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Edited Transcript of ICUI earnings conference call or presentation 27-Feb-20 9:30pm GMT

Q4 2019 ICU Medical Inc Earnings Call

San Clemente Mar 19, 2020 (Thomson StreetEvents) -- Edited Transcript of ICU Medical Inc earnings conference call or presentation Thursday, February 27, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Bonnell;Incoming Chief Financial Officer

* Scott E. Lamb

ICU Medical, Inc. - Advisor

* Vivek Jain

ICU Medical, Inc. - Chairman of the Board & CEO

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Conference Call Participants

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* Jayson Tyler Bedford

Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst

* Lawrence Scott Solow

CJS Securities, Inc. - MD

* Matthew Ian Mishan

KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst

* John Mills

ICR, LLC - Managing Partner

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Presentation

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Operator [1]

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Good afternoon, everyone, and welcome to the Q4 2019 ICU Medical Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. John Mills.

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John Mills, ICR, LLC - Managing Partner [2]

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Good afternoon, everyone. Thank you for joining us today to discuss the ICU Medical financial results for the fourth quarter of 2019. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Scott Lamb, 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 our investor page and click on Events Calendar, and it will be under the Fourth Quarter 2019 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 full 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.

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [3]

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Thanks, John. Good afternoon, everybody. The fourth quarter of fiscal 2019 showed sequential revenue improvement and commercial stability in our most valuable product lines and allows us to hold firm on our view of profitability in the near term.

For the full year of 2019, we delivered cost improvements on the P&L from TSA and other operating expense savings that allowed us to best offset revenue decline versus 2018.

When we reflect on the year, and at least, we're very glad it's over, we were able to: one, stabilize our operational platform after our systems cut over in late 2018; two, survive a rapid deceleration in the IV Solutions segment, which was always expected, but not necessarily at the pace it came; three, handle some unique backwards revenue situations in consumables; while four, finishing the year with the best list of customers we've had since we acquired HIS; five, deploying some capital sensibly with all of the other issues we faced; and lastly, advancing our product quality and service levels to the customer.

We do believe the majority of the issues are behind us from an operational perspective, that the earnings impact and recovery was adequately captured in our previous commentary and that 2020 becomes a year that is about commercial execution and showing ourselves and our investors that we can grow our businesses.

On today's call, we wanted to comment on Q4 and full year 2019 results and discuss our current view of the business and recent performance trends, weave in a few quality items, given some of the recent industry developments, provide an update on the actions we've been taking given the 2019 changes and the last integration items, a quick comment on any coronavirus-related, knock-on effects for us to date and outline the criteria we are judging ourselves by and our near-term goals, and how they fit with the longer-term positioning of the company and the opportunity for value creation.

Meaning in plain English, how do we get back to growing our differentiated product lines and adding cash to our balance sheet. The quarterly comparisons will get easier for us after Q1 2020. But we don't really care if it doesn't show up with cash on the balance sheet.

Q4 was a reasonably clean quarter and showed the gross margin pressure we described in mid-2019 as the production slowdown effects came through the P&L. The company is operationally running well, the competitive environment seems to have stabilized a bit, and we do not have any material production constraints any longer and most manufacturing work has been around optimizing the IV Solutions production environment. The income statement was straightforward with sequential stability in revenues that allowed us to deliver fiscal '19 EBITDA down the middle of our revised guidance from last August.

We finished the quarter with $297 million in adjusted revenue. Adjusted EBITDA came in at $61 million, adjusted EPS came in at $1.94, and cash was $293 million. Adjusted revenue was down 7% quarter-over-quarter on a constant currency basis, due largely to the IV Solutions segment. There were no unusual charges, restructuring and integration charges were down to $11 million.

Starting as usual with Infusion Consumables, which is our largest business. Infusion Consumables had revenues of $120 million in Q4 2019, which implied a 1% decrease year-over-year adjusted for currency and 2% decrease on a reported basis. It was a bit of a mixed quarter for us.

We expected it to be maybe $2 million to $3 million better than it was. And to go into a little bit more detail, U.S. volumes were okay and the customer wins we talked about previously were implemented and this offset some of the -- these offset some of the backwards items we talked about on the previous calls, where we did have some variance was first in Europe and a few select international markets, which was probably $1.5 million to $2 million light to our expectations.

