Good day, ladies and gentlemen, and welcome to the Q2 2016 ICU Medical Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference Mr. John Mills, ICR. Sir, you may begin.

Thank you. Good afternoon, everyone. Thank you for joining us today for the ICU Medical financial results for the second quarter ended June 30, 2016. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Scott Lamb, Chief Financial Officer. Vivek will start the call with an overview of second quarter results, and operational improvements. And then Scott will discuss second quarter financial performance in more detail. Finally, we will open the call to take your questions. Before we begin, I’d like 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 risk 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 discuss non-GAAP financial measures, including results on adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency in ICU Medical’s ongoing results of operations, particularly when comparing underlying results from period to period. We’ve included a reconciliation of these non-GAAP measures in today’s press release and provide as much detail as possible on any addendums that are added back. In addition, the sales numbers that Scott will be covering, as well as the company’s financial statements, for the reconciliation from GAAP to adjusted EBITDA and adjusted earnings per share are available on the Investor Relations portion of the website for your review. Now with that, I will turn the call over to Vivek.

Thanks, John. Good afternoon, everybody. Our second quarter was a very productive quarter as we continue to drive revenue growth and increased EBITDA, which resulted in strong free cash flow and improved net income. We now have better visibility into the full-year, and as we expected, we worked our way through some of the backlog and bumps and OEM issues described on our last call. And as committed and provide better guidance for our entire business for the balance of the year. It has been a very busy first-half of the year operationally. We’ve executed well through a large volume of activity, and have emerged stronger and built on the positive financial and operational trajectory of the last few quarters. On today’s call, in addition to the financial results and a recap of the operational activities year-to-date, we will discuss how our direct channel is benefiting from our improved execution, allowing us to adjust our top and bottom line guidance range for full-year 2016. We’ll also provide an update on our OEM business and its full-year expectations which are in line with our early prediction from our previous two calls and illustrate how our overall mix of business is changing going forward, which should enable continued earnings growth. In Q2 of 2016, we generated revenue adjusted EBITDA and adjusted EPS slightly above our initial expectation. We finished the quarter with approximately $97 million in revenue, resulting in reported revenue growth of just over 15% with negligible currency effect. Please note that some of this revenue growth was due to catching up from certain temporary production constraints mentioned on the last call. Adjusted EBITDA came in just over $33 million, which was a growth of 18% year-over-year and adjusted EPS came in at a $1.15, which was a growth of 19%…

Thanks, Vivek. As Vivek mentioned, we are pleased with our revenue adjusted EBITDA and net income results in the second quarter. As we’ve achieved growth in both our direct and OEM sales channels. Our second quarter 2016 revenue increased 15% to $97 million, compared to $84 million in the same period last year. GAAP net income for the second quarter of 2016 was $16.6 million or $0.98 per diluted share, compared to GAAP net income of $13.6 million or $0.83 per diluted share for the second quarter of 2015. Adjusted diluted earnings per share for the second quarter of 2016 were $1.15 as compared to $0.97 for the second quarter of 2015. Adjusted EBITDA was $33.1 million for the second quarter of 2016 compared to $28.1 million for the second quarter of 2015. The increase in adjusted EPS and adjusted EBITDA is primarily attributable to improved top line growth and improved leverage in our operating expenses. For the second quarter, GAAP net income, GAAP EPS and adjusted EPS benefited slightly from a change in equity compensation accounting policy, which I’ll discuss under my tax comments. Now, let me discuss our second quarter revenue by market segment and then more specifically by direct in OEM, and as always we also have these results posted on our website. Direct sales totaled $61 million or 63% of total revenue, while OEM totaled $36 million. Our primary OEM partner share of overall revenue decreased to 34% compared to 35% from the same period last year. For the second quarter sales in infusion therapy were $71 million, an increase of 21% from the same period last year, and represented 73% of our total sales. Direct infusion therapy sales were $39 million, an increase of 22% from the same period last year and were primarily due…

[Operator Instructions] And our first question comes from Larry Solow from CJS Securities. Your line is now open.

Great, thanks. Good afternoon. I wonder if you guys can just give us a little more color on the continued strong direct infusion sales. I guess, I realized some of that is from the SwabCap. I don’t know if you have an organic number, but sure it’s still well into double-digit. Is it market share? Is it - obviously, you reorganized your sales force early last year? Are you still reaping benefits from that? Is it just a combination of bunch of factors there? If you can help us, give it a little more color now that would be great.

Hey, Larry, it’s Vivek. Hope you’re doing well.

Yes.

Yes, SwabCap is roughly half. I don’t want to get into the numbers, because it’s so small. I mean, it’s again a small P&L. I don’t want to talk about every little product line individually. But I think it’s the category is growing globally. And so infusion does well both in the U.S. and outside the U.S. I think we’re doing very well outside the U.S. and inside the U.S., it’s kind of getting back to our roots, right? We’ve had a stable team now for a year-and-a-half. In my previous experience, yes, I sort of went through the same thing. And I feel like you got some stability, people know what they’re doing and focus. I don’t think it’s that much more than that right now.

