Good afternoon everyone and welcome to the Q4 2019 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] I would now like to hand the conference over to your speaker today, Mr. John Mills.

Good afternoon everyone. Thank you for joining us today to discuss the ICU Medical financial results for the fourth 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 want to let everyone know that we have a presentation accompanying today’s prepared remarks. To view the presentation, please go to our Investor page and click on Events Calendar and it’ll be under the Fourth Quarter 2019 Events. Before we start 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 are based on the best available information to management and assumptions that are reasonable. Such statements are not intended to be a representation of full 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 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 into ICU Medical’s 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 fourth quarter of fiscal 2019 showed sequential revenue improvement and commercial stability in our most valuable product lines and allows us to hold firm on our view of profitability in the near term. For the full year of 2019 we delivered cost improvements on the P&L from TSA and other operating expense savings that allowed us to best offset revenue decline versus 2018. When we reflect on the year and at least we’re very glad it’s over, we were able to; one, stabilize our operational platform after our systems cut over in late 2018; two, survive a rapid deceleration in the IV Solutions segment, which was always expected but not necessarily at the pace it came; three, handle some unique backwards revenue situations in consumables; while four, finishing the year with the best list of customers we’ve had since we acquired HIS; five, deploying some capital sensibly with all of the other issues we faced; and lastly, advancing our product quality and service levels to the customer. We do believe the majority of issues are behind us from an operational perspective that the earnings impact and recovery was adequately captured in our previous commentary and that 2020 becomes a year that is about commercial execution and showing ourselves and our investors that we can grow our businesses. On today’s call, we wanted to comment on Q4 and full year 2019 results and discuss our current view of the business and recent performance trends, weave in a few quality items, given some of the recent industry developments, provide an update on the actions we’ve been taking given the 2019 changes in the last integration items, a quick comment on any coronavirus related knock-on effects for us to date and outline the criteria we are judging…

Thank you for that, Vivek, and good afternoon everyone. To begin, I’ll first walk down the P&L and then take a little – talk a little bit about cash on the balance sheet and finish with some detail to our guidance for 2020. So our fourth quarter 2019 GAAP revenue was $316 million compared to $340 million, down 7% from last year. And for your reference, the 2018 and 2019 adjusted revenue numbers, which exclude contract manufacturing sales to Pfizer at cost can be seen on slide number three of the presentation. Our adjusted revenue for the quarter was $297 million compared to $322 million last year, down 8% or 7% on a constant currency basis. Infusion Consumables were $120 million down 2% or 1% on a constant currency basis. IV Solutions, which we primarily sell in the U.S. were $81 million, down 14%. Infusion Systems were $85 million, down 8% or 7% on a constant currency basis and Critical Care was down $2 million, 13% both on an adjusted and constant currency basis. Adjusted diluted earnings per share for the fourth quarter of 2019 were $1.94 compared to $2.14 for the fourth quarter last year. Our adjusted earnings per share for the quarter was favorably impacted by approximately $0.21 related to year-end true-ups and excess tax benefits connected to equity compensation. We estimate our GAAP and non-GAAP tax rates for the full year of 2020 not including these tax – these excess tax benefits from equity compensation to be in the normalized range of 21% to 23% with the non-GAAP rate at the upper end of that range. And finally as expected, adjusted EBITDA decreased 12% to $61 million for the fourth quarter of this year compared to $69 million last year. As you can see from slide number…

[Operator Instructions] And your first question comes from the line of Matthew Mishan of KeyBanc. Matthew, your line is now open.

Excellent. Thank you for taking the question, I guess.

Hey, Matt.

Hey. Just starting off, Vivek, is $80 million the right run rate in IV Solutions from here? I’m just trying to get confidence in that rate as you kind of work through some major contracts that I think you are still up in 2020.

Sure. I mean, I think when we called it down last summer, I think we said $75 million to $80 million was the range. We’ve averaged above that. And I think you hear us saying we continue to believe somewhere in that range, is the right range. I don’t think we have a different view of anything we’ve said historically or in the last year.

And then just any thoughts on potential flu benefit either in the fourth quarter or in the first quarter 2020?

We had the opportunity. We did get some calls if we would like to put a bit more maybe into the channel on the notion that flu started off very strong in the fall. We chose just to kind of stick with normal business. So we did not get any benefit in flu and right now into the first quarter of this year we haven’t seen anything unusual or no benefit.

And then moving onto the infusion pumps, is it possible that you can say when Plum LVP last went through a 510K update with –including some of the software updates? And then as a follow-up to that, just in early conversations, how willing are hospitals to dual source infusion pumps and given the history, why not a certain level of redundancy in supply?

Great questions. For Plum hardware, the latest 510K that was submitted which was version 1510 was after we owned the business in March, 2017 or April 2017 – March-April 2017. Some of the software 510Ks on MedNet were earlier than that. But those are the facts on where our latest submissions were. In terms of the customer, I think the answer is somewhere in between what you said, which is our experience has been at both places large systems have been willing to have multiple vendors. Where it gets more complicated is people typically go on multiple vendors inside a single building. So a system may say for this portion of the country or this region or this state or this group, it makes sense to use one versus the other. But typically inside the four walls, it gets more complicated, people prefer not to do that.

