Q4 2021 ICU Medical Inc Earnings Call
[music].
Thank you for standing by this is the conference operator, welcome to the ICU medical fourth quarter and fiscal year 2021 earnings Conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
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I would now like to turn the conference over to John Mills, managing partner with ICR. 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 fourth quarter and full year of 2021 on the call today, representing ICU Medical is Vivek Jain Chief Executive Officer, and Chairman and Brian <unk> Chief Financial Officer.
We wanted to let everyone know that we have a presentation accompanying today's prepared remarks to view. The presentation. Please go to our investor page and click on events calendar and it.
It will be under the fourth quarter of 2021.
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 are reasonable such.
Such statements are not intended to be a representation of future results and are subject to risks and uncertainties results may differ materially from management's current expectations.
We refer all of you to the company's SEC filings for more detailed information on the risks and uncertainties that have a direct bearing on operating results and financial position. Please note that during today's call. We will also discuss non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater.
Transparency into ICU medical's 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 on any agenda that are added back.
With that it is my pleasure to turn the call over to Vivek.
Thanks, John Good afternoon, everybody and we hope you and your families are well it's been a busy 90 days again since the last call with closing on the acquisition of Swiss medical and strong sales levels in our most differentiated businesses the volatility in the supply chain and in hospital census for our customers that we described on the last calls continued.
To make it a bit more challenging quarter operationally and the normalcy, we felt in the first half of 2021 Q.
Q4 for US was about balanced improvement in all geographies like everyone in our industry. We want to start first by thanking all of our customers and their frontline workers for trusting us to serve you. During these times and it's been great to meet so many of our new Smiths medical colleagues live is our teams have been in person at the vast majority of sites and production set.
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While Q4 results were generally in line with our previous comments, we wanted to use the time on the call today to comment on the year over year drivers of the three main legacy ICU businesses and provide color on the expected growth for the upcoming year.
Give some sense of the profitability improvements in 2022 for the legacy ICU businesses, even with the current volatility in inflation in the market.
Reflect briefly on the performance over the last few years through the criteria we've outlined consistently on these calls.
Lay out what are the current challenges and opportunities with the Smiths businesses as we see them six weeks in our ownership and describe why there is a wide range of outcomes for the first two quarters.
Articulate our priorities for the near medium and long term with a few comments on the areas of interest in our view on the broad topic of connected care is theres been a lot of questions news and transactional activity in the market.
And lastly, as always bookend scenarios, we see post deal and reiterate our views of value creation.
The short story on Q4 is as follows as we previewed on the last call. We did see sequential revenue growth in our most differentiated business segment and stability in IV solutions on a year over year basis. This resulted in a reported and constant currency sales increase of 7% driven by market share gains and increased utilization and IV systems and IV.
Consumables, but also was likely helped slightly with some pandemic ordering in the context of a difficult supply chain we.
We finished the quarter with $330 million and adjusted revenues adjusted EBITDA came in at $64 million and adjusted EPS was $1 82.
It was a clean quarter again, but with some costs related to the transaction and our Austin maintenance shutdown and again it illustrated some of the additional costs were bearing as gross margins could have been higher.
We had an extremely strong quarter of free cash flow generation at $61 million and finished with pre transaction costs of 572 million on our balance sheet. After using some cash for a payment of a portion of the pursuit vascular earn out and a small international transaction.
When looking deeper at the results the reasons for sequential growth were different than what we saw in Q3 over Q2 sequentially.
Growth, particularly in consumables was what much more balanced across the U S and other geographies versus what we saw in the last quarter. It was really just a big uptick in the U S business.
Europe , and Asia had good sequential growth versus <unk> versus just having easy year over year comps in the prior period.
Of course, where the most tilted to the U S market where were dependent on admissions in electives and we saw procedures and admissions is pretty solid, but as we hoped and say that early in the year. The international markets did get much closer to normal.
Again, we know there's been a wide range of commentary here from all the companies, but our messages and our U S customers were busy managing COVID-19 spikes in the day to day procedure no one knows what the baseline is anymore with any real predictability.
So let's go through the businesses quickly and then come back to discuss the current environment, starting as usual with infusion consumables, which is our largest business.
<unk> consumables had revenues of $148 million, which was a 20% increase year over year on a reported and constant currency basis. The U S market grew mid teens on a year over year basis in international markets. We're in the mid Twenty's with obviously, both looking inflated due to volumes low at the end of 2020.
Core IV therapy grew globally over 20% in oncology was around 15% we.
