Q3 2020 ICU Medical Inc Earnings Call
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Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby and thank you for your patience.
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Alright, Thank you for standing by and welcome to the Q3 2020, ICU Medical Ink earnings Conference call. At this time, all participants lines are in a listen only mode. After the speaker's presentation and there will be a question and answer session to ask a question. During the session you would need to press star one on your telephone if you require.
Any further assistance. Please breast stars zero I would now like to add in the conference over to your speaker today, Mr. John Mills of ICR. Thank you. Please go ahead Sir.
Great. Thank you good afternoon, everyone. Thank you for joining us today to discuss the ICU medical financial results for the third quarter of 2020.
On the call today, representing ICU medical is Bubeck, Jane Chief Executive Officer, and Chairman and Brian Brunelle, Chief Financial Officer.
We wanted to let everyone know that we have a presentation accompanying today's prepared remarks and to view. The presentation. Please go to our investor page and click on the advanced calendar and it will be under the third quarter 2020 events.
Before we start 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 they are based on the best available information to management and assumptions that a reasonable such statements are not intended to be a representation of beach results and are subject to risks and uncertainties.
Future results may differ materially from management's current expectations. We refer all of you to the companies SEC filings for more detailed information on the risks and uncertainties that have a direct bearing on operating results and financial position. Please.
Please note that during today's call. We will also discuss non-GAAP financial measures, including results on adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency in the ICU 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 provided as much detail as possible under the addendums that are added back in.
And with that it is my pleasure to turn the call over to Vivek.
Thanks, John Good afternoon, everybody and we hope refine you and your family as well for the last few years, we have been ending every call with the same comment about support from our customers and the ability of our employees to adapt and a changing environment.
While it was never intended for the pandemic that belief was again required in Q3, as our company around well and adapted to more distinct geographic volatility in our end markets.
Like everyone in our industry, we want to start first by thinking all of our hospital customers and their frontline workers for trusting us to serve them during these times.
And we would like to thank our employees, a number of whom it again to deal with the local fires here in the middle of everything else.
It's been a long week long quarter, and a long year. So we'll try to be brief today.
On today's call. We wanted to comment on Q3 results with a bit more geographic and regional color as we had a wider spread on performance.
Explain the volume and product trends, we experienced during the quarter and at least what we're seeing through October given the recent pandemic challenges globally.
Update any new effects of the pen down.
<unk> on Ico medical and our normal housekeeping items.
And a major slowdown in Canada with the rest of the O us markets generally being flat year over year.
There was commercial stability in the sense.
There was not a lot of customer switching which is both a positive and negative.
We finished the quarter with 303 million in adjusted revenue adjusted EBITDA came in at 62 million and adjusted EPS was $1.92 to better profitability than expected at a better tax rate.
We added a good amount of cash to our balance sheet as restructuring integration costs have dramatically reduced and we paid back our revolver nothing was unusual with currency.
So let's go through the business as quickly and then come back to discuss the current environment.
Starting as usual with infusion consumables, which is our largest business infusion consumables had revenues of $116 million in Q3, 2020, which was a 4% decrease year over year on a constant currency basis and 3% reported.
We did not necessarily have predictable consistency in all places and product lines.
The us region grew 5% in the face of utilization that was still down 5% to 10% as I. Initially mentioned driven by mostly new customer onboarding and pursuit vascular and a very small amount of us oncology growth.
The only us markets in aggregate were down 16%, mostly due to year over year declines in Canada and Latin.
This was not some customer change rather just impact the pandemic.
As we discussed on the last call the oncology CSD market was down in July and part of August It look better in September but in aggregate and please remember we had a massive international Q2 for oncology. We did not have the same oncology gross that we've been used to with the product line being essentially flat globally.
Again, no significant customer changes and we have been back implemented implementing physically on site at accounts starting in September we.
We do not think we had any pandemic stocking in the quarter. The story for Q3 was really about sequential improvements in us volumes implementation starting to happen and frankly, just holding our book and waiting for volumes to increase while absorbing the international volatility.