The remainder was in oncology consumables, where we did solve our production constraints in Q4, but we did not get all the volume we expected to implement it at customer sites. Basically, to be blunt, we had customers in a holding pattern for months. We then released the production and didn't have enough time left to do the proper implementations.

Europe appears to be improving so far in Q1 2020, and we've improved our process for implementation planning. There's been no change in the demand for our oncology consumables, but the number of desired installs does require better planning from us.

On the last call, we did go into more detail on some of the individual subcategory issues that hurt in 2019 to explain what was going on there, while there was no major customer churn, et cetera. To aggregate that for all of '19, we had somewhere around $15 million of slippage backwards in this segment across TEGO, SwabCap and some price harmonization between legacy ICU and legacy Hospira. We believe most of that is behind us and provides a better floor to start 2020.

It's early, but we're pleased with our acquisition of Pursuit Vascular. The people and the team share our values, and the products are helping customers deliver better quality outcomes for their patients. We haven't tinkered with it very much and are primarily focused on supporting the team to broaden awareness of the product and starting to work on how the core technology can help differentiate our consumables business over time.

The rest of the segment was pretty much as we expected. This is a segment where we're the most advantaged, and we have all the pieces, all the technology and all the scale to compete globally and should be able to offer more value to the customer.

For 2020, we believe this segment gets back to growth, and our assumption for now is in the mid-single-digit range.

Moving to Infusion Systems, which is the business of selling pumps, dedicated sets and software, which is important because it's a business that brings in a lot of recurring revenues and helps to support our competitiveness in consumables. This segment did $85 million in adjusted revenue, which was down 7% on a constant currency basis and down 8% reported, which was in line with our expectations.

As a reminder, we had a very strong Q4 2018 in IV systems. But most importantly, for the LVP pump segment, we finished the year strong in terms of competitive customer signings and are confident that we've stabilized a 10-plus year installed base decline. Given the recent industry news, there have been many investor questions around the implications for us.

Let us first walk through our views on the events and any knock-on effects to us and then how it could impact our year. First, infusion pumps are some of the most highly scrutinized medical devices by the FDA. Each year, really since 2010, the regulatory compliance bar has been raised with new standards and it appropriately forces customers to look deeply at the choices and focus on the right areas of stability, safety and track record of innovation.

Now our team has a unique experience of working at a senior level at 2 of the 3 primary manufacturers in the category. Our collective lesson is, when the industry lives in a glasshouse, don't throw stones. We've been asked if we could face the same scrutiny that others are facing in the industry. And the truth is, that's the reality of the business. We prepare ourselves every day. We don't skip on resourcing, and we focus on building compliance into our operations each day to do our best to not make regulatory compliance and event. We want a high complexity and high standard for regulatory authority in the category as it makes market share capture difficult for any new entrant.

Second, as we look towards any potential implications of the recent industry news, we would say it's too early to tell what the impact could be. We will not speculate on this situation other than what has been commented publicly regarding timing. We do 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 ECRI and ISMP guidelines around IV pumps, UL Cybersecurity certification and the other technical evaluations like KLAS.

We've gotten back to the core marketing message around our Plum LVP pump, as these independent and clinical reviews have validated our differentiation.

So on the margin, recent events are probably a good thing for us long-term in the core LVP segment of our Infusion Systems business. However, a small percentage of sales in our Infusion Systems segment is from non-LVP products. We do have some headwinds on the periphery from the non-LVP products in this segment, such as a dedicated prefilter empty syringes for the PCA pumps that we get from Pfizer Rocky Mount and certain ambulatory products.

Since the last call, Pfizer supply of PCA vials and empty syringes has become more consistent, and we do not see much backward slippage in that line.

As we thought about fiscal year '20, we've planned for some deterioration in our non-LVP product lines, and we thought the wins we're holding in LVP pumps could finally have the business close to flat on an annual basis.

Per the previous comment, it's really difficult to precisely handicap exactly what happens competitively with recent events.

