Okay, welcome back. I'm Larry Biegelsen, the Medical Device Analyst at Wells Fargo, and it's my pleasure to host this fireside chat with the management from ICU Medical. With us from the company, we have Vivek Jain, the Chairman and CEO. As I said, it's going to be a fireside chat, so if you have a question, just raise your hand. Vivek, thanks so much for being here.
Thanks for including us in this great event. Once again, we appreciate it.
Let's start with some big picture questions. You always have some helpful commentary on the macro environment. On the Q2 call, you reiterated that you saw a continued stable demand and utilization environment and the status quo on capital equipment. I'd love to get an update from you if anything has changed.
Yeah, obviously a lot of discussion this week on what's happening with underlying volumes. For us, our business is most directly tied to census and admissions, and we haven't seen a lot of change. We said on the call script, demand was in line with our underlying guidance assumptions. We continue to feel that way. The rate of growth has decelerated versus last year, which had a bigger step up, or the year before. But it's certainly meeting our needs, and we don't have a lot of negative things to say about the demand side of it right now. Now we don't see the actual end use, whether it's in an elective case or a surgery center, whatever it may be. But regular hospital admissions and level of busyness is pretty good to us.
Good to hear. You have done a lot of work reshaping the portfolio in recent years. Talk about your ultimate goal in the portfolio management. Is it to improve the weighted average growth rate? Where are you in the process?
If we reflect on our journey, our company's journey, ICU's journey, for the last seven or eight years, we essentially took a small parts supplier and built an integrated infusion company around it. I do not think the intent of that was to optimize the market growth rate. It was really to build a coherent portfolio with things that made sense together. We had to make our first move into the pump business really defensively because our partner, which was Hospira at the time, was not focused on the business, and that led us to other choices of things to add along the way. I think the guiding principles for us, more than chasing growth rate, has been where can we put assets together where we could innovate and bring value to the customer? That value was really around safety and clinical efficacy.
I think that was sort of the main driver. The second driver related to more of our recent portfolio decisions, like the joint venture we created with Otsuka on IV solutions, is to optimize businesses that had less capital intensity, where we believe we did not add the same level of innovation. So our moves to date have been to try to improve capital efficiency and improve ROIC.
So one of the businesses that investors have asked about is Vital Care, while we are on the portfolio. I guess the question is, are you leaning towards keeping it and investing to improve its performance?
I think that's the last 10% of our portfolio. Back to the point on having the most coherent portfolio, there are parts of that that aren't as coherent. At this conference last year, we were starting to say we think there's something to do maybe with some of those assets. We have not been able to get something done at a level we thought made sense. For the moment, we run them until we have a better choice. I don't think that we would necessarily increase investment. Even today, you can see there's certain companies or divestitures may have been expected, and depending on who's on the other side of those conversations, you may not get the value you want. That is probably a pretty good comp for our situation.
Okay. Let's transition to IV systems. You had really strong growth in Q2, 12% organic, 10% for the first half. You did talk about some pull forward of installations from later in the year. There was also competitive wins. What are the sustainable growth drivers into the second half of this year?
Yeah. I think there's a couple of different ways, and on the earnings calls the last few times, towards the end of the call, we've tried to iterate the ways that we can create value in our pump business. The three or four ways we create value is really first and foremost competitive wins, because that captures new market share, and you get not only the benefit of selling the hardware, but you get 7 - 10 years of disposables utilization of razor blades with dedicated sets and some software fees. The second way we create value is refreshing our own install base, and that applies both for our LVP business, but also the syringe pump businesses, et cetera, things that we came in the last acquisition.
The third way we create value is by re-profitizing all of that with deeper software costs and more value we can add there. Most of the 2026 discussion, the back half has been the first item, which has been winning on the competitive front. Over time, the other parts, the refresh and the software, will come more into the equation, and there's some next gen stuff in the home care environment. But so far, it's really been about just taking advantage of the flux in this market in the U.S. more than anywhere else.
How is the Plum pump family positioned competitively? Who are you taking share from? Because none of your competitors are saying they are losing share.
Yeah. I think we have been very careful, Larry, in our public talks to not necessarily. We say it will show up on our income statement, right? Either it does or it does not. Everybody in this line seems to talk their own book. For us, pumps are LVP pumps, syringe pumps, and ambulatory pumps. Not everybody may have the same mix there, and we try to talk on a net basis, not only what we won, but also what may have been lost. It is not clear to me that is an apples to apples. Again, for us, the other thing we said for years in our call script is that in the pump business, and certainly prior to our most recent acquisition, we are still very small. Therefore, we do not need a lot to keep us happy. Most of the wins have been competitive.