We had talked on the previous two calls about feeling positive about the U S market and our growth products setting up well for us as the rest of the world opened up which is what happened.
We would offer the same comments on the drivers first and most importantly, we have improved our position in the market and have implemented new business as the Hospira integration finished we got back to our core clinical marketing we had some recent good press around the UK based nice guidelines for our clear guard product and we expect additional evidence state.
Evidenced based data on our broader portfolio as consumables are still deeply clinical item.
Second we believe there was no relief from the pandemic ordering which was the combination of Covid spikes in parts of the country combined with some industry shortages and a general wariness about the supply chain, which probably caused wholesalers and direct customers to hit the order button a bit more than normal.
We've always said, we'd rather talk about this now versus customer Destocking later, but it is really difficult to know exactly how much of this contributed to the U S. IV therapy portion of consumables over the full year.
Going forward into 2022, we believe this segment is capable of mid single digit growth, which incorporates some eventual U S. Destocking that has not happened yet.
Moving to infusion systems, which is primarily our LDP pumps and associated dedicated sets. This segmented $93 million and adjusted revenue, which was an increase of 1% on a reported basis and 2% on a constant currency basis.
On a year over year basis, the increase was due to the implementation of competitive pumps earlier in the year. So we had more dedicated sets being utilized along with maybe a little bit more demand due to COVID-19 spikes, we actually had a number of installs pushout from Q4, given the omicron surge, but we still finished with the best year of competitive installations were.
Finally in a position now for 2022, where we do not have to call out the decline in the non <unk> products and believe this segment is capable of mid single digit growth.
We continue to not see capital as a customer constraint rather just the issues in the markets of nursing and labor shortages that our customers and fatigue from Covid, but we still believe relative to our size. There are solid competitive opportunity when we're focused on commercial execution here.
Finishing the segment discussion with infusion solutions, we had $77 million in adjusted revenue or a decrease of 7% on a year over year basis, while we managed quite well for the first seven quarters of Covid. We finally got hit a bit with other crime and the same raw materials challenges in Q4 that have been industry wide and frankly, we could have sold more had we had a healthier.
Why chain things have improved since the mid December early January timeframe and the production environment is improving the items. We mentioned on the last call about labor transportation costs raw materials. We believe we budgeted properly for 2022, we continue to believe this business annualized is it plus or minus $80 million a quarter with Q1, having some exposure to weird weather.
And in Texas, and a few rough weeks for them.
Okay. So what does this all mean in the context of EBITDA and profits for legacy ICU before we turned our comments just miss on.
On the last call, we sketched out how the math, we sketched out the math, how inflation gobbled up a meaningful amount of the incremental contribution margin from additional consumables and dedicated set sales.
We're assuming that there's no relief in the market and that there is a real rollover effect into 2022 of the increases and the actual amount is something in the order of $40 million or more over the last two year over the two year period.
But even with that headwind and the impact of a strengthening dollar which has meaning for US now is we don't do a currency adjusted P&L. We still think we can deliver meaningful EBITDA improvement with a range of $265 million to $285 million for 2022 ICU Standalone on.
On the last call, we said labor was permanent and continue to believe that the.
The harder item to know is what is really permanent on the other categories.
We find ourselves asking the question as to why some of these raw materials. Our transportation services are inherently so much more valuable over the long term than they were before the pandemic, particularly as the total utilization for health care end markets is still below historical levels in aggregate.
Obviously some of these costs are indexed to CPI, but we believe in markets and just as we experienced in our own IV solutions business when capacity, increasing pricing rationalize and when theres a shortage the market's penalized so for us it's about trying to get price improvement, where we can trying to illustrate to customers that need to have some of these cost index and ultimately to just write it out serve.
<unk> of the belief that supply and demand will normalize overtime.
And we judge our businesses in this reality and just to indulge us here a bit has set the context for many of the Smiths assets.
We've said for years, the ultimate score that gets measured as our business is larger or smaller smaller or more or less profitable over time, even though so much time is spent dissecting between quarters.
To frame up the picture of ICU through the end of last year.
Our consumables business is about double the size it was pre hospira and is compounded nicely.
That growth has led to economies of scale.
Our pump business had losses that carried through the first two years of Hospira and in 2019 was about $300 million in revenue, excluding the non <unk> products.
We believe it will be above $360 million in 2022 with minimal non <unk> products and while the recent increases are nice and the overall profitability of the business has improved dramatically, it's still not fully optimized with the infrastructure that came with hospira and the pandemic slowed things a bit commercially.
