ICU Medical, Inc. (ICUI) Q4 2017 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Q4 2017 ICU Medical, Inc. Earnings Conference. 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 is being recorded. I would now like to introduce one of your hosts for today's conference, Mr. John Mills. You may begin.

Great, thank you. Good afternoon, everyone, and thank you for joining us today to discuss the ICU Medical financial results for the fourth quarter and year end December 31, 2017. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Scott Lamb, Chief Financial Officer. We wanted to let everyone know that we will have a presentation accompany today's prepared remarks and to view that presentation, please go to our investor page and then click on events calendar. And it will be under the fourth quarter 2017 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 future 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 risks and uncertainties that have a direct bearing on operating results and financial position. Please note that during today's call, 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've also included a reconciliation of these non-GAAP measures for today's release and provided 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 segments, the reconciliation from GAAP to adjusted EBITDA, and adjusted EPS are available on the Investor portion of the website for your review. And with that, it's my pleasure to turn the call over to Vivek.

Thanks, John. Good afternoon, everybody. The fourth quarter of 2017 was our third full quarter of owning Hospira Infusion Systems, and we are balancing our time between active customer dialogues to improve our commercial execution and being deeply in the midst of an integration to create a single unified company. We continue to execute well through a large volume of activity, and operationally, we made progress every day on integrating Hospira Infusion Systems. In addition to the financial summary on today's call, we wanted to provide a brief recap of 2017, comment on the sequential changes from Q3 to Q4 of 2017 and the most recent business segment performance trends, update everyone on the current status of integration and the progress and the challenges since the last call, reiterate and explain our expectations for the medium term of 2018 with our best point of view as of today and the build for the year and lastly provide some thoughts on the longer term value creation opportunity as a high level from both an income statement and balance sheet perspective as the drivers become more evident. 2017 was a very unique year for ICU Medical. We completed an acquisition of a company four times larger than us with closing the Hospira Infusion Systems deal. Over the course of the year we won another two commercial organizations and radically upsized our customer dialogue; two, converted substantial accounts receivable inventory into cash; three, recruited hundreds of new employees and are building the infrastructure to integrate; four, adjusted both up and down our manufacturing capacity to adapt to dramatic shifts in the market environment; five, handled FDA inspections at our newly acquired facilities and lastly, we're undertaking the most complex financial close and audit this company has ever had and as Scott will describe, it's still going an abyss. And through all of that I've seen our people work as hard as any public company I've ever been a part of. The benefits of these efforts for our customers and shareholders began to show itself more at the end of last year as we began to operate stronger and it showed in our shipments and our profitability. To start with financial performance, revenues and adjusted EBITDA in Q4 2017 were slightly better than our expectations. Adjusted EPS was dramatically impacted by tax related positive adjustments from the transaction and other items and we don't think it's a particularly relevant metric this quarter. Unlike Q1 and Q2, we had less transactional accounting impacts to revenues and operating earnings as we have closed all geographies and the reported results are starting to much closer resemble the actual management reporting we run the business with. We finished the quarter with approximately $353 million in revenue. Adjusted EBITDA came in at approximately $70 million and adjusted EPS came in at $2.98, and we finished the quarter with net cash of $350 million on our balance sheet. Sequentially Q3 versus Q4, revenue was up 13 million and EBITDA was up 15 million. The short story on the change is as follows. First, there was increased consumable sales which has always had a good drop through for ICU Medical. Second, some of the operational synergies expected in 2018 were realized a bit sooner and third, the unique temporary market dislocation in IV solutions increased sales more than we expected and we hung on longer to some business we expected to go away. All of which combined to improve our Q4 EBITDA and cash generation. Turning to the individual segments, and please use Slide 3 in the posted deck for the base comparison because this is the highest level of management reporting slide that we actually start our business reviews with. So starting with what we expect will be our largest business over time, Infusion Consumables. This is essentially the legacy ICU business plus the Hospira consumables business, which is predominately the distribution of ICU manufactured products and a smaller amount of unique Hospira products. Our internal estimate, which now almost tracks exactly with the reported numbers, is that the segment had revenues of approximately 121 million in Q4. That would imply the segment being slightly up quarter-over-quarter. Legacy ICU was strong, with growth over 20% in oncology. Both legacy ICU and the legacy Hospira businesses were strong internationally, and the legacy Hospira US business flattened out as we expected. This is a segment where we're the most advantaged now as a joint entity and we're hard at work on rationalizing the product portfolio and bringing together the operational efficiencies of the combination. Commercially, we have all the pieces, all the technology and all the scale to compete globally, and should be able to offer more value to the