Good day, ladies and gentlemen, and welcome to the ICU Medical Inc. Q1 2016 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 be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to John Mills, with ICR. You may begin.

Good afternoon, everyone. Thank you for joining us today for the ICU Medical financial results for the first quarter ended March 31, 2016. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Scott Lamb, Chief Financial Officer. Vivek will start the call with an overview of our first quarter results, and operational improvements. And then Scott will discuss first quarter financial performance in more detail. Finally, the company will open up the call to take your questions. 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 representation of future results and are subject to risk and uncertainties. Future results may differ materially from management's current expectations. We will 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'll 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 included a reconciliation of these non-GAAP measures for today's release and provide 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. Now, with that, I will turn the call over to Vivek. Please go ahead.

Thanks, John. Good afternoon, everybody. Thanks for making the time to get update on a nice view today. Q1 of 2016 was the most active quarter operationally since I've been here. It was a great test of our much improved infrastructure and the strengthening of our overall business. We had a number of challenges and bumps through on our way; we got through most of them, emerged stronger and build on the positive financial and operational trajectory of the last few quarters. Most importantly, we continue to drive performance through revenue growth, gross and EBITDA margin expansion in following up on our acquisition of Excelsior in Q4, we continue to cautiously use our balance sheet for the long-term value creation in Q1 in the form of a stock buyback. On today's call, in addition to the financial results, and the usual direct and OEM performance discussion, I wanted to provide an update on the operational execution going on at ICU and how our activities along with fundamentals of the company, positioned us well for value creation in the medium-term and long-term. In Q1 of 2016, we generated revenue, adjusted EBITDA and adjusted EPS slightly above our initial expectations. We finished the quarter with approximately $90 million in revenue, resulting in reported revenue growth of just over 10%. The effect of currency on our revenue had substantially reduced for us. So, we'll just speak to the actual reported numbers, as constant currency would have improved results less than a 100 basis points. Adjusted EBITDA came in at $33 million which was growth of 26% year-over-year and adjusted EPS came in at $1.14 which is growth of 12% over the last year. Please remember in Q1 of 2015 we had an usually low effective tax rate and that is why adjusted EBITDA…

Thanks, Vivek. As Vivek mentioned, we are pleased with our revenue gross margins, adjusted EBITDA and net income results in the first quarter as we achieved growth in both our direct and OEM channel. Our first quarter 2016 revenue increased 10% to $90 million, compared to $82 million in the same period last year. GAAP net income for the first quarter of 2016 was $15.9 million or $0.96 per diluted share as compared to GAAP net income of $9.7 million or $0.60 per diluted share for the first quarter of 2015. As a reminder, Q1, 2015 results included both a one-time $7.1 million charge related to a legal settlement and an unusually low 16% of tax rate that included discrete tax items. Adjusted diluted earnings per share for the first quarter of 2016 were $1.14 as compared to $1.02 for the first quarter of 2015. Adjusted EBITDA was $32.7 million for the first quarter of 2016, compared to $26 million for the first quarter of 2015. The increase in adjusted EPS and adjusted EBITDA was primarily attributable to continued top line growth, improved gross margins and improved leverage in our operating expenses. Now, let me discuss our first quarter revenue by market segment and then more specifically by direct and OEM. We provided full year guidance on our direct business by specific market segment as that is what we control the most, and guidance for our OEM business on an aggregate basis, and as always, we also have these results posted on our website. As we mentioned on our fourth quarter conference call, for these comparisons beginning in 2016, we will report our revenue for the Terumo related geographies in Asia and SwabCap sales to Medline in our OEM business and no longer indirect as it is an apples for…

[Operator Instructions] And our first question comes from Chris Lewis of ROTH Capital Partners. Your line is open.

Hey, guys. Thanks for taking the questions.

Hi, Chris.

Hey, Chris.

I guess, first is, Vivek, on the production as you just kind of mentioned maybe just elaborate on what those were, what type of impact it had on the first quarter, it sounds like it's going to have a little carryover effect perhaps on margins in 2Q. So maybe just talk about where that is today if those have been resolved and expectations as going forward? Thanks.