Our solutions business is much smaller than it was at peak levels in 2018 with a very different profit picture realistically almost half the inflation headwinds. The company is facing over the course of 'twenty, one and 'twenty two.
Related specifically to solutions.
And the gross margin profile of the solutions business dilutes. The total corporate gross margins for legacy ICU by approximately 10 percentage points not to mention that this business consumes 30% to 40% of the capex needs of the company.
I guess, that's a fancy way of saying returns have in fact been driven by the most differentiated businesses our strong free cash flow generation over the last year as follows this and profitability of our largest businesses are at attractive levels.
The core premise of the Smiths transaction is to enhance the product offerings for these exact categories that drive our returns as well as at logical Adjacencies predicated on the same characteristics of sticky categories low capital intensity single use disposables opportunities to innovate in a logical industry.
Sure.
Six weeks or so into our ownership we firmly believe this is the case.
The big opportunity over the long term is using the combined portfolio to improve in existing markets and also move as the value shifts into new spaces.
Construction of the portfolio was logical and frankly, why it's survived over the years.
But we're entering this situation at a bumpy time and while we know how to settle the bumps it is difficult to predict with exact precision when we will resolve them and it does lead to a wider range of expected outcomes for the next few quarters.
So let me try to describe at a high level, what we're dealing with it.
The first challenge is really around just poor execution on the basics of being a reliable supplier.
Akin to the Hospira situation, where we used to say they forgot they were a manufacturing company and lifted some alternate universe of technology partnerships and distribution et cetera.
It's essentially the same situation here, but at a moment when the entire supply chain has been very weak.
As a result and requires a high level of intensity in understanding your end to end business and it fundamentally starts with being a reliable manufacturer.
Our folks are now in charge of all of these areas and bringing that focus.
And as a result of really just neglect back orders are up fulfillment or below target inventories of key products or low et cetera et cetera. There is plenty of demand. None of this has to do with the products themselves are the product features it's self inflicted harm on the basics of blocking and tackling and absolutely none of it requires any significant capital R.
Technology <unk> innovation to solve its just pure focus on good operations.
The second challenge is related to what we would call a bucket of quality related interruptions when.
When you change people and strategy. So frequently it's hard to run a consistent quality process. It's public information that Smiths received a warning letter in 2021 and with all the twists and turns of what was happening with the company they were essentially frozen.
Just like being a good manufacturer running a compliant quality operation and ensuring safety is what gives us the right to participate in these markets.
The existence of a warning letter while undesirable is the regulatory agency trying to move the ball forward. We entered the same situation when we acquired Hospira and our team worked under an even more stringent framework at the previous infusion company. Many of US came from.
It's the same story here know what your business you're in don't argue with regulators invest in your quality management systems, which we have and have the people that can make decisions and deliver on the commitments made to regulatory agencies and just like the first challenge. None of this requires groundbreaking technological innovation, it's just the basics.
I don't want to get into more specifics than that other than the decisions and remedies are in flight as we speak what we know is we have the right people have been through the exact same set of experiences and our team is now fully embedded into the operation. We've tried to get unfrozen by breaking the items into smaller manageable pieces with clear decision, making we've also supplement.
The team and made a number of key hires based on category knowledge or optimal geography.
But we don't know is when we can call an all clear on the supply chain or complete quality and regulatory compliance related improvements and therefore, it leads to a wider range of financial outcomes in the near term.
Brian will describe.
Just to go through the priorities as this will be the categories will comment on now on these calls in.
In the very immediate term our goal is to progress on the issues just described and stabilize the customer base and accurate transparency, while realizing the low hanging synergies, which all exist.
In the medium term, it's about focusing and to delivering a few key areas of incremental innovation connecting all the pump platforms that.
Finishing some of our own projects a few iterations on the combined consumables portfolio and using the combined portfolio to increase our value and relevance to customers and then focusing on the higher hanging synergies after we integrate core it systems and processes.
And in the long term and it justifies all the effort expended here is to be able to broaden the available markets. We can participate inside and outside of the hospital environment.
We find our infusion systems business is the number two dedicated set provider in the world.
And a large swath of that is in the home care and alternate site markets.
Connection between those environments and how it intersects with the remote patient monitoring drug utilization and payer and provider incentives as interesting to us as we substantially have a substantial installed base in each setting.
We know our devices are out there are unconnected being used to deliver life saving medicine medications.
At the exact moment when patient specific monitoring as needed.
