Yahoo Finance ICU Medical, Inc. (NASDAQ:ICUI) Q1 2024 Earnings Call Transcript
ICU Medical, Inc. (NASDAQ:ICUI) Q1 2024 Earnings Call Transcript May 7, 2024
ICU Medical, Inc. misses on earnings expectations. Reported EPS is $-1.62955 EPS, expectations were $0.84. ICUI isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, ladies and gentlemen and welcome to the ICU Medical Incorporated. First Quarter 2024 Earnings Conference Call. [Operator Instructions]. This call is being recorded on Tuesday May 7, 2024. I would now like to turn the conference over to John Mills, ICR Managing Partner. Please go ahead.
John Mills: Good afternoon, everyone. Thank you for joining us to discuss ICU Medical's financial results for the first quarter of 2024. On the call today, representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Brian Bonnell, 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 will be under the first quarter 2024 events. Before we start our prepared remarks, I want to touch upon any forward-looking statements made during the call including beliefs and expectations about the company's future results. Please be aware, they are based on the best available information to management and assumptions that are reasonable.
Such statements are not intended to be a representation of future results and are subject to risks and uncertainties. Future results may differ materially from management's current expectations. We refer all of you to the company's SEC filings for more detailed information on the risks and uncertainties that have been direct bearing on the 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 in 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 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 of Q1 revenue and earnings performance, provide some commentary on the overall health of the company and then turn it over to Brian to recap the full Q1 results. After that I'll come back with updates on the various integration and consolidation efforts that will improve our medium-term profit outlook. Revenue for Q1 was $553 million for total company growth of 1% on a constant currency basis or minus 1% on a reported basis. Adjusted EBITDA was $79 million and EPS was – adjusted EPS was $0.96. Gross margins were a little higher than expected due to supply chain efficiencies and mix. Our cash balance was near flat sequentially, as we continued to reduce inventory and had our typical higher Q1 cash outflows.
The broader demand and utilization environment in Q1 was healthy across all geographies, with March seeing some reduction in census and it appears to be fine in Q2 at the moment. The capital environment with status quo and investments that customers need to make are getting made. The only additional macro headwind is the strong US dollar in certain commercial geographies, which impacts our IV Systems segment, the most as it's our largest OUS business. Getting into our businesses more specifically, our consumables segment grew 3% constant currency and reported. Growth was driven by our Oncology and Vascular Access lines, which were both at or above 6%, IV therapy was low-single digits and Trex was closer to flat. We did expect some sequential declines, given the very robust volumes we saw in Q4.
Nothing else is new here. We would expect sequential improvements in this segment as we wrap up Q2. Our IV systems business was flat on a constant currency basis or down 3% reported, due to the currency impact I just mentioned. Again, we had a wide range of performance across the product lines, our LVP pump business grew 8% with good dedicated set utilization due to census and a larger installed base, syringe pumps sold slightly above normal quarterly levels and grew 5%, ambulatory pumps were down 10%, as Q1 2023 was the last quarter of the catch-up we were dealing with at the time, which will finally get lapped now. More importantly, ambulatory was sequentially flat and the line is stable and the macro trends of home care remains solid. We have some specific opportunities that are additive to getting the business back to historical levels, which are first the replacement of our own LifeCare PCA products in the market; and second a market event with a smaller player, which is relevant to us.
Our new Plum Duo device and LifeShield IV safety software have been fully available for the last few weeks and we've had our first customer signing. The early feedback is meeting our expectations and we are incorporating super user feedback into our road map and believe we have a hardware product and related safety software that can be the anchor of our offering for many years to come. Just wrapping up the business segments, our Vital Care segment was down 4%, both on a constant currency and reported basis. IV Solutions, the largest component of the segment was flat and the entire decline was essentially due to Critical Care, where we had a reduction in non-hospital OEM sales due to a large order we had in Q1 of last year. The rest of the segment was flat.
From an operational perspective towards our customers like the comments on the last call, the company is running the best it has in the last few years. Customer back orders are at the lowest level in nine quarters and fulfillment has been very stable because of all of the efforts of our team. The discussions have shifted far more to innovation and the integrated value of what we've amassed. Quality has been an area of heavy investment. We feel we're on solid footing. We have had and likely will have a few more important customer notifications, all as part of the overall remediation efforts previously discussed and enhancements we have made. Our goals in 2024 are not so different from our historical goals, as we lost time in the first six to seven quarters following the acquisition.
