Q3 2024 ICU Medical Inc Earnings Call
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Speaker Change: Good day, everyone, and welcome to today's ICU Medical, Inc.'s third quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode.
Speaker Change: Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star 1 on your telephone keypad. You may withdraw yourself from the queue by pressing star 2.
Speaker Change: Please note this call may be recorded and I will be standing by if you should need any assistance.
Speaker Change: It is now my pleasure to turn the conference over to Mr. John Mills. Please go ahead, sir.
Speaker Change: Thank you. Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the third quarter of 2024. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman, and Brian Bonnell, Chief Financial Officer.
Speaker Change: 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 the events calendar, and it will be under the third quarter 2024 events.
Speaker Change: Before we start our prepared remarks, I want to touch upon any forward-looking statements made during the call, including belief and expectations about the company's future results.
Speaker Change: Please be aware they are 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 and uncertainties future results may differ materially from management current expectations
Speaker Change: We refer all of you to the company's SEC filings for more detailed information on the risk and uncertainties that could 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.
Speaker Change: We believe these financial measures can facilitate a more complete analysis and greater transparency in the ICU medical's ongoing results of operations, particularly when comparing underlying results from period to period.
Speaker Change: We've also included a reconciliation of these non-GAP measures in today's release and provided as much detail as possible on any addendums that are added back. And with that, it is my pleasure to turn the call over to Vivek.
Vivek Jain: Thanks, John, and good afternoon, everyone. I'll quickly walk through our summary Q3 revenue and earnings performance, as we believe the results are straightforward, and then provide a few highlights on the various earnings and quality improvement efforts.
Vivek Jain: Brian will take it from there for more specifics on the quarter and the balance of the year Then I'll come back with a discussion on the strategic joint venture we just announced today with Otsuka and the overall situation around IV solutions and the implications for our customers and ICU medical with this transaction
Speaker Change: Revenue for Q3 was $580 million for total company growth of 7% on a constant currency basis or 6% on a reported basis. Adjusted EBITDA was $95 million and EPS was $1.59.
Speaker Change: Gross margins were a little higher than expected due to capture of supply chain efficiencies, FX, and sales mix.
Speaker Change: We again had a good quarter of free cash flow generation, which enabled us to reduce some of the AR factoring line as previously discussed, and our cash balance increased to approximately $313 million.
Speaker Change: The broader demand and utilization environment Q3 was healthy across all geographies and has felt that way this year to date, and since we're almost halfway through Q4, we've not really seen any major changes in the environment.
Speaker Change: The capital environment with status quo and the investments that customers need to make are getting made Then finally we had a quarter with the net impact of foreign exchange in our favor
Speaker Change: Getting into our business units more specifically, consumables grew 9% on both a constant currency and reported basis.
Speaker Change: The largest lines in the segment in order, infusion consumables, vascular access, and oncology, all grew high single digits or better.
Speaker Change: We continue to advance the points made on previous calls around focusing on clinical outcomes, new market creation, and improving in geographies where we had a low share and now have direct operations. And we're focused on progressing the innovation roadmap as we've mentioned previously.
Speaker Change: For the balance of 2024, nothing else is new here, and we would expect the full-year results likely to finish above our original mid-single-digit targets, with the legacy ICU consumables lines being at record levels.
Speaker Change: Our IV systems business unit grew 10% cuts in currency and 7% on a reported basis. We had more balance across the product lines here as compared to Q2.
Speaker Change: and the install calendar for LVPs was stronger than Q2 and therefore we saw sequential growth in the LVP line.
Speaker Change: Some key highlights here include continued new contract signings for our Plum Duo and Fusion system, and we're pleased with what we're seeing so far. We continue to advance our 510k submissions for our Plum Solo and LifeShield safety software. We have received FDA feedback on those submissions, and we're working to clear up the open questions.
Speaker Change: After these products are cleared, the combination of the dual-channel Plum Duo and the single-channel Plum Solo will provide customers flexibility across all clinical care areas and our energy will shift towards the refreshed syringe platform of Medfusion with the goal of filing that 510K submission over the next several quarters and having it connect to our LifeShield safety software as well.
Speaker Change: Our ambition is to have the most modern fleet of infusion devices.
Speaker Change: Simplistically, we want customers to have the right tools for the right job, all connected with a common user interface.
Speaker Change: software solution that minimizes training, improves onboarding, enables interoperability, and drives standardization. For the balance of 2024 nothing else is new here. We would expect results in line with our original targets.