Over the long term that will be our definition of connected care as well as thinking deeper about the actual correlation between the drug prep and delivery with the pharma manufacturers.
From a value creation perspective in the short to medium term with Smiths medical just like Hospira, we see two basic bookend scenarios for the acquisition in.
In the best case, we'll have better execution to improve Smiths topline performance drive operational improvements and focus on cash conversions and returns.
In the worst case, we continue to fight headwinds on <unk> top line, but we can drive operational improvements and generate solid cash returns over time.
Either one of those cases is value, creating relative to the transaction math and the bare minimum standard is to get the core revenues of Smiths medical to a profit level that aligns with our differentiated businesses.
If we do that along with understanding with incremental Capex is really needed post integration returns could be generated quickly but.
But over the long term the same compound and criteria that I started with applies are the business is bigger or smaller and more profitable and our team understands that.
We did use the word core revenue in the last paragraph and just explain that a bit.
There are certain geographies or product lines that are either loss, making or nonstrategic or.
Our goal is to bring clarity to that as soon as practically possible.
The income statement will get cloudy from an earnings perspective, this year as products and teams are already mixed but we don't want to lose the appropriate measurements for the legacy differentiated ICU businesses to ensure they are larger and to make sure. We have the right baseline to measure the smiths products off of going forward.
In retrospect, one of the revisions if we could have time back one of the reasons, we make if we had time back.
I have been to immediately call the non <unk> products as non core at the time of the Hospira acquisition versus the annual explanations we've had to give.
We would prefer to not do that again, so we want to report Smiths revenue separately for this year as we Mark what is the appropriate baseline.
This is happening a bit real time, as we have a normal operating business and a p/e like situation on the sides, we might iterate here a bit.
Therefore going forward, we will continue to report revenues for the legacy ICU business as compared to prior years as its useful for understanding the progress in those businesses.
While the pandemic introduced substantial volatility strategically we do think the weaknesses. It is exposed in the health care supply chain add to the argument for all participants to be healthy and stable, which has been our commentary since we became a full line supplier.
Smiths medical also produces essential items that require significant clinical training capital expenditures and in general are items that customers do not want to switch unless they have to the market need Smiths medical to be a reliable supplier in the combination positions us better.
Our company has emerged stronger from all the events of the last few years. Thank you to our shareholders were patient with us on the time it took to deploy capital and use our liquidity, thanks and advanced our teams and new colleagues from Smiths as we're about to start running up that hill again to drive value out of the combination and thank you to all the customers suppliers and frontline health care workers.
As we improve each day, our company appreciates the role each of US has had to play and with that I'll turn it over to Brian .
Thanks, Vivek and good afternoon, everyone to begin I'll first walk down the P&L and discuss our results for the fourth quarter, including a recap of full year performance for the business I will then move on to cash flow and the balance sheet before wrapping up the discussion with our guidance for 2022.
As a reminder, the Smiths medical transaction closed on January six 2022, and the historical results being discussed today will not include Smiths medical. However, our 2022 guidance will include the expected impact from consolidating the Smiths medical results beginning January 7th.
So starting with the revenue line, our fourth quarter 2021, GAAP revenue was $341 million compared to $320 million last year, which is up 6% reported or 7% on a constant currency basis for your reference the 2020 and 2021 adjusted revenue figures.
<unk>, which exclude contract manufacturing sales to Pfizer can be found on slide number three of the presentation.
Our adjusted revenue for the quarter was $330 million compared to $309 million last year, which is up 7% on both a reported and constant currency basis.
Infusion consumables was up 20% on both a reported and constant currency basis infusion systems was up 1% reported or 2% on a constant currency basis.
IV solutions was down 6% reported or 7% on a constant currency basis, and critical care was up 5% reported or 6% on a constant currency basis.
When looking at full year 2021, adjusted revenue on a constant currency basis. The business in total was up 4% compared to 2020, and we grew our largest and most valuable business of infusion consumables by 15%.
Overall, we were pleased with this level of performance given the volatility and other challenges presented by Covid.
As you can see from slide number four of the presentation for the fourth quarter. Our adjusted gross margin was in line with our expectations at 39% and was the same as the fourth quarter last year.
On a year over year basis, we were able to offset the negative impacts from inflation with favorable mix driven by faster growth in our highest margin business of infusion consumables.
It's also worth noting that both the current and prior year fourth quarter adjusted gross margin rates reflect the impact of the annual scheduled maintenance shutdown of our Austin manufacturing facility.