We expect revenue growth in all of our differentiated product lines. We have substantially progressed, our quality remediation and insured quality for patients and high compliance for regulatory authorities and desire to bring our open warning letter to a close. We intend to execute the substantial integration work, as we have operational stability in place to pursue remaining synergies. And ultimately and obviously, these actions are intended to improve our profit levels and cash flow over the medium-term. And we're focused on optimizing the portfolio from a revenue growth and quality perspective, which will increase any opportunities to rationalize the portfolio at sensible levels. That's my brief recap of Q1 at a high-level. I'll turn it over to Brian, and then come back -- and then I'll come back with a few thoughts and comments on our medium-term outlook, some targets and a few other points.
Brian Bonnell: Thanks, Vivek, and good afternoon everyone. Since Vivek covered the Q1 revenue for each of the businesses, I'll focus my remarks on recapping the Q1 performance for the remainder of the P&L as well as the Q1 balance sheet and cash flow and along the way provide commentary on any implications to our expectations for the full year. As you can see, from the GAAP to non-GAAP reconciliation in the press release, adjusted gross margin for the quarter was 35% which was higher than expected for this point in the year. The drivers of this favorability were roughly equally split between first, product mix, where we experienced a higher proportion of disposable revenue relative to capital during the quarter compared to our plan.
And second, supply chain synergies captured earlier in the year than expected. These favorable items helped to offset much of the anticipated negative impact from the manufacturing under absorption related to the recent inventory reductions, which is reflected in the Q1 gross margin rate consistent with our previous guidance. I'll get into the implications to the full year outlook in a moment when taken into consideration with some other items. Adjusted SG&A expense was $115 million in Q1 and adjusted R&D was $21 million. Total adjusted operating expenses were up 3% year-over-year and reflect a combination of increased selling expenses and R&D investments. Adjusted operating expenses were 24.7% of revenue for the quarter and we continue to expect the full year rate to be at or below 24%.
Restructuring integration and strategic transaction expenses were $16 million in the first quarter and related primarily to IT system integration and manufacturing network consolidation. Adjusted diluted earnings per share for the quarter, was $0.96, compared to $1.74 last year. The current quarter results reflect net interest expense of $24 million. The first quarter adjusted effective tax rate was 28% and includes a discrete expense, related to equity compensation. We continue to expect the full year adjusted effective tax rate to be around 23%. Diluted shares outstanding for the quarter were $24.4 million. And finally, adjusted EBITDA for Q1 decreased to $79 million, compared to $102 million last year. The lower profitability on roughly similar levels of revenue reflects prior year benefits from inventory builds, combined with the current period impacts from inventory reductions.
Now moving on to cash flow and the balance sheet, for the quarter, free cash flow was $30 million which represents the third consecutive quarter of positive free cash flow. Reductions in inventory contributed $14 million of cash and we remain on track to reduce inventory levels this year by our previously stated target of around $40 million with most of this reduction coming in the first half of the year. The focus on inventory allowed us to generate meaningful free cash flow, while still investing in the areas that will drive future returns. These investments included $10 million of cash spend for quality system and product-related remediation, $15 million on restructuring and integration and $15 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. As anticipated, and consistent with last year, our CapEx spend was a bit lighter in Q1 and should pick up over the course of the year.
And just to wrap-up on the balance sheet. We finished the quarter with $1.6 billion of debt and $251 million of cash. As we think about full year earnings in light of Q1 performance we still plan to make any revisions to our guidance if necessary on our Q2 call, consistent with our historical cadence. For now, we believe the correct approach is to continue to assume adjusted gross margin for the year, at our original guidance of 35%. While a portion of the supply chain synergies that provided upside in Q1 are more permanent in nature there is volatility in the global environment that may impact fuel and transportation costs from the current levels. Also, and more importantly, currency and a higher for longer interest rate environment does make an impact as we don't report currency adjusted earnings.