Okay. And I know you actually have been launching some new products. I’m just curious how the Daina 2.0 platform has been received by customers so far. And then just in relation to that, have they been asking for an end-to-end closed platform from compounding to delivery or is this something that new – like a new solution that you’re bringing to them?

I think you were at ASHP, you must have seen this. And so we haven’t talked about it very much. I think it’s been in a limited market release for us. We’ve been reworking it. We brought it back into tweak things a little bit, so it’s just starting to get out there. I think, it’s the notion of – if you look at all these guidelines, you look at U.S. paid $100 million the notion of closed medication delivery has been a topic for a long time. I don’t think we’re inventing whole new cost. There hasn’t been an easy solution from a workflow perspective. That’s what we’re trying to bring to the equation. I think, like all markets, it is early days. It requires education. And there’s all these individual fires that happened in different parts of the infusion chain, right. It was on solutions a number of years ago, right. So we got to stay on point and just keep hammering away at our message there and it’s about safety and quality and that those are the things we believe we had value in.

All right. Thanks for that. And congratulations, Scott, on your retirement. Thank you very much for all the help you’ve given me over the years.

Thanks. I appreciate it was good working with you.

Thank you, Matt for the kind words. You are the newest one to the party and so we’re just teasing you a little bit.

All good, all good.

And your next question comes from the line of Larry Solow of CJS Securities. Larry, your line is now open.

Well, Scott, I will thank you for that shot out. I will appreciate – I do appreciate all your help in the last nine years. So I do wish you best of luck as well. You deserve a break. So, god bless. I guess extra couple of couple of questions. So you just – to summarize, and I think it’s sort of been – sort of your thesis for a while now. Keep that solutions business sort of on the flattish array on the top line and maybe over the next couple of years improve some margins a little bit that have sort of been reset. But get a little bit back into your pockets as you bring some production in house and then grow the other two businesses, maybe not so much in 2020, but in 2021 and beyond. Without going into exact numbers, what is sort of a good target? What do you hope for or expect these two businesses can grow? Is it sort of a 3% grower, a little better than that. What do you sort of aspire to?

Look at a high level, we have to prove our thesis, right, that’s our point. We owe it to ourselves, owe it our shareholders to show that we can grow the businesses. And so thesis is a hypothesis right. We want it to be reality. That is exactly right. Our view is we need to show that we can grow the stuff that’s the stickiest and the most differentiated which is consumables and pumps. And we got to show stability in Solutions, et cetera. I think we had years of growth in consumables and we had an off-year in 2019. And we’re saying, we want to get back into mid single-digit range for 2020. I don’t think there is any structural reason why we don’t think that, that’s not a realistic assumption for a number of years. We used to do that before we had all this stuff. Pumps is super hard to call right now, because of the different lines going into it. I think, there it’s been well talked about what’s the market replacement rate and the market expansion and there is not a huge growth in net hospital beds in the country, right. So pumps is about share gains and pumps is about globalization in the right markets and it’s about changing the value prop to away from just the box itself to software and other service and other features versus just the dedicated set, which it has been about historically. So I don’t really want to make a prediction there. And solutions is totally about census and holding the best customers. So whatever someone’s view is of U.S. census is the way you should think about that.

Okay. And I know you don’t guide to the quarter and you sort of guided to sort of $60 million to $65 million run rate for the – per quarter for the year. In terms of cadence, would you expect to exit 2020 on a little bit of a higher bottom line run rate than you started the year?

Yes, I mean I think that’s – certainly I believe, the supply chain stuff, the other things kick in, all right, gives us time to get more to see. So we spend a lot of time on revenue and cost. We don’t sit around and try to perfect in EBITDA by quarter.

Understood.

It’s not that big of a company.

But general trends obviously, you should hopefully position hopefully position you to be a little bit better as you enter 2021.

I mean we haven’t fully – we haven’t fully lapped, we haven’t – I mean after Q1 we will fully lap some of the negative stuff that was going backwards, right. And so that helps and the wins get more time to get implemented, that helps, etc.

Right. Okay. And just on the cash flow and particularly working capital. I know you talked a couple of years about CapEx going down and that certainly should help your free cash flow. But I would think the business just on an operating – capital operating cash flow basis should generate a little bit more than it’s been doing in the last few years. I realize with Pfizer, with Hospira, with Siemens integrating that and probably cost some money. But also just looks like on the working capital side, you had more of a usage than we would have thought. So I think thoughts to that and as you look out the next couple of years, do you think that can improve?

Yes, let me make a comment. Brian is here in the room with us. And will let Brian answer some of that too. We spent a fortune on integration and we were just talking about it today. And so that was a huge consumer of cash. That’s why I kept – there has been saying that needs to stop. That’s like more important than correcting the working capital changes, right. And then once that’s done, then it becomes very much – that’s more important than you have the DSOs, etc. Once that’s done, then all the other activities Brian is working on pick up.

Right.

