ICU Medical, Inc. (ICUI) Q4 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the fourth quarter 2016 ICU Medical, Inc. 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]. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, John Mills. Please go ahead.

Thank you. Good afternoon everyone. Thank you for joining us today for the ICU Medical financial results for the fourth quarter ended December 31, 2016. 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 and 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 financial position. Please note that during today's call, we will be referencing a presentation that we have also posted on the ICU Medical website under Investors and under Presentation. In addition, 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 addendum's 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 Investor portion of the website for your review. Now with that, I will turn the call over to the Vivek.

Thanks John. Good afternoon everybody. Our fourth quarter was a very productive quarter, as we continue to drive revenue growth and increased EBITDA, which resulted in strong free cash flow and improved net income. It's been a very busy last 12 months, both operationally, as we have executed well to a large volume of activity and strategically as we went through the multiple transactional steps to acquire Hospira Infusion Systems. On today's call, in addition to the financial results of 2016 and providing 2017 guidance, we wanted to recap the key drivers of ICU Medical over the last few years, outline the near-term activities to ensure the successful integration of Hospira Infusion Systems and like we did with ICU Medical, layout the range of scenarios for value creation into the future. We believe there is real intrinsic value in the asset we have created and we wanted to be transparent on the plan and the work that has to happen to have it fully realized. In Q4 2016, we generated revenue, adjusted EBITDA and adjusted EPS slightly above our initial expectations. We finished the quarter with approximately $96 million in revenue, resulting in reported revenue growth of approximately 6% with negligible currency effects. Adjusted EBITDA came in just slightly over $34 million, which was growth of 14% year-over-year and adjusted EPS came in at $1.20, which was growth of 25% over last year. Please remember in Q4 of 2015 we had an unusually high tax rate, which depressed our adjusted Q4 2015, making this a very easy comp. Our cash conversions were very strong and our cash balance at quarter end was approximately $445 million. We continued through Q4 to have very solid performance from our direct lines of infusion and oncology and our overall direct operations continued to generate positive momentum with 18% growth. Specifically, our direct infusion and oncology segments grew 21% and 32% respectively and critical care was up 2%. Full fiscal year 2016 finished with approximately $379 million of revenues, resulting in reported revenue growth of approximate 11%, again, with negligible currency effects. Adjusted EBITDA came in slightly over $134 million, which was growth of 18% year-over-year and adjusted EPS came in at $4.88, which was growth of 23% over last year. Our overall direct operations had 19% growth and still low double digits, when excluding the impact of the Excelsior acquisition. Specifically, our direct infusion and oncology segments grew 23% and 40% respectively with complete organic growth in the oncology line. In our direct infusion segment, where we grew 21% in Q4, we continued to see solid utilization trends in our existing customer base and a growing number of new customers interested in working with ICU Medical. I did want to note, in the first six weeks of this year, we have seen a slight slowdown to growth rates. We are still seeing attractive year-over-year growth just not in the mid-teens and a few weeks do not make a trend but it just feels a touch lighter to me. Our more focused selling efforts over the last 18 months have shown good results in getting back to the core value drivers of ICU around unique products, competitive value and customer service. SwabCap, the key product from our Excelsior acquisition has fully met our revenue commitments both on a direct and OEM basis. In our direct oncology segment, we achieved over 32% growth for the year and continue to believe that we are in the early stages of a very long-term growth opportunity. Our products enable hospitals to address the increasing regulatory guidelines being adopted, which is one of the many reasons we are expanding our customer base. Also, our growth is now being driven by our new ChemoLock product and it will begin to become a bigger part of the offering. We expect continued growth throughout the year and critical care turned out exactly as we described on the previous call. Our overall OEM business declined approximately 14% in Q4. On the last few calls, we were extremely clear and said that we absolutely believed we would see declines in revenues from Hospira over the balance of 2016 and they would be at the smallest percentage of sales in many years at the Q4 exit run rate, but our profitability will remain high as our mix changed. That is exactly what happened here. All activities mentioned on the previous calls relating to our new OEM customers of Terumo, Medline on SwabCap, et cetera, are all moving forward. Let's talk about some of the operational activities for the full year 2016 and what happened with gross margins. As we had expected, gross margins improved 30 basis points sequentially in the fourth quarter. On the last few calls, we detailed a lot of the activities that have happened operationally. An update on the three items that impacted margins the most is as follows. First, all the bridge product we built in Slovakia has been burnt off and we will see the benefits in 2017. Second, SwabCap production is fully integrated into our Salt Lake City operations. Lastly, the normal expectations on productivity gains and scaling up new products to ensure competitive positioning have been put in place by the operations team. These improvements will help us be as competitive as we can be in the new co. From an operating expense standpoint, there is not much to talk about. Cash expenses for the year in general, excluding transactional and restructuring costs, were flat to down for the year. The transaction with HIS or Hospira Infusion Systems does bring additional costs. Before moving on, I wanted to take a moment and reflect on the last three years. Over that time, we grew our organic revenues, improved our gross margin and operating margin substantially, more than double the annual ICU Medical free cash flow and when adding back the Excelsior acquisition, buybacks and litigation settlements added almost $200 million to our cash balance. We laid out a plan in mid-2014 focused