Good day, ladies and gentlemen and welcome to the Second Quarter 2019 ICU Medical Inc Earnings Conference Call. At this time all participants are in a listen only mode. Later we conduct a question and answer session and instructions will follow at that time. If anyone should require operator’s assistance in today’s conference [Operators Instruction]. I would like to introduce your host for today's conference Mr. John Mills of the ICR. Sir, please go ahead.

Great, thank you. Good afternoon, everyone. Thank you for joining us today to discuss the ICU medical financial results for the second quarter of 2019. On the call today representing ICU Medical is Vivek Jain Chief Executive Officer and Chairman; Scott Lamb, Chief Financial Officer and Christian Voigtlander Chief Operating Officer. We wanted to let everyone know that we have a presentation accompanying today's prepared remarks. To view the presentation please go to the investor page and click on the events calendar. It will be under the second quarter 2019 events. Before we started 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're 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 risk 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 –we believe these financial measures can facilitate a more complete analysis and greater transparency in ICU Medicals ongoing results of operations, particularly when comparing underlying results from period to period. We've also included a reconciliation of these non-GAAP measures in today's release and provided as much detail as possible on any addendums that are added back. And with that, it is my pleasure to turn the call over to Vivek.

Thanks, John. Good afternoon, everybody. The second quarter of fiscal 2019 was a difficult quarter commercially, and has caused us to revise our view of profitability for the new year and medium term. We've largely concluded our integration efforts and delivered our TSA and other cost savings. But this can no longer offset a more competitive commercial environment primarily in our IV solution segment. We're executing well towards customers with high service levels, and most of our time is spent on external activities. But the reality of the environment forces us to make certain operational changes which will impact our profitability. On today's call, we wanted to comment on the Q2 results and discuss our current view of the business and recent performance trends. Explain some of the actions were taken from given the market volatility, and their financial and operational impact in the back half of the year, provide the usual updates on key activities, quality and housekeeping items. And lastly and briefly reiterate some of our thoughts on the longer term positioning of the company and the opportunity for value creation. There unfortunately, not a lot of short stories on Q2. The company is running well from a systems perspective post cut over. But the competitive environment and IV solutions and a few lingering production issues caused the decrease in revenues and profitability. The income statement was straightforward with a sequential decrease in revenues that led to a sequential decrease in earnings as most of the TSA cost savings have been in the P&L since the beginning of the year. We finished the quarter with approximately $290 million and adjusted revenue. Adjusted EBITDA came in at $67 million and adjusted EPS came in at $1.99 with cash of $316 million. Adjusted revenue was down 13 % quarter over…

Thanks, Vivek, and good afternoon, everyone. To begin, I'll first walk down the P&L and then talk a little about cash, the balance sheet, and the balance of the year. So, to begin, our second quarter 2019 GAAP revenue was $312 million compared to $360 million, down 13% from last year or 12% on a constant currency basis. For your reference, the 2018 and 2019 adjusted revenue numbers, which exclude contract manufacturing sales to Pfizer cost, can be seen on Slide 3 of the presentation. Our adjusted revenue for the quarter was $290 million compared to $341 million last year, down 15% or 13% on a constant currency basis. Infusion Consumables were $190 million, down 5% or 3% on a constant currency basis. IV Solutions which we primarily sell in the US were $80 million, down 31%. Infusion Systems were $82 million, down 7% or 4% on a constant currency basis. And Critical Care was down $2 million, 18% or 17% on a constant currency basis. Adjusted diluted earnings-per-share for the second quarter of 2019 were $1.99 compared to $2.69 for the second quarter of last year. Our tax rate this quarter was favorably impacted by some discrete benefits related to equity compensation. Now we estimate our tax rate for the full year to be in the range of 70% to 19%. And finally, adjusted EBITDA decreased 14% to $67 million for the second quarter of this year compared to $77 million last year. As you can see from Slide 4 of the presentation for the second quarter are just gross margin was 42%, compared to 45% the second quarter last year. The three largest drivers for the year-over-year decrease were 1.) The ramp down of IV Solutions production and the associated lost overhead absorption 2.) Additional supply chain costs…

Thank you. Ladies and gentlemen, if you have a question at this time, please press *1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press #. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from the line of Larry Solow with CJS Securities; your line is open, please go ahead.