Moving to infusion systems, which is primarily our LDP pumps and associated dedicated set this segment to 88 million in adjusted revenue, which was growth of 12% on a constant currency basis or 11% on a reported basis. As a reminder, this segment captures not only infusion pump hardware, but also the locking key dedicated pump sets.
Those pump sets were also down ballpark, 5% to 10% globally in utilization, but for the reasons. We have been talking about on the last few calls we were able to sell hardware, which improved the results for the segment.
Even before the pandemic, we were holding the best amount of rollover and competitive signings. We had in many years. The challenge continues to be getting into hospitals in implementing these conversions. We continue to believe we have stabilized the 10 plus year installed base decline, we still know that safety is a critical factor when choosing an infusion pump we believe our.
Plus the LDP technology is positioned well as evidenced by the recent clinical guidelines around IP pumps we.
We have gotten back to the core marketing messages around our plump LDP pump as these independent and clinical reviews have validated our differentiation.
As for the non LDP products, which include PA and and our ambulatory pumps nothing has changed with the PPA pumps since the last call and regarding ambulatory our goal and we're getting close is to have enough demand in expansion to finally jump over the annual declines we've had an inventory pumps. The infusion systems segment in total will deliver revenue growth this year.
But it is difficult to predict exact installation timelines as our customers are battling on many fronts, while the implementation calendars unpredictable and the pandemic has slowed decision, making down we still believe relative to our size. There is solid competitive opportunity and we are focused on commercial execution here.
Finishing a discussion with infusion solutions, we had 86 million and adjusted revenue were 6% year over year growth picking up from the comments on the last quarter. The SVP presentations health from sequentially and the LTPS and irrigation products tied to surgeries and IAR visits picked up sequentially with the improvement in admin.
Since we had a small amount, maybe one or $2 million of new customer stocking, but nothing else unusual.
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. We are healthy on safety stock and our new National distribution Center is running in Texas to help improve our supply chain cost longer term and provide enhanced supply chain services to our customers.
We hope the recent events have illustrated the value of having a healthy and diverse supply chain in the country.
The grilles relationship and sourcing of PVC free products is making its way into the customer messaging in the last few days, we have started commercial production on our new half liter line in Austin as part of the transition away from Pfizer Rocky Mount This.
This combined with sourcing of PVC free and a few minor other minor items allows us to be on track for full operational separation from Pfizer Rocky Mountain bigger.
Bigger picture, we have now largely secured the customer base with a better quality list.
Hi, basics coming online have distribution efficiencies coming from all the investments in supply chain and we've made substantial capex investments over the last few years, all of which we hope solidifies our position in the category.
Moving on to some general updates and housekeeping commercially we have seen far less government tenders research.
Recently than in the March to July period, onsite implementations and in person customer calls have started to happen again slowly more of that seems to be in the us in the southwest and southeast markets. We.
We continue to evolve our sales channels and marketing efforts with the assumption that it will not return to fully normal in any near term timeframe.
Nothing significant on quality.
Operationally the manufacturing network logistics and systems of the company are all running well again in Q3, we had solid global fulfillment rates to our customers will be items described in Austin, we are ready for that operational separation from Pfizer.
We've adapted our operational footprint shift hours local transportation and redundancy plans.
We continue to invest and employee safety and have provided incremental compensation over the balance over periods. This year.
We have focused on securing our supply of raw materials and components and we will continue to invest in incremental inventory as a buffer for unforeseen disruptions and as a reminder, our primary manufacturing locations are in Texas, Utah, Costa Rica and incident in Mexico.
On the Pfizer discussion related to the calculation of an earn out payment. There is no change in status Pfizer has been a solid partner and we are working with them to provide additional details pursuant to our agreement as we addressed a litany of issues that came with Hospira, we feel comfortable in our position and we'll address the inquiry with our usual thrown us.
