Good day, and welcome to the ICU Medical, Inc.’s Q1 2021 Earnings Call. Today’s conference is being recorded. At this time, I will turn the conference over to Mr. John Mills. Please go ahead, sir.

Great. Thank you. Good afternoon, everyone. Thank you for joining us today to discuss ICU Medical financial results for the first quarter of 2021. On the call today representing ICU Medical is Vivek Jain, CEO and Chairman; and Brian Bonnell, 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 the investor page and click on events calendar, and it will be under the first quarter 2021 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 full 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 you and your families are well. It’s hard to believe it’s May 2021, and we feel the approaching normalcy in our business and operations and are happy to see our hospital customers improving activity monthly as vaccinations have progressed. 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 you during these times. And we look forward to seeing our own teams around the world face-to-face in the near future as local conditions permit. It’s been too long. Today, we hope for a shorter call as results were generally in line with our comments just a few weeks ago, and not that much has changed, but we did want to, first, comment on the broader trends in the customer market and the geographic flows of our business; second, provide any updates on our normal housekeeping items; third, highlight our improving cash flow metrics; fourth, explain the drivers that will allow us to deliver improving sequential profitability; and lastly, articulate how we feel about our positioning in this environment and comment on the specific criteria which we are judging ourselves. The short story on Q1 is as follows: As we described on the last call, we did see sequential revenue growth in our consumables segment and slight sequential decreases in our IV Systems and IV Solutions segment. On a year-over-year basis, this resulted in a reported sales decline of 4%, which we expected due to the pandemic surge ordering in Q1 of 2020. We finished the quarter with $304 million in adjusted revenue. Adjusted EBITDA came in at $58 million and adjusted EPS was $1.62. Profit was impacted by the weather challenges in February in Texas. And some…

Thanks, Vivek, and good afternoon, everyone. To begin, I’ll first walk down the P&L and discuss our results for the first quarter and then talk a little about cash flow and the balance sheet. So starting with the revenue line. Our first quarter 2021 GAAP revenue was $318 million compared to $329 million last year, which is down 3% or 5% on a constant currency basis. For your reference, the 2020 and 2021 adjusted revenue figures, which exclude contract manufacturing sales to Pfizer, can be found on Slide 3 of the presentation. Our adjusted revenue for the quarter was $304 million compared to $316 million last year, which is down 4% or 5% on a constant currency basis. Infusion Consumables was up 2% or flat on a constant currency basis. Infusion Systems was down 5% or 7% on a constant currency basis. IV Solutions, which we saw primarily in the U.S., was down 12% on both a reported and constant currency basis, and Critical Care was up 6% or 4% on a constant currency basis. As you can see from Slide 4 of the presentation, for the first quarter, our adjusted gross margin was 37%. This was in line with our expectations. Compared to last year, adjusted gross margin decreased by 250 basis points, and this decrease primarily reflects the impact of two items that were unique to this year’s first quarter and combined, reduced adjusted gross margin by approximately 225 basis points. The first and larger of the two items is the timing of the annual scheduled maintenance shutdown of our Austin manufacturing facility that was completed in October 2020 as compared to the summer months in prior years. These costs are capitalized when incurred and recognized on the P&L in line with our inventory turns. As a result,…

Thank you. [Operator Instructions] We will now take our first question from Matt Mishan from KeyBanc. Please go ahead.

Good afternoon Vivek and Brian, I’ll try and keep this short as well. On the Pfizer contract manufacturing agreement, does that mean it will no longer be excluded from sales? And will there be a positive margin to that?

Matt, it’s Brian. I think at this point, we will still, for reporting purposes, keep it excluded for our non-GAAP reporting, consistent with the way that we always have.

Will there be a positive margin to it?

The margin impact under the new agreement, pricing is positive relative to the agreement in place until now. But I think what really has the most value to us are the commitments around volumes. If you look over the past several years, we’ve seen reductions in volumes for that piece of the business, and that’s impacted our profitability. And so we have more degrees of certainty around volumes going forward.

Does it preclude you from entering that market for yourself? I mean I know at one point, that was a consideration.