Great, thank you and good afternoon. Perhaps just question on the Solutions and then one just a general question. On the sort of itemized deductions, just starting from the bottom on the supply chain costs and you spoke of sort of optimizing logistics behind that? I guess to questions to that. Could you give us a little more color on what exactly you have to do there? And I assume over time, most of this impact from expenses should wane, maybe in the next whatever that maybe, two or three quarters, is that fair to say?

Certainly, the bottom two on the walk down there are more temporary in nature. We've had, on the middle bucket, we've had contingency plans. On the bottom, it's totally a function of inventory coming out of the system and warehouse and sell space coming out of the system. It's really, Larry, to take some of the old dated product and other inventory out of the market and it's about squeezing down the number of pallet space and other things. It's just a high cost to hold the stuff.

Right, and the absorption, obviously, your plan to move more into Austin over time, which you've outlined, I assume that sort of the remedy. Does that plan – is there a ping on your overall improvement there or expectation on that or is it just at a slightly lower level?

At the end of the day, if you're making less pieces you have negative absorption, right? For us, is the final equation of how many pieces did we make this year how many pieces did we make next year and then which site do we make them. Over time, we think we get back, but it requires you to get fully up and running into Austin, and we don't want to show something that happens in the quarter, right? It took us in earnest nine months to ramp up when we were hustling. We've been out a little bit of time here, a couple of weeks. It's going to take a full six months to get healthy and get those extra out of the pipe.

And it doesn't sound like, for better or worse, that you expect another leg to drop in mostly your most of the current revenue is sort of committed business, and that's at least a positive. Is that correct?

I would say the non-committed or trade, whatever you want to call it, normal business is a fraction of what it was when we started this business, but it has been incredibly competitive out there, and this is as much about the environment changing on us, and we've tried to incorporate that in what we're saying from an earnings perspective to give us the flexibility to handle situations.

Okay, just lastly, is clear that the story of the quarter and the outlook is on the Solutions piece, but Consumables and Infusion Systems certainly don't seem to be hitting the cover off the ball. Your competitors, from what I read, sounded like there's no true competitors in different segments of the market, but it sounded fairly positive. Is there any – have you seen any decline in the overall market environment, whether it be hospital utilization or anything that would impact you?

No, I feel like it's a little hard to be totally transparent into what everybody's business is. The products are slightly different, and people have different levels of install base that they're renewing and refreshing, right? Which account and the numbers from quarter to quarter. So, I don't know that it's always apples to apples. I don't think we see any big major structural stuff there. We did this incredibly complicated cutover, and we fell down in a couple of production spots along the way in Consumables, and we made our comments there on what we believe on the LVP pumps.

Okay, thanks, I appreciate it.

Thank you, and our next question comes from the line of Matthew Mishan with KeyBanc, your line is open, please go ahead.

Great, thank you very much for taking the question Vivek. Hey, in the face of this, in the same quarter yet a competitor announced about $1 million of capacity expansion and IV Solutions, and you kind of look at it, and you say to yourself the competitive situation doesn't look like it's going to get a better over the next couple of years. How comfortable are you that this $80 million run rate of contracted volume can stay and $80 million run rate of contracted volume?

I think that's a question that we are, again, trying to incorporate in what our comments are here and be cautious for the exact reason you're saying. I think some of the capital that's been pup clear disclosed isn't necessarily for new capacity expansion; it might be for catch-up on things of happened in the past, we may be positioned slightly differently. But I hope our comments also illustrate kind of what's happening in the industry and also give us the ability to compete in the event the environment changes. We've been chasing this, and we're all tired and kind of disappointed around it and so we hope we priced the competitive market into what we're saying, right? That's why we've changed our view of the world. Right? I'm not sure I feel comfortable answering that question, what is the world three years from now? But the idea is obviously to make it a smaller portion of our overall portfolio over time.

Okay. And then making it a smaller portion of the portfolio, you also want to grow the rest of the business. Why do you think that Plum is now stable and could start to increase its installed base over time? What has driven the stability care and your ability to maybe come back in and start winning and taking some share?

Let's stick more on the first part of that, right? Because that's been the objective through now. Which is why we bought a business where that business line was literally 100% neglected, and ICU was downstream of that. We've had it for and four months or something now and we've had people out there actively calling on the customer. It started with that, it started with a redefining our value prop to the customer, and there's been papers and studies and the like, and I feel like just the hustle of trying to understand where our install base was and really developing a deeper relationship there is what we've been focused on. That's been the primary effort to date. It bled out a lot over a 10-year period, right? But I feel like just calling on the customers and understanding where the business is in the reason the product was a very high market share product at some point in time; we've gotten back to that. I don't think we're at the point yet where we're saying hey, we think we're going to grow X, Y, or Z but we're certainly in the conversation, right? And that's why the market's competitive. It's a great time to be a customer out there across the board, and I think all the players know that. It is a healthy, vibrant market right now, Right? And our product needs to hang on its own merits, and people can do the work to see whether that's the case or not. But we certainly put a lot of time and energy into that.