For 2020, the most comfortable we would say right now is flat, plus or minus a little. We continue to feel like we're in good dialogue with many customers across a range of geographies.

Finishing the segment discussion with Infusion Solutions. We had $81 million in adjusted revenue or down 14% year-over-year or flat sequentially. Like last quarter, we did see and feel some more stable footing here right now at these levels. We will skip the usual solution stump speech for this call and just cut to the chase. Commercially, we did have some wins that have started to come into the book. These wins allowed us to handle the changing competitive environment better as we stepped in to defend our market share and handle the continued erosion of our noncommitted business.

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 we've survived the bleed out of the majority of our trading-oriented business.

Operationally, the items we described on our Q2 call last year, including reduced production with extra down days, adjustments to Pfizer purchases, et cetera, have made their way into the P&L and showed in the lower gross margins in Q4.

To go through the laundry list of items in the business. First, on the manufacturing variances, we've gotten after as much cost as we can, and we're running the best model for the time being.

On the supply chain costs, our adjustment to move to a more efficient warehousing and distribution model is in flight with our new centers starting to come online in Texas. I would have the same comment as last call, it's a bit slow, but it doesn't make sense to destroy product versus moving into our own facilities if it's perfectly fine sellable inventory.

In the short term, we feel like our comments from Q2 2019, as the business has been stable, still apply and continue to feel that way for this year.

Longer term, from a value perspective, we feel the business unit to be stable. On the positive side, we've added new customers to our book, are forecasting less production than sales as inventory goes down, and that will normalize late in the year and into next year, and we are bringing online new production in Austin to allow us to move away from Pfizer Rocky Mount on the highest running SKUs.

We've also flipped the switch on our system conversion in Austin, which was our final integration activity, which we believe can lead to longer term efficiency. These are balanced against the reality of the competitive environment and acceptance of risk on the small amount of noncommitted business we have remaining.

Basically, we're trying to make sure that the business unit is not a value detractor longer-term from where we are today and have modeled it as such.

To synthesize the comments on the business segments. For us, the criteria and lens we are judging ourselves from, at this time, has to be the ability to improve our position in our most differentiated businesses of IV consumables and IV systems and to prove stability in our less differentiated businesses.

We talked about the industry structure attractiveness for 2 years, why we fit in the puzzle, and our products are in a good position from a technology, quality and manufacturing perspective. And we think, today, we have the best right to win across our portfolio since we bought the business.

So 2020 for us is about commercial execution.

Moving to housekeeping items. We ended Q4 with excellent global fulfillment rates to our customers. The core IT cutover activities and everything non-IV Solutions was completed in 2019. The cutover of Austin systems is happening as we speak, and we'll update status on the next call. Then we are fully stood up and our attention will shift to optimizing what we've done. From a quality perspective, not much really to report as there were no material audits or inspections in Q4. We're still awaiting the next Austin inspection, and we are prepared.

A brief comment on coronavirus. From the Eastern Hemisphere, we have a very small amount of sales via distribution into China. To date, we've seen no change. What is more in our minds is a supply chain of components from China. Solutions is a North American business only. In consumables, we are deeply vertically integrated and can make just about everything ourselves in our factories outside of the currently impacted geographies. So as a reminder, our 4 factories globally are in the U.S., Mexico and Costa Rica. However, we do source most of the core electronic components for the pump business from China. We have months of component stock on hand, and we will further secure this necessary where possible.

From the Western Hemisphere, we do a healthy business in Infusion Consumables in Italy and, in particular, Northern Italy. As anyone who has followed the infusion industry knows, Northern Italy also produces a number of infusion consumable components. It is too soon to have any view, if anything, has been impacted. To sum it up, so far, we have not experienced any material impact, either commercially or in terms of supply chain. However, we cannot predict how the situation will evolve for the rest of the year, and we'll provide future updates as appropriate.

Okay. To bring this all back to the topic of earnings results and how we think about 2020. Ultimately, it comes down to growing our differentiated highest margin lines and running ourselves as efficiently as possible over time. The only change in our SG&A year-over-year is some commercial investment, adding back to our incentive pool program or infrastructure that came via acquisition.

