Q3 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to Q3 2019, I see your medical Inc. earnings Conference call. At this time all participants are in listen only mode. After the presentation. There will be a question and answer session mono. That's a question. During this session you want me to press Star one on your telephone either.
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I would now like Canada called over to Mr., John Nelson with ice yard. Thank you. Please go ahead.
Thank you good afternoon, everyone. Thank you for joining us today to discuss the ice you medical financial results for the third quarter of 29 team on the call today, representing ice you medical its effect Jane Chief Executive Officer in German and Scott.
Financial Officer.
We wanted to let everyone know you ever presentation accompanying today's prepared remarks and to view. The presentation. Please go to our Investor page and I see you match dot com and click on events calendar.
We will be under the third quarter 2019.
Before we started our prepared remarks I want to touch upon any forward looking statements made during the call, including beliefs and expectations about the company's future results. Please be aware there based on the best available information to management and assumptions that are reasonable such statements are not intended to be a representation of future results and are subject to risk.
In uncertainties future results may differ materially from management's current expectations.
For all of you did the company's FCC filings for more detailed information on the risk and uncertainties that have a direct bearing on operating results in financial position. Please note that during today's call. We will also be discussing non-GAAP financial measures, including results from an adjusted basis. We believe these financial measures can facilitate more complete analysis.
And greater transparency in the ice you medicals ongoing results of operations, particularly when comparing underlying results from period to period.
We've also included a reconciliation of these non-GAAP measures in today's release and provide as much detail as possible on any agendas that are added that well that it's my pleasure to turn the call over to the dock.
Thanks, John Good afternoon, everybody the third quarter, a fiscal 2019 showed commercial stability with revenue improvement in our most valuable product lines and allows us to hold firm on our view of profitability in the near term we.
We showed cost improvements on the piano from T I say savings and operating efficiencies and our actual cash restructuring restructuring expenses have begun to come down. We were also able to deploy a modest amount of capital into the pursuit acquisition that we will further described we had a number of important customer wins during the quarter and our exit.
And well with high service levels to our customers are time was equally split on external commercial activities and internally on the work to mitigate the operational slow down an Ivy solutions, which we started in the summer and described on the last call.
On today's call. We wanted to first comment on Q3 results and discuss our current view of the business and the recent performance trends.
Second provide an update of the actions we've been taking given the market dynamics and their impact.
Third mentioned, a few quality and housekeeping items, and lastly outlined the criteria, we're judging ourselves by and our near term goals and how they fit with the longer term positioning of the company and the opportunity for value creation.
Q3 was a reasonably clean quarter after a difficult Q2 commentary the company's operationally running well the competitive environment seems to have stabilized a bit and we have been catching up on our lingering production issues. The income statement with straightforward with the sequential increase in our consumables revenues and stability in our other lines that allowed.
Just to deliver EBITDA down the middle of our revised guidance provided during the last call we.
We finished the quarter with the 291 million an adjusted revenue adjusted EBITDA came in at 63 million adjusted EPS came in at $1.65 and cash was 337 million.
Adjusted revenue was down 3% quarter over quarter on a constant currency basis due largely to the Ivy solution segment.
There were no unusual charges restructuring and integration charges were down to 8 million and we added cash to our balance sheet before the pursued acquisition.
Let's start with a infusion consumables, which is our largest business and try to go into a bit more detailed that on previous calls.
Infusion consumables had revenues of 120 million in Q3, 2019, which implied a 3% increase year over year adjusted for currency and 2% growth on a reported basis.
U.S. volumes are okay, not great and we did have a number of important customer wins that have slowly started to implement.
We know what has been on our and our investors minds why is this segment slow down versus historical periods.
And at the same time, we've been saying for the last few calls it there hasn't been major customer churn volumes are okay. We had some wins et cetera.
To go into a bit more detail.
Over the last three or four quarters, we've been dealing with a number of items and hopefully most of these are in the rear view mirror.
Starting just about a year ago, we cut over our I T systems and that did have an impact in Q4 2018 and a portion of the first half of 29 team that is behind US now we also work capacity constrained in our oncology products and could not served the full market demand.
