ICU Medical, Inc. (ICUI) Q4 2019 Earnings Report, Transcript and Summary

Good afternoon everyone and welcome to the Q4 2019 ICU Medical Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. John Mills.

Good afternoon everyone. Thank you for joining us today to discuss the ICU Medical financial results for the fourth quarter of 2019. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman and Scott Lamb, Chief Financial Officer. We want 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’ll be under the Fourth Quarter 2019 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 full results and are subject to risk 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 risk 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 addendums that are added back. And with that, it is my pleasure to turn the call over to Vivek.

Thanks, John. Good afternoon, everybody. The fourth quarter of fiscal 2019 showed sequential revenue improvement and commercial stability in our most valuable product lines and allows us to hold firm on our view of profitability in the near term. For the full year of 2019 we delivered cost improvements on the P&L from TSA and other operating expense savings that allowed us to best offset revenue decline versus 2018. When we reflect on the year and at least we’re very glad it’s over, we were able to; one, stabilize our operational platform after our systems cut over in late 2018; two, survive a rapid deceleration in the IV Solutions segment, which was always expected but not necessarily at the pace it came; three, handle some unique backwards revenue situations in consumables; while four, finishing the year with the best list of customers we’ve had since we acquired HIS; five, deploying some capital sensibly with all of the other issues we faced; and lastly, advancing our product quality and service levels to the customer. We do believe the majority of issues are behind us from an operational perspective that the earnings impact and recovery was adequately captured in our previous commentary and that 2020 becomes a year that is about commercial execution and showing ourselves and our investors that we can grow our businesses. On today’s call, we wanted to comment on Q4 and full year 2019 results and discuss our current view of the business and recent performance trends, weave in a few quality items, given some of the recent industry developments, provide an update on the actions we’ve been taking given the 2019 changes in the last integration items, a quick comment on any coronavirus related knock-on effects for us to date and outline the criteria we are judging ourselves by and our near-term goals and how they fit with the longer-term positioning of the Company and the opportunity for value creation, meaning in plain English, how do we get back to growing our differentiated product lines and adding cash to our balance sheet. The quarterly comparisons will get easier for us after Q1 2020, but we don’t really care if it doesn’t show up with cash on the balance sheet. Q4 was a reasonably clean quarter and showed the gross margin pressure we described in mid 2019 as the production slowdown effects came through the P&L. The Company is operationally running well, the competitive environment seems to have stabilized a bit and we do not have any material production constraints any longer and most manufacturing work has been around optimizing the IV Solutions production environment. The income statement was straightforward with sequential stability in revenues that allowed us to deliver fiscal 2019 EBITDA down the middle of our revised guidance from last August. We finished the quarter with $297 million in adjusted revenue. Adjusted EBITDA came in at $61 million, adjusted EPS came in at $1.94 and cash was $293 million. Adjusted revenue was down 7% quarter-over-quarter on a constant currency basis due largely to the IV Solutions segment. There were no unusual charges. Restructuring and integration charges were down to $11 million. Starting as usual with Infusion Consumables, which is our largest business, Infusion Consumables had revenues of $120 million in Q4 2019, which implied a 1% decrease year-over-year adjusted for currency and 2% decrease on a reported basis. It was a bit of a mixed quarter for us. We expected it to be, maybe $2 million to $3 million better than it was. And to go into a little bit more detail, U.S. volumes were okay and the customer wins we talked about previously were implemented and this offset some of the – these offset some of the backwards items we talked about on the previous calls. Where we did have some variance was first in Europe and a few select international markets, which was probably $1.5 million to $2 million light to