Our puts and takes for 2020 are summarized as follows: we believe in a return to growth in consumables, driven by oncology, some wins in the base business and some supplement from Pursuit Vascular and stopping or bottoming out the lines that were going backwards.

In IV systems, we think we have the best chance we've had in LVP pumps to date. In IV Solutions, we have the manufacturing savings that we moved on last year. These are viewed against the competitive environment in IV Solutions, erosion of non-LVP product lines and margin in the short-term on LVP capital sales. We do believe, from a revenue perspective, we start to look again like a normal company as we finish lapping all the solutions volatility after Q1, but that's really optics.

From an EBITDA perspective, we believe our previous commentary still applies that for the time being, it's best to remain at $60 million to $65 million a quarter. We continue to be cautious given the environment and what we did to our shareholders and ourselves when we rebased our view in Q2 last year and want to make sure we have the flexibility to compete across all of our product lines.

Given the spend on Pursuit in the events of 2019, we didn't put material cash on our balance sheet. We do want to start that again in 2020. We believe that even with a little less cash, we have a safe and strong balance sheet that can protect shareholders and be deployed for value creation as opportunities emerge. We've made significant capital investments into our factories and systems over the last 2 years and are in the final stages of some major production upgrades with more vertical integration and sterilization across our network, new tooling and an investment mindset for quality and growth.

We have a set of strong experienced people to do the work, and we have a culture of not wasting shareholder resources in respect for our capital.

As always, I'd like to close that things are moving fast. We're trying to improve the company with urgency, and we're trying to take responsible actions and break some of the inertia that many of our companies in our position face. 2019 was the toughest year our team had in our tenure at ICU. The company will be stronger from the experience. I really appreciate the effort of all combined company employees to handle the bumps, move forward, focus on improving results, and our company appreciates the support we've received both from our customers and our shareholders.

Before I turn it over to Scott, this is the last time I'm saying that sentence after 6 years, as Scott is retiring after 17 years with the company, with the last 3 years, felt like 10. I wanted to say thank you on behalf of all colleagues. We took a company whose core existence might have been questioned 5 or 6 years ago and turned it into an important industry participant and an interesting and fun place to work. That required an unhealthy amount of work and we could not, no way, know how have done it without you. I appreciate your friendship and partnership over the last 6 years and wish you some downtime. So with that, I'll turn it over to Scott.

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Scott E. Lamb, ICU Medical, Inc. - Advisor [4]

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Thank you for that, Vivek, and good afternoon, everyone. To begin, I'll first walk down the P&L and then take a little -- talk a little bit about cash and the balance sheet and finish with some detail to our guidance for 2020. So our fourth quarter 2019 GAAP revenue was $316 million compared to $340 million, down 7% from last year. And for your reference, the 2018 and 2019 adjusted revenue numbers, which exclude contract manufacturing sales to Pfizer at cost, can be seen on Slide #3 of the presentation.

Our adjusted revenue for the quarter was $297 million compared to $322 million last year, down 8% or 7% on a constant currency basis.

Infusion Consumables were $120 million, down 2% or 1% on a constant currency basis. IV Solutions, which we primarily sell in the U.S. were $81 million, down 14%. Infusion Systems were $85 million, down 8% or 7% on a constant currency basis, and Critical Care was down $2 million, 13%, both on an adjusted and constant currency basis. Adjusted diluted earnings per share for the fourth quarter of 2019 were $1.94 compared to $2.14 for the fourth quarter last year. Our adjusted earnings per share for the quarter was favorably impacted by approximately $0.21 related to year-end true-ups and excess tax benefits connected to equity compensation.

We estimate our GAAP and non-GAAP tax rates for the full year of 2020, not including these tax -- these excess tax benefits from equity compensation to be in the normalized range of 21% to 23% with the non-GAAP rate at the upper end of that range.

And finally, as expected, adjusted EBITDA decreased 12% to $61 million for the fourth quarter of this year compared to $69 million last year.