It's still a bit slow, but that also is getting behind us now.
Lastly, we had some unique some category dynamics outside of the normal horse trading of the competitive environment.
As we mentioned on the last call. We went backwards on our OEM orders for our Swabcap products and we also face competitive pressure from external innovation in certain of our dialysis product lines. The OEM situation will normalize overtime and we felt we had to address the challenge on external innovation via the acquisition of pursuit.
Vascular it was a situation we had been tracking for years and the time in circumstance just made it actionable now.
We recognize it is a bit different from our historical transactions from a value perspective, but we felt if we were going to take a bit of risk anywhere it would be in our consumables segment.
So what did we liked about pursuit vascular.
First we felt there was a straightforward acquisition a small number of products skews with consumables manufacturing that we deeply understand second aside from the cannibalization factor. It gave us what we thought was the best product in a globally growing market category.
Third we like the clinical positioning they underwrote a number of solid studies that showed strong clinical superiority and allow them to get important label claims that really require a lot of time and investment to receive and we had some familiarity with this topic from previous experiences.
Lastly, we felt that the core technology and as much there no how could help differentiate our consumables business overtime. So thats why we did.
The rest of the segment was pretty much as we expected. This is the segment wherever the most advantage now has a joint entity, we have largely rationalize the product portfolio brought together the operational efficiencies the combination.
Commercially we have all the pieces all the technology all the scale to compete globally and should be able to offer more value to the customer again, there may have an individual puts and takes in this segment. So it may not be a perfectly smooth curve, but we continue to feel positive about this segment into Q4 and beyond.
On infusion systems, which is the business selling pumps dedicated sets and software which is important because it's a business that brings a lot of recurring revenues and helps to support our competitiveness in consumables.
This segment did 80 million in adjusted revenue, which was flat on a constant currency basis, and down 2% reported which was inline with our expectations to give a bit of the longer story on pumps, we have a few different product categories in which we operate.
The vast majority of our product line is our core large volume infusion pumps LDP for short segment here and the product product primary product line is called the plumbed LDP pump.
This is a product that the old I see you medical pre deal was deeply dependent on and that had lost significant ground in the U.S. market since 2010.
For the first time in many years, we can say that our U.S. installed base actually was larger at the end of Q3 versus the end of the prior year. Now this is not a big amount, but it validates our comments on saying we felt we had stabilized the plumbing installed base of pumps.
And while we know there are still maybe historical losses that have not yet come out of our installed base. We believe we are holding enough competitive wins to offset those and potentially circus.
We've gotten back to the core marketing message as there has been a number of independent clinical reviews that it validated the differentiation of the plum.
Some of those are around the original core technology benefits and some of those are in the newer differentiators like cyber security and connectivity.
So thats good for us at the core LDP segment, our infusion systems business is growing however, we do have some headwinds on the periphery from the non LDP products. In this segment such as a dedicated prefilled are empty syringes for the PPA pumps that we get from Pfizer Rocky Mount We described as shown in the last call and it continues to her.
Kurt Pfizer does seem to be making progress on the issue, but the challenge has been given the lack of consistent supply a portion of the installed base has chosen to move away from these products.
For us strategically the plumbline drives the majority of value since its more closely linked to the rest of our businesses and is very sticky when customers commit and we feel the best we have about it since we bought the business.
Growing our pump installed base is a long term strategic priority, but the short term practical challenge is we do not realized positive cash flow, we're earning in the initial period of pump wins and these non LDP products still generate positive cash or earnings and we're absorbing those hits on our PNM and we wanted to.
Make that clear to investors.
The value creation aspects of real incremental Cashel happens overtime as we improve our installed base and we continue to feel like we're in good dialogue across a number of geographies.
Finishing the segment discussion with infusion solutions with 81 million in adjusted revenue or down 12% year over year or up 1 million sequentially.
We did see and feel some more stable footing here at these levels.