For the full year, our adjusted gross margins were 39%, which is the high end of the range that we communicated in our initial 2021 guidance, despite experiencing meaningfully meaningful inflation, particularly in the second half of the year.
SG&A expense of $81 million in Q4 was up 11% year over year and reflected a $6 million increase compared to the third quarter.
Driven primarily by higher sales related expenses from increased revenues, along with year end adjustments related to incentive and equity compensation.
R&D expense was $13 million for the quarter up $1 million, both year over year and sequentially compared to the third quarter and the changes compared to both prior year and the third quarter are primarily driven by timing of project spend.
Restructuring integration and strategic transaction expenses were <unk> 9 million in the fourth quarter versus $6 million last year. The fourth quarter 2021 spending mostly consisted of expenses related to the Smiths medical acquisition, along with onetime regulatory initiatives.
Adjusted diluted earnings per share for the fourth quarter were $1 82, compared to $1 77 last year, both the current and prior year results were favorably impacted by lower tax rates due mostly to excess benefits from equity compensation.
Which contributed approximately <unk> <unk> in the current year and 15 in the prior year.
Diluted shares outstanding for the quarter were 21 8 million.
And finally, adjusted EBITDA for Q4 increased 7% to $64 million compared to $60 million last year.
Now moving onto cash flow and the balance sheet.
For the quarter free cash flow was $61 million in Q4 was another strong quarter of cash flow generation driven by a combination of solid earnings and continued strong working capital management.
With both accounts receivable and inventory at their lowest levels in several years.
Going forward for the legacy ICU business.
For <unk>, we expect DSO to generally remain around current levels.
But we do expect to see a buildup in inventory over the next several quarters to ensure we can successfully onboard and support new business and carry additional safety stock to buffer any supply chain disruptions.
The strong Q4 cash flow allowed us to end the quarter with $572 million in cash and investments on the balance sheet, even after making payments in the quarter of $26 million for the pursuit vascular earn out and $15 million for a small foreign acquisition.
For the full year 2021, the company generated $199 million of free cash flow after investing approximately $90 million in capex and restructuring integration and strategic transaction expenses.
This represented the best free cash flow year in the history of the company.
In the fourth quarter, we spent $22 million on Capex for general maintenance and capacity expansion at our facilities as well as placement of revenue generating infusion pumps with customers outside of the U S. This was in line with our expectations and brought our total capex spending for 2000 $21 million to $69 million.
Moving forward to 2022, Vivek already provided some guidance related to our expectations for each of the businesses. So I'll cover the rest of the P&L for the new combined company.
Starting with adjusted EBITDA, We expect 2022 adjusted EBITDA for the combined company to be in the range of $450 million to $500 million.
This amount, we expect the legacy ICU medical businesses.
To generate approximately $275 million of EBITDA.
Given by topline growth in our most differentiated businesses of infusion consumables and infusion systems offset somewhat by the impacts of inflation and foreign exchange.
Specifically compared to 2021 within just the legacy ICU businesses, we expect to absorb an additional $20 million to $30 million impact from inflation and $5 million to $10 million from foreign exchange.
Next we expect the Smiths medical base business to contribute $150 million to $200 million of adjusted EBITDA.
The midpoint of this range is a bit lower than the $190 million expected run rate that we shared back on the call in September and reflects the expected 2022 impact from the quality related interruptions in supply chain challenges that Vivek described in his comments.
Additionally, the wider range is to accommodate the uncertainty regarding the degree and the timing of the recovery during the year for these two items.
Finally, we expect cost synergies to contribute approximately $25 million of adjusted EBITDA in 2022.
Moving down the P&L, we expect 2022 adjusted EPS to be in the range of $9 to $10 50 per share. The vast majority of this range relates specifically to the previously mentioned quality and supply chain matters.
But in addition to that there is a 40 <unk> impact related to the transaction itself and includes the combined effect of one closing sooner than expected to slightly.
Slightly higher depreciation expense coming from the purchase accounting valuation of the Smiths medical assets and three higher year, one interest expense as we hedged a larger portion of the debt than originally expected in order to reduce exposure to rising interest rates.
In future years.
The low end of the guidance range of $9 assumes limited recovery during 2022, okay.
Good quality interruptions and supply chain challenges.
And assumes no further worsening of the supply chain issues. The high end of the range of $10 50 reflects our upside case for these two areas and also includes some other opportunities that we didn't build into our base case scenario.
Moving along to the rest of the P&L for modeling purposes. The combined company adjusted gross margins should be around 40%. After adjusting Smiths medical's historical classification of freight and logistics costs to be consistent with ICU.