As you can see from Slide #7 of the presentation, our adjusted gross margin for the fourth quarter was 40% compared to 42% for the fourth quarter last year. The 2 largest drivers for the year-over-year decrease were similar to the last quarter, and include the impact from the ramp down of IV Solution production and the associated loss overhead absorption and additional supply chain costs related to higher-than-optimal inventory levels. For 2020, while the change is minimal, we've updated the methodology for calculating the gross -- our gross margin in order to conform with the presentation of our other non-GAAP measurements, including adjusted EBITDA and adjusted EPS by excluding amortization and stock-based compensation expense. A comparison of the historical and updated calculations of adjusted gross margin for 2018 and 2019, by quarter, is provided in the slide presentation.

The impact of the change is to increase adjusted gross margin by 23 and 33 basis points for the full year 2018 and 2019, respectively. For 2020, using the updated methodology, we expect gross margins to be between 39% and 40%, similar to the second half of 2019.

As expected, year-over-year SG&A decreased approximately $6 million and was 22% of revenues. The decrease came primarily from TSA savings as a result of separating from Pfizer and lower incentive compensation related to performance.

For the first time since we bought Hospira Infusion Systems, we expect an increase in SG&A for 2020 due to a reset of incentive compensation and the acquisition of Pursuit Vascular.

As a percent of revenue, R&D expenses were relatively flat year-over-year at $13 million, and we expect R&D to continue to run approximately 4% of revenues in 2020. Restructuring, strategic transaction and integration expenses were down $30 million to $11 million in the fourth quarter versus $41 million last year. This is primarily the system integration costs for our Austin manufacturing facility and a onetime charge to move our U.S. pump service depot to our existing Salt Lake City facility.

In 2020, we expect to spend approximately $30 million in the first half with most of that related to our Austin manufacturing facility integration with a significant decrease in the second half of the year.

Now moving on to cash and our balance sheet. For the quarter, free cash flow was $25 million. After the purchase of Pursuit Vascular in the fourth quarter, we ended the quarter better-than-expected at $293 million in cash and investments as we reduced inventory and continue to reduce DSOs.

By the end of 2020, as we continue to make working capital improvements, such as reductions in inventory, we expect to have over $350 million in cash and investments. This includes a onetime $22 million payment to Pfizer expected in the first quarter related to the take-or-pay charge that was recognized in the second quarter of 2019.

In the fourth quarter, we spent $24 million on CapEx, and similar to the third quarter, it was primarily related to general maintenance, system integration, capacity expansion for our consumables business and transferring a portion of contracted solutions products from Pfizer to our Austin manufacturing facility.

In 2020, we expect to reduce spending on CapEx by approximately 10%.

For 2020, we expect our adjusted EBITDA to be between $240 million and $260 million and adjusted EPS to be between $6.50 and $7.20.

And just to reiterate, adjusted EPS includes a normalized tax rate when compared to 2019. And for modeling purposes, we expect diluted shares to be approximately $21.5 million.

Lastly, as I move to the next chapter, I did want to say a few words on Brian Bonnell, our incoming CFO.

Brian has been inside the company now for almost 2 years, came with financial oversight for the exact same products at another industry participant, has a terrific work ethic and has a 10-plus year relationship with Vivek, Christian, Virginia and the rest of the team. I could not imagine a more smooth transition.

For me, it's been an amazing experience in the last 17 years and has been a worthwhile last several years working with Vivek and the rest of the team. And I want to thank everyone that I've worked with at ICU Medical, and I look forward to the next chapter in my life. And with that, I'd like to turn the call over for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Matthew Mishan of KeyBanc.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [2]

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Just starting off Vivek, is $80 million the right run rate in IV Solutions from here? I'm just trying to get confidence in that rate as you kind of work through some major contracts that I think are still up in 2020?

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [3]

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Sure. I mean I think when we called it down last summer, I think we said $75 million to $80 million was the range. We've averaged above that. And I think you hear us saying we continue to believe somewhere in that range is the right range. I don't think we have a different view of anything we've said historically for the last year.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [4]

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And then just any thoughts on potential flu benefit, either in the fourth quarter or in the first quarter '20?