Yeah. Sure. I would say those are just in the normal bumps that happen in running a manufacturing company. We had some tool sort of not running enough capacity or as the tool go down for a couple of weeks early in the quarter, we caught up largely and all these issues toward the end of the quarter. We were just spending a little bit of money to make sure our products got where they needed to be and it happens. And you don't feel that pain in the same quarter necessarily, right? So our catch-up will affect us this quarter. We're largely through it, it went on I would say maybe into two weeks into April or so when we've been pretty healthy since then.

And moving to direct, you continue to show a strong growth there. I guess specifically in infusion growth of 14%, oncology growth of 40% year-over-year. Can you just elaborate on kind of what you're seeing in the direct infusion segment and what continues to kind of drive that sustained momentum in that business.

Sure. On direct infusion, we did get the benefit of SwabCap, which is not a huge number, but some of that is SwabCap in there. So we want to be transparent about that that wasn't pure 14% organic. We are seeing good organic growth and I think that by focusing on the customers we have, I think we can go with them in getting back to the roots of what makes the ICU product offering unique right where can we play different than some of the bigger people and we've been spending a lot of energy on that for the last five quarters or six quarters. And what types of customers and what cost of the trading centers, I think we've just tried to revamp what we're doing on the direct side for 1.5 years now.

Okay. And just one more from me and then I'll hop back in the queue a bit, the B. Braun's distribution agreement, maybe just kind of give us an overview of what we should expect for this year and perhaps maybe medium-term to longer-term with that - are there other products that you think could be potential candidates for similar types of distribution agreements in the international territories going forward? Thanks.

Sure. The expansion around SwabCap was B Braun, it was a legacy agreement we picked up from Excelsior and we certainly assume that they may not want to continue with us and it frankly turned out to be the opposite. And they did want to continue with our product and we're very happy to serve them. And we're actually going to get to access more markets with them with that product which is great. I don't think it changes our SwabCap's forecast that we put out for the deal for this year, but as we get closer to the end of this year, we'll see if there's any impact in the future. With that as it relates to international, we're always searching for the right partners, geography-by-geography, whether that's a local distributor or a multi-national like Terumo. I've said before, our international growth has been very strong and continued to be this quarter. But, it's where we lack scale in lot of places. And so, we need to keep figuring out how to maximize the value of our product. So, we're always looking for new partners in the different geographies.

Thank you. And our next question comes from Mitra Ramgopal of Sidoti. Your line is open.

Yes. Hi, good afternoon. First, Vivek, on the clinical care side, I know you're going to hold off in terms of the launch of the hemodynamic system. I was wondering, what's your strength when you think you'll have that segment growing again?

Yeah. I mean, I don't think it's an easy - I don't think it's been easy situation there as we've said for long time. It is a herculean effort for a small company to get a new piece of capital hardware approved. I mean we had double-digit millions into that program over the last number of years, and it's a big victory to get it through the FDA. I think there is a difference between launch in the sense of limited market release and talking to customer about it, letting the world know that there is innovation coming versus having it absolutely ready from a software bugs, standup service perspective, that's going to take a little bit longer. I'm not comfortable saying there is going to be growth in that business, certainly not for this year, right our guidance been reflect that and again that's one of those we'd come back later in the year when we see where we are with getting a product range final version to make it comment about the future. But, I don't want to give a specific date for returning growth in clinical care.

Yeah, that's fair. And I know there is only so much you can say about your OEM relationship. But, have you noticed any change in [indiscernible] that for example Pfizer has focused more on Hospira again?

No. I think things for us are pretty much status quo. I don't think there's anything very, very different.

Okay. That's it from me. Thanks again.

Thank you. Our next question comes from Brooks West of Piper Jaffray. Your line is open.

Hi. Can you hear me?

Yeah.

Perfect.

Hey, Brooks. How are you?

