Thank you for standing by. This is the conference operator. Welcome to the ICU Medical Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to John Mills, Managing Partner with ICR. 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 fourth quarter and full year 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 Calendar, and it will be under the fourth quarter of 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 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 been a busy 90 days again since the last call with closing on the acquisition of Smiths Medical and strong sales levels in our most differentiated businesses. The volatility in the supply chain and in hospital census for our customers that we described in the last calls, continued to make it a bit more challenging quarter operationally than the normalcy we felt in the first half of 2021. Q4 for us was about balanced improvement in all geographies. 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 meet so many of our new Smiths Medical colleagues live as our teams have been in person at the vast majority of sites and production centers. While Q4 results were generally in line with our previous comments, we wanted to use the time on the call today to comment on the year-over-year drivers of the three main legacy ICU businesses and provide color on the expected growth for the upcoming year, give some sense of the profitability improvements in 2022 for the legacy ICU businesses, even with the current volatility and inflation in the market; reflect briefly on the performance over the last few years through the criteria we've outlined consistently on these calls; lay out what are the current challenges and opportunities with the Smiths businesses as we see them six weeks into our ownership and describe why there is a wide range of outcomes for the first two quarters; articulate our priorities for the near, medium and long term with a few comments on the areas of interest in our view,…

Thanks, Vivek, and good afternoon, everyone. To begin, I'll first walk down the P&L and discuss our results for the fourth quarter, including a recap of full year performance for the business. I'll then move on to cash flow and the balance sheet before wrapping up the discussion with our guidance for 2022. As a reminder, the Smiths Medical transaction closed on January 6, 2022, and the historical results being discussed today will not include Smiths Medical. However, our 2022 guidance will include the expected impact from consolidating the Smiths Medical results beginning January 7. So starting with the revenue line. Our fourth quarter 2021 GAAP revenue was $341 million compared to $320 million last year, which is up 6% reported or 7% 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 number 3 of the presentation. Our adjusted revenue for the quarter was $330 million compared to $309 million last year, which is up 7% on both a reported and constant currency basis. Infusion Consumables was up 20% on both a reported and constant currency basis. Infusion Systems was up 1% reported or 2% on a constant currency basis. IV Solutions was down 6% reported or 7% on a constant currency basis, and Critical Care was up 5% reported or 6% on a constant currency basis. When looking at full year 2021 adjusted revenue on a constant currency basis, the business in total was up 4% compared to 2020, and we grew our largest and most valuable business of Infusion Consumables by 15%. Overall, we were pleased with this level of performance, given the volatility and other challenges presented by COVID. As you can see from Slide number 4 of the…

[Operator Instructions] Our first question is from Jayson Bedford with Raymond James.

So just a few questions. And Brian, you kind of touched on it a little bit here, but perhaps you can dumb it down for me. So the $450 million to $500 million in EBITDA guide is, I think, pretty well aligned with expectations. The EPS guide, I think, is a bit below some expectations out there. So can you maybe walk through why there's a bit wider of a variance here between the two profitability metrics?

Yes, Jayson, I think the first thing I would point out is within that EPS guidance, there are -- there's a total of $0.40 worth of impact related to the transaction itself, and most of that $0.40 relates to items that don't impact EBITDA. It's higher depreciation expense from the valuation of some of the assets and it's also a little bit of additional interest expense because we did end up hedging a higher percentage of the outstanding debt to protect ourselves in future years. So that's definitely a portion of that. In addition, it depends on kind of where you're starting as it relates to EBITDA, We had expected to do actually a little bit better than that $190 million in the first year. So we may be starting from a little bit of a higher base than what you are starting with.

Okay. Okay. Just with respect to the quality-related interruptions, Vivek, I think you mentioned that the decisions and remedies are in flight. I guess, when will you have better visibility on these dynamics? And how much is in ICU's control versus, say, reliance on any type of regulatory body out there, i.e., the FDA?

Yes. I mean I think we're really into it right now, Jayson, and I want to be careful and not get ahead of any data that we still have to gather and knowledge we have to accumulate. I feel like the regulatory agency does what it does. It's informed the Company that it hasn't been as compliant as it could be, and then it's up to the Company to self-determine with the appropriate check-ins whether we're doing that. And so we understand what that means, and we're in process of figuring out how to get the whole place more robust, and we've been through that before. There's no magic date. It's much more about us understanding, making some decisions on products, understanding some of the technical fall downs and then the broader system fall downs and how we can resolve those things. So -- but the work on that has all started already. But we don't have a magic date, which is why we can exactly pinpoint it to a number to have a tighter range.