our expectations. The remainder was in oncology consumables where we did solve our production constraints in Q4, but we did not get all the volume we expected implemented at customer sites. Basically to be blunt, we had customers in a holding pattern for months, we then released the production and didn’t have enough time left to do the proper implementations. Europe appears to be improving so far in Q1 2020 and we’ve improved our process for implementation planning. There has been no change in the demand for our oncology consumables. But the number of desired installs does require better planning from us. On the last call, we did go into more detail on some of the individual sub-category issues that hurt in 2019 to explain what was going on there while there was no major customer churn, et cetera. To aggregate that for all of 2019, we had somewhere around $15 million of slippage backwards in this segment across Tego, SwabCap and some price harmonization between legacy ICU and legacy Hospira. We believe most of that is behind us and provides a better floor to start 2020. It’s early but we’re pleased with our acquisition of Pursuit Vascular. The people and the team share our values and the products are helping customers deliver better quality outcomes for their patients. We haven’t tinkered with it very much and are primarily focused on supporting the team to broaden awareness of the product and starting to work on how the core technology can help differentiate our consumables business over time. The rest of this segment was pretty much as we expected. This is a segment where we’re the most advantaged and we have all the pieces, all the technology, all the scale to compete globally and should be able to offer more value to the customer. For 2020, we believe this segment gets back to growth and our assumption for now is in the mid-single digit range. Moving to Infusion Systems, which is the business of selling pumps, dedicated sets and software which is important because it’s a business that brings in a lot of recurring revenues and helps to support our competitiveness in consumables. This segment did $85 million in adjusted revenue, which was down 7% on a constant currency basis and down 8% reported, which was in line with our expectations. As a reminder, we had a very strong Q4 in 2018 in IV systems, but most importantly for the LVP pump segment, we finished the year strong in terms of competitive customer signings and are confident that we stabilized the 10-plus year installed base decline. Given the recent industry news there were many investor questions around the implications for us. Let us first walk through our views on the events and any knock-on effects to us and then how it could impact our year. First, infusion pumps are some of the most highly scrutinized medical devices by the FDA. Each year really since 2010 the regulatory compliance bar has been raised with new standards and it appropriately forces customers to look deeply at the choices and focus on the right areas of stability, safety and track record of innovation. Now, our team has a unique experience of working at a senior level at two of the three primary manufacturers in the category. Our collective lesson is when the industry lives in a glass house, don’t throw stones. We’ve been asked if we could face the same scrutiny that others are facing in the industry and the truth is, that’s the reality of the business. We prepare ourselves every day. We don’t skip on resourcing, and we focus on building compliance into our operations each day to do our best to not make regulatory compliance an event. We want a high complexity and high standard for regulatory authority in the category as it makes the market share capture difficult for any new entrant. Second, as we look toward any potential implications of the recent industry news, we would say it’s too early to tell what the impact could be. We will not speculate on this situation, other than what has been commented publicly regarding timing. We do know that safety is a critical factor when choosing an infusion pump. We believe our Plum LVP technology is positioned well as evidenced by the recent clinical equity and ISMP guidelines around IV pumps, UL cybersecurity certification and the other technical evaluations like KLAS. We’ve gotten back to the core marketing message around our Plum LVP pump as these independent and clinical reviews have validated our differentiation. So on the margin, recent events are probably a good thing for us long term in the core LVP segment of our Infusion Systems business. However, a small percentage of sales in our Infusion Systems segment is from non-LVP products. We do have some headwinds on the periphery from the