Good day ladies and gentlemen and welcome to the fourth quarter 2016 ICU Medical, Inc. 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 may be recorded. I would now like to introduce your host for today's conference, John Mills. Please go ahead.

Thank you. Good afternoon everyone. Thank you for joining us today for the ICU Medical financial results for the fourth quarter ended December 31, 2016. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman and Scott Lamb, Chief Financial Officer. Before we start, 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 and 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 be referencing a presentation that we have also posted on the ICU Medical website under Investors and under Presentation. In addition, we will 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 have included a reconciliation of these non-GAAP measures for today's release and provided as much detail as possible on any addendum's that are added back. In addition, the sales numbers that Scott will be covering, as well as the company's financial statements, the reconciliation from GAAP to adjusted EBITDA and adjusted EPS are available on the Investor portion of the website for your review. Now with that, I will turn the call over to the Vivek.

Thanks John. Good afternoon everybody. Our fourth 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. It's been a very busy last 12 months, both operationally, as we have executed well to a large volume of activity and strategically as we went through the multiple transactional steps to acquire Hospira Infusion Systems. On today's call, in addition to the financial results of 2016 and providing 2017 guidance, we wanted to recap the key drivers of ICU Medical over the last few years, outline the near-term activities to ensure the successful integration of Hospira Infusion Systems and like we did with ICU Medical, layout the range of scenarios for value creation into the future. We believe there is real intrinsic value in the asset we have created and we wanted to be transparent on the plan and the work that has to happen to have it fully realized. In Q4 2016, we generated revenue, adjusted EBITDA and adjusted EPS slightly above our initial expectations. We finished the quarter with approximately $96 million in revenue, resulting in reported revenue growth of approximately 6% with negligible currency effects. Adjusted EBITDA came in just slightly over $34 million, which was growth of 14% year-over-year and adjusted EPS came in at $1.20, which was growth of 25% over last year. Please remember in Q4 of 2015 we had an unusually high tax rate, which depressed our adjusted Q4 2015, making this a very easy comp. Our cash conversions were very strong and our cash balance at quarter end was approximately $445 million. We continued through Q4 to have very solid performance from our direct lines of infusion and oncology and our overall direct operations continued to generate…

Thank you Vivek. As Vivek mentioned, we are pleased with our revenue, adjusted EBITDA and adjusted EPS in the fourth quarter. Our fourth quarter 2016 revenue increased 6% to $96 million when compared to $90 million in the same period last year. GAAP net income for the fourth quarter of 2016 was $9.5 million or $0.54 per diluted share compared to GAAP net income of $5.5 million or $0.33 per diluted share for the fourth quarter of 2015. Adjusted diluted earnings per share for the fourth quarter of 2016 were $1.20 as compared to $0.96 for the fourth quarter of 2015. Adjusted EBITDA $34 million for the fourth quarter of 2016 compared to $30 million for the fourth quarter of 2015. Now let me discuss our fourth quarter revenue by our direct and OEM channels and then more specifically by market segment. Direct sales totaled $66 million or 69% of total revenue while OEM totaled $29 million. For the fourth quarter, sales in infusion therapy were $69 million, an increase of 6% from the same period last year and represented 73% of our total sales. Direct infusion therapy sales were $44 million, an increase of 19% from the same period last year and were primarily due to sales of our needlefree products. Sales in oncology were $13 million, an increase of 9% from the same period last year and represented 13% of our total sales. Direct oncology sales were $10 million, an increase of 30% from the same period last year. This was due to increases in both existing and new customer sales. Sales in critical care which are essentially all direct were $13 million, a slight increase from the same period last year and represented 14% of our total sales. Our fourth quarter sales for domestic and international were…

[Operator Instructions]. Our first question comes from the line of Tom Bakas from Piper Jaffray. Your line is now open.

Hi guys. Good afternoon. Thanks for taking my questions. So first, I appreciate the comments and the prepared remarks and I know the deal only close three weeks ago, but if I could just push for a little more color on the initial thoughts on the positives and negatives of the acquired business? If there have been any surprises? And then finally, does the rationale for making this deal still make sense?

Hi Tom, it's Vivek. Thanks for the questions. I tried to go through some of them in the prepared remarks. I think other things I would add in terms of findings, I tried to spend a lot of time leading up to the deal and post closing and even next couple of weeks with core customers and buying partners out in the United States and globally and I do think there is a sense that customers, for everything that this business has been through, customers want to see a healthy competitor here. They know the value we offer to the market. They know the products are fundamentally good. And I think they have experienced some of the execution issues we have talked about. They would like to see us succeed. So I take that as kind as a positive. I think we have been really pleased on the core group of people that really get the business and we are trying to work together with them to offer more transparency in how to be successful and how to work like a team. I think we are pleased with that. And then in terms of rationale, I think the reality of what we outlined there on the Hospira reductions, that was coming, I am talking a little defensively, that was coming to us one way or another in 2017 and then the contract was up for renewal in 2018. And so I think anybody who runs the numbers can see, on a hypothetical standalone ICU basis, what that would have looked like versus trying to parlay that situation into a much larger company here. So if I was just talking defense and I said it when we made a deal, we would have given away 20% of the equity of the company to protect 35% of the earnings, absolutely a deal, right. So I still feel like economically, putting aside all the strategy stuff relative to the cards we were holding, it was the right thing to do.

