Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 ICU Medical, Inc. Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. John Mills of ICR. Thank you. Please go ahead, sir.

Great. Thank you. Good afternoon, everyone. Thank you for joining us today to discuss the ICU Medical financial results for the third quarter of 2020. On the call today, representing ICU Medical, is 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. And to view the presentation, please go to our Investor page and click on the Events Calendar, and it will be under the Third Quarter 2020 Events. Before we start our prepared remarks, I want to touch upon any forward-looking statements made during the call, including beliefs and expectations about the company's future results. Please be aware they are based on the best available information to management and assumptions that 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 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, and we hope we find you and your family is well. For the last few years, we have been ending every call with the same comment about support from our customers and the ability of our employees to adapt in a changing environment. While it was never intended for the pandemic, that belief was again required in Q3 as our company ran well and adapted to more distinct geographic volatility in our end markets. Like everyone in our industry, we want to start first by thanking all of our hospital customers and their front-line workers for trusting us to serve them during these times. And we would like to thank our employees, a number of whom have had, again, to deal with the local fires here in the middle of everything else. It's been a long week and a long quarter and a long year, so we'll try to be brief today. On today's call, we wanted to comment on Q3 results with a bit more geographic and regional color as we had a wider spread on performance, explain the volume and product trends we experienced during the quarter and at least what we're seeing through October given the recent pandemic challenges globally, update any new effects of the pandemic on ICU Medical and our normal housekeeping items, tighten our near-term financial expectations. And lastly, articulate how we feel about our positioning in this environment, any strategic implications and reflect on the criteria by which we are judging ourselves. The short story on Q3 is as follows. We did see sequential improvement in all of our lines of business in the U.S. market, which supported 4% total company growth year-over-year, but we did have some specific international geographies that had more volatility than we experienced…

Thanks, Vivek, and good afternoon, everyone. To begin, I'll first walk down the P&L, and then talk a little about cash flow and the balance sheet. So starting with the revenue line. Our third quarter 2020 GAAP revenue was $319 million compared to $308 million last year. It is up 4% or 3% on a constant currency basis. For your reference, the 2019 and 2020 adjusted revenue figures, which exclude contract manufacturing sales to Pfizer, can be found on slide number three of the presentation. Our adjusted revenue for the quarter was $303 million compared to $291 million last year, which is up 4% on both a reported and constant currency basis. Infusion Consumables was down 3% or 4% on a constant currency basis. IV Solutions, which we saw primarily in the U.S., was up 6% on both a reported and constant currency basis. Infusion Systems was up 11% or 12% on a constant currency basis, and Critical Care was up 15% or 14% on a constant currency basis. As you can see from slide number four of the presentation, for the third quarter, our adjusted gross margin was in line with our expectations at 38% compared to 41% for the third quarter last year. The year-over-year decline of three percentage points reflects the impact from lower production levels of our IV Solutions products, less favorable product mix from lower consumables and higher infusion systems hardware revenues as well as temporary COVID-related manufacturing costs recognized in the third quarter. For the full-year, we continue to expect gross margins to be in the range of 38% to 39%, and we expect the balance of the year to be impacted by the mix of consumables versus Infusion System's hardware as well as incremental costs related to the annual scheduled maintenance shutdown of…

Darius, are you there?

[Operator Instructions] And your first question comes from the line of Matt Mishan with KeyBanc.

Hi, good afternoon. Hey. It seems like you guys are getting some opportunities to get back into the hospital and start doing those implementations. Can you give us a sense of the scale of the backlog that's developed over the course of the last like nine months?

It's different by different business units. It's been easier on the consumables front to keep the implementations moving because there's just generally a higher underlying familiarity with the products and some of the training can be done in a more remote fashion. On the hardware side, it's longer. We have to absolutely positively be on site for physical implementation. I wouldn't want to say that we've got some massive backlog of people awaiting on-site implementations. I would just say more it's getting back somewhat to normal in certain parts of the country. I'll leave it at that. Just to give a sense that it's moving beyond remote in some spots.

And then moving to gross margin. As you think about the 37% level we're at today and the phasing of recovery from that over the next couple of quarters, are you through the majority of the manufacturing absorption issues you've had in IV Solutions? And does mix start to normalize from here for you?