And that gross margin rate does assume the quality and supply chain matters are not fully resolved this year.
Interest expense is expected to be approximately $60 million. The combined company tax rate should be in the range of 21% to 23% with the non-GAAP rate at the high end of this range. This is about one percentage point higher than Icu's standalone normalized tax rate driven by <unk>.
<unk> Medical's income mix.
And finally diluted shares outstanding are estimated to average $24 4 million during the year.
While we expect the businesses of the combined company to generate meaningful cash flow during 2022.
We anticipate a significant amount of that cash will be reinvested into three key areas.
The first is the integration of the Smiths medical business.
Second is quality improvement initiatives for Smiths medical and the third is higher levels of inventory, mostly related to the legacy ICU businesses in order to bolster levels of safety stock and I'll offer onboarding of new customers to.
The planning related to the exact amount and timing of these investments is still underway and we will provide updates over the next few quarters.
And finally, we expect our capex requirements for the combined company to be in the range of $100 million to $120 million in 2022.
Okay.
In summary, we are pleased with how we finished the year and the momentum we have in the legacy ICU businesses as we move into 2022, even in the face of a challenging environment for supply chain stability and inflation.
While the Smiths medical businesses are facing some temporary headwinds we remain convinced of the long term opportunity financial returns.
And our ability to tackle the issues strategically we needed to broaden our available markets and we look forward to getting that portion of the business on the same trajectory as legacy ICU.
And with that I'd like to turn the call over for any questions.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad.
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Our first question is from Jayson Bedford with Raymond James. Please go ahead.
Hi, Good afternoon, I Hope you guys are doing well.
So just a few questions.
Brian you kind of touched on it a little bit here, but perhaps you can.
All it down for me. So the 450 to 500 million EBITDA guide is pretty well aligned with with expectations.
The EPS guide I think is a bit below some expectations out there. So can you maybe walk through why there is a bit wider of a variance here between the two profitability metrics.
Yes, Jason I think the first thing I would point out is within that EPS guidance.
There are there is a total of 40.
Worth of impact related to the transaction itself and most of that 40.
It relates to items that don't impact EBITDA. It is higher depreciation expense from the valuation of some of the assets and it's also a little bit of additional interest expense because we did end up.
Hedging a higher percentage of the outstanding debt to protect ourselves in future years. So thats.
That's definitely.
A portion of that.
<unk>.
In addition.
It depends on kind of where youre starting as it relates to EBITDA.
<unk>.
We had expected to do actually a little bit better than that 190 in the first year. So we may be starting from a little bit of a.
Higher base than what you're starting with.
Yes.
Okay.
Okay.
Just with respect to the quality related interruptions.
Vivek I think you mentioned that the decisions and remedies are in flight I guess when will you have better visibility on these dynamics and how much is in icu's control versus say reliance on any type of regulatory body out there I E. The FCA.
Yes, I mean, I think we're really intuit right now, Jason and I want to be careful and not get ahead of any any day.
The data that we still have to gather and knowledge we have to accumulate.
I feel like the regulatory agency does what it does it's informed the company that it hasnt been as compliant as it could be and then it's up to the company to self determine.
With the appropriate check ins, whether we're doing that and so we understand what that means.
And we're in process of.
Figuring out how to get the whole place more robust and we've been through that before there is no magic date, it's much more about us understanding making some decisions on products understanding some of the technical fall downs and in the broader system fall Downs.
How we can resolve those things so but the work on that is all all started already but we don't have a magic date, which is why we can exactly pinpointed to.
To a number.
Have a tighter range.
Okay.
Is the level of back order at Smiths, which I think you alluded to.
Is that a function of cleaning this up or is that more of a.
Supply chain.
Oh, I am sorry to preempt you, they're totally unrelated just okay.
Falling down plenty of demand customers, calling and asking Where's my stuff every day.
Purely purely on.
Purely unrelated.
Okay, and then just in terms of the base business.
Is the expectation that EBITDA margins improve in 'twenty two versus 21.
Tough right now to say because we don't exactly we've modeled like the inflation headwinds stay.
Right, no relenting, and expedite costs or the transportation cost of the raw materials cost and those some of those things are not that was a little.
The comments that wasn't that those are going to put CPI. Those things are three act CPI or double.
Normal prices on some of the Expedites when you need you need a product to move really quickly we've assumed and Smiths was also bearing a lot of.
Excess costs there.
We've assumed those carried through the full year, it's tough to see.