And then just last question, I just want to make sure I understand the commentary around the safety stock that you've built. Is that inventory you're holding in some warehouses and distribution or is that already in the channel through the distributors that your customers have to work through?

No, that's inventory we're holding. So, one of the reasons you see cash not growing even though we're still decent EBITDA numbers this year is because inventory will be up year-over-year, right? This idea that on a low-price item, everybody sitting around with lots of idle global capacity moving around really couldn't serve in a catastrophic event anyway, right? What really does is product sitting in a warehouse here that is months of coverage, and that's a value prop we could offer a customer.

All right, thank you very much.

Thank you, and our next question comes from the line of Jayson Bedford, with Raymond James. Your line is open; please go ahead.

Hi, good afternoon, and I apologize for the background noise. Can I just recap the IV Solutions dynamic here? There's a lot of detail but just kind of let me know if this thought process is correct. So, you came into the year thinking you were going to do about $400 million in IV Solutions revenue. You now seem like you're on track to do about $325 million. I guess one, are those numbers jive with your commentary?

Yes.

Okay, so, the EBITDA impact from this seems like it's about $60 million. What you're saying is that half of this is permanent; the other half is arguably transient as you realign inventory and production. Is that a fair recap of what's going on here?

Yes.

Okay. IV Solutions, it seems like the implied guide going forward here is about $75 million $76 million a quarter. Is that primarily – it was kind of vast, but it's a little more specific here. Is that just largely your committed business meeting the trading business is pretty much gone?

Yes.

Okay. And that's how we should think about 2020 as well from a quarterly run rate perspective?

Plus, a little bit of wins minus a little bit of losses, something around those lines.

Okay. You mentioned supply constraints impacting both Consumables and the pump business. Is there any way to quantify the impact, and I realize it's pretty small in the grand scheme of the prior discussion, but is there any way to quantify the impact in the quarter and then are these issues behind you?

I prefer not to categorize a quarter; I really want the results to speak for themselves, Jayson, when we put it out there. I think today; we finally have had new production, online in oncology that helps – got kind of a double whammy with the recall we had earlier in the year, we had to take some new parts of the online to replace things that were already in the channel. That's all finally cleaned up, and so we feel much better about it.

Okay, and just trying to understand the commentary, you feel positive on the Consumables segment in the second half of 2019. Should we interpret positive as we expect the business, that segment, to grow year-over-year?

I certainly think that's what we intend, right? We were positive on the segment all year, in our comments the end of last year, getting, right? We've just had some challenges. Nothing is structurally different here. There haven't been big churns one way or the other, right? There's been more wins that we haven't implemented to the time being and losses we've had out, but it just hasn't come into the income statement yet. So, ultimately, it needs to speak for itself.

Okay. In terms of the balance sheet, your sit in on 300 some odd million in cash, what's the plan with that cash that's just sitting there?

I mean the plan is the same as it was for three years when it sat there before we bought Hospira, right? To ultimately use it to drive value and capital deployment. We did authorize a bigger buyback and stuff because we don't know exactly what's going to happen in the marketplace, but fundamentally we believe that capital and the unlevered EBITDA we have is better used to bring other things into the portfolio than anything else and leverage ourselves more to a concentrated set of product lines right now, right?

Okay, I apologize, I missed it. What is –?

Jayson, the background noise got a little bit worse, if you'd get some more quieter, it'd be great.

What's the size of the buyback?

You'll see in the Q, we up to100.

Okay, thank you.

Thank you, and I'm showing no further questions at this time, and I would like to turn the conference back over to the CEO, Vivek Jain for any further remarks.

Okay, thanks, folks. Look, this is a harder message for us, and it's not one that we're frankly have been very familiar with, and so we hold ourselves accountable. All employees are rallying around making this the best company we can make it, and it is never a straight line up, and we respect people's opinions, and we respect our own capital and make sure we do the right thing. So, we're open for any questions, comments, people know how to find us, and we'll make ourselves available immediately. Okay? Thanks very much, we'll talk to everyone soon.

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