non-LVP products in this segment such as the dedicated prefilled or empty syringes for the PCA pumps that we get from Pfizer Rocky Mount and certain ambulatory products. Since the last call, Pfizer supply of PCA viles and empty syringes has become more consistent and we do not see much backward slippage in that line. As we thought about fiscal year 2020 we planned for some deterioration in our non-LVP product lines and we thought the wins we’re holding in LVP pumps could finally have the business close to flat on an annual basis. Per of the previous comment, it’s really difficult to precisely handicap exactly what happens competitively with recent events. For 2020, the most comfortable we would say right now is flat plus or minus a little. We continue to feel like we’re in good dialog with many customers across a range of geographies. Finishing the segment discussion with infusion solutions, we had $81 million in adjusted revenue or down 14% year-over-year or flat sequentially. Like last quarter we did see and feel some more stable footing here right now at these levels. We will skip the usual solutions stump speech for this call and just cut to the chase. Commercially, we did have some wins that have started to come into the book. These wins allowed us to handle the changing competitive environment better as we stepped into defend our market share and handle the continued erosion of our non-committed business. We continue to believe the quality of our customer book has improved thus holding the best list of sustainable relationships versus the day we bought the business and we’ve survived the bleed-out of the majority of our trading-oriented business. Operationally, the items we described on our Q2 call last year, including reduced production with extra down days, adjustment to Pfizer purchases, et cetera, have made their way into the P&L and showed in the lower gross margins in Q4. To go through the laundry list of items of – the laundry list of items in the business. First on the manufacturing variances. We’ve gotten after as much cost as we can and we’re running the best model for the time being. On the supply chain costs, our adjustment to move to a more efficient warehousing and distribution model is in flight with our new centers starting to come online in Texas. I would have the same comment as last call. It’s a bit slow, but it doesn’t make sense to destroy product versus moving it into our own facilities if it’s perfectly fine sellable inventory. In the short term, we feel like our comments from Q2 2019 as the business has been stable still apply and continue to feel that way for this year. Longer term, from a value perspective, we feel the business unit to be stable. On the positive side, we’ve added new customers to our book, are forecasting less production and sales as inventory goes down and that will normalize late in the year and into next year and we are bringing online new production in Austin to allow us to move away from Pfizer Rocky Mount on the highest running SKUs. We’ve also flipped the switch on our system conversion in Austin, which was our final integration activity, which we believe can lead to longer-term efficiency. These are balanced against the reality of the competitive environment and acceptance of risk on the small amount of non-committed business we have remaining. Basically, we’re trying to make sure that the business unit is not a value detractor longer term from where we are today and have modeled it as such. To synthesize the comments on the business segments. For us the criteria and lens we are judging ourselves from at this time has to be the ability to improve our position in our most differentiated businesses of IV consumables and IV systems and to prove stability in our less differentiated businesses. We talked about the industry structure attractiveness for two years, why we fit in the puzzle and our products are in a good position from a technology, quality and manufacturing perspective and we think today we have the best right to win across our portfolio since we bought the business. So 2020 for us is about commercial execution. Moving to housekeeping items, we ended Q4 with excellent global fulfillment rates to our customers. The core IT cut-over activities and everything in non-IV Solutions was completed in 2019. The cut-over of Austin systems is happening as we speak and will update the status on the next call. Then we are fully stood up and our attention will shift to optimizing what we’ve done. From a quality perspective, not much really to report as there were no material audits or inspections in Q4. We’re still awaiting the next Austin inspection and we are prepared. A brief comment on coronavirus. From the Eastern