Okay. And then on the gross margin, sounds like obviously a little short-term or little more of an issue, but it seems it’s going to be resolved or is resolved. Q3 and Q4, do they get back sort of - or do we get back to the Q1 levels by Q4. And a second part of that question, could you just remind us that the expected benefits from Slovakia? And I assume most of that will go through the gross margin line or cost of goods.

Yes. I’ll start and then go back to Scott. I care about serving the customers. And we had some self-inflicted wounds. We had to put up the money to do it right. It’s annoying, but I don’t think it affects long-term value, that’s why I went through that.

Absolutely.

It’s going to make the year not as strong as Q1. We build back up there. Scott noted the specific. We still until a couple of weeks ago, we’re going to prepare a little bit. So I don’t want to overestimate on the good side here.

Yes, and the only thing I would add to that is to reiterate what we believe previously, or we just mentioned, which is we are seeing improvements at the factories as we speak. We’re continuing to see those improvements. We spent a little bit more than we wanted to, but it was to serve the customer really. And so, we expect sequential improvement over the next two quarters, and then we’ll start to realize some additional good guys next year that Vivek brought up earlier in the call.

Okay. And just last question on the SG&A, you mentioned that was going to go up a little bit in the back-half of the year. Anything specific to that and just…

No, I said, cash expenses are going to go down, so SG&A went up, because the revenues were a lot, so sales accruals for commissions that is over [ph] a lot. We’re kind of implying the back-half will be a little smaller than the front-half. There will be some accruals coming out and just some spend related to the [excels and stuff out of it] [ph], it should all be out.

Okay, so you’re saying it won’t go up on an absolute basis next quarterly…?

Cash costs will be down sequentially.

Okay, okay, great.

Compared to the first-half.

Got it, okay. Great, I understood [ph] that. Okay, great. Thanks a lot, guys. I appreciate it.

[Operator Instructions] Our next question comes from Jayson Bedford from Raymond James. Your line is now open.

Hi, good afternoon. Thanks for taking the questions, guys. I guess, let me just take it back to the gross margin question, even if I back out kind of the quantified disruption you mentioned in the second quarter there, was there anything that stood out in the first quarter that would make that level not attainable over the next year or so?

I’d say, eventually no. There is nothing outstanding that would prevent us from getting back there, whether it’s this year or next year.

I think the one thing that could hurt us is the one we don’t coach, is currency, right? If currency went the other direction, then I think - if currency went materially in another direction it would be hard to get back there. But if things stayed constant with currency, I think we’d feel pretty comfortable with that statement.

But was there anything exceptional in the first quarter that causes that gross margin to be near 50%, 55%?

No, no. When we look at - most of what we sell is under long-term fixed price contracts, we had lower volumes, gross margins - it’s a better way to lock more volume revenue-wise this quarter. But it was with additional costs to get it out the door, right? And we’ve had a lot more - remember we’ve closed Slovakia, put that into Ensenada’s, lot of new people working through some of the productivity. We thought we had it all licked. And we do know it’s going to be a little bit lower in Q2, it costs us even more than we expected.

Okay, fair enough. Okay. You went through, Scott, a lot of numbers there at the end of your talk. The guidance, your expectation for OEM sales, is it still flat year over year? I know you quantified your primary OEM customer there, but just overall OEM is it still flat?

Yes, I think roughly flat, to go a little bit in either directions.

Okay. And then, you’re obviously growing well in oncology. When do you let ChemoLock go and ramp production and really put a little more effort behind that?

I think we’ve made the investments into production capacity. They’re just not fully online yet. So I don’t think there is any changing our mind, we’re just waiting to get the tooling in house to get the stuff validated and start running it into the system. We’re just not there yet. But everything has been ordered. Everything we need for next year has been ordered and ready.

Okay. And then, maybe just lastly for me on…

Jayson, which tells you we believed, right, we put up the money.

Right. Can you view that as additive to ChemoClave? It’s not necessarily cannibalistic?

It depends on the use-case pharmacy-by-pharmacy. In some cases, a customer may like the convenience and additional features of ChemoLock versus the ChemoClave. In some cases, we believe it will help us add safety to hospitals, where safety wasn’t being practiced, right. So it’s really depends on the used cases by hospital.

Okay. Lastly, capital deployment, Vivek, you mentioned valuation it look like you had a related expense to that in the quarter. Are you seeing deals out there, but valuation is just the sticky point, is that the message?

We are looking - we look every day it’s hard that’s the candid answer. It’s not that easy.

All right. Thanks.

And our next question comes from Chris Lewis from Roth Capital Partners. Your line is now open.

Hey, guys, thanks for taking the question.

Hey, Chris.

First on the Cogent monitor, when do you feel like you have that product kind of at a point where you can fully go out and sell that with all of the bells and whistles and applications that you refer to.

I think our best guess right now is early next year, right. We are working hard on getting the feature set done, it’s another four or five months away.

How important is that product just to stabilize that critical care business and do you see that product as potentially being a driver or sometime in 2017 see critical care and return to kind of a normalized growth rate?