on free cash flow generation to drive value with different bookend scenarios and I wanted to thank legacy ICU employees and shareholders for believing in those plans. We delivered on our commitments for all three years. Our team feels that we played the cards the best we could and that enabled us to be positioned to solve the big strategic issue we had of reliance on a single customer with our acquisition of Hospira Infusion Systems, after we explored all other shareholder value creation options and assessing the viability of that relationship over the next few years. So let me start to talk about Hospira with a recap of the transaction, its rationale and then some comments on integration what the bookend scenarios are and how this fits into 2017 guidance and beyond. We closed the Hospira transaction on February 3 and have owned the business less than four weeks. We did this on offense to create a leading pure play infusion company with a complementary full-line product portfolio, the ability to unify our distribution channels globally and to provide compelling economics to stakeholders over time. And we have talked numerous times about the defensive reasons and the need to control our own destiny. Offensively, we felt the ability to offer the full product suite was a unique opportunity to become a big player where ICU has been the smallest player in a category dominated by multinationals. While ICU executed well over the last few years, it was getting hard to compete against the larger players. Second, we saw benefits as we, the supplier, could integrate with Hospira, the customer, to offer more value to customers. Third we said on numerous calls that getting global is hard. This transaction gave us an opportunity to globalize in a major way. Lastly, we felt we could deliver shareholder value creation based on our teams' collective experiences and the skills we have sharpened over the last few years at ICU Medical and previous companies with a very similar range of scenarios. And from an intrinsic value standpoint, we are creating a pure play acid in the category with a good industry structure where absent unique events, market share typically moves slowly and just like ICU, there is an opportunity to improve performance in businesses that have been under managed. Economically, under the revised transaction framework we laid out in January, we will pay $675 million for the asset with $400 million in our stock and roughly $275 in cash with $75 million in seller financing. When including fees, which matter, it will be approximately $200 million in initial cash outlay. From an integration perspective, many activities are underway, multiple work streams are running on distinct areas, including IT, which is the biggest area as well as operations, international and domestic commercial activities. Even though we are early into the transaction, we have taken some decisive actions already, including locking down the go forward leadership team, the announced closure of our Dominican Republic factory and the beginning of some complex commercial integration in the U.S. market. Our bias at the moment is to spend more if needed to enable the integration faster as we believe it will accelerate future value creation. I will make a few comments on the positive and negative findings of the first few weeks. On the positive side, we have been pleased to find a core group of people who deeply understand the technology and are committed to the customer. We found high quality R&D talent and a lot of projects have move forward well. And we have seen major investments into quality made by Hospira and Pfizer, which need to be validated through our next set of FDA inspections. On the negative side, we found inertia, some mistaken fondness for some corporate largess and systemic processes that don't necessarily make us more responsive or customer oriented or efficient with our capital. We see opportunity and ability to address some of those issues quickly. The basic bookends here are very similar to the ICU story. Much like ICU in 2013 and 2014, our view is Hospira Infusion Systems has been in what we would call a prolonged transition period. During these transition periods, companies are less decisive when they are unsure about the long-term. Like our experience at ICU, we believe the Hospira business with just some basic operational rigor can improve its P&L in the medium to long-term. Our goals are just like our previous experiences to first enhance margins then improve overall growth. In the best case, we will have better execution to improve our topline performance over time, drive operational improvements and improve cash conversions and returns. In the worst case, we continue to fight headwinds on the topline, but we can still drive operational improvement and generate solid cash returns overtime. Those are the exact same words we used to describe the opportunity for ICU a number of years ago and either one of those cases, along with the defensive reality, justified the transaction. And just like ICU, there are number of intrinsic value drivers, including high-quality or hard to reproduce production assets, sticky product categories and the opportunities for more cash generation. But what is different than our previous experience from ICU is the sheer size and scale of the work we have to do. It is very rare when the $400 million lean corporate player buys the $1 billion revenue customer. This is a complex corporate carve out and has aspects of a turnaround in certain areas of the business lines at the same time. We do get to do this from a position of strength and stability in our base business, but it is a heavier lift than ICU was as a project and the business has more product and customer baggage than what we started with at ICU. We wanted to give a couple of examples of this complexity. Again, this is not to talk down or talk up the circumstance rather just to be realistic on what we have ahead of us. We have begun what is the most straightforward in the domestic commercial integration activities. International markets will be more complex because in this type of corporate carve out, much like a private equity deal that public investors will not typically see, we have delayed closings of countries where we do not get control of the P&L immediately and therefore do not influence results directly. We pay Pfizer to maintain these activities, pass the P&L to us and those costs can bounce around a little bit. From a quality systems integration, we are approaching is very cautiously. Hospira's on the docket to have multiple production sites review this year and we need to first focus on completing those activities successfully. IT is perhaps the most complex of integration activities. We are in the planning stages, but it is not like we bought a business with self standing systems or infrastructure. I have been burned on