Hemisphere we have a very small amount of sales via distribution into China. To date, we’ve seen no change. What is more in our minds is a supply chain of components from China. Solutions is a North American business only. In consumables we are deeply vertically integrated and can make just about everything ourselves in our factories outside of the currently impacted geographies. So, as a reminder, our four factories globally are in the U.S., Mexico and Costa Rica. However, we do source most of the core electronic components for the pump business from China. We have months of component stock on hand and we will further secure this necessary where possible. From the Western Hemisphere, we do a healthy business in Infusion Consumables in Italy and in particular, Northern Italy. As anyone who has followed the infusion industry knows Northern Italy also produces a number of infusion consumable components. It is too soon to have any view if anything has been impacted. To sum it up, so far we have not experienced any material impact, either commercially or in terms of supply chain. However we cannot predict how the situation will evolve for the rest of the year and will provide future updates as appropriate. Okay, to bring this all back to the topic of earnings results and how we think about 2020. Ultimately, it comes down to growing our differentiated highest margin lines and running ourselves as efficiently as possible over time. The only change in our SG&A year-over-year is some commercial investment, adding back to our incentive pool program or infrastructure that came via acquisition. Our puts and takes for 2020 are summarized as follows, we believe in a return to growth in consumables driven by oncology, some wins in the base business and some supplement from Pursuit Vascular and stopping or bottoming out the lines that were going backwards. In IV systems, we think we have the best chance we’ve had in LVP pumps to date. And in IV Solutions we have the manufacturing savings that we’ve moved on last year. These are viewed against the competitive environment in IV Solutions, erosion of non-LVP product lines and margin in the short term on LVP capital sales. We do believe from a revenue perspective, we start to look again like a normal company as we finish lapping all the solutions volatility after Q1, but that’s really optics. From an EBITDA perspective, we believe our previous commentary still applies that for the time being it’s best to remain at $60 million to $65 million a quarter. We continue to be cautious given the environment and what we did to our shareholders and ourselves when we rebased our view in Q2 last year and want to make sure we have the flexibility to compete across all of our product lines. Given the spend on Pursuit in the events of 2019, we didn’t put material cash on our balance sheet. We do want to start that again in 2020. We believe that even with a little less cash, we have a safe and strong balance sheet that can protect shareholders and be deployed for value creation as opportunities emerge. We’ve made significant capital investments into our factories and systems over the last two years and are in the final stages of some major production upgrades with more vertical integration and sterilization across our network, new tooling and an investment mindset for quality and growth. We have a set of strong experienced people to do the work and we have a culture of not wasting shareholder resources in respect for our capital. As always, I’d like to close with things are moving fast. We’re trying to improve the Company with urgency and we’re trying to take responsible actions and break some of the inertia that many of our companies and our physicians face. 2019 was the toughest year our team had in our tenure at ICU. The Company will be stronger from the experience. I really appreciate the effort of all combined company employees to handle the bumps, move forward, focus on improving results and our Company appreciates the support we’ve received both from our customers and our shareholders. Before I turn it over to Scott, this is the last time I’m saying that sentence after six years as Scott is retiring after 17 years with the Company with the last three years felt like 10. I wanted to say thank you on behalf of all colleagues. We took a Company whose core existence might have been questioned five or six years ago and turned it into an important industry participant and an interesting and fun place to work. That required an unhealthy amount of work and we could not no way, no how have done it without you. I appreciate your friendship and partnership over the last six years and wish you some downtime. So with that, I’ll turn it over to Scott.