Okay. Great. Thank you for that. That makes sense. My next question might be for Scott. It's just regarding the topline. Can you just lay out exactly what happens to ICU sales in this transaction? And just how should we think about your revenue guidance specifically?

Sure. So probably the best way to think about it is, start with ICU revenue for 2016 which was approximately $380 million. You back out the inter-company revenue to Hospira, call it $114 million, $115 million. That gives ICU net revenue of $265 million. If you take 11/12 of the approximately $1 billion standalone Hospira, that's about $920 million. And that brings you to about $1.185 billion. And then if you add to that direct growth, ICU legacy direct growth, of approximately $30 million to $35 million, that gets you over the $1.2 billion.

Tom, it doesn't count when you sell it to yourself, right. So the $114 million we sold to Hospira sort of gets eliminated in addition.

Okay. That makes sense. And if I can just sneak one more and just while around the topic, Scott, you mentioned the legacy business. If you could just maybe give a little bit of an update there and a little more color on the growth in the segment?

I can grab that one. So our direct business is, I think, that number I was talking about, there was roughly 19% growth year-over-year. Now some of that we did get some benefit from the Excelsior acquisition. As I said, if we look on pure organic, we were still low teens on the direct business. And that was the number we were saying the incremental EBITDA for 2017 was factoring roughly 10% or 11% growth in our direct business. And we felt that was in line with what we have seen historically, a little more conservative for what I feel we need to be a little bit more conservative right now on what we are seeing out there.

Thanks guys. I will jump in queue.

Okay.

Thank you. Our next question comes from the line of Larry Solow from CJS Securities. Your line is now open.

Good afternoon. Just wanted to maybe just follow quickly on the core legacy outlook. So I guess the 10% sales growth you are sort of equating that to about 10% EBITDA growth. Is it fair to say, so limited margin improvement? Or maybe that's just for rounding errors? Or wouldn't there be some --

I think that's exactly right, Larry. I mean you remember, this Hospira did help our productivity with the amount of work that it is providing our factories, right. As that's gone away, some of that negativity gets reflected. So we have to reallocate costs across our whole book of business. So that's the fair assumption right now.

Got it. Okay. So maybe it would have been a little bit greater, even standalone even without the transaction?

Well, not without the transaction.

If you did lose the Hospira, you are still losing, okay, you mean the volumes for just Hospira, the inventory slowdown and just the slowdown in production. Okay. So what happened then?

The fact that we have a production slowdown, we can't allocate all of that just to Hospira. Some of that flows in cost to close our own business.

Got it. So on a standalone basis essentially your EBITDA would have been flat outlook plus the inventory reduction?

Plus the negative absorption of having the work go away from your factories. The inventory reduction is specific to the Hospira piece, right.

Right.

We have a factory that costs the same to run. We make less stuff. That increased cost gets spread everywhere.

Right. But in your guidance you are saying plus 13% and then minus 12%, right. So you are essentially about flat, right. And then you are taking away the --

No. But I think there's two different issues, which is, in your first part, you said the marginal profitability of our incremental growth --

That is being impacted in that 13%. I got that.

It would have been better had we had more work.

Understood. That's very clear. I got you. Fair enough. Okay. Great. So then essentially the dilution or the drop in EPS is from that inventory reduction and then obviously the dilution from Hospira.

Well, no Well, the dilution in EPS, just to make sure, the way I thought about the dilution in EPS was basically, to be blunt about it, the business we are buying, while it still generate cash and we care about cash returns, because of the relative EBITDA contribution to the depreciation we are carrying, it doesn't contribute any net income. And to simply take no net income and a little bit of interest expense on a very attractive financing we got from Pfizer, but we have 20% more shares outstanding, that's a 20% hit to EPS if we don't get any net income. Now we could have filled that with cash, if we wanted to the negotiations to go other way, if they were amenable, but we didn't even entertain that because as we just thought it was more responsible to do it with the equity relative to where we were trading and we felt we could clean that up over time, on the assumption things went well.

Got you. And then going out forward and again obviously, it probably will get asked this kind of question, because your two businesses will get blurred but it seems like maybe perhaps your guidance on the core is maybe understandably conservative, but hopefully that seems like hopefully a lower number, assuming your production at Hospira improves based on that $10 million incremental EBITDA in 2018.