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [5]

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We had the opportunity. We did get some calls, if we would like to put a bit more maybe into the channel on the notion that flu started off very strong in the fall. We chose just to kind of stick with normal business. So we did not get any benefit in flu. And right now into the first quarter of this year, we haven't seen anything unusual, so no benefit.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [6]

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And then moving on to the infusion pumps. Is it possible that you can say when Plum LVP last went through a 510(k) update with -- including some of the software updates? And then as a follow-up to that, just in early conversations, how willing are hospitals to dual source infusion pumps? And given the history, why not a certain level of redundancy in supply?

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [7]

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Great questions. For the Plum hardware, the latest 510(k) that was submitted, which was version 1510 was after we owned the business in March 2017 or April 2017 -- March-April 2017. Some of the software -- 510(k)s on MedNet were earlier than that. But those are the facts on what were our latest submissions were. In terms of the customer, I think the answer is somewhere in between what you said, which is, our experience has been, at both places, large systems have been willing to have multiple vendors, where it gets more complicated as people typically don't have multiple vendors inside a single building. So system may say, for this portion of the country, or this region, or the state, or this group, it makes sense to use one versus the other. But typically, inside the 4 walls, it gets more complicated. People will prefer not to do that.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [8]

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Okay. And then -- and I know you actually are -- have been launching some new products. I'm just curious how the Diana 2.0 platform has been received by customers so far? And then just in relation to that, have they been asking for an end-to-end closed platform from compounding to delivery? Or is this something that -- like a new solution that you're bringing to them?

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [9]

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I think you're referring -- I think you were at ASHP, you must have seen this. And so we haven't talked about it very much. I think it's been in a limited market release for us. We've been reworking it. We brought it back in to tweak things a little bit. So it's just starting to get out there. I think it's the notion of -- if you look at all these guidelines, you look at USP <800>, the notion of closed medication delivery has been a topic for a long time. I don't think we're inventing a whole new clock. There hasn't been an easy solution from a workflow perspective, that's what we're trying to bring to the equation. I think, like all markets, it is early days, it requires education. And there's all these individual fires that happen in different parts of the infusion chain, right? It was on solutions a number of years ago, right? So we got to stay on point and just keep hammering away at our message there, and it's about safety and quality, and those are the things we believe we have value in.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [10]

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All right. Congratulations, Scott, on your retirement. Thank you very much for all the help you've given me over the years.

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Scott E. Lamb, ICU Medical, Inc. - Advisor [11]

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Thanks, Larry (sic) [Matt]. Appreciate it, it was good working with you.

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [12]

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Thank you, Matt, for the kind words. You're the newest one to the party. So we're just teasing you a little bit.

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Operator [13]

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And your next question comes from the line of Larry Solow of CJS Securities.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [14]

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Well, Scott, I will thank you for that. I will appreciate -- I do appreciate all your help in the last 9 years, I do -- I wish you best of luck as well. You deserve a break. So god bless. I guess I can just ask a couple of questions here. Just so to summarize, and I think it's sort of been -- sort of your thesis for a while now. Keep that solutions business sort of on the flattish rate on the top line and maybe over the next couple of years, improve some margins a little bit, that has sort of been reset. But get little bit back into your pockets as you bring some production in-house, and then grow the other 2 businesses, maybe not so much in '20, but in '21 and beyond. What -- without going into exact numbers, what is sort of a good target? What are you hopeful or expect these 2 businesses can grow? Is it sort of a 3% grower, a little better than that? What do you sort of aspire to?

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [15]

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Look, at a high level, we have to prove our thesis, right? That's the point. We owe it to ourselves or to our shareholders to show that we can grow the businesses. And so thesis is a hypothesis, right? We want it to be reality. That is exactly right. Our view is we need to show that we can grow the stuff that's the stickiest and the most differentiated, which is consumables and pumps. And we got to show stability in solutions, et cetera. I think we had years of growth in consumables, and we had an off year in '19, and we're saying we want to get back into mid-single-digit range for '20. I don't think there's any structural reason why we don't think that, that's not a realistic assumption for a number of years. We used to do that before we had all this stuff.