Thank you for that, Vivek, and good afternoon everyone. To begin, I’ll first walk down the P&L and then take a little – talk a little bit about cash on the balance sheet and finish with some detail to our guidance for 2020. So our fourth quarter 2019 GAAP revenue was $316 million compared to $340 million, down 7% from last year. And for your reference, the 2018 and 2019 adjusted revenue numbers, which exclude contract manufacturing sales to Pfizer at cost can be seen on slide number three of the presentation. Our adjusted revenue for the quarter was $297 million compared to $322 million last year, down 8% or 7% on a constant currency basis. Infusion Consumables were $120 million down 2% or 1% on a constant currency basis. IV Solutions, which we primarily sell in the U.S. were $81 million, down 14%. Infusion Systems were $85 million, down 8% or 7% on a constant currency basis and Critical Care was down $2 million, 13% both on an adjusted and constant currency basis. Adjusted diluted earnings per share for the fourth quarter of 2019 were $1.94 compared to $2.14 for the fourth quarter last year. Our adjusted earnings per share for the quarter was favorably impacted by approximately $0.21 related to year-end true-ups and excess tax benefits connected to equity compensation. We estimate our GAAP and non-GAAP tax rates for the full year of 2020 not including these tax – these excess tax benefits from equity compensation to be in the normalized range of 21% to 23% with the non-GAAP rate at the upper end of that range. And finally as expected, adjusted EBITDA decreased 12% to $61 million for the fourth quarter of this year compared to $69 million last year. As you can see from slide number seven of the presentation, our adjusted gross margin for the fourth quarter was 40% compared to 42% for the fourth quarter last year. The two largest drivers for the year-over-year decrease were similar to the last quarter, and include the impact from the ramp down of IV Solutions production and the associated loss overhead absorption and additional supply chain costs related to higher than optimal inventory levels. For 2020 while the change is minimal, we’ve updated the methodology for calculating the gross – our gross margin in order to conform with the presentation of our other non-GAAP measurements, including adjusted EBITDA and adjusted EPS by excluding amortization and stock-based compensation expense. A comparison of the historical and updated calculations of adjusted gross margin for 2018 and 2019 by quarter is provided in the slide presentation. The impact of the change is to increase adjusted gross margin by 23 basis points and 33 basis points for the full year 2018 and 2019 respectively. For 2020 using the updated methodology we expect gross margins to be between 39% and 40%, similar to the second half of 2019. As expected year-over-year, SG&A decreased approximately $6 million and was 22% of revenues. The decrease came primarily from TSA savings as a result of separating from Pfizer and lower incentive compensation related to performance. For the first time since we bought Hospira Infusion Systems, we expect an increase in SG&A for 2020 due to a reset of incentive compensation and the acquisition of Pursuit Vascular. As a percent of revenue, R&D expenses were relatively flat year-over-year at $13 million and we expect R&D to continue to run approximately 4% of revenues in 2020. Restructuring, strategic transaction and integration expenses were down $30 million to $11 million in the fourth quarter versus $41 million last year. This is primarily the system integration costs for our Austin manufacturing facility and a one-time charge to move our U.S. pump service depot to our existing Salt Lake City facility. In 2020, we expect to spend approximately $30 million in the first half, with most of that related to our Austin manufacturing facility integration with a significant decrease in the second half of the year. Now moving on to cash in our balance sheet. For the quarter free cash flow was $25 million. After the purchase of Pursuit Vascular in the fourth quarter we ended the quarter better than expected at $293 million in cash and investments as we reduced inventory and continue to reduce DSOs. By the end of 2020 as we continue to make working capital improvements, such as reductions in inventory we expect to have over $350 million in cash and investments. This includes a one-time $22 million payment to Pfizer expected in the first quarter related to the take or pay charge that was recognized in the second quarter of 2019. In the fourth quarter, we spent $24 million on CapEx and similar to the third quarter that was primarily related to general maintenance, system integration, capacity expansion for our consumables business, and transferring a portion of contracted solutions products from Pfizer to our Austin manufacturing facility. In 2020, we expect to reduce spending on CapEx by approximately 10%. For 2020, we expect our adjusted EBITDA to be between $240 million and $260 million and adjusted EPS to be between $6.50 and $7.20. And just to reiterate, adjusted EPS includes a normalized tax rate when compared to 2019. And for modeling purposes, we expect diluted shares to be approximately 21.5 million. Lastly, as I move to the next chapter, I did want to say a few words on Brian Bonnell, our incoming CFO. Brian has been inside the Company now for almost two years, came with financial oversight for the exact same products at another industry participant, has a terrific work ethic and has a 10-plus year relationship with Vivek, Christian, Virginia and the rest of the team. I could not imagine a more smooth transition. For me, it’s been an amazing experience the last 17 years and has been a worthwhile last several years working with Vivek and the rest of the team. And I want to thank everyone that I’ve worked with at ICU Medical and I look forward to the next chapter in my life. And with that, I’d like to turn the call over for any questions.