Look, you have known us for a while now, right. There is just no reason to get ahead of things. We have got a lot of stuff going on. And we have been accurate. We would like to keep that track record up. And there is more moving parts than there has ever been right now.

Fair enough. What about your comments, obviously, you know your uncertainty for the -- it sounds like in 2017, it's timing of integration expense, severance expense, getting off with all the positive systems. Your confidence, you haven't wavered too much, maybe the timeline has been pushed out a little bit but in that $250 million number in 2018, is that sort of hitting that run rate maybe at the end of the year as you enter 2019? And one, that question and then what's your confidence level just that Hospira can actually revenue can stabilize?

Let me answer those. That was a lot. Let me answer those in two parts. The first part, I think the part we -- going back to like what we can control which was our speech for a long time. What we can control right now is synergies that we can deliver by things we see and we control. And so that first bucket of synergies, that $30 million to $35 million, that will all be put in place this year and start to be in count on January 1 of next year, right.

Right.

So that part on that slide, we feel like it's for the full year because that's where we are going. Our own growth, we feel like $10 million of incremental EBITDA growth on legacy ICU to the extent that that, it is kind of an imaginary number now, that still feels like a safe assumption given what we have seen the last couple of years this year. And then it's the part getting off of Pfizer system. That's the one we don't know. It's not going to happen before next June, right. And so it's the only question on my mind is, can it happen as early as June or does it happen closer to the end of the year. We just don't know exactly when. And there is a bunch of things that have to happen to enable that work.

And that number that you give of the additional $35 million. The TSAs now from Pfizer are still $80 million. So would there be more for that? More to come on that as you go out to 2019 and 2020,I guess?

I think just keep it simple and say, look, if we are paying them $80 million to run ourselves either through other synergies or through running ourselves more efficiently, because it's all going to be the same bucket. If we can run ourselves at $50 million, that would imply another $30 million of savings, right.

Got it.

And that's through a net number or just specific to TSAs.

Got it. And then, sorry to interrupt you there, just on the confidence level on Hospira stabilizing on the revenue part?

Again, I think that's the question everybody is really focused on. We have tried to call it the best that we can call it. I feel like you have seen us now and we are trying to make sure that we can have enough. Some of these actions we have already started, right, on integration work and some of the synergy achievement. We want to make sure we are putting things in the bank that we can deliver our earnings number even if the revenue bumps around a little bit. So we are not quite there yet but we are trying to be responsible. I don't want to say, Larry, that it's actually positively done at this level of revenues today.

Understood. Okay. Great. Thanks. I appreciate it.

Thank you. Our next question comes from the line of Jayson Bedford from Raymond James. Your line is now open.

Good afternoon. Thanks for taking the questions, guys.

Hi Jayson.

So just first a clarification. The combined revenue in 2016, does that includes the OEM contract revenue?

No. That has that taken out for the inter-company between ICU and Hospira legacy that eliminated.

Okay.

You are talking about what was posted on the website and supplemental, right? That should not have the contract in it.

Correct. Okay. So, I guess my question then is, with revenue going from, let's call it, $1.4 billion combined in 2016 to $1.2 billion to $1.25 billion, I realize that there is bit of a stub, because you don't have the month of January in there. But is there any way you could separate the revenue impact from, say, the loss of the GPO contracts under Pfizer to the natural share erosion or market dynamics that are playing out?

I think that's a great question. I think competitively, Jayson, we don't want to get it exactly into it, so can we talk a little bit rough numbers. First of all, the loss of that month is $80 million. So that's a third of that gap, right. So the real year-over-year down draft is more in the range of $150 million or so. And at least half of that was because of one specific contract. And I would say, half of that was due to share erosion in other places. I am not sure I would to be more specific than that.

Okay. That's helpful. I guess then, just as a follow-up, when we look at the four buckets of revenue for 2017, I am guessing you don't want to give guidance on a line-by-line item basis, but maybe can you give us an idea of which the four segments will grow? And where do you see a little bit of pressure?

Well, the consumables segment will grow because our growth is being added to that, right. Otherwise the legacy businesses, as we have said, I mean, that was part of the original purchase in October and even the revision, was certainly the pump and dedicated sets and the solutions businesses were going to be smaller in 2017 than they were in 2016. So I think it's a little bit of the question we just were talking about a second ago which is, are we calling it right is this the right number. I don't think we have ever justified the transaction or the return saying we assumed growth in either one of those businesses. Certainly not in 2017 and certainly not in 2018 of the run rate number we have showed. We are presuming the status quo.

Okay. Then Vivek you touched on it earlier and I realize you only had the business for a few weeks, but you still think the portfolio and the quality of the offering is what you thought it would be, right? I guess I have kind of looked at this as a little bit more of an execution issue versus a portfolio issue. Is that a fair understanding?