We'll skip the usual solution stumps speech for this call and just cut to the chase commercially we did have some wins that have started to come into our book. These wins allowed us to handle the change in competitive environment better as we stepped in to defend our market share and handled the continued erosion of our non committed business. We continue to believe the quality of our customer book has improved.
With us holding the best list of sustainable relationships versus the day, we bought the business and we have survived the bleed out of the majority of the trading oriented business.
Operationally everything we stayed on the last call is happening we have significant safety stock in place that we now characterize is permanent we have reduced production slowed the factory took extra down days have stopped taking delivery of unnecessary volume from Pfizer et cetera.
On the two main items, we described in the last call the negativity from manufacturing variances and the negativity from supply chain overage costs were actively getting after the manufacturing variances and feel good about our ability to run the best production environment. We can the supply chain variances are slower to show improvement doesn't make sense, even if it how.
Spinel to destroy more product as necessary in it will eventually come Adams system.
We're still trying to make the best choices with our capital and resources here and it doesn't make sense to put good money after bad for short term decisions.
Moving on a housekeeping items in Q3 global fulfillment rates have been very solid to the customer I would like to thank our teams again, even in this reporting quarter with other companies reporting we've seen the impact that these IP system cut overs can have.
While painful and expensive we did survive our extraction from Pfizer. The only item left is a conversion of the manufacturing site in Austin, which is still on schedule to be complete by mid next year. Then we're fully stood up and our attention will shift optimizing what we've done.
At some level were honest shot clock from Pfizer with the deadline to stand up and we do wonder did we over build a bit relative to if we were starting with the clean sheet of paper. We do think this is one of our competencies and will address the opportunities as they present themselves over time.
From a quality perspective, not much really to report as there were no material audits or inspections. In Q3, we are still awaiting the next Austin inspection and were prepared we did have some disclosure around certain recalls of products made in 2017 in 2018, which are necessary and done in the right fashion to communicate to the customer and to be compliant in.
In sync with the regulatory agencies.
We wanted to reflect a bit on our previous comments and discuss about how we feel about them today.
We said for many quarters that we felt we could still create value even in the face of a tougher revenue environment and we've always said that we believed in our most differentiated businesses of IB consumables and Ivy systems, and the attractiveness of the industry structure merited that point of view.
Today, given the reset in revenues in Ivy solutions. The first comments still applies the probably to a somewhat lesser degree.
We will show again, this year, our ability to reduce costs and running as efficiently as possible, but it gets harder to have this be a material contribution given the improvements we've already made.
So for us and the criterion lens were judging ourselves by from this basis.
Has to be the ability to improve our position in the most differentiated businesses and to prove stability in our less differentiated businesses.
We've been consistently saying that we've been actively calling on customers and trying to illustrate the value we can add to the system and the value to the system in having us as a healthy participant while it's a long journey. We do believe that this message is resonating and we have the right to win across the product lines feedback on the products continues to be solid products are necessary for the sake.
Mhm and have been reliable for many years, we never assumed it was a straight line up and we cannot flip our behavior into short term focus even with the recent changes will continue investing in R&D appropriate capacity expansion into our production network and into commercial resources to serve our customers.
In the short term, meaning the rest of 29 team, we feel solid on our previous guidance for the full fiscal year.
In the medium term, we're working through the various puts and takes and will provide guidance on our year end earnings call. We're trying to balance and return to predictability and consumables the improvement in our LDP category and related investment in manufacturing offsets against the negativity of the non LDP items and infusion systems slow.
On us in realizing some of the supply chain savings and making sure we budget to compete properly in the less differentiated items ultimately comes down to growing our differentiated highest margin lines and running ourselves as efficiently as possible overtime.
We need to continue to be cautious given the environment and what we did to our shareholders and ourselves when we rebased our view on the last call.
We know what we put everyone through and we still have a belief that we will absolutely maximize profitability overtime to the most sensible level in our business like we always have.
We still believe that even with a little less cash we have a safe and strong balance sheets and can protect shareholders and be deployed for value creation as opportunities emerge we've made significant capital investments into our factories and systems over the last two years on there and are in the final stages of some major production upgrades with more.