[Operator Instructions] And your first question comes from the line of Matthew Mishan of KeyBanc. Matthew, your line is now open.

Excellent. Thank you for taking the question, I guess.

Hey, Matt.

Hey. Just starting off, Vivek, is $80 million the right run rate in IV Solutions from here? I’m just trying to get confidence in that rate as you kind of work through some major contracts that I think you are still up in 2020.

Sure. I mean, I think when we called it down last summer, I think we said $75 million to $80 million was the range. We’ve averaged above that. And I think you hear us saying we continue to believe somewhere in that range, is the right range. I don’t think we have a different view of anything we’ve said historically or in the last year.

And then just any thoughts on potential flu benefit either in the fourth quarter or in the first quarter 2020?

We had the opportunity. We did get some calls if we would like to put a bit more maybe into the channel on the notion that flu started off very strong in the fall. We chose just to kind of stick with normal business. So we did not get any benefit in flu and right now into the first quarter of this year we haven’t seen anything unusual or no benefit.

And then moving onto the infusion pumps, is it possible that you can say when Plum LVP last went through a 510K update with –including some of the software updates? And then as a follow-up to that, just in early conversations, how willing are hospitals to dual source infusion pumps and given the history, why not a certain level of redundancy in supply?

Great questions. For Plum hardware, the latest 510K that was submitted which was version 1510 was after we owned the business in March, 2017 or April 2017 – March-April 2017. Some of the software 510Ks on MedNet were earlier than that. But those are the facts on where our latest submissions were. In terms of the customer, I think the answer is somewhere in between what you said, which is our experience has been at both places large systems have been willing to have multiple vendors. Where it gets more complicated is people typically go on multiple vendors inside a single building. So a system may say for this portion of the country or this region or this state or this group, it makes sense to use one versus the other. But typically inside the four walls, it gets more complicated, people prefer not to do that.

Okay. And I know you actually have been launching some new products. I’m just curious how the Daina 2.0 platform has been received by customers so far. And then just in relation to that, have they been asking for an end-to-end closed platform from compounding to delivery or is this something that new – like a new solution that you’re bringing to them?

I think you were at ASHP, you must have seen this. And so we haven’t talked about it very much. I think it’s been in a limited market release for us. We’ve been reworking it. We brought it back into tweak things a little bit, so it’s just starting to get out there. I think, it’s the notion of – if you look at all these guidelines, you look at U.S. paid $100 million the notion of closed medication delivery has been a topic for a long time. I don’t think we’re inventing whole new cost. There hasn’t been an easy solution from a workflow perspective. That’s what we’re trying to bring to the equation. I think, like all markets, it is early days. It requires education. And there’s all these individual fires that happened in different parts of the infusion chain, right. It was on solutions a number of years ago, right. So we got to stay on point and just keep hammering away at our message there and it’s about safety and quality and that those are the things we believe we had value in.

All right. Thanks for that. And congratulations, Scott, on your retirement. Thank you very much for all the help you’ve given me over the years.

Thanks. I appreciate it was good working with you.

Thank you, Matt for the kind words. You are the newest one to the party and so we’re just teasing you a little bit.

All good, all good.

And your next question comes from the line of Larry Solow of CJS Securities. Larry, your line is now open.

Well, Scott, I will thank you for that shot out. I will appreciate – I do appreciate all your help in the last nine years. So I do wish you best of luck as well. You deserve a break. So, god bless. I guess extra couple of couple of questions. So you just – to summarize, and I think it’s sort of been – sort of your thesis for a while now. Keep that solutions business sort of on the flattish array on the top line and maybe over the next couple of years improve some margins a little bit that have sort of been reset. But get a little bit back into your pockets as you bring some production in house and then grow the other two businesses, maybe not so much in 2020, but in 2021 and beyond. Without going into exact numbers, what is sort of a good target? What do you hope for or expect these two businesses can grow? Is it sort of a 3% grower, a little better than that. What do you sort of aspire to?