EBITDA margin expansion.
All of that continues exactly the same with <unk>.
Margin percentage is probably closer to where we are we were trying to say we've absorbed the amazing amount of stuff thats come at us and we feel like we still were.
On track, what we thought margins were for this year and still can have decent year over year profitability I think we probably felt on the margin a little bit better in September and then we took a lot of cost in the fourth quarter that our we've now kept in the forecast. So that's all happening real time.
Okay, and I guess, just maybe last one for me.
Is there a level of <unk>.
Revenue that.
You can take.
<unk> benefited last year from on the Covid side, meaning does that anniversary to put a little bit of headwind on the top line.
In 2022.
Probably some it's difficult to say, Jason that was a deal right and in the in the first half everybody is in the first half when someone else owns a business and you're waiting everybody's got different incentives. So it's difficult to say what was COVID-19 versus just.
Maximizing the value of everything you could sell at that moment et cetera, et cetera. So I would say, there's multiple things that thats why we don't want to focus on we want to find the right baseline for this year and move forward from that.
Okay. Thank you.
Thanks, guys.
Our next question is from Matthew Mission with Keybanc. Please go ahead.
Hey, good afternoon, Brian Thank you for taking the questions.
Just the first on the revenue side when you closed the acquisition. We said it was about $2 5 billion approximately $2 5 billion in pro forma revenue I'm.
Im just trying to understand what.
What when you say, what's core and then some stuff as noncore.
What is what is the right pro forma revenue.
Kind of look at it for the combined company.
At this point.
Okay.
I think if we went all the way Hey, Matt and thank you for the question. If we went all the way there.
And I don't think we're prepared to answer that fully because if you went to the point of saying there were one or two assets that were non strategic we wouldn't want to assume that we were able to solve those situations. So I don't think we want to go.
Quite all the way there I would say the business historically was in the one to one to five range.
And we said in our January presentation, where a $2 $4 billion revenue company.
Part of that was due to correcting for currency changes that happen between kind of late August early September we announced the deal versus today and part of that was due because we knew some of these interruptions and back orders for going on and so that's why we're we're not necessarily giving firm our revenue guidance.
On the Smith, well give it as we always do good direction on legacy ICU business.
Not firm revenue direction on the Smith's book, rather just staying with you feel okay without approximately $2 four company combined.
Okay, I think I think that makes sense.
And then when you say.
Youre frozen at this point does that mean, you are not able to ship products from that facility and how much revenue it will sell.
Ausiello.
Yes.
I think what I said the word frozen I meant just in terms of like decision, making taking a decision deciding do this don't do that et cetera and.
The decision, making and the people involved things, we're not moving and that's changed now in terms of what we're able to ship or not ship I'd, rather not comment on that.
There are obviously some products that.
We have chosen until we understand the situation fully to not put back into the market and thats exactly the items, we're working through.
Right now and there is no no regulatory agency that said you can or can't do something with any product in the U S. Right. This is our our own decision, making about doing things right away.
Okay. Okay.
Sorry.
And then the reason for the wide range of outcomes.
The EPS side the flow through from that and the timing of that probably close straight down to earnings per share.
Fairly high rates, given our low share count.
100, <unk>, that's exactly right correct.
Okay.
Alright, Thank you very much guys.
Thanks, Dan.
Yeah.
Once again, if you have a question. Please press Star then one on your telephone.
Our next question question is from Larry Solow with C. J S Securities. Please go ahead.
Great. Good afternoon. Thanks, Scott.
Couple of real quick as a high level I'll just on the guidance so on the I.
I guess on the Smith.
They did 190 I think last year I will always look.
What's that number that was already a COVID-19 related or adjusted number right. They had a some profit related to COVID-19 that we took out already right. So shouldn't hopefully theres not too much more to fall right.
Actually Larry.
If you went back in history and kind of looked at their publicly oddities reported number it was probably another 230 million or something north of that.
We knew some of these issues were brewing and Thats why I was Brian we ran our kind of 190 or slightly above and that was the number we put out there was a police users yourself.
And then right variance from that is exactly these two issues. We described just picking up on that last question right.
And you had also thought that I think originally.
The timing was more stores that you closed the quarter with two later, which you're probably happy to have it now anyhow, but but in that quarter or two later there was.
That said they were going to try and fix some of these issues. It doesn't sound like they even come to two and maybe the environment has made them worse I guess right in terms of it sounds like it's not a deep hole that you can't get out of but just more top comp effects.