IT conversions before. So we are going to get to spend the time here to do this right, make sure we plan it out right, get the right services around the table and build the capacity inside the company. This is extra important because a lot of margin improvement is dependent on IT consolidation, which allows for changes in the work process. This is just a small list of the many items on our agenda for the upcoming months in addition to doing what really matters, building customer trust and relationships of the combined company. I went through this list because addressing all these items means extra run cost or investments into the business and that factors into our 2017 guidance, which I will switch to now and then talk about our goals in 2018 and beyond. We feel that we have been very transparent with investors on our own plans over the last few years and cautious with our own expectations and we want and need that mentality to continue into 2017. Short-term outperformance is not likely with this transaction and is important that people understand that. As we said on the transaction call a month ago, the results for the acquired business in the short-term will get worse before they get better, similar to our first year here at ICU. The first few quarters under our ownership will not be predictable and will be subject to all the expected difficulties of a carve out. If you are an investor that wants the predictability that ICU has offered in recent years, which will be difficult to repeat over the near-term, but when we get it right, long-term returns could be generated quickly, like ICU. So to build up to our guidance for 2017 and beyond, we basically wanted to fill out the template we showed on our January call and at the JPMorgan conference. Please reference slide three in the supplemental deck. ICU finished 2016 with $134 million in EBITDA. To that we would assume 10% revenue growth on our legacy direct business which would pass through approximately $13 million in incremental EBITDA. We would then add the previously discussed incremental EBITDA of $35 million to $40 million coming from the acquisition and then we would have to factor in the two negatives we previously mentioned. The first, which would have happened to ICU standalone anyway is the knock on effect to our former OEM business as Hospira sales eroded. The decline in primarily Hospira's consumables business have the effect of approximate $12 million EBITDA hit to what would have been our base OEM rate. The second negative is more one time in nature. Now that we own Hospira, we have excess inventory in the channel and because we both don't need to hold inventory of the same product and Hospira was, frankly holding too much. As a result of the transaction, we need to slow our production as we don't need to produce as much as we try to optimize working capital. This has an approximately a $5 million negative hit to our efficiencies until we have proper inventory levels across the supply chain. This is a specific consequence of buying one's customer. So as a result, we see $170 million in adjusted EBITDA as the midpoint of our range. Again, these numbers can move up or down depending on all those integration items that I just mentioned. I did want to spend a second on our medium-term goals for 2018 and beyond. Since we did adjust our expectations for the transaction in January when we stated that our goal is to hit a $250 million run rate in 2018 at some point. I wanted to quickly go through slide four here and show how we are penciling that out. First, we make no assumptions about revenue growth in 2018. We would keep the business steady-state from the legacy Hospira perspective and then add three components to that run rate and that run rate is the $170 million that we are guiding to for 2017. First, we would assume that the legacy ICU business could add $10 million of incremental EBITDA which we felt was reasonable, given our annual build from 2014 to 2017. To that, we would expect to implement synergy sometime this year that would result in an incremental $30 million to $35 million of EBITDA in 2018. And lastly, getting off the Pfizer TSAs are incredibly important and combined with further operating efficiencies offers as much as another $35 million in lower operating costs. Scott will go through the EPS counts for 2017, but I wanted to make a few comments on valuation. When we announced the original transaction, we stated that we cared far more about ROIC and cash flow returns versus accretion dilution. We said accretion dilution was the least relevant item to us. As the earnings came down by roughly $35 million for 2017, it dropped to a level where there was more depreciation than EBITDA and regardless of positive cash flow that results in the negative net income and EPS contribution from Hospira in 2017. We also knew that sticking with a $400 million in equity versus switching that to cash from the balance sheet would add more dilution, but our view was that we could solve the equity dilution over time when successful and it was better to be cautious now. And we knew that if we hit to $250 million run rate, the EPS counts would look very, very different. Just for reference, after the final negotiations last month, the actual costs we will be paying Pfizer across the P&L, some in the form of TSAs and some to perform international or specific operational services is north of $80 million annually. That is the unusual part of this deal as a carve out and the small player buying the larger company. Until we get the lift fully completed, it is expensive to run. As a result, the near-term numbers will have more volatility, but as usual, we will commit to working with intensity to get rid of all waste in operating as lean of an environment that ensures quality and compliance. In closing, we believe that this was a logical evolution for both businesses. We feel we have been able to put together a transaction that didn't risk the enterprise and still left real room for value creation for investors. And if you are an existing ICU investor, we appreciate your support in advance and hope you feel that this action provides sensible capital deployment and an opportunity for increased value in the medium to long-term. As always, I would like to close with things are moving fast. We are trying to improve the company with urgency and we are trying to take responsible action and break some of the inertia that many companies in our position face. We may hit some bumps as we take on some of these actions and we will overcome them and emerge stronger. I really appreciate the effort of all legacy ICU employees and our new colleagues from Hospira Infusion Systems to adapt, move forward and focus on improving results and our company appreciates the support we received both from our customers and our shareholders. With that, I will turn it over to Scott.

