Good day, ladies and gentlemen and welcome to the Second Quarter 2017 ICU Medical Earnings Conference Call. [Operator Instructions] I would now like to introduce your host for today’s conference, Mr. John Mills, Partner at ICR. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us today for the ICU Medical financial results for the second quarter ended June 30, 2017. 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. 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 the financial position. Please note that during today’s call, 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 addendums 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 Investors portion of the website for your review. Also, we are having a presentation that accompanies today’s remarks. You can view the presentation by going to our website at icumed.com and click on the Investor Events. And with that, I will now turn the call over to Vivek.

Thanks, John. Good afternoon, everybody. Our second quarter of 2017 was our first full quarter of owning Hospira Infusion Systems and we are about to embark on stage integration execution to create a single unified company. We continued to drive legacy ICU revenue growth in Q2 and executed well through a large volume of commercial, operational and integration activity. On today’s call, in addition to explaining the Q2 2017 results and the most recent business segment performance, I wanted to provide a status review on the near-term goals we described in the last call, outline the current status of integration, discuss our expectations for the balance of 2017, and lastly, provide a sketch of how we are thinking about 2018 at a high level from both an income statement and balance sheet perspective and on the drivers for value creation and the return of our capital into the longer term. In Q2 2017, revenues were generally in line with our expectations. Adjusted EBITDA and adjusted EPS were slightly above our initial expectations. Like Q1, we continue to have numerous transactional accounting impacts particularly in gross margins which makes the results a little hard to follow. The short story is this. Revenues continue to be slightly better than we thought due to hanging on to some of the business that we expected to go away and likely will, real cash operating expenses were in line with our estimates and the actions we have taken to-date will help improve the results for the balance of the year. We finished the quarter with approximately $332 million in revenue, adjusted EBITDA came in at approximately $47 million and adjusted EPS came in at $0.76 and we finished the quarter with $241 million of cash on our balance sheet. The total company year-over-year comparisons are…

Thanks, Vivek. So the second quarter was our first full quarter as a combined company which makes this period a bit more representative of what the next few quarters could look like although there are a number of moving parts such as the effects of purchase accounting and TSAs with Pfizer. I will first walk down the income statement, then discuss all the various adjustments and then highlight the key items impacting operating performance versus transactional accounting. So to begin our second quarter 2017 revenue was $332 million when compared to $97 million in the same period last year. GAAP net loss for the second quarter of 2017 was $37 million or a loss of a $1.87 per diluted share compared to GAAP net income of $17 million or $0.98 per diluted share for the second quarter of 2016. Adjusted diluted earnings per share for the second quarter of 2017 were $0.76 as compared to $1.15 for the second quarter of 2016 and adjusted EBITDA was $47 million for the second quarter of this year compared to $33 million for the second quarter last year. Looking at the difference in our sequential performance this year of adjusted EPS of $1.68 compared to quarter two of $0.76 with a $10 million tax benefit in Q1 versus only $2 million benefit in quarter two and higher depreciation in quarter two versus quarter one due to the acquisition. Now, let’s discuss our second quarter revenue by market segment and for your reference the 2016 pro forma unaudited revenue numbers can be seen on Slide #4. And as a reminder, revenue will be reported by the following four market segments. The first is infusion consumables. This includes the non-dedicated sets and accessories such as the SwabCap and will include the traditional ICU IV therapy…

Thank you. [Operator Instructions] Our first question is from the line of Larry Solow of CJS Securities. Your line is open.

Great. Thanks. Good afternoon, Vivek a lot to digest here, but just in summary it sounds like just from a high level revenues are year-to-date or even in the quarter perhaps slightly better than expected, but and then the difference being above that’s slightly better on the core is that some of the Hospira revenues or you are holding in some of those markets where you contractually expected to drop over the next couple of quarters. And then on the cost side things are perhaps coming in faster a little bit better integration faster than expected and I guess bodes well for next year is that sort of a good way to look at it?

I think on revenues, it’s what you said. It’s we are hanging on just up for a little bit longer. We do expect it to go away. And then we were able to take up some costs which impacts this year and will help next year. That’s than saying integration is going well Larry. I mean the cost reductions are going well. The integration we are about to start which is all the stuff about running the backend of the business. We believe we planned for it well, but the execution is just about to start.

And just on the Hospira side any reason why you think it’s holding on and what is just contractually – just some of these purchasing matters you are having been you takes a little bit – it’s a little bit of lag between what they do and what the contract says they should be doing and why do you think this will change?

I think to a large degree, it’s a lot of inertia, right to be brutally honest about it. And on some situations, we are in there. We are fighting. We are trying to stay alive and even if we can keep the conversation going for a little bit longer that’s still cash that we are generating to our account. So we are trying to do that. But I don’t think it’s a lot more complicated in that.

And then you sort of gave us ballpark of where you think next year lays out on EBITDA basis, I know that the loss from the Hospira business or the additional losses sort of on gains that were held on this year, is there – can you ballpark what you sort of think that number might be is that like another $10 million less EBITDA type thing or is it more than that?