Patient vertically integrated across our network and as a side to ensure that we could talk about our LTL exposure, new tooling and an investment mindset for quality and growth.
We still believe the categories are deeply valuable with a number of intrinsic value drivers, including high quality are hard to reproduce production assets and sticky product categories, where there is strong differentiation.
We have a set of experienced people do the work and we have a culture of not wasting shareholder resources and respect for our capital, but even with all of this the environment is still fluid earnings lag revenues and some of our businesses and we do not anyone to get ahead of our actual results because the competitive environment is still hard.
As always I'd like to close when things are moving fast we're trying to improve the company with urgency we're trying to take responsible actions and break somebody inertia that many companies in our position face. We have had some bumps we've taken action to overcome them and we will emerge stronger.
I really appreciate the effort of all company in place to adapt to move forward and focus on improving results and our company appreciate to support we received both from our customers and our shareholders with that I'll turn it over to Scott.
Thanks, So back and good afternoon, everyone to be again, I'll first walk down the TNL and then talk a little about cash and balance sheet.
So our third quarter 2019, GAAP revenue was 307 million compared to 327 million.
Were down 6% from last year down 5% constant currency basis.
For your reference the 2018 and 2019 adjusted revenue numbers, which exclude contract manufacturing sales to Pfizer at cost can be seen on slide number three of the presentation.
Our adjusted revenue for the quarter was 291 million compared to 305 million last year down, 5% or 3% on a constant currency basis infusion consumables were 120 million.
Up 2% or 3% on a constant currency basis.
Ivy solutions, which we primarily sell in the U.S. were $81 million down 12%.
Infusion systems were 80 million down, 2% or flat on a constant currency basis, and critical care was down 2 million, 21% or 20% on a constant currency basis.
Adjusted diluted earnings per share for the third quarter of 2019 were $1.65 compared to $1.88 for the third quarter last year.
Our adjusted earnings per share for the quarter was unfavorably impacted by approximately 10 cents related to certain adjustments in connection with the filing of our 2018 tax return.
We estimate our GAAP tax rate for the full year to be in the range of 16% to 18% and the non-GAAP rate to be in range of 20% to 22%.
And finally, adjusted EBITDA decreased 8% to $63 million for the third quarter this year compared to 68 million last year.
As you can see from slide number four of the presentation. Our adjusted gross margin for the third quarter was 41% compared to 44% for the third quarter last year.
The two largest drivers for the year over year decrease were similar to last quarter and included the impact from the ramp down of Ivy solution production and the associated lost overhead absorption as well as additional supply chain costs related to higher than optimal inventory levels.
And thats expected year over year, SGN, a decreased approximately $11 million and were 21% of revenues compared to 23% of revenues for the third quarter last year.
The decrease came primarily from tier say savings as a result of separated from Pfizer and standing up the business on our own.
And as a percent of revenue R&D expenses were relatively flat year over year.
Restructuring strategic transaction and integration expenses were down to $8 million in the third quarter versus $24 million last year and this is primarily the system integration costs for our Austin manufacturing facility.
Now moving onto cash in our balance sheet for the quarter free cash flow was $26 million as cash increased to $337 million in the quarter.
And as expected net working capital increased slightly in the quarter due to an increase in cash and inventory offset by a decrease in accounts receivable.
And with the closing of the pursuit vascular acquisition, we would expect cash at the end of the year to be approximately $275 million.
In the third quarter, we spent $25 million on Capex, primarily related to general maintenance system integration capacity expansion for our consumables business and transferring a portion of our contracted solutions products from Pfizer to our Austin manufacturing facility.
And as we said on our last call, we still expect to invest in the business. This year similar to what we spent last year or approximately $100 million.
Lastly, I would like to say, we're looking forward to working with our new associates at pursuit vascular for even greater success and continuing to help drive our business forward.
And with that I'd like to turn the call over for any questions.
Ladies and gentlemen, if you have a question at this time. Please press Star then your number one on your touched on telephone. If your question has been answered we move yourself and MCU.
Please press the pound.