Thank you Vivek. As Vivek mentioned, we are pleased with our revenue, adjusted EBITDA and adjusted EPS in the fourth quarter. Our fourth quarter 2016 revenue increased 6% to $96 million when compared to $90 million in the same period last year. GAAP net income for the fourth quarter of 2016 was $9.5 million or $0.54 per diluted share compared to GAAP net income of $5.5 million or $0.33 per diluted share for the fourth quarter of 2015. Adjusted diluted earnings per share for the fourth quarter of 2016 were $1.20 as compared to $0.96 for the fourth quarter of 2015. Adjusted EBITDA $34 million for the fourth quarter of 2016 compared to $30 million for the fourth quarter of 2015. Now let me discuss our fourth quarter revenue by our direct and OEM channels and then more specifically by market segment. Direct sales totaled $66 million or 69% of total revenue while OEM totaled $29 million. For the fourth quarter, sales in infusion therapy were $69 million, an increase of 6% from the same period last year and represented 73% of our total sales. Direct infusion therapy sales were $44 million, an increase of 19% from the same period last year and were primarily due to sales of our needlefree products. Sales in oncology were $13 million, an increase of 9% from the same period last year and represented 13% of our total sales. Direct oncology sales were $10 million, an increase of 30% from the same period last year. This was due to increases in both existing and new customer sales. Sales in critical care which are essentially all direct were $13 million, a slight increase from the same period last year and represented 14% of our total sales. Our fourth quarter sales for domestic and international were as follows. Domestic sales were $68 million, an increase of 3% from the same period last year and were driven largely by direct sales in infusion therapy and oncology. And international sales were $28 million, an increase of 14% from the same period last year. And as expected, our gross margin was 53% for the fourth quarter, which was an improvement compared to the second and third quarters this year as the temporary production issues we had earlier in the year are now behind us. Compared to the same period last year, our gross margin was down 34 basis points primarily due to product mix. SG&A expenses were essentially flat compared to the prior year, but decreased 130 basis points to 23.6% of revenue. R&D expenses were down on a year-over-year basis due mainly to decreased project expenses. And restructuring and strategic transaction expenses were $11 million for the fourth quarter and were primarily related to the acquisition of the Hospira Infusion Systems business. Our tax rate was approximately 32.5% in the fourth quarter of 2016 compared to 57% in the fourth quarter last year. As a reminder, last year's increased tax rate was due to the closure and the write-down of our factory building in Slovakia that provided no tax rate benefit, the direct tax impact of the disallowance of various transactional expenses related to the acquisition of Excelsior and the indirect tax impact limiting certain manufacturing tax credits as part of the Excelsior transaction. Now moving on to our balance sheet and cash flow. As of the end of December, our balance sheet remained very strong with no debt. We generated strong operating cash flow of $21 million and free cash flow of $13 million during the quarter. We ended the quarter with cash, cash equivalents and investment securities of $445 million which equates to approximately $27 per outstanding common share. Accounts receivable increased slightly by $2.5 million from September and our DSOs decreased to 54.1 as of December 31, 2016 when compared to 59.2 as of December 31, 2015. And inventories as of December 31, 2016, decreased approximately 3% as compared to September 2016. Now, as you know, we closed the Hospira acquisition on February 3 and I would like to review how we will be reporting the combined revenue of ICU and Hospira moving forward beginning in the first quarter of 2017. Revenue will be reported by the following four market segments. The first is infusion systems, which includes the infusion pump hardware, software, dedicated pump sets and service revenue. Second is infusion consumables. This includes nondedicated sets, oncology and accessories such as the SwabCap and will include the traditional ICU IV therapy and oncology segment. Third is IV solutions. And the fourth is critical care. We are also a contract manufacturer to Pfizer for certain IV solution products that we will make and sell to them at cost for at least a five-year period. On a non-GAAP basis, these contract manufacturing products will not be in our reported solutions revenue and the revenue and cost to manufacture these items are not included in our 2017 revenue and adjusted EBITDA expectations, since they will have no impact on earnings. Now if you look at slight seven, this has the 2016 unaudited combined quarterly revenue for these market segments. Now let me add a few more points to our 2017 guidance picking up on Vivek's comments. I will refer to the same slide three, which first on revenues, in January we said 2017 revenue should be approximately $1.35 billion for the combined company. We were always outlining the calendar year numbers. Practically since we closed February 3, we have to take 11/12 of Hospira to exclude January and then we exclude approximately $50 million of contract manufacturing to Pfizer and that implies a combined company adjusted revenue will be between $1.2 billion and $1.25 billion. Now Vivek already explained how we get to our 2017 adjusted EBITDA guidance of $165 million to $175 million. So let me explain how we get to our adjusted EPS guidance of $3.55 to $3.90 per share, which is on slide number five. This EPS range has the 2017 headwinds of less EBITDA then depreciation for the acquired revenues, which implies a initial negative net income regardless of positive cash generated. Second is obviously, the incremental effect of the shares we issued to Pfizer, as Vivek described. Finally for modeling purposes, we expect our 2017 tax rate to be between 29% and 31%. Obviously, when we hit a run rate of $250 million of adjusted EBITDA sometime in 2018, adjusted EPS will look much, much different. As you know, for the last few years, we have been extremely focused on cash and cash earnings, which has among other things allowed us to be conservative with our balance sheet and be prepared for the purchase of Hospira Infusion Systems. And even though we are laser focused on free cash flow this year, there are a lot of moving parts and cash costs related to the acquisition, including some minor catch up in CapEx spending for Hospira, restructuring and spending cash to stand up Hospira as quickly as possible and how much inventory we are able to reduce this year. All these things make it difficult to generate much free cash flow this year, but we will keep everyone updated as the year goes on and as we have more line of sight to the timing of these matters. We are a much more complex company post transaction with a very complex carve out from Pfizer that will take place over the next 18 months. This will create some bumpiness in the quarters and the reporting becomes more complex. And so I want to review how that will be done, so we have time to work with investors in advance to reporting our first quarter as a combined company. Turning to slide six, I wanted to outline the adjustments that are unique to the P&L due to the Hospira transaction and items we have never had to highlight before. This first one includes an adjustment to add back the revenue and gross profit on sales made to Hospira pre-close and remained as inventory on Hospira's books post-close. Obviously this just applies to inventory sold to Hospira by us and then reacquired by us in the deal. This adjustment goes away once all of this inventory is sold. The next adjustment is due to purchase accounting and as an adjustment to offset the step up in the Hospira finished goods inventory value or mark-to-market that is required in purchase accounting. This too goes away once this inventory is sold. These adjustments are in addition to the onetime adjustments related to restructuring and integrating the business into ICU that will occur over the next 18 months. Also, as mentioned before, we will adjust for the impact of the contract manufacturing relationship with Pfizer. We have a lot of work ahead of us and as we have said before, 2017 will be a year of integration. The quarters will be bumpy, but we have a clear path to create a very strong combined company that will be a fully integrated leading pure play infusion therapy business. But once we have all the pieces in place, we are very excited about the value creating opportunity for all shareholders of the combined company and we look forward to keeping everyone updated on our progress and on our first quarter earnings call. And with that, I would like to turn the call over for any questions.