I think the reality, Matt, is – it’s Vivek, volumes went down on a number of those products. And that hurt us. And I think I just described the second part of your first question is, I’d just say, at least we’ve tried to structure so that we don’t encounter more turbulence, negative turbulence going forward, it’s all part of making solutions stable and predictable, but not only revenues, but profitability. On the second part, I think we’ve been a bit reticent in exploring some of those areas because we just don’t want to at least until the performance recently, we haven’t wanted to enter a category that was frankly declining in units, what was given on – or value, which was going on in regular solutions. Anyway, we weren’t trying to compound that problem. I don’t want to say – never say never because we do have manufacturing assets and production scale that can be used there, but I think we have to be very selective about it.

Okay. Excellent. And then just on the language in the R&D spending, I think last quarter, you had said it was double-digit growth for the year. And this quarter, it was like increased a bit. I’m just trying to balance those two.

It’s just been – on some of the projects, Matt, it’s been hard to spend the money to get kind of prototypes and boards and things we need in certain spots of the world, right? We would like to spend the money. It’s just been difficult to get it all spent. I don’t think it wasn’t a lot more than that.

Okay. And then how should we think about like the installations that you’re planning in Q2 and the correlation of gross margin?

May I think the biggest impact actually in gross margin, I’ll pass it back to Brian here. The biggest impact in gross margin are the actual items that Brian talked about in Q1. I think we’d rather say we feel okay about what we said the year was going to be. And we contemplated any pain we might feel from installations in the annual number, and we’re not changing that view. It might be a little bit bumpy depending on what gets installed where and when. But the primary focus in February and March was just to make sure the calendar is full for Q2 installations. I think the calendar is pretty good for Q2 installations right now.

All right. Excellent. It’s look normalization as well.

Thank you.

We will now take our next question from Jayson Bedford from Raymond James. Please go ahead.

Hi, Good afternoon. Just maybe to pick up on the last question. Can you talk about the environment or appetite out there to swap out pumps? Is it better today than it was in the fourth quarter?

It’s better today than it was – Jayson, it’s better today than it was in the fourth quarter. Obviously, there’s been lots of twist and turns and changes of suppliers in the market over the last number of weeks and months. I think our lesson from having been in this industry for many years is just everything takes longer than you think, whether that’s getting a new customer and getting it onboarded or getting a new product approved or solving issues. It’s a market that seems to be doom to that. And I think all participants probably recognize that now. And we are in a pretty okay place at the moment. And so we want to be active and make the best of that opportunity. So I think certainly getting our hospital customers domestically getting the vaccinations behind them allows us to have a better set of conversations than we were able to have in November, December. January. If you remember last year, we talked about the summer being pretty good and then slowing down in the fall. Again, it’s opening back up a little bit, which is good. Different answer – I’m sorry to go on here, different answer internationally, some of those international markets, the ones I referenced in the script are really still challenging and some of the ones – the Asian markets, etc., are really open. And you can see that in other people’s results, just the variety of performance.

Okay. You entered the year, I think, with over 100 basis points of committed share gain. How much of that were you able to get deployed and recognized in the first quarter?

Very small amount.

Okay. And then just curious as to what you’re seeing in April. Can we assume that April was stronger than March? And then I guess, more specifically, are trends starting to get better in both Canada and Europe?

Sure. And Brian, can you talk about that?

Yes. I think as it relates to April, I mean, we said that in the first quarter, toward the end, we saw gradual improvements in volumes. And I’d say that has – that gradual improvement has continued in April. So we feel okay about how the second quarter has started.

Yes. I mean I think the strongest statement we can make there, Jayson, is by saying on the consumables that we felt like there’s some reasonable chance, some chance for sequential improvement, again, which means volumes would be going up. And at least feeling solid about our ability to grow the dedicated pump sets over the balance of the year. For the U.S. market, I think we certainly see that improvement coming. And to the second part of your question, Canada and Europe, both improved sequentially. But Canada – I know you have a vested interest there. Canada is a bit slow. Things are moving slow in Canada. The business is improving sequentially, but new business discussions are slow in Canada, new business discussions and some spots of Northern Europe are still slow right now.