Look at a high level, we have to prove our thesis, right, that’s our point. We owe it to ourselves, owe it our shareholders to show that we can grow the businesses. And so thesis is a hypothesis right. We want it to be reality. That is exactly right. Our view is we need to show that we can grow the stuff that’s the stickiest and the most differentiated which is consumables and pumps. And we got to show stability in Solutions, et cetera. I think we had years of growth in consumables and we had an off-year in 2019. And we’re saying, we want to get back into mid single-digit range for 2020. I don’t think there is any structural reason why we don’t think that, that’s not a realistic assumption for a number of years. We used to do that before we had all this stuff. Pumps is super hard to call right now, because of the different lines going into it. I think, there it’s been well talked about what’s the market replacement rate and the market expansion and there is not a huge growth in net hospital beds in the country, right. So pumps is about share gains and pumps is about globalization in the right markets and it’s about changing the value prop to away from just the box itself to software and other service and other features versus just the dedicated set, which it has been about historically. So I don’t really want to make a prediction there. And solutions is totally about census and holding the best customers. So whatever someone’s view is of U.S. census is the way you should think about that.

Okay. And I know you don’t guide to the quarter and you sort of guided to sort of $60 million to $65 million run rate for the – per quarter for the year. In terms of cadence, would you expect to exit 2020 on a little bit of a higher bottom line run rate than you started the year?

Yes, I mean I think that’s – certainly I believe, the supply chain stuff, the other things kick in, all right, gives us time to get more to see. So we spend a lot of time on revenue and cost. We don’t sit around and try to perfect in EBITDA by quarter.

Understood.

It’s not that big of a company.

But general trends obviously, you should hopefully position hopefully position you to be a little bit better as you enter 2021.

I mean we haven’t fully – we haven’t fully lapped, we haven’t – I mean after Q1 we will fully lap some of the negative stuff that was going backwards, right. And so that helps and the wins get more time to get implemented, that helps, etc.

Right. Okay. And just on the cash flow and particularly working capital. I know you talked a couple of years about CapEx going down and that certainly should help your free cash flow. But I would think the business just on an operating – capital operating cash flow basis should generate a little bit more than it’s been doing in the last few years. I realize with Pfizer, with Hospira, with Siemens integrating that and probably cost some money. But also just looks like on the working capital side, you had more of a usage than we would have thought. So I think thoughts to that and as you look out the next couple of years, do you think that can improve?

Yes, let me make a comment. Brian is here in the room with us. And will let Brian answer some of that too. We spent a fortune on integration and we were just talking about it today. And so that was a huge consumer of cash. That’s why I kept – there has been saying that needs to stop. That’s like more important than correcting the working capital changes, right. And then once that’s done, then it becomes very much – that’s more important than you have the DSOs, etc. Once that’s done, then all the other activities Brian is working on pick up.

Right.

But the integration consumed a ton of cash and look where we are. If you add back the cost of Pursuit, we’re kind of at the level of cash we had before this transaction and we spent hundreds of millions of dollars in integration. So I’ll just say that was the biggest kind of negative polar user of cash and I will let Brian talk about the regular – the work streams going on, broader working capital.

Yes, Larry, this is Brian. So for 2019 it’s clear that from a working capital standpoint we used more cash than we probably would have liked, I think we made some good progress in Q4 to reverse that trend and the goal would be to continue that progress during 2020 and there is an opportunity there.

Got it. Okay, great. And just on the CapEx. Did I catch that right $30 million total, was that just growth cap in the front half, the $30 million Scott referred to?

No, that was the integration – that’s the last of the integration.

Okay. That’s that piece. Okay, got you. So that $30 million a little bit less in Q2 in the back half and hopefully nothing in 2020.

Not a lot a little less, a lot, a lot less.

Right. Okay, great. Great. Excellent. Thank you. All set.

And we have one more question from the line of Jayson Bedford of Raymond James. Jayson, your line is now open.

Good afternoon and thanks. Actually I have a couple of questions. But first on pumps, it looks like you saw some kind of green shoots there with the quarter-on-quarter increase. Did the non-LVP business grow sequentially?

No.

Okay. And the expectation is that it – the non-LVP is kind of flat to down in 2020?

Definitely down.