customer. On the previous call, we stated that we expected Hospira losses to bottom out sequentially towards the end of 2017 and believe the total segment will be close to flat on an annual quarter-over-quarter basis towards the end of the year. And we believe that this segment should be positioned for some growth in 2018. Today, with another quarter under our belt, we think this segment can grow mid-single digits in 2018, which we sanity check by annualizing our Q4 exit run rate. As a note, this is the last quarter where we're going to talk about legacy Hospira sales separate from legacy ICU. Also, it's important to spend a moment on the effects of the transaction on our results in this segment for 2017, as we did not capture the full margin in this segment due to the combination until we sold all of the pre-deal inventory Hospira purchased from ICU. The transactional effects of the segment are now behind us and we should also capture the full margin in 2018. The second segment to discuss was our largest segment in Q4, infusion solutions. This segment reported approximately $130 million in revenues and did have some unexpected growth both sequentially and year-over-year due to the unique temporary industry issues that have been widely been reported in the press and therefore I don't need to detail that in this call. We have been trying to operate with transparency to customers by illustrating the generic drug-like regulatory framework, high capital expenditures and value in a healthy supply-side situation to a business that was a historical price anomaly. From a value perspective, we have sacrificed short-term profits for longer term supply contracts, which we believe offers us more NPV as it makes us a more competitive supplier overtime. Practically speaking, this means you should not assume that 2018 just annualizes at the Q4 run rate. We've been very focused on the longer term, but we want to be clear, rebating from the first presentation on the transaction 18 months ago, we are going to make economically rational decision to not sell products at a loss. We continue to hold some excess capacity, but it's kind of like a utility company. You cannot just turn it on or off as it requires heavy labor and quality investments as well as long term partnerships to make it work. In the medium term of 2018, we see the run rate of this business more in line somewhere between the Q2 and Q3 2017 levels i.e. before the market shortage occurred and appropriately corrected for us getting more contracted volume at a less trading oriented price. If we picked the midpoint of the range of Q2 and Q3 2017 and annualize that, it would imply a flattish business in 2018, but with more business under long term contract. There are two important value drivers in this segment to note. The first we just talked about, more predictable revenue with that ascertainty and the ability to participate in market and contractual growth, but the second which is equally important is to optimize our production assets. At the outset of the acquisition of Hospira, we believe that we have lost a substantial amount of contracted business and significant production volume in a fixed cost manufacturing environment. The recent events combined with a logical integrated value proposition have enabled us to improve the amount of business we have under long term contract and will allow us to fill up the factory we acquired in Austin with more volume. This continues into 2019 and 2020, as we heavily invest to increase our own capacity which could give us the option to move away from Pfizer, Rocky Mount if market conditions change or add more capacity if the need arises. We believe that was one of the attractive aspects of the structure we laid our originally with Pfizer. Lastly, we continue to be vigilant here on quality even as Hospira and Pfizer invest in significant resources as it's mandatory to be in this business. To finish the big three, let's talk about Infusion Systems which is the business of selling pumps, dedicated sets and software, which is important because it's a business that brings a lot of recurring revenues and it was the largest customer of the legacy ICU OEM business. Our internal estimate is the segment delivered 89 million in revenue, which would imply being down near 10% again as the losses we outlined previously are happening. The international business is holding together reasonably well and we continue to expect this segment to bottom out the US sometime in 2018 with the lowest level installed base in the last 10 years. Relative to where we are starting at the new honor, this segment is much smaller than historical levels and just improving ourselves a little can make a huge difference across the P&L. We've been focused on our core group of loyalists here from a customer perspective as well as the situations where we've market share risk and are beginning to process the focusing on how to offset those risks. We think Hospira forgot a lot of the reasons customers like the products and we're going back towards on the basic marketing and defining our value to the market. This segment has a high amount of resources and structural cost to support it, much more so than the other businesses in ICU given its capital equipment. We've been aggressive in right sizing structural costs to align with the current business reality. For IV systems, our view is unchanged from previous views, with this segment continuing to have declines through the middle of 2018. To finish the discussion on segments, since we acquired Hospira, we have been actively calling on customers and trying to illustrate the value we can add to the system and the value to the system in having us as a healthy participant. While it's a long journey, we do believe that this message is resonating. The feedback on the products continues to be solid. The products are necessary for the system and have been reliable for many years. While we started the transaction with our defensive mind set for doing it, we looked at the business and we saw roughly 50% of the total business, infusion consumables and the international portion of infusion systems where we had a good offering and a right to win. Today heading into 2018, we see a somewhat better