Our first question comes on line of Jayson Bedford from Raymond James.
Good afternoon, thanks for taking the questions just a few here.
Maybe I could start on the gross profit line, which came in higher than we expected and I assume most of its on the IB solutions side. You mentioned that results earlier were generally in line with your expectations was gross profit or gross margin also in line with your thinking.
Yes, Jason.
On the gross margin, we expected the second half of the year to be down from the first half of the year and we expect the fourth quarter to be down from from the third quarter.
Most most of the.
Cost Jason on the gets rolled into the manufacturing costs and so you don't see it right away. So the slowdown was as we talked about four is going be felt largely into Q4, maybe a little bit in.
Q1.
We said publicly that those were going to be the most painful from a gross margin perspective.
Okay. So maybe just a follow up on that when looking at the 15 million in supply chain costing you identified last quarter.
Roughly how much of this did you recognize or incur in Threeq you and is this still 15 million is it still a good number.
It is so it's still a good number as we mentioned.
Earlier on the call the supply chain costs are going to take a little bit longer to come out of the system than we had originally thought but we.
We do see a path forward and Thats still a good number.
Okay.
Just jumping to the topline a bit on consumables.
Your Densified few head headwind is there anyway to kind of quantified the impact of those headwinds in the quarter or at least discuss your thoughts.
In the fourth quarter, what's the what's the right run rate here on consumables.
I mean, there's been a lot of puts and takes in Sudan, we didnt cut over last October between oncology between swab cap between some of these other things I'd, rather say, Jason that we just back to normal see for US is proving that we can grow that business right. We had four years of good growth and it slowed down a bit as.
We went through this thing I don't know that we have a magic number that we're targeting let us get through Q4 and.
Finished the rest of stuff and then we'll put it out there for next year.
Okay.
On systems.
And specifically on the PCP pump dynamic I think last call you mentioned that Pfizer should be running consistently by by year end is that still the case or has that been pushed out a bit.
It's gotten it's gotten better.
It has gotten better but we've still we're behind proportion of this quarter and so we were we were paying some.
Combination fees and stuff so it's it hurts.
It hurt us this quarter to it is getting better they put up they put up real time and money in it but.
And slow.
Okay, and I'll take the base on the.
Celine oxide exposure.
Teaser there can you just maybe comment on your relative exposure there.
Sorry, I went off script there.
Almost none we.
We have less than 4% of our outsourced sterilization any tio, we don't use either Illinois, or Georgia, we use the other company.
And for US, that's where a portion of all that capex, we've been putting into the business has gone and we were vertically integrated in and sonata weve doubled down on that and we've put up the capital to vertically integrate our own sterilization and Costa Rica, So thats sort of something we did right at that with E beam right at the outset of these deals thats not to say.
We were so smart we were just already committed to E beam and and we believe in the integration yourself.
Fair enough. Thanks.
Thank you Jason.
Our next question comes from the line of Larry Solow from CJS Securities.
Hey, Larry.
Yes, hi, actually it's Pete Lucas for Larry.
Just a question on the IB therapy market I think you categorize it is still slow but capacity issues getting behind US just wondering looking at how we should look at sales growth going forward is 4% to 6% still attainable as you look out over the next several years or any number.
If you could give us towards that.
Sure I am not totally certain so we think about our businesses I'd be consumables are Ivy systems, the hardware business or.
Solutions I think we were little bit of different across those lines I think in consumables.
We generally were of a positive.
Momentum behind our consumables business for three or four years that slow down I think what we're trying to say as we feel like we're getting back to being consistently positive there in solutions. It's been unbelievably negative for the last four quarters with big volatility in the actual amount of sales and I think.
There were trying to say.
We revised guidance in a painful way I think we still believe the revised numbers, we put out there in the summer apply and we felt like with we feel okay about that for for the current moment I don't want to added up to a whole company level, we'll do that we put out guidance properly after what we've been through.
Great very helpful. You guys have answered a lot of the questions just one big picture question for you.
The update on anything new with regards to Smis medical some recent articles in the press of suggested they may reconsider sale or at least willing to entertain talks with potential interested parties. John if there's anything you could add to that.