Speaker Change: Just wrapping up the business segments, our vital care segment was flat year over year on a constant currency and reported basis. Obviously since the day of first day of Q4 there's been a lot happening in the IV solutions marketplace and we'll discuss that when we explain the choice to enter this new joint venture.
Speaker Change: From an operations and quality standpoint, the cutover of our U.S. and Canada order-to-cash systems was executed in Q3 and many thanks to the numerous folks who went above and beyond to make this as smooth as possible.
Speaker Change: Now that this work is under our belts, we're focused on optimizing our North American physical logistics.
and then we'll begin these activities internationally.
Speaker Change: We continue to work on the previously announced factory consolidations, with essentially most projects intended to be completed by the end of 2025. The vast majority of our real estate contracts have now been exited or repriced, and savings in this area will come into the P&L over 2025 and beyond.
Speaker Change: While these may seem like mundane topics, all three items I just mentioned are economically meaningful and contribute to improving our profitability level.
Speaker Change: From a quality perspective, we believe we've launched the majority of field corrective actions as we needed to stabilize the acquired LSM products.
Speaker Change: There will be a few more here, but we're optimistic that they will be smaller, both in terms of absolute number and scope.
Speaker Change: In Q3, we also had a very detailed FDA follow-up inspection relating to the acquired warning letter at our Minneapolis site. That inspection was completed with no observations and is an important part of our quality improvement journey and we're awaiting our end of inspection report.
Speaker Change: That's really the quick update on Q3, and with that I'll turn it over to Brian and then I'll come back to talk a bit more about IB Solutions and our newly announced joint venture.
Brian Bonnell: Thanks, Vivek, and good afternoon everyone. Since Vivek covered the Q3 revenue for each of the businesses, I'll focus my remarks on recapping the Q3 performance for the remainder of the P&L, as well as the Q3 balance sheet and cash flow, and along the way provide commentary on any implications to our expectations for the full year.
Speaker Change: As you can see from the gap to non-gap reconciliation in the press release, adjusted gross margin for the second quarter was 37%, which was slightly better than our expectations.
Speaker Change: Similar to the first half of the year, we experienced favorable product mix.
Speaker Change: with a higher proportion of disposables revenue relative to hardware during the quarter compared to our plan, along with the benefits from supply chain synergies as we make progress towards capturing the balance of $50 million of synergies over the next few years.
Speaker Change: In the third quarter, we also experienced a more favorable foreign currency environment compared to the first half of the year.
Speaker Change: whereby the U.S. dollar weakened relative to the currencies in our key selling geographies and at the same time strengthened versus the Mexican peso, which is our primary manufacturing foreign currency.
Speaker Change: For Q4, we expect gross margins to be in the 36-37% range, reflecting the additional benefits from continued capture of synergies offset by the impacts of two items.
Speaker Change: which has a lower gross margin profile, and the second being the recent reversal of the favorable foreign currency environment we experienced in Q3 as the U.S. dollar has now strengthened relative to our selling foreign currencies.
Speaker Change: Adjusted SG&A expense was $120 million in Q3, and adjusted R&D was $20 million. Total adjusted operating expenses were $140 million and represented 24.2% of revenue.
Speaker Change: Both the total dollar amount of spend and spend as a percentage of revenue were exactly the same as Q2.
Speaker Change: On a year-over-year basis, total operating expenses were up 11%, reflecting a combination of increased selling expenses from higher revenues and higher incentive compensation.
Speaker Change: Restructuring, integration and strategic transaction expenses were $17 million in the third quarter and related primarily to IT system integration and manufacturing network consolidation.
Speaker Change: Adjusted diluted earnings per share for the quarter was $1.59 compared to $1.57 last year. The current quarter results reflect net interest expense of $25 million.
Speaker Change: The third quarter adjusted effective tax rate was 20% and includes a discrete benefit related to U.S. federal return to provision adjustments which contributed approximately 10 cents per share.
Speaker Change: For comparison purposes, the prior year tax rate reflected discrete benefits, which contributed approximately 25 cents per share. Diluted shares outstanding for the quarter were 24.6 million.
Speaker Change: And finally, adjusted EBITDA for Q3 increased by 6% to $95 million compared to $90 million last year.
Speaker Change: Now, moving on to cash flow in the balance sheet, for the quarter, free cash flow was $16 million, which includes the impact of a $26 million outflow related to lower utilization of our accounts receivable purchase program.
Speaker Change: It was another solid free cash flow quarter when taking into consideration the impact from lower usage of the receivable program.
Speaker Change: We mentioned during the Q2 call that we expected to reduce our usage of the program during the second half of this year, as our liquidity position continues to improve. As of the end of the quarter, we had $27 million outstanding under the program, and we expect this balance to further reduce by year-end.