picture where we believe we have a right to win in most of the portfolio with really the domestic portion of our infusion systems segment as a key challenge and we're working hard to address that business. Okay, on to integration and related activities. There's really nothing new on cost savings. Just about everything we wanted to do has been done. We closed our small acquisition in Australia in December and begun our 3-way commercial integration there. Whole of our country commercial leadership has been secured. With these teams, we've been very focused on first, upping our commercial intensity, changing the execution and improving the customer intimacy that deteriorated over the last few years of Hospira in these business lines. We've had a great number of new experienced teammates join. I don't really have anything new to add to last couple of quarter's commentary on quality other than we continue to dive deeper into all quality related activities and we are at the outset of our notified body inspection season. On the integration activities of IT, cutovers and the GSA separation from Pfizer, we are now in all out execution mode. Philosophically, as the founder of ICU used to say, we're trying to measure twice and cut once. These IT systems migrations are complex, filled with legacy issues and require great caution. I've personally been burned in prior experiences when these projects become more transformational than migrational. Even in this month's medical device reporting cycle, we've seen companies have challenges in these cutovers. So we're being very deliberate, we have started the execution phase in what we call the outer perimeter, countries and regions where we have less profit at stake, but have to implement many of the same processes that we do here in the US market. We have cut over a number of European countries to our instance of Oracle, which is working reasonably smoothly. We have cutover Canada three weeks ago or so, which is our second largest country and it's still challenging and a working process. And literally this week we're cutting over France, Taiwan, Peru and Columbia. We still need a number of weeks to stabilize Canada and we have learned a lot. All of this leads up to the largest cutover which is the main event, the cutover of our US operations sometime in Q3. We know a lot of companies that have more M&A experience than us don't get into this much detail on integration and systems conversions because it spooks everyone. It's not as exciting as revenue growth or synergy, but it is important that we explain what we're literally doing. This transaction was so unusual and that it was not like buying a business that came with IT systems or even people provided what we would call support functions. It literally was the acquisition of manufacturing plants, product lines and local commercial organizations that were run by desperate legacy systems. We're actually uniting all of this onto a single integrated system. And let's be clear, our customers don't care about any of this unless it affects them negatively. But we care about it because it first offers deep value in the form of operational improvement realized over time and two, it sort of supersizes us for the ability to handle more on these platforms when we're through this integration. But the consequence from doing this and practically we had no choice because that was the deal, is that it could be bumpy during these cutovers. We think right now it's best to be cautious and plan that we will not be off these systems until the fourth quarter of 2018. The current count is that we are off about half the TSAs in absolute number, but the big dollar higher complexity ones related mostly to IT will continue into Q4. Okay, to bring this back to the topic of short-term results, how we think about the medium term of 2018 and longer-term value creation? We believe our actual 2017 performance, if we adjusted the unique dislocation of IV solutions out within the $195 million to $205 million EBITDA range. On the last call we stated we expected a range of $240 million to $260 million of EBITDA for 2018. We continue to believe that is the right range handicapping for all the integration, system cutovers and other challenges this deal has thrown at us. Of course, it's already March and we do have some views on the Q1 revenues and performance. We don't expect Q1 2018 to look that different from Q4 2017 from a profitability perspective, maybe just a little lighter as the NPV choices we made start to be implemented. And we expect those TSA exits to drive some savings in Q4 of 2018 as we previously described. So that would imply lower earnings in Q2 and Q3 versus Q1. From what we know right now, with the duplicate expenses we have to add and rapidly changing market place, that is the right assumption for us and we are very serious about that. We also want to make sure we do have skimp on the infrastructure investments that allow to handle more and we're planning long game, we know the transaction was valuable for us. Those investors have been with us a long time will see the exact same annual behavior from us when we address the back half on our Q2 call. This year it is extremely important to be cautious as we work through the US integration in the summer right around the time of our Q2 call. Now with all that said, into the longer term of 2019, we continue to have a view that we can improve our profitability regardless of the revenue environment. We believe that Q4 of 2017 gave a look as to what the opportunity can be. Longer term, if we made the assumption that the combined effect of the operational synergies and TSA savings previously discussed plus future margin improvements based on the integration with the so called high hanging fruit, if those items can collectively offset the NPV choices we've made and the temporary revenue benefits we received in 2017 than what we saw in Q4 of 2017 is not an unrealistic profit mark after we're done with integration. We don't have it all penciled out, but we believe directionally that is the case and we know the EBITDA margin was in Q4 and what the opportunities here. And that does not make any revenue growth assumptions. We have to execute well in 2018 to allow for these to