I think the first part I mean, there was a lot in there.
Chris.
It was.
Exactly right.
We did assume somewhat get the house in order on these topics with another number of months under their belt and our business is a little bit bigger in the back half not huge but a little bit.
And so theres, a little bit of timing, but.
<unk>, what you said in the second one is 100% right which is.
We are very happy that logic prevailed and we were able to achieve early termination and closed in January and grabbed control. The situation I think it's a very important right.
That for us absolutely to each other for sure for sure.
Right around the Europe realm.
Someone else.
The core business to 65 to $85 to 75 midpoint obviously.
Obviously, there was some inflation this year.
You threw out a 20 to 30 number 1 million Brian .
I think we're back in the prepared remarks, you said something.
It was this year or do you actually quantify that.
Does that mean.
Well I'll, let Brian I'll, let I'll, let me do my part of the ICL at least 40 or more over the two year period, and Brian gave more color on what the rollover.
So thats all I had.
Exactly yes.
That was the year over year.
Okay that was an additional 20 to 30 incremental in <unk>.
<unk> right.
Alright, okay.
Obviously the solution you answered part of my question, because I think it's Louis.
<unk> placed.
Inflationary pressures just because it's a U S.
Located.
How about Smith.
Dave.
The other half coming from is that some legacy or is there some smiths in there in terms of.
Places.
Okay, Larry Brian was trying to describe.
Legacy ICU only.
Okay. Okay.
You are correct in that and we tried to be transparent that it's an amazing.
<unk> amount of inflation and it basically break slowing the lines. We've said the last I came up with two calls or three calls a third labor third raw materials in the third.
Trends.
Solutions is very heavy trends because your.
Shifting a lot in the U S land based and.
It's where our largest number of.
U S manufacturing footprint is so.
It's exactly what you are saying there on the Smit portion of it. We tried to include that in that first adjustment. We made back in September right. Because we knew there was more there.
There is not additional that we're saying is something.
Yes that was incorporated things. We said, we just didn't think bucket issue number one bucket issue number two.
At the levels they were.
Because it was going to be more time to remediate, where if you start with this question.
Yes.
Right, Okay, and I know you don't give quarterly guidance and clearly for cadence of the year going to be backend loaded. There's just a lot of factors integration.
Integration for one so it sounds like maybe even more back end loaded with currency.
Inflation comps will ease in the back half so.
Sure.
Yes.
Not to add any color to that.
I'm looking at Brian .
So many moving parts Im not sure we I know you're actually not sure we have a lot of.
Comfort and making quarterly statements right now Brian .
Yeah.
Yes, I mean, obviously the.
Further we get into the year.
More orders.
So more.
The more progress we will likely have made on these two issues. So that would naturally weighted a little more towards the back of the year, but we don't have great visibility as of today.
But in terms of restructuring is there any potential.
You too, but that you may end up selling.
Selling some of their assets.
Is there anything that maybe.
Stands out as something that you may think about sorry, it's not core to you.
I think Larry.
Trying to say in the script there are certain geographies just like Hospira was I mean, we exited a few geographies with hospira within weeks of closing there are some geographies that we're debating or are we better doing it or as a distributor of undertaking it et cetera.
Right. So that may that may slightly impact revenues. It does no impact on earnings.
Optical improves margins.
And in terms of business units may be but it's really hard to even kind of neutral on that unless your health that you are in healthy position supplying customers reliably to maximize the value of everything that right. So kind of job number one.
Is to fix the base business because it will lead to the most available options.
Right.
Last question just on <unk>.
<unk> vascular.
Just remind us.
The earn out there.
You guys.
What was the level or is that a sales number.
That was it was a $26 million earn out payment that was made based on the achievement of the business hitting a specific gross margin target.
Okay, great. Okay excellent. Thank you request in general lending is very very pleased with it.
What's happened is it's been doing very well right yeah, yeah, yeah, absolutely yeah, absolutely great. Thanks.
We obviously, we don't we don't talk about clinical stuff that often but we have a minute look at that study with some pretty compelling.
Pretty compelling data.
So.
Anything else.
No I'm all set I appreciate it.
Thanks.
We do not have any additional questions at this time I would like to turn the conference back over to Vivek Jain for any closing remarks.
Okay. Thanks.
Thanks, everybody.
It's obviously an interesting world out there. We appreciate your interest in ICU, We've got a big Hill to climb in front of us at the right people to do it and our team is engaged.
And actively involved in making this valuable so thanks, everybody we'll talk to you soon.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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