Speaker Change: During the quarter, we invested $8 million of cash spend for quality system and product-related remediation activities.
Speaker Change: $17 million on restructuring and integration and $20 million on CapEx for general maintenance and capacity expansion at our facilities, as well as placement of revenue-generating infusion pumps with customers outside the U.S.
Speaker Change: And just to wrap up on the balance sheet, we finished the quarter with $1.6 billion of debt and $313 million of cash.
Speaker Change: As we think about cash flows over the near term, there are a couple items worth mentioning.
Speaker Change: First, as discussed on the last call, we believe the current cash balance is adequate to support the day-to-day liquidity needs of the business.
Speaker Change: and we would anticipate any further increases to the cash balance to be used for either early pay down of term loan principle or reducing usage of the accounts receivable factoring program.
Speaker Change: And second, year-to-date free cash flow is $109 million, which is already ahead of our original full-year guidance.
Speaker Change: For the fourth quarter, we don't expect the same pace of cash generation, as the fourth quarter typically has higher cash outflows for capital expenditures and tax payments.
Speaker Change: Plus there is the potential reduction in the utilization of our receivable factoring program given our improved liquidity positions
Speaker Change: Based on our Q3 results, as well as the latest outlook for Q4, we are narrowing and raising the midpoint of our previously provided adjusted EBITDA guidance range of 345 to 365 to a range of 355 to 365 million.
Speaker Change: For Adjusted EPS, we are raising our previously provided guidance range of $4.95 to $5.35 per share to $5.40 to $5.70 per share reflecting the improved outlook for Adjusted EBITDA plus the previously mentioned $0.10 tax benefit recognized in the third quarter.
Speaker Change: The guidance assumes higher demand for IV solutions, a commercial environment consistent with the third quarter, including no material impact from the deferral or cancellation of procedures, and today's foreign currency rates.
Speaker Change: And for modeling purposes, you can assume Q4 net interest expense of $24.5 million, a Q4 adjusted tax rate of 24%, and Q4 diluted shares outstanding of $24.6 million.
Speaker Change: To wrap up, we're happy with our performance for the first three quarters of the year, including improvement in our gross margin rate, better than planned free cash flow generation, and an improving balance sheet.
Speaker Change: We've remained focused on the foundational work that will drive earnings improvement in 2025 and beyond. And now I'll hand the call back over to Vivek, who will provide more specific specifics on today's announced IB solutions joint venture.
Vivek Jain: Okay, thanks Brian. I'll send a balance of the time on what's happening with our IV Solutions business and our excitement about the joint venture we're announcing.
Vivek Jain: why ATSUCA is the best partner in the world for us, how this will be a great outcome for our customers and the broader North American market, our strategic thinking on why this structure, and some economic implications for ICU Medical.
Vivek Jain: Obviously the US IV solutions market has been impacted by the events in North Carolina and we empathize with the people and customers impacted by the crisis.
Vivek Jain: We had, and still have, unabsorbed capacity in our Austin location and have been ramping up to first ensure our long-term committed customers are well served, and to be able to help new systems that are willing to make longer-term commitments as we learned a few lessons in our experience through Hurricane Maria.
Vivek Jain: Frankly, we've seen the best of customers and human nature in these moments, and we've also seen some of the characteristics that led to the market concentration that the country has faced.
Vivek Jain: On these earnings calls for years, we've talked about the intrinsic value of IV solutions being out of line with its economic price. Maybe a simple analogy, it's the 10 cent screw that keeps the wheels on the bus.
We've spent years pitching geographic diversification.
Vivek Jain: We went as far as asking the GPOs if they wanted to buy into our business over the years. And we've read the same articles in these times of crisis arguing that the government should mandate diversification when it practically has very few tools to do so and the market has chosen not to.
Vivek Jain: Yet there are yes, there are certain customers who get it and are willing to do the work to diversify But our conclusion which predates the current crisis
Vivek Jain: is that there has to be better choice in the market as defined by product breadth, supply reliability, innovation, geographic diversity, the ability to invest, and then maybe the market itself will work and balance the risk better across suppliers.
Vivek Jain: That's why we're so excited to announce the creation of a manufacturing and innovation joint venture with Otsuka Pharmaceutical Factory around IV solutions.
Vivek Jain: They are the single best partner on the planet for us, and I'll go through the reasons why that's the case on the attached slides that follow the revenue schedule in our investor presentation. And just to preempt the question, this is not some hastily arranged shotgun relationship.
Vivek Jain: I first met with this company over a decade ago on other product categories.