be available and likely it will not be all the straight line in getting there. As always, what really matters to us for value creation in the longer term outside of servicing our customers is real free cash generation. While adjusted EBITDA is a useful metric given all the noise in the transaction, it's important to get these real cash expenses of integration behind us and focus on the real free cash generation for the longer term value creation. In Q4, we added 64 million cash when EBITDA was 70 million due to certain working capital improvements, tax benefits et cetera. We finished the year with net cash of 350 million and no debt. In 2017, we added about 200 million in cash from our opening balance sheet during the year, while absorbing nearly 80 million in restructuring and integration, which is real cash cost and gets added to our model on the transaction value. Scott will talk about both the tax impacts that stemmed from the transaction and the implication of tax reform at ICU Medical. My brief comment on this is that it's good and we will receive benefits from items such as accelerated depreciation while we're in investment and integration mode. If we can have the strongest balance sheet possible at the end of 2018, with over $500 million of liquidity, which is our cash on hand plus our revolver, have an infrastructure of the company that can handle and have continued margin improvement opportunities on our base business with minimal revenue growth assumption, we think we have a case for continued value creation. We believe we have created a more valuable asset and while we prove we can integrate we have earned the right to think broader, but for today solely focused on the task in hand. Our goals are just like our previous experiences to first enhance margins and then improve overall growth. In the best case, we'll have better execution to improve our top line performance overtime, drive operational improvements and improve cash conversion and returns. In the worst case, we continue to fight headwinds in the top line, but we can still drive operational improvement and generate solid cash returns overtime relative to the capital we deployed due to the levers I just mentioned. And just like ICU historically, there are number of continuing intrinsic value drivers including high quality or hard to reproduce production assets, sticky product categories and the opportunity 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 minnow swallows the whale. This a complex corporate carve-out and has the aspects of the turnaround in certain of the business lines at the same time will be in kind of a public LBO just without any debt. We've been lucky on a few items, but it is about us challenging a corporate project as many of us have faced. We feel that we've been very transparent with investors on our plans over the last few years and cautious with our own expectations and we want a need that mentality to continue, particularly through the system conversion. Not to talk down or talk up to circumstance, just to be realistic in what we have ahead of us. As we've said on previous calls, the first few quarters under our ownership will be subject to all the expected carve-out and the bumps that come along. There is a lot of execution in 2018 that has to happen well and we still have to improve or clean up certain legacy Hospira situations. If you're an investor that wants the predictability that ICU has offered in years and years that will be difficult to repeat over the near term. But when we get it right, long term returns could be generated quickly just like ICU. We believe that this was a logical evolution for both businesses. We feel we've been able to put together a final transaction and didn't risk the enterprise and still left real room for value creation for investors. As always, I'd like to close when things are moving fast. We're trying to improve the company with urgency and we're trying to take responsible actions and break some of the inertia that many companies in our position face. We may hit some bumps as we take some of these actions, but we will overcome them and emerge stronger. I really appreciate the effort of all combined company employees to adapt, move forward and focus on improving results. And our company appreciates the support we've received from both our customers and our shareholders. With that, I will turn it over to Scott.

Thanks, Vivek. I'll first walk down the income statement, highlight key items impacting operating performance, spend a few moments discussing the new US tax laws and its impact and lastly, discuss in more detail our full year 2018 guidance. So to begin, our fourth quarter 2017 GAAP revenue was $370 million when compared to $96 million in the same period last year. And please remember the $370 million includes $17 million of contract sales at cost to Pfizer. Adjusted diluted earnings per share for the fourth quarter of 2017 were $2.98 as compared to $1.20 for the fourth quarter of 2016 and for the third quarter included significant tax benefits that I will talk through later on. Adjusted EBITDA was $70 million for the fourth quarter of this year compared to a $34 million for the fourth quarter of last year. Now before I go any further, I want to mention that because of the scale and complexity of the purchase accounting related to the Hospira transaction, there will be a delay of a week or so in the filing of our Form 10-K. It just requires a little more work to complete certain disclosures and analysis. We do intend to file the Form 10-K within the allowed extension period provided by the SEC and we don't expect any material changes to the numbers we are discussing today. That said, there are three items on the GAAP P&L that are subject to change based on final purchase accounting adjustments. Typically any final purchase accounting changes up or down would be a balance sheet reclass, but because we have a bargain purchase gain, any adjustments end up flowing through our GAAP P&L. At this time, there is a potential change to two items on the P&L that could affect net income. The first is bargain purchase gain which would be approximately $10 million. The related tax impact would be up to $1.4 million and the impact to our net