Vivek Jain
Analyst · KeyBanc. You may ask your question
Thanks, John. Good afternoon, everybody, and we hope you and your families are well. We are happy 2020 is over and we look forward to our hospital customers stabilizing after much volatility and our company continues to adapt well in a challenging environment. Like everyone in our industry, we want to start first by thanking all of our customers and their frontline workers for trusting us to serve them during these times. And we would like to thank our employees a number of whom had to again deal with weather-related challenges as our largest domestic employee bases are in Texas around our production and distribution sites. On today's call, we wanted to comment on our Q4 results; explain our view on the full year fiscal 2020 and what drove revenues and impacted earnings and assess our performance in a volatile market; provide our opinions on 2021, the transition to reopening our build and timing for a return to a more normal environment; update on the new effects of the pandemic to ICU Medical; the recent weather disturbances and our normal housekeeping items; outline our near-term 2021 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 and our belief that each of our business can continue growing into 2021 and beyond. The short story on Q4 is as follows; we did see revenue growth in all of our lines of business, which supported 4% total company reported growth year-over-year for the quarter and we again did have variance across the regions, albeit, a bit more muted than Q3. Specifically in the US market, we had 8% year-over-year growth, which was the net effect of utilization still being down from our view of baseline offset by higher temporary COVID admissions, new customer onboarding, hardware sales and the addition of Pursuit Vascular. Europe and LatAm did saw some with sequential improvement and we did have some declines in selected South Asian markets. We finished the quarter with $309 million in adjusted revenue, adjusted EBITDA came in at $60 million and adjusted EPS was $1.77. Profit was impacted slightly by our Austin maintenance shutdown being in October and additional costs for sales compensation and bonus accruals. We had our best quarter of free cash flow generation in the last 2.5 years and added $60 million to our balance sheet as operational improvements have materialized and restructuring and integration costs have dramatically reduced. When we reflect on the full year of 2020, which started out quite solid for us and then experienced turbulence in Q2 and Q3 and found stronger footing again in Q4, we believe at a minimum volumes were down from normal levels at least 10% in Q2 and Q3 in 2020. Q4 is a bit harder to triangulate as while procedures and admissions were still down, there was an incremental amount of COVID-related admissions in the system. Each of our lines of business is directly dependent on admissions, including the majority of sales in the Infusion Systems segment as dedicated pump sets represent the majority of sales. And in the face of these dramatic utilization shortfalls, our Consumables and Solutions segments were essentially flat on a year-over-year basis and our Infusion Systems segment was up double-digits for most of the year helped by competitive share wins and expansion orders directly related to COVID. So we feel optimistic that we still grew in the face of this environment and believe in our ability to continue when a normal environment returns. Profitability was impacted from our original expectations most acutely by our mix, less consumables and utilization of dedicated pump sets contribute more profit than Infusion Systems hardware and currency, while painful earlier in the year, did give some back in the back half on a translational basis. So let's go through the businesses quickly and then come back to discuss the current environment. Starting as usual with Infusion Consumables, which is our largest business. Infusion Consumables had revenues of $123 million in Q4 2020, which was a 3% increase year-over-year on a constant currency basis and 2% on a reported basis. We had the strongest quarter in the US region for consumables in a few years and oncology was not the major driver of this in Q4. While we did have sequential improvement in Europe in aggregate the rest of the world lines of businesses were very close to flat to 2019 levels. Oncology was much stronger in the US in the second half of the year compared to the first, but did not reach double-digit growth for the year. We do not think we had any pandemic stocking in Q4 anywhere in the world. The story for Q4 was really again about sequential improvements in US volumes, implementations starting to happen and frankly just holding serve and waiting for volumes to increase, while finding more stability internationally. For 2021, we believe this segment gets back to mid-single-digit growth with oncology again being a strong driver. Moving to Infusion Systems, which is primarily LVP pumps and associated dedicated sets. This segment did $92 million in adjusted revenue, which was growth of 8% on a constant currency and reported basis. As a reminder, this segment captures not only infusion of hardware, but the lock-in key dedicated pump sets. Those pump sets also improved