Good day, and welcome to the ICU Medical Incorporated Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I'd now like to turn the conference over to your host today Mr. John Mills, Managing Partner. Thank you. You may proceed.

Great. Thank you, Tanya. Good afternoon, everyone. Thank you for joining us today to discuss ICU Medical financial results for the third quarter of 2021. On the call today, representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Brian Bonnell, Chief Financial Officer. We wanted to let everyone know that we have a presentation accompanying today's prepared remarks. To view the presentation, please go to our Investor Page and click on Events Calendars and it will be under the third 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 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 Medicals 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 been a busy 90 days for us since the last call with the resolution of our Pfizer dispute, the announced acquisition of Smiths Medical and a record, or near record sales levels in our most differentiated businesses, all of which aligns with our comments on the last few calls about it being a fluid environment. The volatility in the U.S. supply chain and in hospital census for our customers did make it a bit more challenging quarter operationally than the normalcy we had described in on our Q2 call. Q3 for us was really about meaningful increases in U.S. volumes and good stability or small improvements in the international markets. 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 it's been great to see again our teams face-to-face around the world and to meet some of our soon to be colleagues from Smiths Medical life. While results were generally in line with our previous comments we wanted to use the time today in the call to comment on the in quarter trends and drivers of our business, and try to explain some of the growth we had that was slightly above our expectations. Then relate that to any impacts on near-term business and at least our current feelings about next year in each segment. Try to sketch out how inflation has impacted us at a high level relative to our budget for the year, provide an update on the Smiths Medical transaction as well as our normal housekeeping of items of which they're not many, and book in the scenarios we see post deal…

Thanks, Vivek and good afternoon, everyone. To begin I'll first walk down the P&L and discuss our results for the third quarter. And then talk a little about cash flow and the balance sheet. So starting with the revenue line, our third quarter 2021 GAAP revenue was $336 million compared to $319 million last year, which is up 5% on both a reported and constant currency basis. For your reference the 2020 and 2021 adjusted revenue figures, which exclude contract manufacturing sales of Pfizer can be found on Slide number 3 of the presentation. Our adjusted revenue for the quarter was $328 million compared to $303 million last year, which is up 8% on both a reported and constant currency basis. Infusion Consumables was up 25% or 24% on a constant currency basis. Infusion Systems was up 3% on both a reported and constant currency basis. IV Solutions was down 6% on both a reported and constant currency basis, and critical care was down 8% on both a reported and constant currency basis. As you can see from Slide number 4, the presentation for the third quarter our adjusted gross margin was 40%. This was in line with our expectations and represents an improvement of 2 percentage points to last year's third quarter gross margin, and sequentially it was the same as this year's second quarter. Compared to last year the higher gross margin reflects the benefits of favorable product mix coming from faster growth in our consumables business, as well as higher dedicated disposable volumes within Infusion Systems offset somewhat by inflationary cost increases. At the time we provided our original guidance, we said we expected adjusted gross margin for full year 2021 to be in the range of 38% to 39% and we now expect the full year…

Thank you. [Operator Instructions] Our first question comes from Larry Solow with CJS Securities. Please proceed.

Good afternoon, guys. Thanks for good quarter, and thanks for taking the questions. Just first question, Brian or Vivek. On the guidance it sounds like certainly Q3 was a little bit better than expected. Just trying to get a better feel for the pull forward, do you expect – do you expect actually to lose some of that next quarter or do we kind of feel like Q4 is sort of flat with Q2? So you had a little bump up. Q2 is also a good quarter, but I'm just trying to feel is there – was there significant pull forward? Actually you can contract in some of these categories next quarter or just less growth?

Hey, Larry its Vivek. I will go and let Brian pylon. I felt like in the prepared remarks, I was trying to say that consumables had a couple of million too much more than we frankly thought, like, maybe three or four something like that too much and consumables. And that's why we – we said the real run rate is probably somewhere between Q3 and Q4. So we can't tell you exactly when that's going to, sorry, between Q2 and Q3. We can't tell you exactly when that's going to come out because of how weird it is out there, but that is sitting there and maybe just a little bit in the other businesses but then also the plant shutdown, right. So that's why we're kind of saying we are in Q4.

Okay. That makes sense.

And that just sounds every year until the annual – until the annual numbers we talk about.