We were in some conversations in 2019 pre-COVID.
Vivek Jain: and we've spent the better part of this year exploring this opportunity with hundreds of hours of technical reviews, site visits across continents and building a relationship and shared vision about something that could last for over the next decade.
Vivek Jain: First, just a few facts about ATSUCA on slides 5 and 6.
Vivek Jain: They are a Japanese global healthcare company that's been in business for over a hundred years and are an active participant in branded pharma in the U.S. market.
Vivek Jain: Their IV solutions portfolio is part of their original business and they're the largest supplier in Asia.
Speaker Change: and we believe they have the best innovation of any global supplier.
Speaker Change: That innovation is everything from packaging, being the world's only producer of a four-chamber TPN bag, to very cool ad mixture and reconstitution formats.
Speaker Change: to all materials being PVC-free across the entire portfolio, to core pharma competency around formulations and stability to fit with the other skills.
Slide 6 shows some of this track record of innovation.
Speaker Change: Slide 7 outlines the core reasons we were attracted to them, if not obvious already. Our main reasons were scale and redundancy.
Speaker Change: innovation, the cultural mindset, financial strength, and the experience in U.S. partnerships.
Speaker Change: Key highlights of the transaction are at the bottom of the slide, which is an upfront payment to ICU-Medical, a milestone payment, potentially after two years, and a put-call option for either party starting in 2030, shared governance, etc.
Speaker Change: From an ICU perspective versus our other lines of business, it's been hard for us to drive meaningful innovation in the IV solutions category.
Speaker Change: and our business generally sat alone as a domestic only enterprise in Austin, Texas.
Speaker Change: Slide 8 shows ATSUKA's global manufacturing footprint and Austin will join 16 owned ATSUKA sites with a long-term goal of FDA approval at a number of these locations to create more redundancy.
Just one comment on slide 9.
In a long-term partnership, culture and alignment matters.
Speaker Change: They operate with a long-term mindset, backed by financial strength and experience.
Speaker Change: They operate in geographies faced with natural disaster risk daily, and the commitment to new production technology combined with risk mitigation is ingrained in their culture, and I've seen firsthand how they've hardened their sights in Japan.
Speaker Change: From a customer perspective, we want to bring more innovation along with clear supply redundancy to allow the market to fix the concentration problem.
Speaker Change: We love this structure, outlined on slide 10, the key items slide, because it creates something that will be seamless to customers. On the front end, it will feel exactly the same to customers with us providing everything as we currently do. Sales, logistics, billing, etc., but with additional resources on the manufacturing side.
Speaker Change: We've also stated on these calls for years that IB solutions should be priced relative to its own individual intrinsic value.
Speaker Change: If the market continues to combine this category with other infusion items, we can stay in this structure. Or if the market separates these items in the next GPO cycle or the one after that, we have a put-call structure that allows us to make those decisions after a minimum of five years.
Speaker Change: To conclude this discussion, we are really honored that Atsuka chose to work with us and look forward to many years of a fruitful partnership.
Speaker Change: Now, there will be implications for ICU Medical. It was a tough call to make, but it was important for ATSUCA to be able to consolidate the revenues of the joint venture.
Speaker Change: So, as a result, ICU will deconsolidate IV Solutions financial results and recognize only our proportional share in the net earnings of the JV.
Speaker Change: While it's painful to give up so much revenue, we do believe with the upfront payment the transaction will be EPS break-even to ICU. Simply stated, the interest expense savings from debt paid down from the upfront $200 million payment equals the current EBIT contribution of the business.
Speaker Change: We have to work through the financial reconciliations between now and closing, but net-net, our gross margin will change between 300 to 400 basis points initially after close, and could reach 500 basis points as the JB stands up its own services, but that'll take some time.
Speaker Change: We would have to subtract around $25 million in annual EBITDA from our roll-up next year, and we believe the JV will be able to sustain its own CapEx and we can make other choices with that capital.
Speaker Change: In the bigger picture of ICU, on the last few calls, we've talked about revenue stabilization and the ability to grow our differentiated product lines as demonstrated in Q3.
Speaker Change: While it's nice to have that revenue growth now, it's not lost on us that we're still under-earning as a company relative to the industry as evidenced by the fact we had higher earnings with less revenues historically.
Speaker Change: This JV does not solve that issue on an absolute basis, even if some of the margin ratios change.
Speaker Change: We continue to be extremely focused on all the actions to improve profit in the medium term, which are about revenue growth, mix and pricing, operational efficiencies from my introductory comments, and eventually waiting for the macro items in currency and interest rates to improve.