Look, I think we have, just like when we got the ICU, we were very cautious on quality systems and making sure we delivered our end on that. And I think the same applies here to this company's investing in quality systems a ton, but we have got to get through everything we need to get through there and the team is really good and then working on that hard. I would tell you the time we have spent with customers, people don't have an aversion to any of these products. People use these products and like them for many years. There is not a lot of flaws in them certainly on the consumables bucket. It's our product. So we know them very well. And we believe in them. On the solutions bucket, that's essentially a generic drug like item. It's about quality and reliability and service and on pumps it's more differentiated but the legacy business has invested a lot but don't know that they have executed necessarily well and obviously had a lot of issues with the remediation stuff. So I don't think we come into this and say, we need a whole bunch of new stuff that hasn't been contemplated or that where partnerships aren't in place or bets haven't been made on next gen technology already. I think the chips are in on that. I think it really has been, certainly in two out of the three lines, very much about commercial execution and one of the lines, it's a little bit more about technology.

Okay. That's helpful. And then I guess I will let someone else jump in queue here, but can you just give us an update in terms of what the balance sheet looks like post transaction? And my sense is, you still under levered here. Can you walk through some of the potential options with the cash? Thanks.

Right. So as far as the balance sheet goes, I mean it's no secret we are totally under levered here and that was for the reasons that Vivek spoke about. I think for us going forward, as time goes by this year and we get our arms wrapped a little bit more around some of the CapEx expenditures and the timing of some of the standup costs, we will be able to give better guidance around expectations and CapEx and free cash flow. And until we get there, I would just say that we wanted a conservative balance sheet for reason in this market in this industry and we did that on purpose.

My view, Jayson, is this. There is like four pieces out there that are a little bit up in the air right now. We got a lot inventory with this transaction. What is the rate that we are able to monetize that and turn it into cash? It hurts our P&L as we slowdown production, but it helps cash if move that stuff out the door. How much standup cost do we have to put in? And we have an idea of that? And how much CapEx do we have to put in, right? And then where is the baseline of sales relative to the synergies and cost we can take out? And when we see that whole picture, then I think we have a different confidence sort of to address the balance sheet. I mean, it's a little tongue-in-cheek. We were irrationally overcapitalized in legacy ICU. By our standard, we are in a better place. Once we know those four pieces, we know where the cash is going, then we can decide, can you do something and where the relative valuation of the company is. You have seen the way we have acted when we thought our own security was mispriced historically, right. So we don't want those opportunities to pass us by.

All right. Thanks guys.

Thank you. [Operator Instructions]. Our next question comes from the line of Mitra Ramgopal from Sidoti. Your line is now open.

Yes. Hi. Good afternoon. Vivek, I know it's still early regarding the integration, et cetera. But I was just wondering if you could give some color in terms of maybe sales force integration, different cultures, et cetera coming together? And any feedback you are getting from customers as a result of the new ownership?

It's nice to hear from you, Mitra. I think culturally, there are spots where it's not that different where there is a lot of people who care about the customer and the best people often are the ones who rise to the occasion on that. And I think there is a lot of people here who share that value. And so I don't think there is some culture clash going on. I think we have to make some and have made and implemented some tough choices around where there was duplication not to have that duplication. And I think that also helps culture when there is some clarity around that, right. Because we had some uncertainty and there was literally 17 business days into this thing and we have addressed it. It's done for the U.S. market. And I think that goes a long way. That hasn't been enrolled out yet. I mean this is all happening in real time. We are actually here in Chicago working on such things. That hasn't happened real time yet to the customer face where that change hasn't made its way to an actual customer. But I think, again, you have seen ICU or on our previous conferences to do some of these thing before. They take time to gel. They take time to heal. But I think we have worked really hard to try to make sure we get the right people on the right seats in the right place and that's an ongoing process.

And as it relates to the synergies, do you expect, in terms of a cross-selling, et cetera, would international be an opportunity for you longer-term? Or is it pretty much a domestic opportunity for you regarding Pfizer?

I mean, the word cross-selling is also kind of an interesting word to me. We are buying into businesses that we weren't in. So it's not necessary cross-selling. It's just selling what they had and at some level they were selling the things that we were the manufacturer for. So I don't there is a lot of cross-selling in the classical sense. Internationally, I think there is certain markets that we want to invest in and want to invest in aggressively where we can justify the investment now where we couldn't as ICU. But I also think there is some markets that we need to really think through. Can we drive good returns there? And what's the right way to participate in them in a way that this company wasn't forced necessarily to think before. And you know, right now the value is much more at stake in the U.S. So we are more focused on that. Over the next couple of quarters, we will turn our attention to some of those deeper international questions. But there are absolutely some high-value markets that we need to place bets in.

Okay. Thanks again for taking the questions.

. :

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.