[Operator Instructions]. Our first question comes from the line of Tom Bakas from Piper Jaffray. Your line is now open.

Hi guys. Good afternoon. Thanks for taking my questions. So first, I appreciate the comments and the prepared remarks and I know the deal only close three weeks ago, but if I could just push for a little more color on the initial thoughts on the positives and negatives of the acquired business? If there have been any surprises? And then finally, does the rationale for making this deal still make sense?

Hi Tom, it's Vivek. Thanks for the questions. I tried to go through some of them in the prepared remarks. I think other things I would add in terms of findings, I tried to spend a lot of time leading up to the deal and post closing and even next couple of weeks with core customers and buying partners out in the United States and globally and I do think there is a sense that customers, for everything that this business has been through, customers want to see a healthy competitor here. They know the value we offer to the market. They know the products are fundamentally good. And I think they have experienced some of the execution issues we have talked about. They would like to see us succeed. So I take that as kind as a positive. I think we have been really pleased on the core group of people that really get the business and we are trying to work together with them to offer more transparency in how to be successful and how to work like a team. I think we are pleased with that. And then in terms of rationale, I think the reality of what we outlined there on the Hospira reductions, that was coming, I am talking a little defensively, that was coming to us one way or another in 2017 and then the contract was up for renewal in 2018. And so I think anybody who runs the numbers can see, on a hypothetical standalone ICU basis, what that would have looked like versus trying to parlay that situation into a much larger company here. So if I was just talking defense and I said it when we made a deal, we would have given away 20% of the equity of the company to protect 35% of the earnings, absolutely a deal, right. So I still feel like economically, putting aside all the strategy stuff relative to the cards we were holding, it was the right thing to do.