Okay. And is the level of back order at Smiths, which I think you alluded to, is that a function of cleaning this up? Or is that more of a supply chain that can...

I'm sorry to preempt you there. Totally unrelated, just falling down. Plenty of demand. Customers calling and asking where is my stuff every day, purely unrelated.

Okay. And then just in terms of the base business; is the expectation that EBITDA margins improve in '22 versus '21? .

Tough right now to say because we don't exactly -- we've modeled like the inflation headwinds stay, right? No relenting in the expedite costs or the transportation cost or the raw materials costs. And those -- some of those things are not -- that was the little -- the comments on that wasn't that those are going up with CPI. Those things are 3x CPI or double normal prices on some of the expedites when you need a product to move really quickly. . We've assumed -- and Smiths was also bearing a lot of excess costs there. We've assumed those carried through the full year. It's tough to see EBITDA margin expansion if all of that continues exactly the same way, so it's probably -- margin percentage is probably closer to where we are. We were trying to say we've absorbed an amazing amount of stuff that's come at us, and we feel like we still were on track to what we thought margins were for this year and still can have decent year-over-year profitability. I think we probably felt on the margin a little bit better in September, and then we took a lot of costs in the fourth quarter that are -- we've now kept in the forecast. So that's all happening a bit real time.

Okay. And I guess just maybe last one for me. Is there a level of revenue that you'd say, Smith benefited last year from -- on the COVID side? Meaning does that anniversary to put a little bit of headwind on the top line in 2022?

Probably some. It's difficult to say, Jayson. It was a deal, right? And in the first half, everybody has -- in the first half, when someone else owns the business and you're waiting, everybody's got different incentives. So it's difficult to say what was COVID versus just maximizing the value of everything you could sell at that moment, et cetera, et cetera. So I would say there's multiple things. That's why we don't want to focus on -- we want to find the right baseline for this year and move forward from that.

Our next question is from Matthew Mishan with KeyBanc.

Just the first on the revenue side, when you closed the acquisition, -- you said it was about $2.5 billion -- approximately $2.5 billion in pro forma revenue. I'm just trying to understand what -- like what -- when you say what's core and then some stuff is noncore, what is the right pro forma revenue to be -- to kind of look at through the combined company at this point.?

I think if we went all the way -- hey, Matt, and thank you for the question. If we went all the way there, and I don't think we're prepared to answer that fully because if you went to the point of saying there were one or two assets that were nonstrategic, we wouldn't want to assume that we were able to solve those situations, right? So I don't think we want to go quite all the way there. I would say the business historically was in the $1 billion to $1.25 billion range. And we said in our January presentation, we're a $2.4 billion revenue company. Part of that was due to correcting for currency changes that happened between kind of late August, early September when we announced the deal versus today. And part of that was due because we knew some of these interruptions and back orders were going on. And so that's why we're not necessarily giving firm revenue guidance on the Smiths -- we're giving, as we always do, good direction on the legacy ICU business, not firm revenue direction on the Smiths book rather than just saying we feel okay with that approximately $2.4 billion company combined.

Okay. I think that makes sense. And then when you say that you're frozen at this point, does that mean you're not able to ship products from that facility? And how much revenue is associated with that?

Yes. I think when I said the word frozen I meant just in terms of like decision-making, taking a decision, deciding do this, don't do that, et cetera. And the decision-making and the people involved, things were not moving, and that's changed now. In terms of what we're able to ship or not ship, I'd rather not comment on that. There are obviously some products that we have chosen, until we understand the situation fully, to not put back into the market, and that's exactly the items we're working through right now. And there is no regulatory agency that said you can or can't do something with any product in the U.S., right? This is our own decision-making about doing things the right way.

Okay. I think that's fair then. And then the reason for the wide range of outcomes on the EPS side is the flow-through from that and the timing of that. It probably flows straight down to earnings per share at a fairly high rate given the low share count. Is that right?.

That's 100% correct.

[Operator Instructions] Our next question is from Larry Solow with CJS Securities.

Just a couple of real quickies, just at a high level, just on the guidance. So on the I guess on the Smiths piece, I know they did $190 million, I think last year, that was the trailing 12 months. Wasn't that number -- that was already a COVID-related or adjusted number, right? They had some profit related to COVID that we took out already, right? So I shouldn't -- hopefully, there's not too much more to fall off. Is that right?

Actually, Larry, if you went back in history and kind of looked at their publicly audited reported number, it was probably another $230 million or something north of that. We knew some of these issues were brewing, and that's why it was Brian said we ran our model at kind of $190 million or slightly above, and that was the number we put out there. We said please use this as your assumption. And then the variance from that is exactly these two issues we described and it's picking up on this next question.