sequentially Q4 versus Q3, and finished the year essentially flat in the face of pretty steep utilization declines as I just mentioned. That math works because we had more pumps active in the marketplace and the overall segment results were aided by not only the competitive wins and installations, but a healthy amount of pandemic orders from governments and add-ons from existing customers. The other challenge we faced over the last few years since we bought the business has been the declines of our non-LVP products, which are down more than $30 million in aggregate over the last few years. Those items in 2021 should account for 5% or less of the segment now. We believe we have enough demand and expansion to eventually jump over these declines. We're holding the best amount of rollover and competitive signings we've had in many years. The challenge continues to be getting into hospitals and implementing these conversions. We continue to believe we have stabilized a 10-plus year installed base decline. We still 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 guidelines around IV pumps and winning the class award again for interoperable pumps. We've gotten back to the core marketing message around our plum LVP pump, as these independent and clinical reviews have validated our differentiation. The Infusion Systems segment delivered 10% growth in 2020. And in 2021, it's difficult to predict the exact installation timelines as our customers are battling with everything from vaccine rollouts to weather-related delays. We think the safest thing to say at the moment is that the business could be up or down a little for the year. As we said last year, we would come back to mention those government and excess orders we received in the spring and summer of 2020 of this -- 2020 time frame. That would be difficult to repeat, but we believe we will have more regular non-COVID surge pumps in the market each day and that we hold enough to ensure sustained growth over time. Most important to us is as vaccinations rollout and the customer base eases on COVID cases in-house, it should allow for improved focus and decision-making on new technology. We do not see capital as a constraint and we still believe relative to our size there is solid competitive opportunity and we're focused on commercial execution here. Finishing the segment discussion with Infusion Solutions. We had $82 million of revenue -- of adjusted revenue in the quarter or 1% year-over-year growth. We do not believe we had any material customer stocking in the quarter. We continue to believe the quality of our customer book has improved with us holding the best list of sustainable relationships versus the day we bought the business and the entire industry has moved forward into renewals of longer-term contracts. We are healthy on safety stock and our new national distribution center's running in Texas to help improve our supply chain costs longer term and provide enhanced supply chain services to our customers. We hope the recent events have illustrated the value of having a healthy and diverse supply chain in the country. Regarding the recent weather and its impact on our Texas operations. We have invested nearly $100 million in CapEx into this site, since we took ownership and we saw the benefits of that during the deep freeze. We had no infrastructure damage in either our production or distribution sites. However, due to the impassable road conditions for employees in Austin, we did have a few days of unplanned shutdown until all the roads cleared. We had and have adequate inventory in hand to ensure continued high customer service levels and our facilities and engineering teams worked tirelessly to quickly bring back up operations. We're not going to penalize our employees due to the unforeseen weather and we will have to spend a bit more in overtime over the next few weeks, which makes an impact as that cost rolls through gross margins. But all that CapEx investment did protect our infrastructure and as insured items like the move away from Pfizer Rocky Mount and a more efficient distribution network has happened. No change here into 2021, as we continue to believe this is an $80 million a quarter business. Okay. Moving on to some general updates. Commercially, we have seen sequential in-person customer calls picking up. Ballpark as of the moment we see about 30% of our calls live and do assume T&E and other discretionary spending will resume at some point this year. Quality there's not much new. We have had some successful smaller notified body audits in the last quarter. We continue to make progress on leading all the new regulation guidelines related to EU MDR. Operationally, the manufacture network logistics and systems of the company are all running well. In Q4, we had solid global fulfillment rates to our customers. We handled the weather challenges. In 2020 for the full year, we invested in employee safety, provided incremental compensation. We have focused on securing our supply of raw materials and components and we'll continue to invest in incremental inventory as a buffer for unforeseen disruptions like the one two weeks ago. As a reminder, our primary manufacturing locations are in Texas, Utah, Costa Rica and Ensenada Mexico. On the Pfizer discussion