And just – I don’t want to get too granular, but the size of Canada and Europe in terms of percent of total sales?

Canada is our single largest country that we do business in outside the U.S. It matters to us.

Okay. And then you’re comfortable with this?

The whole company is really only consumables and pumps internationally. And that represents about $300-ish million of business. And most of that business is still heavier, Europe and Canada, right.

And just, I guess, the messaging on gross margin, I think I had it right in that it was 225 bps off of a gross margin of 37%. As we look at that going forward, with – is gross margin largely dependent on new pump deployment in terms of where it goes?

Yes. Yes. That will be the largest single variable probably for the rest of the year on gross margins.

That’s why I think – Jayson, Brian’s script was saying, we feel okay about the 38% to 39% for the year. But that pump volatility could move that up or down. I think we have the clearest view of Q2, right, because of the – we’re actually talking basis points of gross margin, like very specifically.

And just to be clear, the 38% to 39% for the year starts at 37% in 1Q?

Yes.

Okay. All right, thank you.

Thanks Jayson.

We will now take our next question from Larry Solow from CJS Securities. Please go ahead.

Yes. Hi, it’s Pete Lukas for Larry. Just sticking with the gross margins. You’ve covered a lot of it and given us a lot of nice detail in terms of the outlook for this year. Maybe if you could just kind of talk broadly on the longer-term drivers there that you see. In particular, the shift in systems toward more disposables as well as you mentioned the improvement you get now that Austin is behind you. Do you see with more control in your own testing on the manufacturing distribution side as you built that up in terms of internal capabilities as a driver going forward? Or what else do you see as some of the longer-term drivers there?

Sure. Pete, nice to meet you. I think we were trying to lay out our view of how earnings should increase over the long term. Again, it’s hard – a little bit hard quarter-to-quarter right now. But if we get to a normal level of profitability in Q2, which Q1 was not, and we continue to either have consumables growth and incremental pump wins that improve our market share that drive disposable usage, the incremental cost and drop-through – the incremental cost is low from those pieces of business and the drop-through is high. Those are the things we have to do to create value above a normal level of profitability. That normal level of profitability was kind of incorporated into our annual guidance this year. So I think we’re trying to give the formula that it’s not going to be IV Solutions that drive profitability here. We got to have differentiated items really going. What we need is IV Solutions, is what we feel like we’ve delivered for the last seven quarters, which is stability in the business. And the last item on the contract manufacturer work making sure that was secure. So it didn’t go backwards was important to us. And that’s why we were trying to outline the criteria to say, we think we can actually create value and improve margins if we can make our consumable business as big as possible, if we can have as many dedicated sets flowing through the income statement as possible. That’s really it. That’s the formula for us right now.

Great. And just one last one for me. In terms of being able to – you mentioned the hospitals starting to improve there for you. In terms of being able to get in and compete for new wins, I think I heard you say 70% of your calls are now in person. How do you see that improving in the short term?

I think right now, I think we said in the script, 50% with a little bit lower number in the Northeast, which is a bit strange still to us. I think we’re seeing travel requests and movement of our people around the country happening. And so I think live calls are going up. I think they’re going up quickly, and we will have more spend. So back to the gross margin, well, we will have more spend, but it’s a good spend if we’re out there seeing customers. And so not every one of those gross margin dollars will drop-through necessarily, but we’d rather be investing it into the revenue generation side. So I think that trend is moving up. It’s moving up fast. And at least certainly, if that’s what you do for a living, you want that. And so our teams want to get out there and be active with the people we’re trying to serve and support.

Very helpful. Thanks guys.

Thank you very much.

That concludes today’s question-and-answer session. Mr. Jain, I’ll pass the call back over to you for any additional or closing remarks.

Thank you, Ryan. Appreciate it. Thanks, everybody, for your interest in ICU Medical. We tried to have a shorter call today, and we look forward to updating everyone on Q2 as we normally do. Thanks.

This concludes today’s call. Thank you for your participation. You may now disconnect.