that would then even further reduce the exposure in either one of these scenarios. The benefits of some of these might be overlapping, but they do include those that can happen in the near term and are generally lower effort, such as doing more direct exporting from Mexico for product that is imported today and then ultimately ends up going outside of the U.S., to also taking advantage of what is known as the 9802 provisions that could reduce the value of the product that is subject to the tariff to only the value add that is added in Mexico.
In addition, we do have some longer-term opportunities that are a bit higher effort, higher investment, including more aggressive restructuring of our supply chain. Of course, while we're exploring the options here on the longer-term stuff, we would have to have probably a better sense of the medium to longer-term tariff environment to make sure that we're getting an adequate return on that investment. This is kind of where we see the range of potential outcomes. Obviously, we're monitoring the situation very carefully, and there's a lot of analysis being done to kind of figure out what ultimately this is going to mean to us.
Yeah, no, thank you so much for providing this. I think everyone will appreciate some of the details here. Just had.
Brian should win the award for the most thorough tariff answer that anybody has said on any of these calls lately.
Yeah, that was pretty good. Yeah. I just had, yeah, just one follow-up on that is you have two sections on that slide, unmitigated impact, which is a simple math equation, and then how things will play out, which includes you guys taking certain actions to try and mitigate those exposures. Just with the news changing so frequently, just wondering kind of how you think about balancing some of those higher-effort mitigation strategies with just the level of uncertainty that we're just currently dealing with?
That's exactly the challenge that we have, right? It's really difficult to undertake some of these more aggressive actions until you do have better visibility as to what the long-term environment's going to be. It's because the level of investment required means that the payback period for some of these things is years. It's not months. At this point, I think we're doing a lot of the planning, but we'd have to have some better clarity before you would actually begin making some of these investments.
All right, yeah, and we'll stay tuned. I think this is a great update. We'll kind of see what happens with the news, and then if they do go into effect, how long those actually last for, and we'll have to see. I just had one quick follow-up come in through the chat asking if your GPO contracts allow for any tariff pass-through?
No, I think if you break down our business, a chunk is GPO contracted, the biggest of which is solutions, pumps, and consumables, which were recently renewed as of this January. Those contracts were negotiated early last year, and they did not contain provisions to pass on tariffs. We were more focused on getting the price increases that we desired. A chunk of our business into home care, alt site, etc., is non-contracted business. In those markets, we would explore what we could do, but we have been taking price there too, and we want to be sensitive to kind of our role in the system. I would say under analysis, probably difficult on the GPO contracted items, and probably some flexibility in the non-contracted items.
That makes sense there. I'm just going to shift the discussion a little bit. Some of your individual markets, one area that's been getting a lot more attention, given some of the movement is the IV solutions space. Before diving into the JV, I was wondering if you could just give a brief update on how you're viewing the state of the IV solutions market and if you think things are relatively back to normal at this point, following some of the disruptions late last year.
Yeah. I mean, I think as we previewed in the Q4 call, we didn't expect it to last very long. It certainly feels like it's not all the way back to normal, but it's pretty darn close. I don't think there's very much to talk about on that topic anymore. That will show up in our, we expect our solutions results to get much more in line to our historical view versus what happened in Q4.
For sure. I think that's a good opportunity to pivot a little bit longer term. If anyone's newer to the story, maybe just talk a little bit about the transaction that you made with Otsuka Pharmaceutical to form the JV in the IV solution space, and why it was the best decision for ICU to make?
Yeah. I mean, I think the solutions business is a necessary ingredient into participating in the infusion markets. However, it's different economically and from a regulatory and capital investment point of view. I guess we felt in the solutions business, we didn't have the same global economies of scale that we did in our other businesses. We weren't holding cards that would allow us to be the best innovators over time. We have a finite amount of capital. To compete there effectively over time, one needs more capital. It's kind of a more traditional industrial manufacturing business. We sought a partner, and we think we were very lucky to make a transaction with the best partner in the world, the largest producer of these items in Asia across Japan, Thailand, Vietnam, Indonesia, Pakistan, India, Middle East, etc.
A company that brings kind of in the U.S. market, these categories were served by essentially what was at some level Big Pharma, what Abbott was historically for all the spinouts, etc. It got put into these device companies. This kind of brings Big Pharma and the economics of Big Pharma back to the business with really Japanese investment-like time horizon and access to large pools of capital and product innovation. We felt if you could combine capital with innovation and take those requirements away from us, it was a win-win for our customers. It was a win-win for our shareholders. We could allocate our capital back to the businesses where we think we have better right to innovate and win in.