But I know you guys have talked about it a lot during the last shutdown too. That makes a lot of sense. And just, you mentioned 20% your – your base has grown 20%, U.S. base on the LVP pumps. Can you sort of help us, has that number like the started, it must have grown pretty significantly this year, then too I imagine, right. That's sort of over a two-year period, right, two-and-a-half year period from the bottom?

That's right. I mean, I think again everybody has, if you listen to every, all the competitors talk, we – everybody has a little bit different way of how they count market share. But I think at some point we thought we got into low teens and we improved on that by 20%, right.

And just to clarify the supply chain, the example you gave there, so $70 million consumables and normally you'd get 30, 35 that would fall the bottom line. Now it's only maybe 15, 24 at the bottom line. So you're actually on consumables alone losing 15 million...

If you kind of said, you ballpark, right, exactly, a little bit more than 30, right. Should be contribution, but plus 20 – almost 20 or something on the bottom line, but usually get all of that. And the difference is exactly the inflation stuff. Now the inflation may not be in the consumables business because it weighs the least as easiest to move around, et cetera. But that just the way...

That's just, but that's a good example and that's, and I'm sure there's more inflationary pressures, other areas being impact. That's just the right, I mean, that's not the only piece you're right using that as an example, but I'm sure there is...

No. Well I was using the examples of the cost is coming in three primary buckets. The costs came in and then, bunch of this is in already. But it is fluid out there is the three buckets, laborer, trends, particularly if you have to expedite trends it's brutal right now. And raw materials and the known is there's a supply imbalance on both capacity on the trends side and on some of these raw material production. And why are those inherently more valuable today if there's less global demand? Yes. There's been production interruptions and yes things there is core inflation, but excess in some of these kind of seems a bit much to us.

Right. Okay. Just last thing, just on the timing of the Smiths potential closure. So you mentioned you got the Hart-Scott-Rodino was passed FTC approval. The shareholder votes on the 17th. I think originally when you did the acquisition, you said by the middle of 2022, so it seems like that's running ahead of schedule maybe early in the year, maybe sometime early in Q1. Is that a better guesstimate for timing?

Yes. I mean, I think one we're happy and pleased that I think things have been considered in a constructive way and as soon as possible, as soon as possible.

Okay. Great. Thanks. I appreciate it.

Our next question comes from Matthew Mishan with Keybank. Please proceed.

Hey, good afternoon guys. And congratulations on one of the better, relatively in line quarters I've seen.

I would, we've been so busy with all this stuff. We haven't actually even looked that closely whatever he has done. So hope that relatively broader market not just us but…

I was referring to you relatively in line with expectations.

Okay.

Not mine. You were above my – you were above my expectations guys.

Thank you. Everybody gets their 15 minutes.

So you guys have had a lot of competitive momentum over the last couple of years, and I think this has been building towards the moment where you're implementing and planning a lot of new pumps winning in consumables and really kind of executing on a lot of what's been going on over like the last couple of years. How much of this would you say is catch over some stuff that may have been delayed from implementation of COVID? And how do you kind of think about like your pipeline like new business activity going into next year?

Sure. I don't know if I would call it catch up, a little bit on some of the full line implementations that were delayed certainly in the back half of last year that got pushed to this year. That's why the competitive [indiscernible]. So there's some portion of that, but in the other areas in oncology, in some of the regular core IV Therapy areas, they’re just been the regular day to day wins in market expansions that have been happening. Those haven't been pent up. I think it's just finally, we've got – we had to get through all the solution stuff two years ago, get contracts resigned. I think we did a lot of that and that finally let our teams have time to go out there and call. And now it's a different challenges. We had a little bit of a run on the store and some of these items and we got to make sure we can deliver from the supply chain standpoint. So it puts a lot of stress. We budget for a certain amount of growth and when you well exceed that with all the stuff going on right there, it puts a lot of strain on the system. And so we're feeling that a little bit. In terms of the pipeline, I think we tried to preview a little bit, but we felt about each of the big profit driving businesses and consumables in palms, we felt – we feel like we're in pretty good shape at them bigger and more relevant next year than they are this year.

All right. Excellent. And then I guess, like the important question around the combination of yourself and Smiths, I think you had indicated pro forma EPS approaching $11. You've now reported your third quarter, at least your numbers are moving up a little bit. They've reported their half year numbers. It's only been a couple of months, but how comfortable are you still with the $11 of pro forma EPS, approaching $11 of pro forma EPS?