The number one driver of gross margins is total consumables mix in the whole company, whether those are in the IV Consumables segment or whether those are dedicated pump sets in the Pump business, which is the vast majority of what's reported in that pump systems number. And so those two items, which have had utilization declines, make a really big impact on the gross margin line, more than anything else. There is still some, not a lot of cleanup going on from the solution stuff at the end of last year. That's why we're spending time talking about the Dallas Supercenter Warehouse coming online, the efficiencies, et cetera. But Brian, please feel free to add anything beyond those two.

Yes. No, I think that's correct. I think for the Q4, we'll probably see, at this point, while there's puts and takes, gross margin's fairly consistent with what we saw in Q3.

That was a point we were trying to make on the earnings side, Matt. Just -- we absorbed a big body blow. There've been favorability on selling some more pumps, which was COVID related, right, not having all those consumables hurts a lot. And we feel like we've done OK through that.

Okay. Yes, for sure. And then the last question is what does the M&A environment looks like for you guys right now?

We presented at a conference in September for one of the firms. And we said we would love to deploy capital if given the opportunity for something responsible. But that doesn't mean you can do something irresponsible or that doesn't generate returns, which is kind of the generic standard answer. We believe and always have given. I think we have spent a lot of time making sure that the company finished its integration from Pfizer Hospira, and we are with the exception of a few manufacturing largely getting there. So it's a topic that we know we can't turn our back toward.

Congratulations on the last quarter.

Thank you, Matt

Your next question comes from the line of Jayson Bedford with Raymond James.

Hi, good afternoon. I have a few. Maybe just to pick up on one of the lines of earlier question on gross margin. Yes. I appreciate the consumables dynamic, but overall revenue levels are higher than where you were, at least for most of '19. And I'm just wondering, what are the sources outside of mix of gross margin improvement from here? Meaning the breakoff from Rocky Mount, is that additive to margins? If you could just kind of walk us through how they improve from here outside of mix.

Brian, do you want to go first?

Yes. I'm happy to. So Jayson, I think that product mix is going to be the biggest driver. And then beyond that, there's some improvement that we will likely see as a result of our supply chain and logistics efficiencies. And I think that's what's going to be -- have the biggest impact, I think, going forward.

Yes. I mean we took two pieces of pain over the last 12 months, Jayson, as you well know, right? One was price pain on some of the solutions business, price and volume pain, as that changed at the end of last year. That made a big difference and then knock on that -- all of the -- it's been interesting. All the manufacturers have been talking about the absorption impacts. And again, I thought we were like early in that. And we've been working our way through that. So to Brian's point as the supply chain gets healthier, there should be something there. Ultimately, it is mix more than anything to drive as much of the disposables through the pipe than anything else.

Okay. IV Solutions, it's kind of bumped around a little bit this year, and I realize that this isn't a normal year. And I know you mentioned the $1 million to $2 million in the quarter. But is this kind of the new baseline? Again, you kind of went 91%, 74%, 86% on solutions. What's the right baseline for solutions going forward?

Yes. I think when we tried to talk about what we need to do to be competitive. We said it's an $80 million a quarter business, and I feel like on the Q1 call, we were very transparent, and we had $5 million or $6 million extra of -- that went into the channel, that came out in Q2 or it went minus $6 million from $80 million and here, we had one or two and did $86 million. I think we certainly feel safer given how volatile it is, and it is hard to predict with the COVID environment out there. We'd probably stick with the saying it's still an $80 million business is our assumption.

Okay.

A lot of us say.

That's fair. Again, I'm just looking for a baseline. On the pump side, you mentioned there were no government tenders. But where are the new pumps coming from, meaning is this new business? Is this business that you had previously won that you're just now getting to? Kind of where is the new business and new pumps going?

Yes. I think most of -- well, I think that the line you want to draw is, it's not government, it's not kind of spontaneous business and reaction of pandemic. It's still probably marginally heavier weighted to add-on expansion at existing customers, and competitive, it probably hasn't flipped yet in any given quarter to say more of it has been competitive than our own installed base, but it's easier to implement where you already or upgrade or implement where you already have the share because people are familiar with the product. On the competitive side, those installs take longer and require more scheduling and more ability to get into the sites to do it.

Just on the competitive dynamic, clearly, there's been some disruption this year. Height of COVID was a tough time to capitalize on this disruption. Is now a better time, meaning, are you seeing more competitive opportunities today than you were, say, three months ago?