Okay. Great. Thank you for that. That makes sense. My next question might be for Scott. It's just regarding the topline. Can you just lay out exactly what happens to ICU sales in this transaction? And just how should we think about your revenue guidance specifically?

Sure. So probably the best way to think about it is, start with ICU revenue for 2016 which was approximately $380 million. You back out the inter-company revenue to Hospira, call it $114 million, $115 million. That gives ICU net revenue of $265 million. If you take 11/12 of the approximately $1 billion standalone Hospira, that's about $920 million. And that brings you to about $1.185 billion. And then if you add to that direct growth, ICU legacy direct growth, of approximately $30 million to $35 million, that gets you over the $1.2 billion.

Tom, it doesn't count when you sell it to yourself, right. So the $114 million we sold to Hospira sort of gets eliminated in addition.

Okay. That makes sense. And if I can just sneak one more and just while around the topic, Scott, you mentioned the legacy business. If you could just maybe give a little bit of an update there and a little more color on the growth in the segment?

I can grab that one. So our direct business is, I think, that number I was talking about, there was roughly 19% growth year-over-year. Now some of that we did get some benefit from the Excelsior acquisition. As I said, if we look on pure organic, we were still low teens on the direct business. And that was the number we were saying the incremental EBITDA for 2017 was factoring roughly 10% or 11% growth in our direct business. And we felt that was in line with what we have seen historically, a little more conservative for what I feel we need to be a little bit more conservative right now on what we are seeing out there.

Thanks guys. I will jump in queue.

Okay.

Thank you. Our next question comes from the line of Larry Solow from CJS Securities. Your line is now open.

Good afternoon. Just wanted to maybe just follow quickly on the core legacy outlook. So I guess the 10% sales growth you are sort of equating that to about 10% EBITDA growth. Is it fair to say, so limited margin improvement? Or maybe that's just for rounding errors? Or wouldn't there be some --

I think that's exactly right, Larry. I mean you remember, this Hospira did help our productivity with the amount of work that it is providing our factories, right. As that's gone away, some of that negativity gets reflected. So we have to reallocate costs across our whole book of business. So that's the fair assumption right now.

Got it. Okay. So maybe it would have been a little bit greater, even standalone even without the transaction?

Well, not without the transaction.

If you did lose the Hospira, you are still losing, okay, you mean the volumes for just Hospira, the inventory slowdown and just the slowdown in production. Okay. So what happened then?

The fact that we have a production slowdown, we can't allocate all of that just to Hospira. Some of that flows in cost to close our own business.

Got it. So on a standalone basis essentially your EBITDA would have been flat outlook plus the inventory reduction?

Plus the negative absorption of having the work go away from your factories. The inventory reduction is specific to the Hospira piece, right.

Right.

We have a factory that costs the same to run. We make less stuff. That increased cost gets spread everywhere.

Right. But in your guidance you are saying plus 13% and then minus 12%, right. So you are essentially about flat, right. And then you are taking away the --

No. But I think there's two different issues, which is, in your first part, you said the marginal profitability of our incremental growth --

That is being impacted in that 13%. I got that.

It would have been better had we had more work.

Understood. That's very clear. I got you. Fair enough. Okay. Great. So then essentially the dilution or the drop in EPS is from that inventory reduction and then obviously the dilution from Hospira.

Well, no Well, the dilution in EPS, just to make sure, the way I thought about the dilution in EPS was basically, to be blunt about it, the business we are buying, while it still generate cash and we care about cash returns, because of the relative EBITDA contribution to the depreciation we are carrying, it doesn't contribute any net income. And to simply take no net income and a little bit of interest expense on a very attractive financing we got from Pfizer, but we have 20% more shares outstanding, that's a 20% hit to EPS if we don't get any net income. Now we could have filled that with cash, if we wanted to the negotiations to go other way, if they were amenable, but we didn't even entertain that because as we just thought it was more responsible to do it with the equity relative to where we were trading and we felt we could clean that up over time, on the assumption things went well.

Got you. And then going out forward and again obviously, it probably will get asked this kind of question, because your two businesses will get blurred but it seems like maybe perhaps your guidance on the core is maybe understandably conservative, but hopefully that seems like hopefully a lower number, assuming your production at Hospira improves based on that $10 million incremental EBITDA in 2018.