Speaker Change: Where this JV does impact us is how long we can bear interest expense to make sure we're maximizing the value of any of our other assets.
Speaker Change: Net debt at the end of Q3 was about $1.3 billion, as Brian referenced.
Speaker Change: Between our mandatory principal payments of around $75 million-ish in 2025 plus $200 million in paydown of the term loans from this situation, it would put us approximately around $1 billion of net debt by the end of 2025.
Speaker Change: If earnings can continue to improve alongside an improving interest rate environment and lower leverage ratio spread, perhaps we can think about other ways to return capital to shareholders over time.
Speaker Change: Again, all of this has to happen, but it's certainly not out of the range of potential outcomes.
Speaker Change: To be direct on our goals for the next year or two, we want our consumables and systems business to be reliable growers with an industry with an industry acceptable profit margin with the tightest and most optimized manufacturing network and each with a multi-year innovation portfolio and we ultimately want to transfer value from debt to equity, which Brian noted we are finally better prepared to move on.
Speaker Change: There is no confusion within the company in the pursuit of these goals, and we don't have any frivolous activities here. We produce essential items that require significant clinical training, hold manufacturing barriers, and in general are items that customers do not want to switch unless they must.
Speaker Change: The market needs ICU Medical to be an innovative reliable supplier and our company is stronger from all the events over the last few years And the good news of today Thank you to all our team members and customers as we improve each day with that. I'll open it up to questions
Speaker Change: Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question.
We'll go first to Brett Fishbin with KeyBank.
Speaker Change: Hey guys, thank you so much for taking the questions. Vivek, you definitely gave a lot of detail around why this was the best partner in terms of entering this type of JV arrangement. We're just curious if you could give a little bit more around, you know, the strategic thought process of going in this direction with a JV, whether you guys consider to sell, and then why you think sticking around in the solutions business for the foreseeable future is the best decision for the company.
The End
Sure. Hi, Brett.
Speaker Change: product for our customers that's deeply linked with the other things that we do.
Speaker Change: I think where we struggled is what I tried to outline in the script is trying to be the best innovator we can be on pumps and software, trying to be the best innovator around consumables and category creation.
It was hard for us to do all of it.
Speaker Change: and our portfolio was a little narrower here than some of the other players. We were looking for a way to stay in the market.
Speaker Change: still absolutely deliver these items to our customer, but make sure we could bring the innovation that could be more relevant to them and diversify the market a little bit. And it, for us, like the choices in the other categories, it came down to.
Speaker Change: who had market leadership around the world in the other geographies and who had the most innovation.
Speaker Change: All right, I appreciate that color. And then just one question on the ERP. You touched on it briefly.
Speaker Change: I believe that you've now completed the U.S. and North America portion of it and sounds like it was relatively successful. Just curious if there was any disruption intro quarter from that at all and you know what kind of incremental benefits you might be seeing as we progress into the fourth quarter?
Speaker Change: I mean there was certainly disruption to the team members' lives during the quarter. We had to deal with it, ourselves included.
It's a lot of work, a lot of people sacrificed.
Speaker Change: I mean, during, I would say, the month of August, yeah, there was a little bit of bumpiness. We had the month of September to clean up some of those items, but it only gets cleaned up because people gave a lot.
Brian Bonnell: Brett, to your point, I would say that although there was some volatility during the quarter, the quarter itself really wasn't impacted at all when you look at it kind of in total. So from my standpoint as CFO, that's the definition of success.
Speaker Change: All right. Thanks again. I'll jump back into you. Appreciate it, guys.
Thank you very much. Have a good evening. Thank you.
We'll go next to Eric Fleming with Raymond James.
Speaker Change: joining us on for Jason tonight a couple quick questions on the LVP on Duo has have you been able to hold the pricing levels that you were talking about earlier this year?
I don't, I don't know that we...
Speaker Change: publicly articulated the pricing levels, but I would say we recognize that you don't have many chances to have new technology reset in the market. We believe in the technology. We want customers who believe in that. We're focused on holding that level. We have not made any changes to where we thought we would start marketing that product.
How's the market share looking?
with everyone now back on the market.
Speaker Change: duo in the market and the amount of conversations. And again, we were very transparent on the power of incumbency, etc. on the previous calls. It's all relative the size of our business, which frankly isn't that big in the U.S.
Speaker Change: And we feel very good if solo comes and the ability to access our own install base Where our equipment is finally aging out and needing a little bit of refresh
Speaker Change: So I think we feel good on both of those fronts. And then the CAD product is almost a separate conversation, but continues to be the best asset that came with the acquisition.