From an expense perspective is not very much to talk about we continue to run favorable on discretionary costs.
Okay to give a little bit more color on what we experienced throughout the quarter Europe was generally flat and usually the summer months there are a little slower.
The us market sequentially improved each month of the quarter like other med device companies are set on their calls and we don't want to get in the habit of real time sales data and for US. It's about the long term, but October continued to feel okay for us.
But we do want to be clear like we were in our Q1 call. It's really hard to predict the pandemic impact and how much it carries into Q4 for next year. So far we have not seen any impact of recent European lockdowns, but we have built some caution into that as we try to tighten up our guidance.
Regarding our near term financial results. After all the events of this year, we still think currency will be the largest variance to our original 2020 earnings expectations.
We sounded the alarm bell on admissions early and continue with the assumption that the pandemics impact on us hospitals does not worsen from the current level.
We do believe the market broadly defined does not want a winner take all setup in these essential item categories.
And that is before each categories assessed on its own innovation clinical outcomes et cetera.
And the new normal or Covid, 19 world, where supply chain resiliency and diversity matters. We believe are essential items logically benefit at our most differentiate m's are still differentiated.
So we focused on what we can control in these moments, having the best list of supportive healthy customers when new important customers, while we wait for volumes to normalize keeping.
Keeping our employee safe, while delivering the best operational stability for those customers, making sure we drive differentiation in our most valuable categories.
Hold the best liquidity, we can for a company our size.
And using all of the above to be prepared for whatever realignments or opportunities arise.
And ultimately to focus on our own execution or.
Our company has emerged stronger from all the events of the last few years. Thank you to all the employees customers suppliers and frontline healthcare workers our company appreciates throughout each of US has had in each of you has had to play with that I'll turn it over to Brian.
Thanks, Quebec and good afternoon, everyone to begin our first walk down the P&L and then talk a little about cash flow and the balance sheets.
So starting with the revenue line or third quarter of 2020 gap revenue was 319 million compared to $308 million last year, which is a 4% or 3% on a constant currency basis.
For your reference the 2019 in 2020, adjusted revenue figures, which exclude contract manufacturing sales adviser.
Can be found on slide number three of the presentation.
Are adjusted revenue for the quarter was $303 million compared to $291 million last year, which is up 4% on both a reported in constant currency basis infusion consumables was down 3% or 4% on a constant currency basis, Ivy solutions, which we saw primarily in the U S was up <unk>.
6% on both Ah reported and constant currency basis.
Confusion systems was up 11% or 12% on a constant currency basis, and critical care was up 15% or 14% on a constant currency basis.
As you can see from slide number for the presentation for the third quarter are adjusted gross margin was in line with our expectations at 38%.
Compared to 41% for the third quarter last year.
The year over year decline of three percentage points reflects the impact from lower production levels of our Ivy solutions products.
Less favorable product mix from lower consumables and higher infusion systems hardware revenues as well as temporary covid related manufacturing costs recognized in the third quarter.
For the full year, we continue to expect gross margins to be in the range of 38% to 39%.
And we expect the balance of the year to be impacted by the mix of consumables versus infusion systems hardware as well as incremental costs related to the annual scheduled maintenance shutdown of our Austin manufacturing facility that was completed in October.
1% to $62 million for the third quarter of this year compared to $63 million last year.
Now moving on to cash flow and the balance sheet.
For the quarter free cash flow was $52 million.
In Q3 was another strong quarter of cash flow generation driven by a combination of solid earnings.
Excluding restructuring and integration spending and reductions in working capital specifically lower accounts receivable balances from improved collections.
Over the past four quarters the company generated over 100 million of free cash flow after investing over $85 million in Capex and an additional 34 million in restructuring integration and strategic transaction expenses.
Scholars and 65 cents per share.
To $6.65 to $7.
Per share.
In closing it has been a long and challenging year, but I take comfort in our strong balance sheet ample liquidity and improving cash flows from declining restructuring and integration spending and better working capital management.