Look, you have known us for a while now, right. There is just no reason to get ahead of things. We have got a lot of stuff going on. And we have been accurate. We would like to keep that track record up. And there is more moving parts than there has ever been right now.

Fair enough. What about your comments, obviously, you know your uncertainty for the -- it sounds like in 2017, it's timing of integration expense, severance expense, getting off with all the positive systems. Your confidence, you haven't wavered too much, maybe the timeline has been pushed out a little bit but in that $250 million number in 2018, is that sort of hitting that run rate maybe at the end of the year as you enter 2019? And one, that question and then what's your confidence level just that Hospira can actually revenue can stabilize?

Let me answer those. That was a lot. Let me answer those in two parts. The first part, I think the part we -- going back to like what we can control which was our speech for a long time. What we can control right now is synergies that we can deliver by things we see and we control. And so that first bucket of synergies, that $30 million to $35 million, that will all be put in place this year and start to be in count on January 1 of next year, right.

Right.

So that part on that slide, we feel like it's for the full year because that's where we are going. Our own growth, we feel like $10 million of incremental EBITDA growth on legacy ICU to the extent that that, it is kind of an imaginary number now, that still feels like a safe assumption given what we have seen the last couple of years this year. And then it's the part getting off of Pfizer system. That's the one we don't know. It's not going to happen before next June, right. And so it's the only question on my mind is, can it happen as early as June or does it happen closer to the end of the year. We just don't know exactly when. And there is a bunch of things that have to happen to enable that work.

And that number that you give of the additional $35 million. The TSAs now from Pfizer are still $80 million. So would there be more for that? More to come on that as you go out to 2019 and 2020,I guess?

I think just keep it simple and say, look, if we are paying them $80 million to run ourselves either through other synergies or through running ourselves more efficiently, because it's all going to be the same bucket. If we can run ourselves at $50 million, that would imply another $30 million of savings, right.

Got it.

And that's through a net number or just specific to TSAs.

Got it. And then, sorry to interrupt you there, just on the confidence level on Hospira stabilizing on the revenue part?

Again, I think that's the question everybody is really focused on. We have tried to call it the best that we can call it. I feel like you have seen us now and we are trying to make sure that we can have enough. Some of these actions we have already started, right, on integration work and some of the synergy achievement. We want to make sure we are putting things in the bank that we can deliver our earnings number even if the revenue bumps around a little bit. So we are not quite there yet but we are trying to be responsible. I don't want to say, Larry, that it's actually positively done at this level of revenues today.

Understood. Okay. Great. Thanks. I appreciate it.

Thank you. Our next question comes from the line of Jayson Bedford from Raymond James. Your line is now open.

Good afternoon. Thanks for taking the questions, guys.

Hi Jayson.

So just first a clarification. The combined revenue in 2016, does that includes the OEM contract revenue?

No. That has that taken out for the inter-company between ICU and Hospira legacy that eliminated.

Okay.

You are talking about what was posted on the website and supplemental, right? That should not have the contract in it.

Correct. Okay. So, I guess my question then is, with revenue going from, let's call it, $1.4 billion combined in 2016 to $1.2 billion to $1.25 billion, I realize that there is bit of a stub, because you don't have the month of January in there. But is there any way you could separate the revenue impact from, say, the loss of the GPO contracts under Pfizer to the natural share erosion or market dynamics that are playing out?

I think that's a great question. I think competitively, Jayson, we don't want to get it exactly into it, so can we talk a little bit rough numbers. First of all, the loss of that month is $80 million. So that's a third of that gap, right. So the real year-over-year down draft is more in the range of $150 million or so. And at least half of that was because of one specific contract. And I would say, half of that was due to share erosion in other places. I am not sure I would to be more specific than that.

Okay. That's helpful. I guess then, just as a follow-up, when we look at the four buckets of revenue for 2017, I am guessing you don't want to give guidance on a line-by-line item basis, but maybe can you give us an idea of which the four segments will grow? And where do you see a little bit of pressure?

Well, the consumables segment will grow because our growth is being added to that, right. Otherwise the legacy businesses, as we have said, I mean, that was part of the original purchase in October and even the revision, was certainly the pump and dedicated sets and the solutions businesses were going to be smaller in 2017 than they were in 2016. So I think it's a little bit of the question we just were talking about a second ago which is, are we calling it right is this the right number. I don't think we have ever justified the transaction or the return saying we assumed growth in either one of those businesses. Certainly not in 2017 and certainly not in 2018 of the run rate number we have showed. We are presuming the status quo.

Okay. Then Vivek you touched on it earlier and I realize you only had the business for a few weeks, but you still think the portfolio and the quality of the offering is what you thought it would be, right? I guess I have kind of looked at this as a little bit more of an execution issue versus a portfolio issue. Is that a fair understanding?