Speaker Change: Sorry, and one other follow-up, or not follow-up, another question. On the Mexican peso, with the recent election results, what's the outlook in terms of any potential tariffs and the impact on the benefit you're getting in the peso right now?
Speaker Change: I mean, I think, obviously, it's unclear. Last time around, it was not particularly meaningful. I would say we are a bit player of the amount of stuff coming from Mexico, not only in the healthcare industry, but, you know, automotive consumer or whatever, and we'll all be treated the same, we'll all be treated the same way. Right now, we're not sitting around and spending a lot of time planning, planning on that scenario.
Speaker Change: Sorry, one last one. You mentioned the FDA has inspected that Smith's facility with the warning letter and you're just awaiting the final report. Is that correct?
Speaker Change: At the site where the warning letter was issued, we did have a very thorough follow-up inspection, we had no observations.
Speaker Change: That's one of the components to getting a full clean bill of health. It's the hardest and most strenuous one And so that box got checked at the end of that you're issued a end of inspection report. You could receive that any number of months after the Inspection and we don't have that in hand yet
Okay. Appreciate it. Thanks, guys.
The End
Speaker Change: Once again, if you would like to ask a question, please press star 1 on your telephone keypad.
We'll go next to Larry Fowler with CJS Securities.
Vivek, go back to the strategy of the deal.
Speaker Change: consumables, while you also have another partner helping, you know, I guess, take 50% of that investment. And also you're adding, I assume, some complementary products that they're bringing, as well as the manufacturing redundancy, right? So to me, it seems like almost a win-win, if I'm looking at that correctly.
Speaker Change: I mean, we thought about it a lot. I appreciate the comments. Sorry. We thought about it a lot. It's obviously a Joking aside. It's a very fluid time in the market
Speaker Change: We tried to come up with a structure that protected us in the near term, sort of in the medium term.
Speaker Change: and maybe hedged a little bit of the risk we have today, but certainly kept us in the business for the longterm.
Speaker Change: if we can do what we think we can do together. So we really think we found a win-win on the structure. We had searched for this for a long time. It's not easy to do.
Speaker Change: It took a long time here. And the valuation, right, and the valuation looks like it's 16 times EBITDA. I guess that, you know, there must be, Atsuka must have, and you as well, think that this number is certainly a depressed number for the last couple years, so I'm sure there's some...
Speaker Change: low-hanging fruit just on pricing and things but then the ability to add their products into your distribution network, I guess.
Speaker Change: brings that up a lot more potentially, but I guess the question I have is there's a decent amount of assets right on your balance sheet tied to solutions that I guess will come off in the deconsolidation. Any way to frame that?
Yeah, Larry, hey, it's Brian.
Speaker Change: Your question around multiples, which you know, we don't really pay attention to I think it's probably closer to 13 times or something like that rather than
Speaker Change: the 16 you mentioned, but we think it's representative of the value of the business, of course, and the value that can be created with our partners. Yeah, and then, of course, I guess just from an accounting standpoint, we will deconsolidate.
Speaker Change: the financial results as well as kind of the assets and liabilities on the balance sheet.
Speaker Change: I think the decision-making structure was one part of it, Larry. The other decision-making was fundamentally about, is this better for customers? Is it better for the marketplace? Does it check the boxes that help undo the concentration problem by bringing innovation and more choice?
Speaker Change: we looked in the mirror to every one of those we felt like this will be better for the marketplace better for a customer we couldn't get there on our own
Speaker Change: And if I could just squeeze one more question on the gross margin, independent of the lift you expect from the deconsolidation, but just on the core of the entire business, the solutions piece.
Speaker Change: You've captured sounds like some supply chain efficiencies or expedited those the last couple quarters Those kind of
Speaker Change: just a little bit faster than you assumed you'd get them.
Speaker Change: Nothing really to, you know, perhaps that the outlook for next year doesn't really change that much. You've just gotten a little bit
better this year, faster.
Speaker Change: I guess question one and then you still expect consolidation to drive like a 200 basis point improvement in gross margin plus or minus I say 26 when you get the four-year benefit? Thanks.
Speaker Change: The projects will be done.
Speaker Change: I think Larry I would focus on the gross margin percentage, we've been very clear brines in every script, we had a target of 40 that we wanted to get to.
Speaker Change: And that's.
Speaker Change: That 50 was part of filling the gaps so it's all relative to where we are against that target yes.
Speaker Change: Vivek did reference as it relates to the joint venture and.
Speaker Change: Margin impact there the remaining one to two percentage point.