Pumps is super hard to call right now because of the different lines going into it. I think there -- it's been well talked about what's the market replacement rate and the market expansion, and there's not a huge growth in net hospital beds in the country, right? So pumps is about share gains and pumps is about globalization in the right markets. And it's about changing the value prop to -- away from just the box itself to software and other service and other features versus just a dedicated set, which has been about historically. So I don't really want to make a prediction there. And solutions is totally about census and holding the best customers. So whatever someone's view is of U.S. census is the way you should think about that.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [16]

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And I know you don't guide to the quarter. And you sort of guided to sort of a $60 million to $65 million run rate for the -- per quarter for the year. In terms of cadence, would you expect to exit '20 on a little bit of a higher bottom line run rate then you start the year?

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [17]

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Yes. I hope, I mean, I think that's certainly our belief. The supply chain stuff, the other things kick in, all right, gives us time to get more to see.

So we spent a lot of time on revenue and costs. We don't sit around and try to perfect an EBITDA by quarter. It's not that big of a company.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [18]

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But general trends, obviously, should hopefully position you to be a little bit better as you enter '21.

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [19]

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I mean, we haven't fully lapped. We haven't -- I mean, after Q1, we'll fully lap some of the negative stuff that was going backwards, right? And so that helps and the wins get more time to get implemented, that helps, et cetera.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [20]

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Right. Okay. And just on the cash flow and particularly working capital. I know you talked a couple of years about CapEx going down, and that certainly should help your free cash flow. But I would think the business, just on an operating cash flow basis should generate a little bit more than it's been doing in the last few years. I realize with Pfizer, with Hospira, (inaudible) integrating that and all probably cost some money, but also just looks out on the working capital side, you had more of a usage than we would have thought. So any thoughts to that? And as you look out the next couple of years, you think that can improve?

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [21]

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Yes, let me make a comment, Brian is here in the room with us. And let me let Brian answer some of that, too. We spent a fortune on integration. We're just talking about it today. And so that was a huge consumer of cash. That's why I kept -- has been saying that needs to stop. That's like more important than, frankly, the working capital changes, right? And then once that's done, then it becomes very much -- it's more important than the DSOs, et cetera. Once that's done, then all the other activities, Brian's working on, pick up. But the integration consumed a ton of cash and look where we are we. If you add back the cost of Pursuit, we're kind of at the level of cash we had before this transaction and we spent hundreds of millions of dollars in integration. So I'll just say that was the biggest kind of negative polar user of cash, and I'll let Brian talk about the regular -- the work streams going on in broader working capital.

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Brian Bonnell;Incoming Chief Financial Officer, [22]

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Yes, Larry, this is Brian. So for 2019, it's clear that from a working capital standpoint, we used more cash than we probably would have liked. I think we made some good progress in Q4 to reverse that trend, and the goal would be to continue that progress during 2020, and there's an opportunity there.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [23]

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Got it. Okay. Great. And just on the CapEx, did I catch that right, $30 million total, was that just growth cap in the front half, the $30 million that Scott referred to?

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [24]

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No. That was -- that's the last of the integration...

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Lawrence Scott Solow, CJS Securities, Inc. - MD [25]

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Okay. That's that fees. Okay, got you. So that $30 million a little bit than less in Q -- in the back half. And hopefully, I think...

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [26]

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Not a lot a little less, a lot, lot less.

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Operator [27]

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And we have one more question from the line of Jayson Bedford of Raymond James.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [28]

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Actually, I have a couple of questions. But first, on pumps, it looks like you saw some kind of green shoots there with the quarter-on-quarter increase. Did the non-LVP business grow sequentially?

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [29]

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No.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [30]

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Okay. And the expectation is that it's -- the non-LVP is kind of flat to down in 2020?

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [31]

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Definitely down.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [32]

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Okay. And then earlier in the year, Vivek, you mentioned 100 basis points of share gains in LVP. And have you seen the impact of that on the revenue line? Does that contribute to the fourth quarter?

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [33]

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Not really. That's when I said we believe what we're holding in transactions under contract that we haven't implemented yet. That we felt good between that and what was going down that we had a chance to be close to flat, that wasn't really the driver of the fourth quarter.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [34]

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Okay. And just to be clear, it doesn't look like your guidance assumes any notable share gain as it relates to the current industry environment in LVPs.