Look, I think we have, just like when we got the ICU, we were very cautious on quality systems and making sure we delivered our end on that. And I think the same applies here to this company's investing in quality systems a ton, but we have got to get through everything we need to get through there and the team is really good and then working on that hard. I would tell you the time we have spent with customers, people don't have an aversion to any of these products. People use these products and like them for many years. There is not a lot of flaws in them certainly on the consumables bucket. It's our product. So we know them very well. And we believe in them. On the solutions bucket, that's essentially a generic drug like item. It's about quality and reliability and service and on pumps it's more differentiated but the legacy business has invested a lot but don't know that they have executed necessarily well and obviously had a lot of issues with the remediation stuff. So I don't think we come into this and say, we need a whole bunch of new stuff that hasn't been contemplated or that where partnerships aren't in place or bets haven't been made on next gen technology already. I think the chips are in on that. I think it really has been, certainly in two out of the three lines, very much about commercial execution and one of the lines, it's a little bit more about technology.

Okay. That's helpful. And then I guess I will let someone else jump in queue here, but can you just give us an update in terms of what the balance sheet looks like post transaction? And my sense is, you still under levered here. Can you walk through some of the potential options with the cash? Thanks.

Right. So as far as the balance sheet goes, I mean it's no secret we are totally under levered here and that was for the reasons that Vivek spoke about. I think for us going forward, as time goes by this year and we get our arms wrapped a little bit more around some of the CapEx expenditures and the timing of some of the standup costs, we will be able to give better guidance around expectations and CapEx and free cash flow. And until we get there, I would just say that we wanted a conservative balance sheet for reason in this market in this industry and we did that on purpose.

My view, Jayson, is this. There is like four pieces out there that are a little bit up in the air right now. We got a lot inventory with this transaction. What is the rate that we are able to monetize that and turn it into cash? It hurts our P&L as we slowdown production, but it helps cash if move that stuff out the door. How much standup cost do we have to put in? And we have an idea of that? And how much CapEx do we have to put in, right? And then where is the baseline of sales relative to the synergies and cost we can take out? And when we see that whole picture, then I think we have a different confidence sort of to address the balance sheet. I mean, it's a little tongue-in-cheek. We were irrationally overcapitalized in legacy ICU. By our standard, we are in a better place. Once we know those four pieces, we know where the cash is going, then we can decide, can you do something and where the relative valuation of the company is. You have seen the way we have acted when we thought our own security was mispriced historically, right. So we don't want those opportunities to pass us by.

All right. Thanks guys.

Thank you. [Operator Instructions]. Our next question comes from the line of Mitra Ramgopal from Sidoti. Your line is now open.

Yes. Hi. Good afternoon. Vivek, I know it's still early regarding the integration, et cetera. But I was just wondering if you could give some color in terms of maybe sales force integration, different cultures, et cetera coming together? And any feedback you are getting from customers as a result of the new ownership?

It's nice to hear from you, Mitra. I think culturally, there are spots where it's not that different where there is a lot of people who care about the customer and the best people often are the ones who rise to the occasion on that. And I think there is a lot of people here who share that value. And so I don't think there is some culture clash going on. I think we have to make some and have made and implemented some tough choices around where there was duplication not to have that duplication. And I think that also helps culture when there is some clarity around that, right. Because we had some uncertainty and there was literally 17 business days into this thing and we have addressed it. It's done for the U.S. market. And I think that goes a long way. That hasn't been enrolled out yet. I mean this is all happening in real time. We are actually here in Chicago working on such things. That hasn't happened real time yet to the customer face where that change hasn't made its way to an actual customer. But I think, again, you have seen ICU or on our previous conferences to do some of these thing before. They take time to gel. They take time to heal. But I think we have worked really hard to try to make sure we get the right people on the right seats in the right place and that's an ongoing process.

And as it relates to the synergies, do you expect, in terms of a cross-selling, et cetera, would international be an opportunity for you longer-term? Or is it pretty much a domestic opportunity for you regarding Pfizer?

I mean, the word cross-selling is also kind of an interesting word to me. We are buying into businesses that we weren't in. So it's not necessary cross-selling. It's just selling what they had and at some level they were selling the things that we were the manufacturer for. So I don't there is a lot of cross-selling in the classical sense. Internationally, I think there is certain markets that we want to invest in and want to invest in aggressively where we can justify the investment now where we couldn't as ICU. But I also think there is some markets that we need to really think through. Can we drive good returns there? And what's the right way to participate in them in a way that this company wasn't forced necessarily to think before. And you know, right now the value is much more at stake in the U.S. So we are more focused on that. Over the next couple of quarters, we will turn our attention to some of those deeper international questions. But there are absolutely some high-value markets that we need to place bets in.

Okay. Thanks again for taking the questions.

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