I mean if you added up the pieces we said there of the adding off the base of this year that took us to some number like 260. And we don’t know exactly it’s doing a couple of percentage points better than we thought this year where we are hanging onto. And when we revised the deal in January, some of these losses will continue into ‘18. So it’s probably what we are hanging onto plus a little bit for next year, right. And so at that gross margin, it could be $15 million or $20 million of risk around that right.

And then just last question on the…

I would say the run rate in the back half and hopefully losses first half of the year, right.

So it sounds like you are instead of using the run rate 250, it sounds like maybe you are hopeful of getting closer to that 250 if losses are in a $10 million, $15 million year-over-year?

I am not leaving anything, it’s going better and we think on integration I am not saying we are changing. Right now we improved we think this year and we have tried to get the color as to why we think we can standby the 250 run rate we said before.

Okay. So most of the numbers are really run rate type thing and not a full year number per se, is that right?

As of now that’s how we are seeing.

Got it, okay. And then just lastly I think I know you said legacy oncology ICU was up 20%, is there anyway I don’t know if you – can you figure out legacy just in infusion therapy side, is there anyway to sort of – that sounds like still growing low double-digits range is that fair to say?

No not legacy ICU….

Excluding the Hospira adjustment sort of…?

Not, but even not legacy ICU infusion therapy it wasn’t double digits towards the end of last year, right. So it’s doing fine, it’s growing, but it’s all co-mingled in the same pot now, it’s one segment. So we are not going to – we got to stop talking about legacy, we are not even setting up our systems to look at things that way.

It’s not that easy to cancel, but is there any change, the market obviously was red hot last year is there any change in sort of that macro or anything of meaning or material?

I mean right now utilizations continue to look okay to us and fairly balanced. And there isn’t outliers in any part of the country. So we haven’t seen major utilization shifts. I mean we are paying a lot of attention to senses. Senses was a little bit lighter, but nothing dramatic.

Got it, okay, great. Thanks a lot.

Thank you. [Operator Instructions] Our next question is from Jayson Bedford of Raymond James. Your line is open.

Good afternoon. Thanks for taking the questions. I guess just to finish up the last discussion, the message on 2018 EBITDA around run rate of $250 million you give us a few more components, but it sounds like you are endorsing that comment or reiterating the goal of $250 million EBITDA run rate is that?

I mean we said – hi Jason. We said $250 million when we cut the deal. We obviously felt that was a tough time and we are trying to say we believe what we said at that moment and illustrates up the components to help us get there.

Okay. Is there any way you could bridge us from the first – from the gross margin the adjusted gross margin in 1Q of 45% to the 2Q gross margin of 36%, can you just give us the components of that?

I will all handily give that one to you Scott.

Jayson there is a couple of components to that that we mentioned. One is do you remember in the first quarter we shipped one month of product to Hospira that had the full profit in it in the first quarter versus we did not get to recognize any of that profit in the second quarter. The second is the fact that we are bringing down inventory levels as you can see and that had an impact on the factories absorption of fixed overhead that’s the two primary reasons for it.

And the profit on the products sold to Hospira I have to believe that’s a few million dollars, so the vast majority of the gross margin drawdown here from 1Q to 2Q is the drawdown in inventory is effectively what it is?

I don’t know if I would characterize that as such and as Vivek mentioned there is $20 million…

It’s not a small amount of money, Jayson. It impacts the gross margin by more than 100 basis points right to recapture that.

Yes. I think they both were impactful Jayson.

But Jayson it’s what we said which is we would slowdown production and try to sell what we acquired in the transaction and we are trying to do that and that’s how when I tell about Hospira, it’s funding itself for it’s integration. We are still putting cash on the balance sheet in the midst of crazy integrations I think.

And if you are just looking at margin not GP but margin for example remember there are certain legacy Hospira products that have lower gross margins than do the legacy ICU and we had three months of legacy Hospira versus only two month last quarter, so you could look at that as mix as well.

Okay. Scott what’s the tax rate associated with the $0.76 in adjusted EPS that you reported?

You us – there is the tax benefit of the 2 million and then I believe the rate and adjusting out the tax effect while it adjusted out is around 27%, 28%.

Okay. I am just trying to get to the disconnect between it seems like the EBITDA was a lot bigger than from a upside perspective than the adjusted EPS and I am just trying to figure out what the delta is there. So, maybe I could take that offline.

Sure.

I guess from – just lastly from me in terms of closing the international countries, your accounting for a portion of that in the other bucket as you played out in the press release, is there any idea of how much you are kind of leaving on the table meaning how much you recognized when these countries are indeed closed?

So Jayson if you look at the face of the P&L it shows I believe $34 million, $35 million in other that is almost all primarily related to these delayed closed countries. And so that revenue is not allocable to the two market segments of consumables and systems. And so what we tried to do in this call was to estimate what we thought that allocation might be to get it by market segment. And so we are basically realizing the overall revenue on the face of the P&L that’s in the total revenue line, but it’s just not allocable to the different market segments until we bring them into the ICU fold so to speak.

Okay. And just maybe bigger picture, maybe for Vivek, what has the ownership of the Hospira portfolio done for the legacy ICU business meaning I guess I am specifically thinking of the kind of independent non-dedicated set business that you had outside of your Hospira relationship. Has it helped, hurt or status quo?