The company is operating well and we continue to focus on serving our customers and with that I'd like to turn the call over for any questions.
Thanks.
Thanks.
Carriers are you there yes as a reminder, if you would like to ask a question he will need to press star one on your telephone once again that is star one on your telephone to ask a question.
And your first question comes from the line of Matt Miszewski with Keybanc.
Hi, good afternoon, everyone.
Hi go ahead Bob.
It seems like you guys are getting some opportunities to get back into the hospital and start doing those implementations.
Can you give us a sense of the scale of the backlog Thats developed over the course of last like nine months.
It's different by different business unit.
It's been easier on the consumables fronts to keep the implementations moving because theres.
Just generally a higher underlying familiarity with the product and some of the training can be done in a more remote fashion on the hardware side ex longer we have to absolutely positively be on site for physical implementation.
I wouldn't want to say that we've got some massive backlog of people awaiting onsite implementations I would just say more its getting back.
Somewhat to normal in certain parts of the country and leave it at that but just to give a sense that its moving its moving along.
It's moving beyond remote in some spots.
And then moving to gross margin.
Yes.
As you think about that the 37% level, where we're at today due to the phasing of a recovery from that over the next couple of quarters are you through the majority of the manufacturing absorption.
Issues, you had in I'd solutions, and and does mix.
Start to normalize from here for you.
The number one driver of of gross margins is total consumables mix in the.
The whole company, whether those are in the.
Hi, Beacon symbol segment or whether those are dedicated pump sets in.
Pump business, which is the vast majority of whats reported in that pump systems number and so those two items, which have high utilization declines make.
Make a really big impact on the gross margin line more than anything else.
There is still some not a lot.
Of cleanup going on from the solution stuff at the end of last year. That's why we're spending time talking about the.
Dallas Supercenter warehouse coming online the efficiencies et cetera, but brought Ryan please feel free to add anything down those those two yes, no I think thats I think Thats correct I think you will.
For the Q4, we'll probably see at this point, while there's puts and takes.
Gross margins fairly consistent with what we saw in Q3.
Ryan you want to you want to go first.
Yeah.
Talk about what we need to do to be competitive we said, it's an $80 million.
Water business.
And I and I I feel like on the.
Q1 call, we were very transparent and we had five or 6 million extra of.
Miller with the product on the competitive side, those installs take longer and require more scheduling and more ability get into the sites to do it.
Just on the competitive dynamic.
Clearly there's been some disruption this year I had a cold, but it was a tough time to capitalize on this disruption.
It is now a better time, meaning are you seeing more competitive opportunities today than you were say three months ago.
I think we we would say we're certainly in more conversations and we have been at any point this year and.
It was and it is it's a tough time to get people to make to get people to make decisions.
On the other hand, it's going to be this way for a while so we just have to get out there and.
Illustrate the value that we can offer and so I I don't think our comments are different than before which is.
It's.
Just a few on the on the follow ups I tell you mentioned that the consumables and.
Certainly a nice sequential improvement a little bit less than I would have expected and it sounds like you guys too and I guess, that's more on the international front.
Just how but particularly oncology and implementation it does sound like it's starting to pick up now, but I guess did.
Yes, I think already and I think Thats I think thats very fair to say I think all of it because if the utilization is down five or 10%. The actual sets that run would that hardware are also down right, whether it's an ivy consumable disposable item in the consumable segment, our dedicated pumps that those are all census.
All the same admission and census, driven items and so they too are down but all year, because we can put more hardware out there we've been able to.
In Q3, so theres a bit of a take there and then in Q4, we probably see solutions somewhat closer to.
That $80 million range that we've kind of set as the baseline.
Got it okay.
Great I appreciate the color thanks, guys.
There are no other questions I would now like to turn the call back to the Vic Chang for any closing comments.
Thank you I hope everybody has a handling this environment well, we've got to keep the call short today and allow people to get back to other items and we appreciate the interest in the company very much we will talk to you at the end of Q4.