I think it has come from all market participants, and what we hope is that trend continues and that over time, we are able to add the refresh of our own install base in addition to the competitive end to the pump numbers.
When does the upgrade cycle really start for your pump business?
Most of our equipment probably has a six or seven year life right now, and the useful life is eight or nine years. It should start next year, and last for three or four years beyond that. I think it's something you have to be sensitive to. Customers who are happy, satisfied, have a working piece of equipment, you have to be delicate. You can't quite be as heavy-handed as a software vendor saying, "I don't support this device," et cetera. You need to do it with some heads-up and some notification. I mean, that process has started.
Hospital profitability concerns and changes to 340B, do you think that is going to have an impact on pump replacement schedules?
I mean, as long as I've worked in the industry, there's always been discussion of the financial health of hospitals. Obviously, the recent events add more fuel to that discussion, but no one buys an infusion pump voluntarily, right? My joke is it's teaching your mom how to use a new cellphone, right? It's a lot of work, it's a lot of energy to go through, and you only purchase the system when the current system you have is at end of life or doesn't have the features and capability. You're not doing it because it's a revenue generating item. In the case of what's happened in this country, where there's had to be a lot of refresh of various vendors' devices, the capital was available for all of that refresh.
To me, that shows that the funding is there because you need this device to deliver medications, deliver care at a hospital.
Okay. The Medfusion syringe pump, you are expecting to refile the 510(k) in the second half of the year. Talk about your confidence in that new filing, and ability to address FDA's concerns, and what is a realistic timeline for clearance?
Yeah. I think we feel a little sensitivity. We typically, or historically, did not talk about even the products that we filed until they were approved, right? When we went through some challenges, you have to provide a little bit more color commentary, and we did that. For the most part, things were approved on a first pass approval, meaning you submit the first time, you get approval within 180 days. This Medfusion and CADD filing that we made last year is the first time we did not get a first pass approval. The agency, for a variety of reasons, came back and asked for some additional testing and one or two features or challenges to be addressed with the product. We have done most of that work already now on Medfusion and will file this year, as you said.
I think we would be reticent to commit to saying it absolutely would happen with a review of only the items that were requested or the full 180 days. The answer is somewhere between those two. We do not know. But our focus right now is addressing the questions, getting all the data packs together, which is not technically complex, it just needs time, and getting the submission in.
And what is the U.S. opportunity for the syringe pump?
The largest pump opportunity is really the LVP opportunity. Syringes, in the U.S., are mostly used in a NICU environment, and they sort of are, I would call it, like a 10 :1 ratio. For every 10 LVP pumps, there is one syringe. So if you said there is ballpark, 1.5 million LVP pumps in the U.S., there is 150,000 syringe pumps. The company we bought, that is Smiths Medical. The Medfusion syringe system is roughly approximately 50% of the U.S. market share. It is a pretty healthy install base for us to upgrade with new technology, and we are eager to get that product into the market.
Since it is used in NICUs, is there kind of a pricing element here? Is it more value, higher pricing, higher ASPs?
I do not know that that is about the NICU. I think it is about the market structure in syringe pumps and the nature of the device. Syringe pumps do not use a dedicated set the way an LVP does. So there is no razor blade, so sort of the value is captured by the manufacturer in the capital sale itself. Outside of software, there is no continuing disposable annuity that there is in LVPs.
Got it. Recognizing that the Medfusion pump is a priority now, when would you restart development of CADD for pain management? Yeah.
I don't think it's restart. We haven't stopped. There's a finite amount of testing infrastructure we have. It was heavily tilted towards Medfusion. As that work completes, the CADD testing is happening at the same time, so it's not restarted. It's happening right now. It's just a couple of months off the pace of the Medfusion work.
That's helpful. Switching gears to consumables, it's returned to mid-single digit organic growth. How sustainable is that?
Consumables, we have a one-page supplement in our quarterly release. If you look over the last five or six years, and certainly the last 10 quarters it's in that release, consumable's been a very reliable mid-single digit grower. We believe that trend will continue. Happy to get into the reasons why, but they're a combination of really creating new markets, which is the most valuable things, the things that we've done in oncology, in dialysis care, and now we're trying some biologics delivery, pricing, globalization, and then just regular U.S. wins, et cetera. There's a bunch of underlying drivers, and we think all of those reasons will continue, plus being aided by winning on the pump side.
That's helpful. How much do the competitive wins and pumps help drive consumable growth?
