Ladies and gentlemen, thank you for standing by. And welcome to Q3 2019 ICU Medical Inc Earnings Conference Call. At this time, all participants are in a listen only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to hand the call over to Mr. John Mills with ICR. Thank you. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss the ICU Medical financial results for the third 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 wanted to let everyone know that we have a presentation accompanying today's prepared remarks. And to view the presentation, please go to the investor page at icumed.com and click on the events calendar. It will be under the third 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 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 third quarter of fiscal 2019 showed commercial stability with revenue improvement in our most valuable product line and allowed us to hold firm on our view of profitability in the near term. We showed cost improvements on the P&L from TSA savings and operating efficiencies and our actual cash restructuring expenses have begun to come down. We were also able to deploy modest amount of capital into the Pursuit acquisition that we will further describe. We had a number of important customer wins during the quarter and are executing well with high service levels to our customers. Our time was equally split on external commercial activities and internally on the work to mitigate the operational slowdown in IV solutions which we started in the summer and described on the last call. On today's call, we want to first comment on Q3 results and discuss our current view of the business and the recent performance trends. Second, provide an update of the actions we've been taking given the market dynamics and their impact. Third, mention a few quality and housekeeping items and lastly, outline the criteria we are judging ourselves by and near-term goal and how they fit with the longer-term positioning of the company and the opportunity for value creation. Q3 was a reasonably clean quarter after our difficult Q2 commentary. The company is operationally running well. The competitive environment seems to have stabilized a bit. And we've been catching up on lingering production issues. The income statement was straightforward with a sequential increase in our consumables revenues and stability in other line that allowed us to deliver EBITDA down the middle of our revised guidance provided during the last call. We finished the quarter with $291 million in adjusted revenue. Adjusted EBITDA came…

Thanks Vivek, and good afternoon, everyone. To begin, I'll first walk down the P&L and then talk a little about cash and balance sheet. So our third quarter of 2019 GAAP revenue was $307 million, compared to $327 million, were down 6% from last year, down 5% on constant currency basis. For your reference the 2018 and 2019 adjusted revenue numbers which excluded contract manufacturing sales to Pfizer at cost can be seen on slide 3 of the presentation. Our adjusted revenue for the quarter was $291 million, compared to $305 million last year, down 5% or 3% on constant currency basis. Infusion Consumables were $120 million, up 2% or 3% on a constant currency basis. IV Solutions which we primarily sell in the US were $81 million, down 12%. Infusion Systems were $80 million, down 2% or flat on a constant currency basis and Critical Care was down $2 million, 21% or 20% on a constant currency basis. Adjusted diluted earnings per share for the third quarter of 2019 were $1.65 compared to $1.88 for the third quarter last year. Our adjusted earnings per share for was unfavorably impacted by approximately $0.10 related to certain adjustments in connection with the filing of 2018 our tax return. We estimate our GAAP tax rate for the full year to be in the range of 16% to 18% and the non-GAAP rate to be in the range of 20% to 22%. And finally adjusted EBITDA decreased 8% to $63 million for the third quarter of this year, compared to $68 million last year. Now as you can see from slide 4 of the presentation, our adjusted gross margin for the third quarter was 41% compared to 44% for the third quarter last year. The two largest drivers for the year-over-year decrease were…

[Operator Instructions] Our first question comes from the line of Jayson Bedford from Raymond James.

Good afternoon. Thanks for taking the question. It's just a few here. Maybe I could start on the gross profit line which came in higher than we expected. And I assume most of it's on the IV Solutions side. You mentioned that results earlier were generally in line with your expectations. Was gross profit or gross margin also in line with your thinking?

Yes. Jayson, on the gross margin we expected the second half of the year to be down from the first half of the year. And we expect the fourth quarter to be down from the third quarter.

Most of the cost, Jason, gets rolled into the manufacturing cost and so you don't see it right away. So the slowdown was as we talked about before was going to felt largely in the Q4 or maybe a little bit in Q1. I think we said publicly that those were going to be the most painful from a gross margin perspective.

Okay. So maybe just to follow up on that when looking at the $15 million in supply chain cost that you identified last quarter, roughly how much of this did you recognize or incur in 3Q? And is this still $15 million --is it still a good number?

It is still a good number as we mentioned earlier on the call, the supply chain costs are going to take a little bit longer to come out of the system than we had originally thought, but we do see a path forward and that's still a good number.

Okay. Just jump into the top line a bit, on consumables, you identified a few headwinds. Is there any way to kind of quantify the impact of those headwinds in the quarter or at least discuss your thoughts in the fourth quarter? What's the right run rate here on consumables?

I mean there's been a lot of puts and takes in today. We did a cut over last October between oncology, between SwabCap, between some of these other things. I'd rather say, Jayson, that we just back to normalcy for us are proving that we can grow that business right. We had four years of good growth and it slowed down a bit as we went through this thing. I don't know that we have a magic number that we're targeting. Let us get through Q4 and finish the rest of the stuff and then we'll put it out there for next year.

Okay. On systems and specifically on the PCA pump dynamic. I think last call you mentioned that Pfizer should be running consistently by year end. Is that still the case? Or is that been pushed out a bit?

It's gotten better. It has gotten better, but we still were behind for portion of this quarter and so we were paying some accommodation fees and stuff. So it hurts, it hurts us this quarter too. It is getting better. They put up real time and money in it but have been slow.