But the integration consumed a ton of cash and look where we are. If you add back the cost of Pursuit, we’re kind of at the level of cash we had before this transaction and we spent hundreds of millions of dollars in integration. So I’ll just say that was the biggest kind of negative polar user of cash and I will let Brian talk about the regular – the work streams going on, broader working capital.

Yes, Larry, this is Brian. So for 2019 it’s clear that from a working capital standpoint we used more cash than we probably would have liked, I think we made some good progress in Q4 to reverse that trend and the goal would be to continue that progress during 2020 and there is an opportunity there.

Got it. Okay, great. And just on the CapEx. Did I catch that right $30 million total, was that just growth cap in the front half, the $30 million Scott referred to?

No, that was the integration – that’s the last of the integration.

Okay. That’s that piece. Okay, got you. So that $30 million a little bit less in Q2 in the back half and hopefully nothing in 2020.

Not a lot a little less, a lot, a lot less.

Right. Okay, great. Great. Excellent. Thank you. All set.

And we have one more question from the line of Jayson Bedford of Raymond James. Jayson, your line is now open.

Good afternoon and thanks. Actually I have a couple of questions. But first on pumps, it looks like you saw some kind of green shoots there with the quarter-on-quarter increase. Did the non-LVP business grow sequentially?

No.

Okay. And the expectation is that it – the non-LVP is kind of flat to down in 2020?

Definitely down.

Okay. And earlier in the year, Vivek, you mentioned 100 basis points of share gain in LVP and have you seen the impact of that on the revenue line? Did that contribute to the fourth quarter?

Not really. That’s what I said, we believe what we’re holding in transactions under contract that we haven’t implemented yet, that we felt good between that and what was going down that we had the chance to be close to flat. That wasn’t really the driver of the fourth quarter.

Okay. And just to be clear, it doesn’t look like your guidance assumes any notable share gain as it relates to the current industry environment in LVPs.

We don’t want to speculate on anything that’s going to hear things go slowly. We’ve been around the stuff for a long time. So…

Okay. And then just on the consumables side, it’s a little softer than I expected. When you talked about the $15 million in slippage backwards, is that just all supply related, is that what you mean by backwards?

No, not at all. I mean in 2000 – and ballpark, these are not precise, in 2018, we sold $10 million a Tego for example and maybe we sold half of that in 2019 or something. Product lines actually went backwards, that we had big issue with OEM SwabCap where there was a lot of load in 2018. It didn’t happen in 2019, less dollars of revenue. So individual things went backwards and then a little bit of price harmonization that I talked about. That wasn’t at all supply related. That was why we had to step in and do Pursuit, why for the first time we didn’t have consumables growth because we just too much stuffed to jump over. And the Hospira distributed products, we talked about a little bit historically. There was always enough that even those things were going on year-to-year in the background, they never shows up, when they got to $15 million or that kind of number, it gets much harder to outgrow that.

Okay. From a supply perspective though to the extent there was an impact in 2019, you enter 2020 here with full supply.

No, we have very, very high service levels right now across the board. So said differently, as I think where you’re going, had we had our production issues solved earlier in the year, I think all of us believe we could have delivered a better Q4, even Q3 oncology number than we did. Basically we had orders on the books since March. We didn’t really get the product released until September-October and then to call up a customer and say I know you’ve been waiting for us for six months, can you help us in the next three weeks and get installed, the calendar just didn’t work out in many places as we thought we could do that. So you’re exactly right, probably to the tune of $1 million. That’s not business gone away, it’s sitting there, we just got to get it on the schedule and get it in. So it was frustrating to us. So that’s why I said there was – it was $2 million to $3 million less than we thought. The international markets were sluggish and I think I said that either on the call or at an investor meeting midway through last quarter, that’s turned around a little bit right now.

Okay. You said there is no change in demand for oncology. What is end market demand for – from a growth perspective for oncology?

I think a safe number we’d feel comfortable saying, Jayson, is sort of like north of double digits, I’d just say that 10% or better.

Okay. On gross margin, have you seen the worse from a rampdown of IV Solutions production, meaning have you seen – is the bulk of the impact behind you now?

I’m going to let Brian – I’m looking at Brian go there, Jayson.

Yes, Jayson, this is Brian. I would say that the majority of the impact shows up in Q4 and in 2020 and forward. It’s going to just – you can assume margins are flat.

Okay. I guess –

We’ve got a couple – there is a couple of little offsets, Jayson, like on this systems cut-over in Austin, right. We lose a little bit of production absorption on things like that. So for us the manufacturing was the biggest chunk that rolled through in Q4. There is still a few things out there. It’s better to be safe and just say kind of stays flat for a while, right, we took it.

Okay, that’s helpful. Thanks. And, Scott, congratulations. I wish you the best.

I’m showing no further questions at this time. I would now like to turn the conference back to CEO, Vivek Jain.

Thanks everybody. I recognize obviously, it’s been a couple of eventful days in the market here and I’m sure people have many other things going on. So we appreciate you spending time with us. Even with what’s going on, we’re very happy last year is over and we look forward to getting back to work and looking like a normal company in 2020. Thanks everybody. Appreciate it. Bye.

Thank you so much to our presenters, and to everyone who participated. This concludes today’s conference call. You may now disconnect. Have a great day.