You guys provided a few metrics about the expected impact of the JV on 2025 results. Maybe just taking a little bit of a longer-term view, what do you think the transaction ultimately changes in terms of ICU Medical's normalized revenue growth and margin outlook once completed?
I guess on the growth rate for the company as a whole, if you just think about it, IV solutions represents half of our vital care segment, where we've historically guided to flat revenue growth each year, whereas consumables and systems have been mid-single digits. The math around simply making that lower growth vital care segment smaller relative to consumables and systems results in probably like a half a percentage point or so uplift to our consolidated growth rate.
On the gross margins, we did say that gross margins will improve by three to four percentage points beginning after the JV closes, and then we deconsolidate those operations. We will get another one to two percentage points of gross margin benefit once that JV exits the services arrangements with ICU, but that won't be for several years down the road. This benefit is really incremental to that 40% goal that I had mentioned earlier, Brett.
I think one topic. Oh, go ahead, Vivek.
Long-term, I'd add there, Brett. Just the other piece is our story; our existence is also about free cash flow generation. Eventually, we were tight on capital the last couple of years, right? We have a little bit of catch-up in other parts of the business. As that normalizes, alleviating that capital burden for solutions and putting that into the JV is valuable to us, right? The CapEx matters in that business to be competitive a lot. No one really focused on that because it's all about the growth question, but it consumed cash for many, many years since inflation hit.
I think everyone would agree leverage and seeing the leverage ratio and interest expense come down would be very positive. I appreciate that as well. Just one other, I think you kind of alluded to some of the innovation and product development that Otsuka brings to the table. Just curious where you think the portfolio is differentiated from the Otsuka side?
I mean, I think just quickly, and again, it's not our core business anymore, but there's three or four things. One, until the shortage, there was a long discussion in the U.S. about what is PVC-free, DEHP-free products, right? Everything they make is in that product format. The large U.S. two U.S. manufacturers don't offer that format. Us and the market share leader. Clearly, that is a big, big advantage. That's what the other new entrants have marketed off on. They have far more scale. Two, they're the leader in multi-chamber packaging and the innovator. That's in the topics of nutrition, where there's an effective duopoly in the U.S. that needs to be broken. They are the innovation holder and intellectual property holder globally in that area.
Third is ready-to-use formats for premixed drugs, etc., where some of these businesses as Hospira, faded, the focus on that stopped. They have lots of innovation there and can participate in those markets. The fourth is if we can, over the near term, get U.S. regulatory approval to import on a permanent basis from those countries, the cost curve is very, very appealing because, as a company, again, Branded Pharma, with big returns invested a lot of money in CapEx. Their production costs, even under an importation framework, are very, very low to the point that it makes it worthwhile. That is value we intend to offer to our customers to drive our other businesses over time.
Switching gears a little bit to the infusion systems business, I'm wondering how you would characterize the competitive landscape in the LVP space, both in terms of customer demand and then just how you're viewing some of the activity across the manufacturers?
I mean, it's a long conversation to synthesize it to its essence. It is a market where incumbency advantage is very high. What we really need to focus on is the portion of the market that may actually be willing to switch. We think there is enough market available out there to gain additional points of market share from where we are today. It is a competitive dynamic, and there are some number in the 20%-30%-35% of the U.S. market that over the next two or three years needs refresh or replacement for a variety of different reasons, either aging or product remediation, etc. We certainly think the majority of that will stay with the incumbent. We simply need one in every five or one in every six to make an alternate choice.
That is the market we are very focused on bringing technology to. We believe that there is a portion of the market that wants new technology, that wants additional safety features, that wants improved workflow. Our innovation is centered around those items. I do not want to oversimplify. It is competitive out there. We believe, like all markets, if you are the innovator and you have a unique product value prop that people rely on, that is where we find ourselves today.
Outside of LVP, you've also started to speak about several additional product updates in this category, including Plum Solo, the LifeShield Safety Software, and eventually probably updates for MedFusion and CADD as well. I'm just wondering if you can give a little bit of an update on where each of those products currently stand and what you're willing to share in regards to potential timelines.