Competitive wins and pumps make a difference in consumables because typically when we have the pumps, it is more likely than not that we have the consumables. As it relates to most of our install base, we would expect that we have a high share of consumables in that already. So incremental chunks can come when you win pumps. That is a portion of the consumables growth, also alongside all those other drivers I just mentioned.
You mentioned price. If we add all this up, could you do better than mid-single digits?
I think we have been a consistent mid-single digit grower for five or six years. For right now, we would be happy to stick to that.
Stick to that line. Do you guys disclose price? Like how much price contributes to your growth?
I think, again, in the difficult moments, we talked about price a little bit, and we said price was for the company, and this included IV solutions before the joint venture. We said price was equal to 1% for the company, it was $25 million or something like that. I think, again, it is not quite as good as that because we were trying to recoup that, and we took a timeout on price this year as we tried to recoup what happened in 2022 and 2023. That will start again for us in 2027 and 2028.
Okay. Switching gears to Vital Care, the fundamentals of the business, it was negative in the first half. You expect the business to be stable in the second half. Does stable mean flat in the second half or similar level of decline as the first half?
I think what we meant, and maybe we did not analyze it quite as much as you did right there, was just, is it going to be a sequentially flat number? We think generally speaking, it will be a sequentially flat number. The reality is not all products are created equal, right? Not all revenues are worth the same. As we are working our way through our integrations, et cetera, if something helps us accelerate consumables or pumps but might cause a hiccup in Vital Care, we would not make that decision. It is just lower down the priority list. It is driven by the returns, and that is where it sits. The other pieces we have mentioned on, I cannot remember if it was the Q2 call or the Q1 call, that we were exiting certain product lines.
We sold a little line of business in Japan, and so the numbers will get re-reported on an organic basis, which might help it slightly, et cetera. It is kind of in the rounding, ± 70.
Flat sequentially would still be down year-over-year?
Flat sequentially would still be down a little bit, I think, year-over-year. Maybe less because of this organic definition change, but what we care about is it makes more cash this year than it made last year.
It sounds like it will still be a drag going forward on overall ICU growth.
Yeah. It is certainly not growing at the rate of the large two businesses. We do not sugarcoat it. We say that. But we do not think it makes sense to do something value destructive to chase a little bit of growth if the growth is good enough in those segments anyway. Back to the point on finding a good outcome for the situation there.
And then switching gears to the financials. Your guidance assumes a stable macro environment with inflation at the current level and current diesel and oil prices. We haven't seen-
That was current as of whatever the day the call was.
Three months ago. Well, oil's 20% higher since most companies reported three months ago. I think it looks like it's gone from about $80 to $100. How should we think about the cap and roll lag effect and the inventory on balance sheet potentially carrying higher COGS into second half of this year and 2027?
Obviously, higher transportation costs do impact us. We've been able to offset that because relative to our budgeting, at least, tariffs came in a little bit lighter. I don't know that we've ran 2027 at the full prices. We are less correlated to oil prices than we were pre-IV solutions joint venture. More than half of our freight and logistics costs were related to IV solutions. It's a heavy, bulky business we're moving around. That now sits in the joint venture off of our income statement. What sits on ICU's income statement still does have some exposure, but to a far less degree than we had historically.
What are the puts and takes that investors should consider for revenue growth and margin improvement in 2027?
If you review our investor deck, we have been very candid. Obviously, our journey since the last acquisition and what happened in the world took us two years longer than we would have liked. But we said we believe we still have another 200 basis points of gross margin opportunity under our control from finishing the manufacturing integration, logistics integration, which are bumpy, but we need to get through them, and what we believe we have available to us in price. That sits on the back of what our guidance has been the same for three years in a row. It will likely be next year, which we believe our two large businesses will grow mid-single digits with the goal of doing better than that, which we do occasionally quarter to quarter.
Revenue growth with improved margin, keeping our costs flat, which we have done a pretty good job at, if you look at our SG&A over the years. Getting to, I am sorry, I am answering this question more than you asked now.
Yeah
Getting to producing cash over the balance of this actually gets our leverage ratio to 2x or less, and then being able to give that capital back one way or the other to shareholders, being a reliable grower, is exactly what we talked about on stage here last year. The only difference why it has not happened yet was not being able to get something done in Vital Care. The organic part of it has gotten us there on the cash and debt equation.
That's helpful. I had a follow-up question on that, and I've lost my train of thought. Okay, the guidance has been the same, you said, for the last two years, so you're basically implying don't expect much difference for 2027.
Yep.
Okay. Capital allocation, you expect to reach 2x leverage by the end of this year. You touched on that. How does your capital allocation strategy change after that? Does M&A or share buyback move up in priority scale?