related to the calculation of an earnout payment. It is more likely than not we will enter an arbitration process. Pfizer has been a solid partner and we've worked with them to provide additional details pursuant to our agreement. Pfizer was obviously an equity participant here in on our Board of Directors and we've tried to treat them well at every step as we addressed the litany of issues that came with Hospira. We feel very comfortable with our position and are prepared for the matter, but we do assume it will take possibly up to another six months for an arbitration result. Okay. To give a little bit more color on what we experienced throughout the quarter and even more recently and how it impacts our thinking for 2021. In Q4, we believe that US hospitals had a high level of ICU utilization with COVID patients and we saw that trend continue through January. In Europe, we had sequential growth even in the face of some pretty severe lockdowns and we did not see international markets with the same patient mix. Obviously for the US now with the drops in infections and related hospitalizations there is capacity freeing up in the system. But the hardest item to predict is the timing of when it's replaced with normal recurring volume. We have seen large companies give a wide variety of ranges from very quickly to only in the back half of 2021. But we just don't know the answer right now and what's more important to us is that we can still grow our valuable items of consumables and dedicated sets on a year-over-year basis. Regarding our Q1 -- regarding Q1 2021 near-term financial results. Even with this uncertainty, we think we will have sequential growth in Consumables. We expect pumps to have a little less hardware be installed and be slightly down. For the year, we have tried again to give general direction on revenues. From an expense perspective, we do expect a 10% or so increase in R&D spending as we have a number of key projects that are reaching filing status in 2021 and we would expect some of the discretionary expenses to return in the back half of the year. The largest driver of profit will again be mixed, depending on how much hardware gets implemented. We think it's prudent for now to take the view that adjusted EBITDA would be in the $245 million to $265 million range and Brian will walk you down to EPS. This assumes a steady build through the year and some caution that it does take time for hospitals to return to normal levels as the decrease in COVID cases free up capacity. As a reminder, the net effect of the pandemic was neutral to down in earnings for the company in 2020. While we generated margin from excess hardware sales and cost savings and discretionary expenses, the hit in absolute volumes to Consumables was a large negative. To synthesize all these comments on the business segments, the pandemic how we're trying to judge ourselves, we've stated for a while that we have the ability to improve our position in our most differentiated businesses of IV Consumables and IV Systems and we have proven stability in our less differentiated businesses IV Solutions. While there can be quarter-to-quarter variations and jumping over the excess hardware is tougher earlier in the year, we believe each of the businesses can be bigger over time. We've talked about the industry structure attractiveness for years, why we fit in the puzzle and that our products are in a good position from a technology, quality and manufacturing perspective. While the pandemic has introduced substantial volatility, strategically we do think the weakness is it is exposed in the health care supply chain add to the argument for all participants to be healthy and stable which has been our commentary since we became a full line supplier. We make essential items that require significant clinical training, capital expenditures and in general are items that customers do not want to switch unless they have to. We are a U.S. manufacturer that's deeply vertically integrated and has core redundancy on products that we do not produce domestically between Ensenada and Costa Rica. We do believe the market broadly defined does not want a winner-take-all set up in these essential items categories and that's before each category is assessed on its own innovation clinical outcomes et cetera. In the new normal or COVID-19 world where supply chain resiliency and diversity matters, we believe our essential items logically benefit and our most differentiated items are still differentiated. So we focus on what we can control in these moments: having the best list of support of healthy customers; win important new customers while waiting for volumes to normalize; keeping our employees safe while delivering the best operational stability for our customers; making sure we drive differentiation in the most valuable categories; have the best liquidity we can for a company our size, using all of the above to be prepared for whatever realignments or opportunity arise and focus on our own execution. Our company has emerged stronger from all the events of the last few years. Thank you to all the employees customers suppliers and frontline health care workers. Our company appreciates the role each of us and each of you has had to play. With that I'll turn it over to Brian.