First of all, let’s take that in two parts. The first part is the company, we have spent a lot of money on that program, so we need to get it out and we do believe it stabilizes the critical care business, where we are getting hurt is when our installed base get stood up and we need to hang on to our installed base first and foremost. So that the lens we see it in. The second in terms of what is I mean, from a growth perspective. I think, that will take some time, I think the challenge is the critical - like all businesses, the critical care business is five or six different sub-businesses underneath that. And some of the big ones for clinical reasons are having shrinkage in the size of the marketplace and that makes keeping our head above water difficult. So I think we were feeling pretty good that we’ve been able to stabilize the business, if not, be reasonably flat, get the new monitor and hold on to our installed base prove that we can do that after that we can talk about growth, until it’s out there, I don’t really want to spend a lot of time talking about critical care growth.

Got you. And then, can you just provide an update on how the on boarding processes are going for Terumo and B. Braun?

Sure. In terms of Terumo, it’s been just a ton of regulatory work, it’s nearing completion. We’ve made a lot of progress, and so I think it’s in involved process as anybody who has done business in some of the geography knows. But we’re executing well through it. And I think we feel like there is a very clear roadmap getting it on board. On the Braun thing which is still in its very early days and very small on SwabCap, that’s happening. Business is being transacted every day. They have the products in hand. It’s just more of a discussion of where else could we sell it.

Okay, great. And then, just one or two more, I may have missed it, but it looks like there was a $1.5 million strategic transaction expense. Am I reading that right or was that related to the Slovakia closure?

Yes, on the P&L, there was $1 million purchase gain and that was just related to…

There was a piece of technology we purchased out there. And it had some other benefits. It was not an operating item and it wasn’t an expense, it was actually a gain.

Okay, got you. And then, just one more for me, Vivek, in the past you kind of talked about, your goal is not really to expand margins at least in the near term. As we think about 2017 and the leverage story. It seems like you have a few meaningful headwinds converging with Slovakia SwabCap and kind of gross margin line stabilizing and perhaps…

Tail, tailwind, not headwind, right?

I’m sorry, tailwind. Did I say headwind?

Yes, big difference, yes.

Quite a different. As you think about those tailwinds converging, are you a little bit more bullish by your expansion - your margin expansion story here over the next 12 to 18 months? Thanks.

I think, that’s exactly why we’re talking about it right, because I think, if we look - the pieces of the puzzle, our direct revenue growth - I said, I felt like it was solid for the balance of the year and into next year on infusion oncology. We felt like we had margins in a good place for the opportunity to do better, right, albeit it is been a little bumpy for the last 90 days. That was in a good place. And then, what’s going to happen with the principle OEM customer, well, if we can get down to a lower enough percentage of sales and still deliver this amount of profitability, both our direct revenues and the margin should offer value creation on top of that. It’s exactly the model we’re trying to drive to.

[Operator Instructions] And our next question comes from Tom Bakas from Piper Jaffray. Your line is now open.

Hey, guys, good afternoon. Congrats on a strong quarter and thanks for taking my question. Just first, it seems like your direct infusion and oncology businesses are performing well. Just if you just give us a little color on the reasons for that. And then, also the sustainability there, can you see that continue into next year?

Sure, hi, Tom. I think we just talked about it a little bit, which is just - it’s time in feet for some of our team members, stability, consistent marketing, understanding our own value proposition, better customer service. Lot of things have frankly gotten away from getting back to the core of some of the unique products, the custom products, the things people want to talk about, at least on the infusion side, I feel like it, but not sure of that. Oncology, it’s a little bit of the macro, which is people see the need for safety in the handling of hazardous drugs. And we’re in a good position in that market. Our current market share and our innovation, I think gets attention of customers and we’ve been executing well through that. In the comments I made in the script, that’s what we believe, which is we see solid growth in both of those areas for the balance of the year. And I probably can see right now into early next year.

Great, thanks. And then a quick follow-up, it looks like the share count ticked up sequentially and I think you guys said your cash balance is about $400 million now. Just wondering why there weren’t any buybacks in the quarter.

Well, I’ll let Scott answer the share count question and then I’ll come back to buybacks?

Okay. So okay, Tom, if you’re talking about primarily the diluted share count, that’s one of the effects of adopting this new accounting standard on equity compensation. Where in the past on the treasury buyback method that amount used to run through the income for purchasing back shares that no longer run through it. So while we get positive effective on the tax rate to get our tax rate more in line with - really what it does is get the GAAP rate and the cash tax rate more in line with one and other. But it does have an offsetting effect on the treasury buyback method. And so that is one of the major reasons for the increase.

On the buyback, earlier this year we bought back almost $20 million of stock. We think we did that wisely. And we’ll continue to do it opportunistically. I think the mission of small companies is to grow. And I’d much rather horde capital frankly and use it when the time is right to expand the value of the company than minor changes on the share count line for EPS to be super blunt about it.

Thank you very much.

I am showing no further questions. I would now like to turn the call back to Vivek Jain for any further remarks.

Thanks everybody for your interest in the company and participating in our Q2 call. I hope everybody sees we’ve been executing well and delivering value and driving our results. And we look forward to updating everybody on our Q3 call later this year. Thanks. Have a great summer.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.