Okay and I'll take the bait on the ethylene oxide exposure teaser there. Can you just maybe comment on your relative exposure there?

Yes. I'm sorry. I went off script there. Almost none. We have less than 4% of our outsource sterilization in ETO. We don't use either Illinois or Georgia. We use the other company and for us that's where a portion of that catbacks we've been putting into the business is gone. And we were vertically integrated in Ensenada. We've doubled down on that. And we put up the capital to vertical integrates on our own sterilization in Costa Rica. So that's sort of something we did right with e-beam right at the offset of these deals. That's not to say we were so smart. We were just already committed to e-beam. And we believed in the integration our self.

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

Yes. Hi, actually it's Pete Lucas for Larry. Just a question on the IV therapy market. I think you categorized it is still slow but capacity issues getting behind us. Just wondering looking at, how we should look at sales growth going forward? Is 4% to 6% still attainable as you look out over the next several years or any number or guidance you could give us towards that?

Sure. I'm not totally certain. So we think about our businesses, IV Consumables or IV Systems, the hardware business or solutions. I think we were a little bit of different across those lines. I think in consumables, we generally were a positive momentum behind our consumables business for three or four years that slowed down. I think what we are trying to say are we feeling like we're getting back to being consistently positive there. In solutions, it's been unbelievably negative for the last four quarters with big volatility and the actual amount of sales and I think there we're trying to say we revised guidance in a painful way. I think we still believe the revised numbers we put out there in the summer apply. And we felt like -- we feel okay about that for the current moment. I don't want to add it up to a whole company level; we will do that when we put out guidance properly after what we've been through.

No, great, very helpful. And you guys have answered a lot of the questions. Just one big picture question for you. Any update on anything new with regards to Smiths medicals? Some recent articles in the press have suggested they may reconsider a sale or at least willing to entertain talks with potential interested parties. Don't know if there's anything you could add to that.

I think we would say we have no comment. And we do not want any of our shareholders to speculate or make assumptions about things happening. We had shareholders who suffered last year's result, and we want to be very transparent about that. So please, no, it's a speculative thing, we have no comment on that situation or any other situation right. We're not going to do that.

Our last question comes from the line of Matthew Mishan from KeyBanc.

Great and thank you for taking the questions. Congratulations on some stability and a nice work.

Have you ever had to say that before? Have you ever said that before to call?

The first one I said congratulations. Going back to Pursuit, this is like the first one you first bolt-on type acquisition you've done in a while. Is there a pipeline of these types of deals that you're potentially looking at? Small strategic technology rises?

I don't know that there's a long list. There's a very few number of those types of things out there. Yes, I feel like we didn't have time until we finish the integration or got very close to the end here of integration even look, we've put somebody in a job. We spend the time doing that and our model has always been, we're not that big right and so the free cash flow we could make out of our business could support just one of those things each year, if they were available. I don't necessarily think there's one of those available every single year. But there are a few out there, but you just have to be patient. We really tongue-in-cheek. We pursued this thing for a while and it took time to just find this moment. It's not a huge list.

And then could maybe give some scale to the LVP versus the other category in the used business so we can understand a little bit of the headwind you're facing versus, I guess, is it something in which is -- or is it easily overcome?

It's getting close from a revenue perspective I think, little bit overcome it, it's 90/10-ish type situation or something like that. But you still make some money on the 10, so it hurts from an earnings perspective because you're not substituting with eco margin contributed stuff right out of on day one right. So it hurts economically even if it's manageable from a revenue perspective.

Okay and then you typically give in like directionally forward EBITDA guidance on the third quarter call. And I do appreciate that you want some more visibility at this time. But can you go over some of the larger, but larger moving pieces that we should be thinking about into next year?

Sure. I mean I think we were trying to --we're trying to say our criteria for ourselves is can we grow the stuff that's the most differentiated. And so far it's getting back to normal consumables growth, with oncology is a portion of that and regular consumables are a portion of that. Then on the systems business revenue wise how much positive revenues do you have an LVP minus the negative of the PCA et cetera. Even though that may hurt from an earnings perspective. And in solutions, we tried to offer, we're judging ourselves by stability meaning we said a little bit below where we actually landed this quarter is where we thought things are. I think that continues to be our view. That was our framework plus capital deployment, if any minus the negatives of getting back the supply chain cost. And the other things that we talked about in the last call.

Okay and last one, then I am going to jump off. How our customers, kind of gearing up for USP 800 at this point? I think there are some delays and there's a language change. Have you seen it impact kind of the customer behavior and how they're looking to adopt it?

I think it's a different answer for different parts of the market. I think the customer base that we currently hold which I would call as kind of large institutions. They for the most part have recognized that this is coming a budget for it and have to operate within like a best-in-class environment for even their own clinician safety. And so we could sell every piece we could make to that. Audience, some states have delayed. There have been some language changes. The more local office, clinic stuff where the cost is additional et cetera probably we would expect to slow down a little bit. But that's not where really our business is tilted at the moment. So that's a bit of tomorrow's problem because we think we have enough opportunity just to get the larger institutions that are in front of us. End of Q&A

We have no further question at this time. I will now turn the call back to Mr. Vivek Jain for closing remarks.

Okay. Thanks everybody. It' is a quick call in Q3. We appreciate you joining us on Veterans Day here. For those who don't know, our office backs up to Camp Pendleton. And we see how hard and how serious the people who work there are. So we appreciate everything that they do. And we look forward to talking to everybody on our year-end call. Thanks very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.