Over the course of the first quarter, we saw our large international sales currencies, yen, euro, et cetera, weaken against the dollar, with no strengthening of the dollar against our production currencies of the Mexican peso and Costa Rica Cologne, which for the full year adds up to over $10 million of EBITDA variance from the rates assumed in our plan. While we believe our supply chain synergies, if things remain stable, can offset most of this currency impact, it's too early in the year to be precise. And finally, as it relates to the Q1 gross margin benefit from product mix, our original full year forecast for capital and disposables revenue mix hasn't changed as we expect to be selling more capital in future quarters. To wrap up, we're happy with the first quarter performance, including improvement in our gross margin rate and continued progress in free cash flow generation.
We remain focused on the foundational work that will drive earnings improvement in 2025 and beyond. I'll now hand the call back over to Vivek, who will provide updates on the specific initiatives underlying net earnings improvement.
Vivek Jain: Okay. Thanks, Brian. On the last call, and we don't need to rehash all the reasons here, we tried to articulate our belief that we were under earning as a company relative to the industry and we wanted to go through the actions to date to improve profit in the medium term. We still need to prove that we're capable of predictable sustained revenue growth, but do believe we have seen less volatility over the last few quarters as the business has stabilized. Our original model expectations continue for a number of our acquired products where the goal is to get back to near historical sales levels and for some of the legacy ICU lines to recoup the substantial inflation we absorbed over time with price improvements. But sustained revenue growth is also at innovation.
And on the last call, we described some of the key programs an update versus the last call is that we now expect to get our Plum Solo IV pump and LifeShield safety software with interoperability 510(k) submissions to the FDA before the end of Q3, a quarter earlier than expected. This is an important program because in addition to broadening out the full infusion hardware suite, it specifically allows us to approach our existing installed base with a better tech solution. As a reminder, most of our current Plum 360 pumps were only put into service from 2015 onward, and we've never really had the benefit of having our own installed base rolled over to any substantial degree. We continue to expect to refresh syringe comp on file by the end of the year, and all of these products will work with the latest version of LifeShield software.
We also expect certain important new filings over the next 12 to 24 months, in our consumables area and the valuable temperature management business. We're growing our position with existing products of today, and these will be supplemented by a significant refresh in key parts of the portfolio with a large portion already done. We have been careful targeting these investments because innovation drives sustained revenue growth. The other half of improving our earnings power is about gross margin expansion outside of the price or mix or volume inputs. Where we've had businesses at or near record levels, those production environments are fully utilized and improving efficiencies. But where we've had businesses that are smaller, we've absorbed real inefficiencies and the pain was compounded with the inventory choices we made.
This leads to the basic blocking and tackling of network consolidations, which is not some grand transformational program or anything like that. Since the last call, we've announced additional closures of two large underutilized production sites and consolidation of those products into existing space in our network dovetailing with our previous comments to have fewer places have them full and have them in the right geography. We can handle this now as our pump production has almost been fully consolidated in Costa Rica. These aren't easy choices, and they impact real people who have been team members for many years, but it must be done to drive value for us and for our competitive positioning to the customer. Additionally, we're just about ready to consolidate our U.S. order-to-cash systems over the summer which will lead to available logistics and back-office synergies in the quarters to follow.
And we continue to whittle down underutilized real estate as leases present themselves. This list of actions is economically meaningful and contributes to getting where we need to be and offsets the normal bumps that happen in business, but it will take some time to execute. Given what we've been through the last few quarters, we're not willing to commit to specific dates in absolute margin levels, but our team's experience and integration allows us to go as fast as possible. Out of our controller interest costs, which we do expect to change eventually, but we are operating with a higher for longer mindset. From a value perspective, we felt it more sensible to bear more interest expense as long as manageable versus not maximizing the assets where the revenue, earnings and quality of those assets is improving but requires investment.
Debt paydown continues to be our highest capital allocation priority and any extra cash above our needs would go to repayment. To be direct on our goals for the next year or two, we want our consumables and systems businesses to be reliable growers with an industry acceptable profit margin with the tightest and most optimized manufacturing network in each with a multiyear innovation portfolio, and we want the rest of the portfolio to add up to levels where we deliver an acceptable profit margin that ultimately allows us to transfer value from debt to equity. There is no confusion within the company in the pursuit of these goals, and we don't really have any frivolous activities here. We produce essential items that require significant clinical training, hold manufacturing barriers and in general, items that customers do not want to switch unless they must.
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. Thank you to all of our team members and customers as we improve each day. With that, we'll open it up for questions.
Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Jayson Bedford from Raymond James. Your line is now open.
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