I think we would say we're certainly in more conversations than we have been at any point this year, and it was -- and it's a tough time to get people to make decisions. On the other, it's going to be this way for a while, so we just have to get out there and illustrate the value that we can offer. And so I don't think our comments are different than before, which is it's not quite the ease it was than other moments in the industry when these things happen, but it's still a good window, and we should go execute.

And there's no big, in your view, capital constraints from your -- from the customer side?

No. We haven't felt it very much.

Okay. And then just lastly, you did call out LatAm and Canada. How big is that percent of sales, just roughly?

I don't think we want to get into a country by country, but we do sell each quarter several million dollars into Canada and maybe low single-digit millions into LatAm. LatAm really just shut, absolutely shut for quarter went backwards materially. So it was -- it's the only way we had to give a little more detail to try to explain how those consumables numbers made sense in Q3.

Fair enough. Thank you.

Thanks, Jason.

We have one more question from the line of Larry Solow with CJS Securities.

Larry, you're keeping everybody from getting back to their screen on the other topic. Come on.

I know. Good afternoon. Most of my questions actually were answered, but I got to throw a couple out here, keeping you on your toes. Just a few on the follow-up. So you mentioned the consumables and certainly a nice sequential improvement, a little bit less than I would have expected and it sounds like you guys too. And I guess that's more on the international front. But just particularly on oncology and implementation, it does sound like it's starting to pick up now. But I guess, had you expected some more oncology implementations and contributions in the U.S. in Q2? It seems to be pushed to the right a little bit.

I think oncology surprised us, and -- and we tried to highlight this in the last call. Oncology surprised us already at the time we were having the last call. We experienced a big drop-off in sort of new starts, new patients. And it's been hard to prove that, that was directly related to screening, but really through July and a good chunk of August, just like regular census and admissions started to change in the beginning of June, oncology started to change at the beginning of September. And so September and October feel much more normal or closer to normal. But there's like a two-month lag between oncology versus just regular admission stuff. And so I don't know that we could point to one thing or another, but even to our own expectations, it was still a little bit less in Q2.

Okay. Okay. Got you. But it does sound like, hopefully, it's starting to ramp up.

It's being normal in the last eight weeks.

Yes. And on the solutions -- excuse me, on the systems side, another -- I know you called out last quarter is probably being the peak short term. You had a nice amount of equipment sales there. But this quarter actually got pretty close to it, and I think low double-digit growth. Can you -- in terms of the growth, is most of that still coming on the, I assume, on the hardware side? Is that fair to say?

Yes. I think that's very fair to say. I think all of it because if the utilization is down 5% or 10%, the actual sets that run with that hardware also down, right? Whether it's an IV Consumable disposal item in the consumable segment or a dedicated pump set, those are all the same admission and census-driven items. And so they too are down, but all year because we've been putting more hardware out there, we've been able to offset that, right? The goal would be to continue to win in hardware and then have census come back to normal, that would look like a different picture.

Right, right, right. Okay. And then just last on the solutions piece. I think last year, when you sort of had that shortfall, you called out most of your business, the remaining piece, I think, over 90% is under long-term contract. But I think that was a piece that was expiring. Some contracts are up for bid at the end of this year, although I believe maybe you've already secured some of those over the last 12 months.

Yes. I think we would feel comfortable with that comment on what portion was under contract, and that was the point we were trying to make. We largely secured our customer base. We think what we've been through this year. I mean there's a few little things here and there, but we feel pretty good about it.

And just last question on the guidance, it sort of implies that sequentially flat to down. Am I reading that right? And is that -- I know you called out a little bit of a gross margin. So what's sort of the flat to down, if looks like revenues might actually be improving going to Q4?

Yes, Larry, I think what you're seeing there is on the consumable side, we do expect continued sequential improvement in Q4 relative to Q3. But then as you look at the rest of the businesses in Q4 on the Infusion Systems side, we won't see the same level of hardware that we saw in Q3. So there's a bit of a take there. And then in Q4, we probably see solutions somewhat closer to that $80 million range that we've kind of set at the baseline.

Got it. Okay. Great. I appreciate the color. Thanks, guys.

Okay.

There are no other questions. I would now like to turn the call back to Vivek Jain for any closing comments.

Thank you. I hope everybody is handling this environment well. We try to keep the call short today and allow everybody to get back to other items. And we appreciate the interest in the company very much. We will talk to you at the end of Q4.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.