Sure. I think we were pretty transparent on the call script. Plum Duo, which is really the high-complexity product, is approved. Solo, which has really two value props to us. Solo, everything is into the agency. We're waiting for feedback. It appears to be responsive. There is not a lot of drama as it relates to the agency on things that are under the funded response timelines. They seem to be responding on those timelines. The Solo opportunity for us is twofold. It adds value in the competitive discussions where not every single use case in every floor of the hospital needs a high-complexity pump. Part of our story is a better choice for customers. You do not need to be overpumped, so to speak. The other opportunity for Solo is our own install base of hundreds of thousands of devices in the U.S.
We've never had the opportunity to refresh. Our devices are finally getting old. Nine or ten years next year into the market, Solo is a real device to try to upgrade our own existing install base with more features, more value in the device itself. Solo is really important. It's coming quickly. We'll know in the next number of months where it lands. We set on the call script that we expect a revised syringe pump to be on file this year, and certainly a revised filing for CADD, probably not so many feature changes for the ambulatory pump that came from Smiths. The crown jewel of the Smiths acquisition was the CADD infusion pump, which is majority global, is a global leader in home care and an important player in pain management in the hospital. That product is finally performing very, very well. We've gotten it stable.
Over time, the goal is to have innovation that connects all three of those modalities with the LifeShield Safety Software suite. That has been the long-haul intent item. The individual devices had to get done first. We believe a customer will eventually recognize connecting to that patient all the way into the ambulatory infusion and the home care environments.
Yeah, I think it's a pretty compelling long-term story when you think about all of the next-generation pumps and bringing them together on an integrated platform, which just kind of poses the question, do you feel like you need to have those products across the finish line, Plum Solo being one, but also the updated syringe pump running on the same software to be able to really compete with some of the more modular platforms that are out there, like Alaris?
I mean, again, a very small portion of the U.S. market is interoperable today. That is the land grab. Interoperable means connected to the EHR and pre-programmable, except bi-directional connectivity programmable. Less than 20% of the market is. The market is still whole cloth to be converted. If you think about it, the Smiths Syringe Business that we acquired stood on its own anyway, separately, and still is a leader for an independent syringe pump in the market.
I mean, the short answer is making it easier is better for customers. 100%, we should do it. It still exists until we get there. It is really not that far away. We would make those commitments to any customer who is stepping into our technology anyway. Just same way when we buy software packages, things have not been fully developed yet, but we know they are on the come. Same thing would apply here.
I just wanted to ask on consumables, just since more of a portfolio sometimes gets a little bit lumped together. I was just curious if there were any other new products that have either recently been launched or in the plans that you would call out on that side.
I mean, clearly, the majority of R&D for the last four or five years has gone to the pump business, the vast majority. We have been trying over the last bit of time as we have gotten stable to rebalance that, of course, the core consumables business, which generates the majority of our cash and returns today. A number of things are in flight and have gone in. I would probably prefer not to talk about them until they get done here. If you look at some of the smaller acquisitions we did over the years, those are the things we developed at home, like oncology. Part of the value prop in consumables is just to create these niche markets, right? Not to compete in the core areas, to find the high acuity, high clinical value spots, even if smaller markets. I think we've done a good job of doing that. We'll continue to.
All right. We'll definitely keep our eyes open there in the years ahead. I wanted to then shift to Smiths a little bit. I feel like last year, we spoke a lot about Smiths. I think you guys have made a ton of progress around the integration, which is great to see. It's taken a little bit longer than you would have originally expected. With things seemingly now stable, I'm just curious what you have left in terms of integration activities and if there's any way to quantify the cost synergies that you still think are ahead during the second phase?
Sure, Brian, I'll start, and please chime in. I think Brian quantified at some level by talking about the gross margins, right? His explanation of getting to 40 and where we may exit the year, the balance is the remainder of synergies plus a little bit of price. The work largely should be done by the end of next year. A number of plants will be closed this year. We won't see the economics of that flow through the income statement until next year.
There are a few more activities on logistics, international order to cash, maybe one remaining site or so that has to get consolidated next year. We are not done. It's the operational stuff that, frankly, we need to do because we didn't achieve our original goals. We need to do these things as fast as we can just to get to the original watermark we tried to set for ourselves. We can see the end now, right? We lost two years along the way.