I would say we don't have a whole lot more information as of today than we did in early September we had the call, right. Because of the way the process worked or the alternative transaction, we didn't see a lot of information at the depth we want. So I would say our point of view is the same, not because we're more confident or less confident just because we haven't really seen anything materially new in the interim, right. We haven't seen monthly performance since then or anything, right. So we're relying on what we thought then.

Okay. Excellent. Thank you very much.

Thanks, Matt.

We will take our last question from Jayson Bedford with Raymond James. Please proceed.

Hi. Good afternoon.

Hey, Vivek. So a couple of fourth quarter questions and then a couple of questions on 2022. So either Brian or Vivek, just the fourth quarterly implied EBITDA I think it's my back of the envelope is right implies about $63 million relative to 3Q down about $9 million, $5 million due to kind of the manufacturing in Austin. What are the other ways if I just look at sequentially EBITDA?

I mean the guess second one there; Jayson is if there was a little bit excess that was stocked up by distributors in the quarter because of shortages in the industry, right. If we had more sales than we frankly expected or we could itemize what customers they made sense to. If that came out in Q4, that would penalize those businesses right in the quarter. So that's really the biggest driver, a little bit of – some of the inflation is in if, a little bit more on that coming in Q4, but the biggest driver is exactly the plant shutdown and if there was any excess, right.

Right, and nobody wants to talk about it when it's happening. Everybody loves saying I had a great sales quarter, and they're like, oh, there was destocking when you don't have this, rather just say there's some of it now and not have a debate about it.

Okay. Just on that, I guess that the $3 million to $4 million of overage in consumables, I think you mentioned it's related to supply chain issues. So is this over ordering on the sake of your customers or has one of your competitors had issue that you steered more business your way?

I think it might be a little bit of both. I mean, obviously we're heavy in some regions of the country that really had COVID spikes. And so there was a lot of, yes we can get your hands on in some spots. And I think other people may have been down on a few items that shifted our way, and I'm not sure I'd call that necessarily permanent business or the industry was just short and we were the beneficiaries of that. So obviously we tried to make it our permanent business, but we remember much I'm from the other businesses.

Okay. And then on 2022, I think for consumables, you mentioned that you would – you hope to grow at or above market, just remind us what is market growth in consumable?

I mean, clearly this year is not market growth because of what the silliness of last year. Mid-single digits something like that is, if you add in the higher growth pieces from oncology and some of the other specialty items in the regular IV something like that, but it's getting to be a big business now. It's good.

Okay. And then just also with respect to the commentary for infusion systems on 2022, I think you said it would grow, Is the expectation that your non-LVP business is flat in 2022?

No. I think we just don't have to talk about it anymore. It's gotten small enough and we think we have enough growth now with a larger install base and the winds we think that are going to implement and we never have to say those words again.

Okay. Okay. And just on the…

Sorry, go ahead.

That's really, no, I'm sorry, that's just very muddied up the waters of some, two things mud up the weather and LVP one when we bought Hospira, there were – there were wins. There were – actually there were wins by the competitor out of the Hospira install base that hadn't happened yet. So we actually went down the first two years, right. And then we had to bottom out and go back up. And so we built back up off that – off that base. That's made it hard to tell because it was shrinkage then and then the not LVP stuff. So that's all kind of behind us now.

Okay. And just lastly on pumps, COVID historically at least the last year-and-a-half has been a source of hesitation from a pump deployment standpoint. Do you think we past that now and kind of the new headwind here is just kind of short labor shortage issues at the hospital level. Do you think, again, do you think kind of COVID, I hate to say is behind us, but is that still a source of hesitation from a deployment standpoint?

Yes. I don't know if you'd call it just COVID I'd say it's like it's the hangover of COVID, it was fatigue, right. It's just exhaustion. And if you're short staff and having to make a bunch of changes right now. If you have a need to do it and your equipment's told you do it, people are doing it. We're installing every day out there. But it is a factor, right? It is a factor. So the more normal the world can get the better off we'll be on this topic. I don't know if I'd call it COVID, I'd call it like the aftermath, right? The labor knock-on effects and the exhaustion knock-on effect, et cetera.

Okay. All right. Thank you.

Thanks guys. Appreciate it. And I got a lot of companies are reporting today. Thank you for making time for us. We appreciate it very much.

Thank you. This does concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

Okay. Thanks everybody.