I think for all the difficulties we went through in 2022 and 2023, we didn't skimp on R&D. We have a lot of things coming to fruition right now, and we have enough to keep us busy for a while. While we organically innovated a lot, grew the business, we did a lot of M&A to create the company we have today. I'm not sure we feel that way for the next bit of time. Plus, it's been hard to go through what we went through. Therefore, that changes our views on cap allocation and in particular, if we're spending less on restructuring and remediation, which was necessary but is coming to an end, that free cash flow should go back to the shareholder.
Until stock price made a change or rates made a change, we thought that would be through buyback, and I'm sure AI will generate some grid for us and tell us where it's a good decision and not a good decision, and we'll follow whatever that chart says.
You have an authorization in place now?
I think we have an authorization. Probably needs to be expanded, but that's more mechanics.
Got it. Tariffs? Any refunds this year, and is that a headwind for you next year or a tailwind?
For us, we did get refunds this year, but even though they ran through the normal income statement last year, we excluded them this year to have a good comparable. None of our earnings overachievement relative to guidance here is due to tariff refunds. They're on the side. They obviously help cash, help debt, et cetera. Help cash.
The refunds were all for tariffs paid in 2025? Some companies have actually gotten refunds for tariffs paid in 2026.
I don't actually know if we've gotten any tariffs for the little bit of 2026 yet, but we've gotten most of the cash back. Maybe there's a little bit left to come. At the moment, I don't think we see tariffs next year, well, until 10 days ago, next year, any different than we saw this year. It is very unclear to us what's happening, if anything, with Section 232, which I'm sure has been talked about this week, or USMCA, et cetera. That's not just an ICU issue, that's an industry-wide issue of something. Our guidance was presumed the current tariff regime, current fuel prices. We obviously probably included a little bit of ability to manage some things in there, but if they all went in the wrong direction, yeah, we'd have to think about things.
You manufacture a lot in Mexico, right?
We are a heavy Mexican manufacturer and heavy Costa Rican manufacturer.
USMCA.
CAFTA, which was re-signed in the fall of 2024, and USMCA were both very important to us.
Got it. What is still underappreciated about the ICU story?
I do not know so much. We believe in the market. I think it is more the show-me side of it, that we have to demonstrate the revenue chart, things we are proud of for the difficulties we put people through. The revenue chart, we believe, has looked very attractive for 10 quarters in a row. There will be bumps up and down, but the businesses have been bigger every single year. What has not shown up is the cash earnings. It has shown up on adjusted EBITDA, but that does not mean cash. I think what we need to demonstrate is that the cash that we expect comes out of the business and that that cash, as a yield of the valuation of the company, can be delivered and returned and used effectively.
I think it's obvious what we did with the joint venture that changed the optics of the P&L and the capital intensity of the company. There are other areas to improve our capital efficiency, and we'd like to do that. The part we're not talking about is revenue growth because I think the market fully appreciates all the shots on goal between the competitive pump wins, the refresh of the install base, the software opportunities, the consistency we've had in consumables. It's all the other stuff down in the P&L that needs to fall into place, and it's our job to show that sooner rather than later.
Do you have free cash flow targets, conversion rates, and things like that in your guidance?
In our company-wide bonus plans, if you read our proxy, free cash flow targets have been part of the company's bonus plans. If we went back to 2019, 2020, 2021, free cash flow for us was in excess of net income. That is unlikely to be the case given the current mix, but it should be a lot closer than it is. It's not that we don't have targets. We've had free cash flow targets, we just want more, and so that number needs to get bigger over time.
Okay, great. Well, look, we covered a lot of ground.
Quickly.
We still have time. Chris?
Yep. Can you talk about your confidence or ability to continue to set [LDD] records going forward?
I think in the pump business, normally we should have pretty good visibility at least 180 days out. I think we said on the last call it will be a record year for pumps. Certainly, we believe that to be the case. It's still not that big. A million or two could make a difference whether it's a record quarter or not, but it's close. The year will be a record year. We believe that also about next year. I don't think we'd love to say each quarter it's going to keep going bigger because that doesn't always necessarily happen that way based on the install schedule. But for what we can see for the next bit of time, things have felt pretty good. We felt like we were saying that at the end of last year, and that's happened this year.
We still need to finish signing up our book for all of next year, but we're working our way into next year right now.
Anything else? No, you are good? We have got some time, so if people in the audience have questions.
We were fast. You were talking fast.
You were efficient. Well, look, I always appreciate you coming, so thank you.
Thank you for having us. Great firm, great opportunity, and great meetings. We appreciate it very much.
Sounds good. Thanks, Vivek.