I think we would say we have no comment and we do not want any of our shareholders to.
Speculate.
We're make assumptions about things happening.
We had shareholders who suffered last year as a result, and we want to be very transparent about that so please. Please no interest Michael anything we have no comment on that situation or any other situation right. We're not we're not can do that.
Understood that's fair thank you.
Our last question comes from the line of Madison from Keybanc.
Great. Thank you for taking the questions.
And then Greg congratulations on an.
Stability.
Have you ever had to say that before have you ever set up for Nicole.
The first when I said, congratulations and thank you.
Going back to pursue this is like the first one.
First bolt on type acquisition, you've done in a while our there is a pipeline.
Types of deals.
You're potentially looking at small.
The strategic technology rises.
I don't know that there is.
A long list there is a very few number of those types of things out there.
Yes, I feel like we Didnt have time.
Until we finished the integration or got very close to the end here by severe integration even look we've put somebody in a job we spend their time doing that and.
Our model has always been.
We're not that big right and so the free cash flow, we could make out of our business could support just one of those things each year. If there were available I don't know so I think there is one of those available every single year.
But there is up there are few out there, but you just have to be patient when we really.
Tongue in cheek, we pursued this thing for awhile and took time to just find this moment.
Okay, Thats not a huge list.
Okay.
And then maybe give some scale to the to the L. the LDP versus the other category Energy's business. So we can understand a little bit of.
The headwind you're facing versus I.
I guess is it something in which it or is that easily overcome.
It's getting close from a revenue perspective, I think tip over comment it's it's it's a.
90, 10 ish type situation or something like that but you still make some money on the 10. So it hurts from an earnings for such because you're not substituting with equal contract margin contributor of stuff right out of.
On day, one right. So it hurts economically even if it's manageable from a revenue perspective.
Okay.
Then you typically given.
Like Directionally forward EBITDA guidance on on the third quarter to call and I do appreciate that you want it you want some more visibility this time, but can you go over some of the larger but larger moving pieces that we should we should be thinking about into next year.
Sure I mean I think.
We were trying to we're trying to say our criteria for ourselves is.
Can we grow the stuff that's the most differentiated and so for us it's getting back to normal consumables growth.
Oncology is a portion of that rather consumables is a portion of that.
Then on the systems business.
Revenue wise, how much positive revenues do Haven, LDP minus the negative of the.
Of the PCIA et cetera.
Even though that may hurt from an earnings perspective.
And in solutions, and we tried to offer were judging ourselves by stability, meaning we said.
A little bit below where we actually landed this quarter is where we thought things are I think that continues to be our view that was our framework plus.
Capital deployment if any.
Minus the negatives of getting back the supply chain cost in the other things that we talked about in the last call.
Okay.
And last one then I'm going to jump and then on denim denim and jump off.
How are customers kind of gearing up for for U.S.P. 800 at this plan I think there's there's some delays and there was a language change.
Our have you seen impact.
The customer behavior on how that how they're looking to adopt it.
I think it's a different answer for different parts of the market.
I think the customer base that we currently hold which I would call is kind of large institutions.
Dave Dave for the most part have.
Recognize that this is coming a budget for it and have to operate within like a best in class environment.
Or even their own clinician safety.
And so we could sell every piece, we could make to that audience. Some states have delayed the absence of languages. The more local office clinic stuff, where the cost as additional et cetera, probably we would expect to slow down a little bit, but that's not where really our business is tilted at the moment, so thats a bit.
Tomorrow's front, because we think we have enough opportunity just to get larger institutions that are in front of us.
Okay. Thank you very much.
Thanks.
We have no further question at this time I will now turning to call back to Mr. with that Jane for closing remarks.
Okay.
Thanks, everybody is quick calling Q3, we appreciate you joining us on.
Veterans day here for those who don't know our office backs up to camp Pendleton, and we see how hard and how serious the people who work.
There are and so we appreciate everything that they do and we look forward to.
Talking to everybody on our year end call. Thanks very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.