It’s too early to say it’s done anything. It’s certainly not going to hurt. I think the things that we are excited about there and we said look, we do believe we will have growth in the – and you guys know it, it’s a word that’s hard to come by and still have to be months here. We are talking about doing okay in that segment next year. One area of excitement for us is in our oncology business, Hospira had exclusive access to a large portion of the market. And so we are unleashing our folks on that portion of the market and getting its full attention, which is good. Second thing is the international opportunity and focus, ICU was doing okay internationally, but Hospira brought a bunch of countries. So, they had real scale and we want to put all the products in their hands and this Australian thing is kind of an example of that like where we got to just do better and there is more market available to us. And in the U.S. – and it’s not something you want to wear in your sleep, but the fact that we are vertically integrating and capture the full top to bottom margin allows us to be more competitive in some situations. We are trying to just get a dialogue in those situations, but it does position us better. I mean, those are the three real drivers for us on consumables.

Okay, thanks. So, I will get back in queue.

Thanks, Jayson.

Thank you. Our next question is from Mitra Ramgopal of Sidoti. Your line is open.

Yes, hi, good afternoon. Just a couple of questions. Vivek, you talked early about doing the deep dive into the product lines and in geographies and one of the things you decided was to exit Brazil and some of the Middle East locations. I was just wondering is this sort of an annual review you will be doing or is this more sort of good for the next maybe 3 years to 5 years out in terms of what you know underway?

Look at the infusion business over last 3 years to 5 years, no, I mean, I think it’s everyday, it’s our job right. It’s big. It’s 3 or 4 times the size of us. And so we got to get it right on the people. We got to get it right on the products and the systems and with every level, we are looking at it everyday. There is a lot of good people there who are getting us up to speed fast and adding value, but it’s not a static thing where we just – we will let you file this year. We didn’t just check the box and it’s all okay, right, that’s not what it’s going to be. But what I am happy about is there was a lot of good work and analysis done, it’s just didn’t necessarily make its way to the top. There is no lot of people who have a lot of history and knowledge about the business and the segment and etcetera. And we are just trying to let those people get out in the sunlight and show themselves a little bit.

Great, okay. No, totally understood and I know you mentioned markets like Canada being pretty important now just small acquisition regarding the Australian market, are there other geographies you think you need to be in or and again I know you are always evaluating but anything that…?

I think there are geographies like this Australia. I think it’s small [indiscernible] talking about it. But there are geographies that are important that we were relying on Hospira and Hospira wasn’t executing well and so we need fix those geographies. Canada was an example of where they are executing well and there is a great team etcetera. That wasn’t the case in every market. And so in the markets we have a great team we got to leverage out in markets that we were both a little bit left on, we have to invest and in certain markets it just as like the Middle East stuff we are talking about or the Brazilian pop market, if you are not of a certain size get out and you have to make those decisions and regardless of what might be a 10 year growth opportunity we can’t subsidize it today and I think on the margin, there is probably a rebalancing there is probably a few more places to get a little less weighted on and a few more places to invest more in.

Right. And let me look at the product line, I know critical care is something you are going to be bringing on some new products looking at the first half maybe versus a year ago etcetera it seems like it’s still not quite where you wanted to be?

It is not from a P&L perspective where we wanted to be it, used to be roughly flat, I think it was down and we are not trying to disrespect critical care here. It just hasn’t been at the forefront in the last few months, it was down a little bit. But the big thing happened which is the product Cogent was launched, it made it’s way to market. It’s at customer sites, a little bit like our attitude was on ChemoLock 18 months ago or 2 years ago. We are not going to talk about until we get some real amount of sales, but it’s done, it’s being produced, it’s out the door. And that is different than we got approval a year ago and it took a year on some of these capital equipment projects to get them out there, but that is happening, that’s a really good thing for that business.

Right. And finally I know you are only about six months into the whole process, you have already gone through the FDA inspections identified a lot of cost savings etcetera, how would you characterize where you are in the process in terms of where you expected to be looking back at the transaction six months in, would you say you are pretty much where you want to be or you are maybe ahead, maybe a little behind, how would you view things right now?

We don’t have so much time these days today to be interested about that stuff. I feel like we are good at we did okay job on the easy stuff, right. We did an okay job on the cost reduction which you are tough choices but a manageable set of decisions. I think the next six months as we start these IT migrations will be a much more telling period is our planning was solid or not. And so I think the things that protect the shareholder and protect the P&L in terms of cash generation, managing inventory and working capital, cost reduction hanging onto business. That’s stuff we have done okay some through luck and some through our actions. And now the execution around the integration is going to kind of be the next test right and that’s a real test when you start turning off systems and turning on systems and you are own watch.

Right, okay. Thanks again for taking the questions.

Thank you. And I am not showing any further questions at this time. I would like to turn the call back over to Vivek Jain for any further remarks.

Thanks everybody for listening to our Q2 call. We hope you see we are working hard to try to create value around this large undertaking and then transaction that we did. We look forward to updating everybody on our third quarter call. And we hope everybody enjoys the balance of the summer. Thanks very much.

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