Speaker Change: Range would probably be coming later on.
Then 2026, when the joint venture would potentially be.
Speaker Change: Stand a little more on its own as it relates to certain commercial type of activities.
Speaker Change: Alright, Gotcha and you just didn't get the 40, well, but just do the math just with the.
Speaker Change: Deconsolidation alone from where we are today are pretty close alright.
Speaker Change: Yes.
Speaker Change: Gotcha, Okay, great I appreciate all the color. Thanks.
Speaker Change: We'll move next to Kristen Stewart with C L King.
Kristen Stewart: Hi, Thanks for taking the question I was wondering if you could just share a little bit more details on what you're seeing today with IV solutions and your ability to ramp up manufacturing how much you're able to ramp up to really take advantage of the market dislocation from your competitor.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: We feel Kristin it's vivek thanks for the question.
Speaker Change: We feel like we're not interested in really playing a short term game, we got burned on that and Maria.
Speaker Change: And our.
Speaker Change: Price at the end of that was going to have to restructure our business back then and we don't want to do that again and.
Speaker Change: And so for US the business. We are interested in is if truly people want to diversify and.
Speaker Change: Take a long term view on they're either dual or solve whatever may be.
Speaker Change: Supply I don't think were running around trying to be opportunistic and.
Speaker Change: And part of this decision.
Speaker Change: This partnership was saying, we thought by bringing the set of skills and redundancy.
Speaker Change: And innovation together, we could wind up with higher market share than we have today over time it wasn't about exploiting what's gone on right now and it's a very awkward time for customers because we certainly believe the suggest like App area. The situation will get rectified people will come back and there will be adequate supply in the market.
Speaker Change: <unk>.
Speaker Change: No one has.
Speaker Change: We certainly don't want to speak for anybody but no. One has the illusion that that share that that capacity is not going to come back on line absolutely. So for us it's much more about the long term.
Okay. Thanks very much.
Yes.
Speaker Change: We'll go next to Mike Matson with Needham <unk> company.
Mike Matson: Yes, thanks, Thanks for taking my questions.
Speaker Change: I'll turn the call I apologize this has gone through this but just just so on this deal it's going to be a JV. So all the is there any.
Speaker Change: Revenue benefit to ICU once the deal is completely set up or is all of that revenue is going to be flowing through the JV.
Speaker Change: So Mike just I guess kind of how does how does the activities of the joint venture show up in our P&L.
Speaker Change: We will be consolidated the results so on the P&L, all we will show us.
Speaker Change: <unk>.
Speaker Change: Our <unk>.
Speaker Change: Portion in the net earnings of the joint venture. So we will benefit economically from from any incremental revenues.
Speaker Change: If they generate incremental profits, but it doesn't it won't show up on our revenue line.
Speaker Change: Okay, Okay got it.
Speaker Change: And then.
Speaker Change: Just your sales team would be.
Selling deeper IV solutions or.
Speaker Change: I think with those people move over to be part of the <unk>.
Speaker Change: Okay.
Yeah, Mike it's vivek commercially.
Speaker Change: Everything to the customer remains exactly the same you order it via ICU chip the ICU we run.
Speaker Change: Warehouse et cetera, we bill now those may be services that are provided on behalf of the JV, but the whole experience is seamless to the customer and the integrated value that's delivered meaning the commingling of the value prop is some of these products across other infusion of items continues because its all held together commercially.
<unk>.
Speaker Change: The revenue benefit is really.
Speaker Change: One of the two different parts of that question one part of the revenue benefits. If we believed on our own we.
Speaker Change: We had a better chance of the first two pillars of our company that we described in the call. The infusion consumables the infusion pumps growing at a superior growth rate two solutions over time, it could be revenue growth accretive that may not be the case in the short term given whats.
Speaker Change: What's going on.
Speaker Change: But the idea is.
Speaker Change: The experience for the customer will feel exactly the same as it does today.
Speaker Change: Yes, Okay, yes that makes a lot of sense, then so youre kind of potentially removing a slower growth.
Speaker Change: Business and.
Speaker Change: But maintaining the benefits of bringing all the bringing that along with everything else to the table for customers.
Speaker Change: Just to be Super blunt about it.
Speaker Change: Over the if we learned yes, there is some shortage today, but if we learn to what happened last time, when we learned what happened through the people who supplied things during COVID-19 the market has a habit of.
Speaker Change: Vaccines ventilators testing wherever you won the market has a chance of reverting to the mean, rather even if there is even there.
Speaker Change: Uplift in recognition of the value of this market.
Speaker Change: Bob.