Great, doing well. Thanks for taking the question. Vivek, I wanted to start from the higher level of more coming into the tail on burning, we've seen maybe some of the best Q1 growth out of medtech at least that I can remember and particular strength in the hospital's supply segment. I wonder what it just gets to the speculate on, what do you think is going on? And do you feel like we're actually seeing true volume growth return in this fields sustainable just at a macro level?

We study a lot of different things, we study like many businesses, it's sometimes easier to go deeper with the customers you have sometimes and get new ones and certainly it's our product offering broad-ends. We're able to go deeper with our existing customers across different categories, but it's all necessarily volume increases, categories like Oncology are being created, categories like SwabCap are being created. So, we get to participate in the creation of certain new markets. On the regular day-to-day infusion therapy products, we see differences regionally, we see differences what states that took funding, that didn't take funding from the government. I know it's difficult to pinpoint that there's a very black and white national answer, we do see the bigger systems winning and we're growing faster with those customers that are growing, but I'm not sure we have a smarter point of view, they're one of the big multivolume suppliers.

Okay. Thanks for that. And then maybe just follow up question on infusion, again kind of a market question. Are you seeing actual share shifts within the big pump players and I'm just coming off the Baxter Investor Day, they're launching a new line of pumps. I'm just wondering what you're seeing in terms of no share shifts within the hospital and how that might be impacting your business both near term and longer term. Thanks.

Yeah. We have a - there is a direct, I mean kind of goes back to the first comment when I got here two years ago. We feel direct pain if an OEM customer of ours is unable to gain infusion pump market share, right. And if they have less pumps, they have less sets that our parts are on. And we've felt that pain is if you look at our OEM infusion therapy results over the last couple of years, that's exactly what we have experienced, there was a lot of shift in our mind. We are being cautious and are kind of saying both through what we feel in the market and know about the market and what we saw last year in orders to us versus what we believe underlying demand is, that doesn't match up and either share is going to continue to shift or there is a just a mismatch between products that's been ordered and how long it's going to take its way to make it out into the system. But I think there's a number of globally focused competitors in the space now and the market dynamics have changed.

Right. That's very helpful. Thanks, Vivek.

Thank you. [Operator Instructions] And our next question comes from Larry Solow of CJS Securities. Your line is open.

Hi. Good afternoon. This is actually Lee Jagoda for Larry.

Hey, Lee.

Hey.

So, just one quick one from me. Now that you've done a smaller size acquisition and bought some stock back opportunistically. How should we think about your desire to deploy more meaningful capital ahead of any decision by your key customer?

It's a great question, Lee. It's one we rest every day. And it's not just a key customer, it's kind of where are we in the grand scheme of evaluations and available assets and other things we deal every day. I think to start with the first one on buyback versus M&A, I think it's intensive small companies to grow and our needs are little bit even more acute than that because we've had historical customer concentration, now we think we'll get down to 30% here or in the high 20s, when this contract ends and as we talked about it before, right, which is - and our profits have changed so much when we make on our own, but the money is still on our minds is better spent in the name of growth and add-on acquisitions and diversification, right. And our needs are different than others in that. Buyback to us was, you've said the right word, it was much more opportunistic and it look like there was a lot of fear out there in February and we should take advantage of that. We do the same thing again. And then in terms of anything with our customer, I think we have to be optimistic and plan for the best with them. So, we don't necessarily believe or read in newspaper. We have to spend our capital wisely, and we are accumulating it at a very nice rate, right now and we know that that's not going to be able to be hold onto forever, right. But we think we've got enough growth certainly for the balance of this year, and we are staying with margin, et cetera, for next year we have some time to do the right thing.

Okay. And just want to make sure I heard it right earlier. In terms of hospital, you were saying this year, you would expect them to stabilize. And next year, we should expect some growth but then stabilize at a higher level is that had a thing...

No, I'm sorry, if I wasn't - I'm sorry Lee, I wasn't clear. We are confirming what we said in our previous two calls, which is we expect them to be down roughly 10% or $10 million, 2016 over 2015. What we believe to the previous question and what's going on in the broader market. We do see a lot of share in customer activity happening, but we see kind of bullets of that going on, right now. And we think that will settle I think at next year, and we believe to be more of a plateau next year. Look, and we may be wrong in that, we've been - for two years, we've been fairly medicine to have a long-term view on that, but I think we've just seen enough shares that we think, we're going to bounce of the bottom here somewhere, and we kind of feel that could be next year.