Yeah. It has been spoken about a lot and a lot of moving pieces. I think another topic with Smiths was some of the specific product areas like vascular access. You mentioned ambulatory representing pretty big headwinds for a certain period of time. It seems like those have also stabilized. Just thinking about Smiths as a whole, are you at the point where that portfolio is now growing off of a lower base, or are there still other areas that might be still challenged and posing meaningful headwinds to ICU?
I mean, I think if you reflect on last year's results, all the Smiths products that were in the consumables segment that we report or the system segment, with the exception of syringe pumps, which are the smallest one, all grew year- over- year. The items that came from the acquisition that have been flat are in the vital care segment. I mean, we still have work to do there, right? Even though we eliminated $300 million of the revenues of vital care, we still have $300 million that are not necessarily growing. We need to fix that, right? We cannot just pretend that flat is okay forever. We are focused on that. The remainder of the items are growing. I think the thing that we take pride in at the moment is the crown jewel was the ambulatory infusion platform, right?
We can debate its portion of the value of the acquisition, but by far and away was the largest. That is performing well. That we feel on solid ground on. The other important assets are the ones that are in the systems. The most important assets are in the consumables and the systems buckets, which would be the tracheostomy franchise and vascular access. Those are performing better, but still not to our level of satisfaction and continue to get a lot of attention. If we can get those three all going right consistently, we think that justifies a lot of the headache that we put ourselves through. After that, we'll get to the vital care items.
It has been great to see the improvement so far. I think things are at least stabilized and feels like there is more opportunity you guys are working on. Maybe just concluding on a couple of questions on cash flow and capital allocation. I think you talked a little bit on the earnings call about the free cash flow outlook being similar year- over- year. What are the biggest moving pieces holding you back from showing a greater level of cash flow growth in 2025?
Yeah. I mean, I think the one thing to note, Brett, is in 2024, we did end up with probably $50 million of better cash flow than what our original plan was. We did benefit from a few things during the year that won't recur during 2025. I think if you kind of take a step back and think big picture, the real opportunity for us on free cash flow is the fact that we're still spending around $100 million a year on integration and quality remediation. We'll continue to spend that same amount in 2025, which it's the fourth year now where we've spent about that level. The spend needs to start coming down sometime next year. It won't immediately go down to zero, but we need to begin heading in that direction. That's when you're going to see free cash flow really improve.
Even longer term beyond that, we do have some additional opportunities to even further increase free cash flow by more than just that $100 million of improvement as we grow earnings, hopefully able to pay down some debt and maybe lower interest rates means lower interest expense as well. If you kind of think about our financial improvement plan around revenue, earnings, and cash flow, we've really made the most progress on revenue growth, where 2025 is going to be the second year in a row of some pretty good growth. For earnings, 2025 is really kind of the first year of having a meaningful step up in EBITDA. Free cash flow, really, is lagging a bit. It's probably a year or so behind earnings just given this restructuring and quality remediation spend.
I appreciate the color, Brian. Last question from me, and then I'll just give the floor back to you for any closing thoughts that you would like to leave investors with. I think you're still looking at some possible divestitures. Obviously, cash flow is focused on debt reduction. How far away do you think we might be from bolt-on M&A becoming part of the story again?
I mean, I think on the call script, we said we think we have enough organic development to keep us busy. To be brutally honest, right, we did an acquisition that turned out to be much harder than we had expected. Our investors suffered as a result. I think it's not lost on us. You have to rebuild that consistency before you have the right to do other things. We haven't spent a lot of time at all on inbound. We've been spending time getting our house in order and getting our own organic innovation over the finish line, which have also been real investments. I would never want to say never, but it hasn't been a barrier of a lot of energy for the last couple of years.
Yeah, it's completely fair. All right. Any closing thoughts before we sign off here?
I appreciate the work. Keep things done. I think last summer, we laid out our case that we were under earning early last year. By last summer, we were saying we think the risk-reward is getting tilted more to reward. From a value perspective, obviously, the markets have been volatile. Things have not changed that much since last summer. Our conviction around that statement is probably stronger today than it was last summer. We are getting closer. We think the risk-reward for investors is tilting more in the right direction. It is our job to execute and make that happen. We appreciate the interest and the support.
Thanks so much to you guys as well for joining. Thanks to everyone in the audience for listening in.
Thanks very much, everyone. Have a nice day.
Thank you, Brett.