Right. And you had also thought that -- I think originally the timing was more so that you closed a quarter or two later, which you're probably happy to have it now anyhow. But in that quarter or two later, there was -- they had said they were going to try and fix some of these issues. It doesn't sound like they even attempted to and maybe the environment has made them worse, I guess, right? In terms of -- it sounds like it's not a deep hole that you can't get out of but just more comp effects.

I think the first part -- I mean, there was a lot in there. The first part was exactly right. We did assume they would somewhat get the house in order on these topics with another number of months under their belt. And our business is a little bit bigger in the back half, not huge, but a little bit. And so there's a little bit of timing. But please, what you said before is 100% right, which is we are very happy that logic prevailed, and we were able to achieve early termination and close in January and grab control of the situation. I think it's a very important fact for us and we looked at each other...

Better under your umbrella so -- than someone else's. And then on the core business, $265 million, $285 million or just $275 million midpoint. Obviously, there were some inflation this year. And I know you threw out a $20 million to $30 million number, Brian. I think Vivek in the prepared remarks, you said something what there was this year. Did you actually quantify that? [indiscernible]

Brian I'll let -- let me do my part. I said at least $40 million or more over the two-year period, and then Brian gave more color what the actual rollover.

Yes. It's in the range. That was the year-over-year.

Go ahead. Okay. That was an additional $20 million to $30 million incremental in '22. Right. Okay. And the -- obviously, on solutions you answered part of my question was I think solutions was a brunt of the inflationary pressures just because it's a U.S. located. How about Smiths, have they -- where is that other half coming from? Is that some legacy? Or is there some Smiths in there in terms of inflation.

Larry, Brian was trying to describe legacy ICU only. And the -- you're correct in that, and we try to be transparent that it's an amazing amount of inflation. And it basically breaks along the lines, we've said the last, I can't remember it was two calls or three calls, right? 1/3 labor, 1/3 raw materials and 1/3 trans. And solutions is very heavy trans because you're shipping a lot in the U.S. land-based and it's where our largest number of U.S. manufacturing footprint is. So it's exactly what you're saying there. On the Smiths portion of it, we tried to include that in that first adjustment we made back in September, right, because we knew there was more coming there. So there's not additional that we're saying is something there -- that was incorporated in the things we said. We just didn't think bucket issue number one and bucket issue number two, kind of at the levels they were at because there was going to be more time to remediate where you start with this question.

Right. Okay. And I know you don't give quarterly guidance. And clearly, for cadence for the year, it's going to be back-end loaded. There's just a lot of factors, integration for one. So it sounds like maybe even more back end loaded with currency and inflation comps at least will ease in the back half. So any thoughts to that? Any color to that?

I'm looking at Brian. It's so many moving parts Brian. I'm not sure we actually -- I'm not sure we have a lot of comfort in making quarterly statements right now. I don't know, Brian.

Yes. I mean, obviously, the further we get into the year the more orders -- the more progress we will likely have made on these two issues. So that would -- naturally weight it a little more towards the back of the year, but we don't have great visibility as of today.

Right. In terms of restructuring for Smiths, is there any potential -- not holding you to it, but that you may end up selling some of their assets? Or is there anything that maybe stands out as something that you may think about selling that's not core to you?

I think, Larry, we were trying to say in the script, there are certain geographies -- just like Hospira was. I mean we've exited a few geographies with Hospira within weeks of closing. There are some geographies that we're debating are we better doing it or is a distributor better taking it, et cetera. So that may slightly impact revenues, even if it has no impact on earnings, right, but net, it optically improves margins. And in terms of business units, maybe, but it's really hard to even kind of noodle on that unless you're in a healthy position in supplying customers reliably, until you maximize the value of whatever you may have, right? So kind of job number one is to fix the base business because it will lead to the most available options.

Right. Last question, just on Pursuit Vascular. Can you just remind us the earnout there that you guys -- what was the level there? Is that a sales number?

That was -- it was a $26 million earnout payment that was made based on the achievement of the business hitting a specific gross margin target.

But in general, [indiscernible] is very pleased with what's happening there.

It's been doing very well, right? Yes. Yes, yes, absolutely.

We don't talk about clinical stuff that often, but if you have a minute look at that study, it was some pretty compelling data. So anything else?

Absolutely. No, I'm all set.

We do not have any additional questions at this time. I would like to turn the conference back over to Vivek Jain for any closing remarks.

Okay. Thanks, everybody. It's obviously an interesting world out there. We appreciate the interest in ICU. We've got a big hill to climb in front of us. We've got the right people to do it, and our team is engaged and actively involved in making this valuable. So thanks, everybody. We'll talk to you soon.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.