Okay. Very helpful. Thank you.

Thank you. And we have one more question from Jayson Bedford, Raymond James. Your line is open.

Good afternoon. Thanks for squeezing me in here. I guess, I just want to revisit the production issue, you mentioned in the first quarter was little unclear. Was there an impact on first quarter sales or gross margin in the quarter?

No. There wasn't really an impact in sales in the quarter, Jason. But there - the remediation of that which was playing catch up a little bit in March and into early April will affect Q2.

On the sales or gross margin line of that?

On the gross margin line in Q2.

Okay. And I also wanted to ask you about the strength and gross margin, you mentioned a few factors. I think the shutdown of Slovakia, the integration of SwabCap and it sounds like steady. I was talked there were more kind of back half 2016 kind of 2017 drivers, but your gross margin clearly in the first quarter was probably the highlight of the quarter. So I'm just wondering outside of - I'm guessing some contribution from FX, what were the other sources of the gross margin strength in the first quarter?

Well, I was hoping the $7 million of EBITDA growth. I'll let Scott by law, I mean I would think about it as gross margins with half currency, half production gains on the floor. I think we'll have a little bit of the number, we're talking about the numbers are small movement here. But downward pressure in Q2 as they catch up and then get back to these kind of levels later in the year and the points I was trying to make around Slovakia and SwabCap the high hanging fruit, those are tough choices and we should be getting the benefit of that next year, that could be taken from its of currency went away from us or we're buying the clients that are different from our current OEM and expectations [indiscernible]. But we're trying to say there has been a multi-year journey here on gross margins. Scott?

No, I wouldn't add anything to that.

Okay. I think that's all.

Okay. And I realize you don't want to get into somewhat detail on 2017 here, but as I look to the level here in the first quarter and we look at 2017, you're adding on benefits from the SwabCap integration as well as the full flow back you shutdown. There's no reason to believe that it's going to call back from these levels, outside of the blip next quarter?

Correct, but if currency changed on us, it will fall from back on that, right, or production volumes changed drastically that will also cause.

Right. Okay. And then, just curious as to the impact of SwabCap, is it having any impact either reinvigorating your sales force or helping pull through additional connector revenues somewhere?

I think it's just two things on that. It's actually work for the sales force and it's - the company is very lean, right. As we've said in a good way and that's why margins have gone up, but it's a lot of work to manage the conversion to - remember, Covidien was a legacy distribution partner, there we're doing that all ourselves, getting that cut over and then, some of the new implementation. It's asking a lot of our folks and obviously, they're rewarded for that and excited about that, but it's making us to reflect a little bit on the overall resourcing level and that's why we're making comments should we be making other investments. I mean that's a good problem, I mean there's revenue out there to get. And on the pull through, I think there's a series of customers we never got access to and it's a new product, it gives us a right to be it, account said we didn't have relationship with historically, right. They weren't interested in [indiscernible] or whatever it maybe and I think that's a good thing.

All right. A follow-up...

Go in.

Lastly and I apologize if I miss this, but Cogent when will you actually launched the device?

I think right now Jayson we'll be out there and talking to customers about it in a limited market release in a soft launch. But in terms of actually booking a dollar of revenue, so I can see the real launch, that's not going to happen till some point later this year until we get this software, if that not could even drift into late this year, right. And don't get me wrong we're super happy we got the 510(k) in hand, but it take time to go from a 510(k) to a commercialization. But I view it's another operational commitment we made and we got it done.

All right. Thank you.

Thanks, Jayson.

Thank you. And at this time, I'm showing no further questions. I would like to turn the call back to Vivek Jain for closing remarks.

Thanks, everybody. We appreciate it. We hope you feel great about Q1. And if you think just like last year Q2 is going to be a really informative call, and we appreciate everybody's support and interest in ICU, and feel free to contact staff, if any other questions. Thanks very much.

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