Okay. And earlier in the year, Vivek, you mentioned 100 basis points of share gain in LVP and have you seen the impact of that on the revenue line? Did that contribute to the fourth quarter?

Not really. That’s what I said, we believe what we’re holding in transactions under contract that we haven’t implemented yet, that we felt good between that and what was going down that we had the chance to be close to flat. That wasn’t really the driver of the fourth quarter.

Okay. And just to be clear, it doesn’t look like your guidance assumes any notable share gain as it relates to the current industry environment in LVPs.

We don’t want to speculate on anything that’s going to hear things go slowly. We’ve been around the stuff for a long time. So…

Okay. And then just on the consumables side, it’s a little softer than I expected. When you talked about the $15 million in slippage backwards, is that just all supply related, is that what you mean by backwards?

No, not at all. I mean in 2000 – and ballpark, these are not precise, in 2018, we sold $10 million a Tego for example and maybe we sold half of that in 2019 or something. Product lines actually went backwards, that we had big issue with OEM SwabCap where there was a lot of load in 2018. It didn’t happen in 2019, less dollars of revenue. So individual things went backwards and then a little bit of price harmonization that I talked about. That wasn’t at all supply related. That was why we had to step in and do Pursuit, why for the first time we didn’t have consumables growth because we just too much stuffed to jump over. And the Hospira distributed products, we talked about a little bit historically. There was always enough that even those things were going on year-to-year in the background, they never shows up, when they got to $15 million or that kind of number, it gets much harder to outgrow that.

Okay. From a supply perspective though to the extent there was an impact in 2019, you enter 2020 here with full supply.

No, we have very, very high service levels right now across the board. So said differently, as I think where you’re going, had we had our production issues solved earlier in the year, I think all of us believe we could have delivered a better Q4, even Q3 oncology number than we did. Basically we had orders on the books since March. We didn’t really get the product released until September-October and then to call up a customer and say I know you’ve been waiting for us for six months, can you help us in the next three weeks and get installed, the calendar just didn’t work out in many places as we thought we could do that. So you’re exactly right, probably to the tune of $1 million. That’s not business gone away, it’s sitting there, we just got to get it on the schedule and get it in. So it was frustrating to us. So that’s why I said there was – it was $2 million to $3 million less than we thought. The international markets were sluggish and I think I said that either on the call or at an investor meeting midway through last quarter, that’s turned around a little bit right now.

Okay. You said there is no change in demand for oncology. What is end market demand for – from a growth perspective for oncology?

I think a safe number we’d feel comfortable saying, Jayson, is sort of like north of double digits, I’d just say that 10% or better.

Okay. On gross margin, have you seen the worse from a rampdown of IV Solutions production, meaning have you seen – is the bulk of the impact behind you now?

I’m going to let Brian – I’m looking at Brian go there, Jayson.

Yes, Jayson, this is Brian. I would say that the majority of the impact shows up in Q4 and in 2020 and forward. It’s going to just – you can assume margins are flat.

Okay. I guess –

We’ve got a couple – there is a couple of little offsets, Jayson, like on this systems cut-over in Austin, right. We lose a little bit of production absorption on things like that. So for us the manufacturing was the biggest chunk that rolled through in Q4. There is still a few things out there. It’s better to be safe and just say kind of stays flat for a while, right, we took it.

Okay, that’s helpful. Thanks. And, Scott, congratulations. I wish you the best.

I’m showing no further questions at this time. I would now like to turn the conference back to CEO, Vivek Jain.

Thanks everybody. I recognize obviously, it’s been a couple of eventful days in the market here and I’m sure people have many other things going on. So we appreciate you spending time with us. Even with what’s going on, we’re very happy last year is over and we look forward to getting back to work and looking like a normal company in 2020. Thanks everybody. Appreciate it. Bye.

Thank you so much to our presenters, and to everyone who participated. This concludes today’s conference call. You may now disconnect. Have a great day.