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [35]

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We don't want to speculate on anything that's going here. Things go slowly. We've been around this stuff for a long time. So...

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [36]

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Okay. And then just on the consumable side is a little softer than I expected. When you talk about the $15 million in slippage backwards, is that just all supply-related? Is that what you mean by backwards?

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [37]

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No, not at all. I mean -- ballpark, these are not precise, in 2018, we sold $10 million of TEGO, for example, and maybe we sold half of that in '19 or something. Product lines actually went backwards. That we had a big issue with OEM SwabCap, where there's a lot of load in '18. It didn't happen in '19, less dollars of revenue. So individual things went backwards and then a little bit of price harmonization that I talked about. That wasn't at all supply related. That was why we had to step in and do Pursuit. Why, for the first time, we didn't have consumables growth because there's just too much stuff to jump over, and the Hospira distributed products we talked about a little bit historically. There was always enough that even those things were going on year-to-year in the background, it never shows up. When it got to [$15 million] or that kind of number, it gets much harder to outgrow that.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [38]

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Okay. From a supply perspective, though, to the extent there was an impact in '19, you entered '20 here with full supply?

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [39]

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No. We have very, very high service levels right now across the board. So said differently, is I think where you're going. Had we had our production issues solved earlier in the year, I think all of us believe we could have delivered a better Q4, even Q3, oncology number than we did.

Basically, we had orders on the books since March, we didn't really get the product released until September, October and then to call up a customer and say, I know you've been waiting for us for 6 months, can you help us in the next 3 weeks get installed? The calendar just didn't work out as in many places as we thought we could do that.

Exactly right, probably to the tune of $1 million. That's not business gone away. It's sitting there. We just got to get it on the schedule and get it in. So it was frustrating to us. So that's why I said there was -- it was $2 million to $3 million less than we thought. The international markets were sluggish. And I think I said that, either on the call or at an investor meeting midway through last quarter. That's turned around a little bit right now.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [40]

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Okay. You said there's no change in demand for oncology. What is end market demand from a growth perspective for oncology?

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [41]

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I think a safe number, we'd feel comfortable saying, Jayson, is sort of like north of double digits, I'd say, that 10% or better.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [42]

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Okay. On gross margin, have you seen the worst from a ramp-down of IV Solutions production? Meaning, have you seen -- is the bulk of the impact behind you now?

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [43]

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I'm going to let Brian go there Jayson.

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Brian Bonnell;Incoming Chief Financial Officer, [44]

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Yes, Jayson, this is Brian. I would say that the majority of the impact shows up in Q4 and in 2020, and forward. It's going to just -- you can assume its margins are flat.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [45]

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Okay. I guess...

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [46]

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We've got a couple -- there's a couple of little offsets, Jayson, like on the systems cutover in Austin, right? We lose a little bit of production absorption on things like that. So for us, it's -- the manufacturing was the biggest chunk that rolled through in Q4. There's still a few things out there. It's better to be safe and just say kind of stays flat for a while, right? We took it.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [47]

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And Scott, Congratulations. I wish you the best.

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Scott E. Lamb, ICU Medical, Inc. - Advisor [48]

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Thank you, Jayson.

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [49]

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Jayson, thanks for all your effort you spent in the company, for years of support and Scott and us, we appreciate it.

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Scott E. Lamb, ICU Medical, Inc. - Advisor [50]

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Very much.

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Operator [51]

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I'm showing no further questions at this time. I would now like to turn the conference back to CEO, Vivek Jain.

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Vivek Jain, ICU Medical, Inc. - Chairman of the Board & CEO [52]

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Thanks, everybody. I recognize, obviously, it's been a couple of eventful days in the market here, and I'm sure people have many other things going on. So we appreciate you spending time with us. Even with what's going on, we're very happy last year is over, and we look forward to getting back to work and looking like a normal company in 2020. Thanks, everybody. Appreciate it. Bye.

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Operator [53]

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Thank you so much to our presenters, and to everyone who participated. This concludes today's conference call. You may now disconnect. Have a great day.