Speaker Change: The only way to make it a faster growth business for us was with more innovation and we needed a partner to help us do that.
Speaker Change: Okay got it and then just wanted to ask one on the pump market and competitive dynamics there. So.
Speaker Change: I guess.
Speaker Change: I won't cover back then, but just looking through their comments it sounds like they kind of they are saying at least that there.
Speaker Change: Delivering on what they thought they could do in terms of reentering that market. So what are you seeing.
Speaker Change: What degree have you been able to pick off some share from them or other players.
Speaker Change: Yes, it is and its an active market because a lot of people are forced to make a decision right now I think again, we've grown up in this business and our comments on last couple of calls there is a huge advantage to incumbency to all players.
Speaker Change: But again relative to our LDP size, so it wasn't that big.
Speaker Change: There is enough choices out there to have us certainly get.
Speaker Change: Meaningful return on our R&D investments into the plug duo <unk> plump solo.
Speaker Change: Programs and there is more conversations going on than there ever happen.
Speaker Change: We certainly think a huge majority of people generally stay with the incumbent.
Speaker Change: The amount of market that needs to change is plenty for us to to grow it.
Speaker Change: Okay.
Speaker Change: Yes that makes sense. Thank you.
Speaker Change: We will go next to Michael <unk> with Jefferies.
Hey, guys. Thanks for taking my question.
Speaker Change: Most have been on it already but just on the JV.
Speaker Change: What would the free cash flow.
Accretion look like for that deal.
Speaker Change: How much funding will that maybe on the.
Capex perspective.
Speaker Change: I know you said, it's neutral and adjusted EPS, but just on the Capex and free cash flow.
I would say Mike in terms of free cash flow.
Speaker Change: Bart marginally positive.
Neutral to marginally positive.
Speaker Change: For us.
Speaker Change: I mean, we Havent had hey, Mike welcome to the call by the way.
Speaker Change: Yes.
It's not like we had tons of excess cash lying around in the last year or two there are some spots we want to invest in.
Some of the production assets in the other areas I wouldn't assume like it changes.
Speaker Change: Changes the overall.
Speaker Change: Cash flow picture that much. It may just gets reinvested in some other areas that are we can make more of a difference.
Speaker Change: Okay alright, thank you.
Speaker Change: Yes.
Speaker Change: Well, Richard now Debrett Fishman with Keybanc.
Speaker Change: Hey, Thanks for taking the follow up just wanted to clarify one point.
Yeah.
Speaker Change: So yes totally appreciate the comments around like short term versus long term and in full agreement just wanted to see you did mentioned that there were some incremental capacity. If there was some additional revenue or EBITDA that you're expecting to realize from that increased demand in the fourth quarter and what's included in guidance.
Speaker Change: Okay.
Speaker Change: We just haven't thought about it that much rent, we're going as fast as we can go and.
We're doing that on the belief that there will be enough volume that is sustainable there.
Speaker Change: We really not sitting around looking at it on a.
Speaker Change: Short term basis, Alright fair enough fair enough and last question from me just can you explain any more you can about the put call option that's embedded in the JV agreement and what the mechanics look like at a high level. Thank you.
Speaker Change: It will all be public.
Speaker Change: And our filings over the next couple of days or weeks whenever they go in.
Speaker Change: Essentially.
Speaker Change: It's an option.
Speaker Change: That goes out a decade can exercise that option until the fifth year and that option is based on.
Speaker Change: Multiple of revenues, so if the market grows and expands and value we participate in that and we received that multiple of revenues times, our ownership percentage and so it has an incentive to keep growing the business to make it as large and relevant to customers as possible.
Speaker Change: And vice versa.
Speaker Change: Companies only wound up supply and call it what items, if customers only want to buy fluids or solutions individually.
Speaker Change: A call option exists if theres no need to have some of these items together, but no one really knows today, how the market's going to develop but I think it's the best of all worlds as we can figure it out as it comes and to the customer it just needs to be seamless.
Speaker Change: And with no other questions holding I will now turn the conference back to our presenters for any additional or closing comments.
Speaker Change: Thanks, everyone for your interest in ICU medical sorry. The call was sold late we are obviously busy trying to get stuff done I think this is sort of the latest relative to the quarter end, we've done it and we will make sure it happens faster in the future.
Speaker Change: Have a good fall and talk to you soon thanks very much.
Speaker Change: This does conclude today's call. We thank you for your participation you may disconnect at any time.
Speaker Change: Okay.
Speaker Change: Okay.
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Speaker Change: Okay.
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Speaker Change: Got it.
Speaker Change: One of them.
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Mhm.
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