income per diluted common share would be up to $0.48. Please note in our adjusted EPS we have always excluded any gains from the bargain purchase for this transaction. Now let's discuss our fourth quarter GAAP revenue by market segment. As a reminder, the 2017 revenue data related to delayed closing entities is not available by market segment. However, by the end of December, all delayed closed entities were closed. Because of this, we are able to allocate the majority of the other revenue towards respective market segments, primarily infusion consumables and infusion systems, with other revenues being only $4 million in the fourth quarter. So GAAP sales of infusion consumables were $120 million versus $82 million last year, which includes the legacy ICU infusion and oncology consumables business. Q4 represents the first full quarter where we were able to recognize the full intracompany revenue and profit in our consumables business on product we had previously sold to Hospira but had not yet shipped post-acquisition. On a GAAP basis, IV Solutions sales were $147 million. Excluding $17 million of contract sales to Pfizer, IV Solutions sales were $130 million. And just to reiterate, we continued to benefit from unique industry circumstances in the fourth quarter. Sales of infusion systems were $88 million where we continued to see expected loss of business and critical care sales were $13 million, the same as the fourth quarter last year. And as I already mentioned, the remaining $4 million of sales was made up of sales to delayed closed countries and isn't traceable back to a specific market segment. For the fourth quarter, our GAAP gross margin was 37% compared to 53% for the same quarter last year. The expected year-over-year decline is due to the acquisition of the Hospira business, which has historically lower gross margins. As you can see from Slide 4 in the previous three quarters, there were temporary transactional accounting impacts due to the acquisition that affected our gross margin which are now behind us. The only remaining item is our minimum five-year agreement with Pfizer to provide certain solution-related products at cost. As you can also see from Slide 4, backing out the impact of those sales, our gross margin was 39%. A sequential 230 basis point improvement as we started to see positive results from actions we are taking to improve cost such as the shutdown of our factory in the Dominican Republic. SG&A expenses increased for the 3 months ended December 31, 2017 as compared to the same period in the prior year, primarily due to the impact of the Hospira acquisition. This includes the cost of TSAs to Pfizer and new hires to help stand up the Hospira business. We do expect the SG&A cost to increase through the third quarter as we continue to hire people to stand up the business from Pfizer, then see a drop-off in TSA cost by the end of the year as we migrate off of Pfizer's systems. R&D expenses increased year-over-year due to the acquisition of Hospira, and as a percentage of revenue, R&D spend increased to 4% compared to the fourth quarter of last year at 3%. Restructuring, integration and strategic transaction expenses were $10 million for the three months ended December 31 and were mostly related to our acquisition of the Hospira business. Just as we said on our last call, we are making consistent progress on our integration as we continue to see a clear path forward to standing up the legacy Hospira business from Pfizer with a heavy emphasis on systems integration. And as Vivek already mentioned, we have our next wave of successful system cutovers in Canada, our second largest market and several smaller countries. In addition, there was a $5 million non-cash adjustment to this quarter to the carrying value of our contingent consideration payable to Pfizer. This is based on reaching a certain cumulative earnings target by the end of 2019. This change is created by many factors, including the discount factor, time value of money and the probability of reaching this target. These changes impact our GAAP earnings, but are excluded from our adjusted earnings since this has nothing to do with the operational performance of the business. Our 2017 tax benefit was largely driven by the cost of integrating Hospira and purchase - and the purchase price accounting. As a reminder, the bargain purchase gain is excluded from the tax calculation. Additionally, the overall tax benefit included US tax benefits from stock compensation including the option exercises that run through the tax rate and R&D tax credits. The impact to our tax rate related to the new federal reform was minimal. It included an estimated one-time transition tax payable of $2 million related to mandatory repatriation of foreign earnings, payable over an eight-year period and the remeasurements of the deferred tax liabilities of $1.1 million. Historically our average tax rate of 35% has been one of the highest in the industry. By taking advantage of the new corporate tax legislation and the Hospira transaction that provides opportunities to lower our tax rate through lower tax jurisdictions, we believe our tax rate for 2018 should be at a historical low and be approximately 20% to 22%. I know 2017 tax was difficult to follow, but we did receive a lot of valuable benefits. And just to simplify in a normalized environment based on a tax rate of, say, 21%, we would expect the adjusted EBITDA of $70 million to generate approximately $2 of adjusted EPS versus the $2.98 reported. Now moving on to our balance sheet and cash flow, we continued to be very focused on cash earnings and free cash flow. And in this quarter we were able to generate $61 million of free cash flow and ended the year with $315 million net cash after paying off our $75 million note to Pfizer and absorbing approximately $80 million of integration cost. This positive free cash flow was driven primarily by cash earnings and the reduction of working capital as we again significantly reduced inventory in the fourth quarter and improved turns to three times. We believe we have worked off most of the large inventory balance we purchased from Pfizer and believe net working capital this year will increase one or two percentage points mostly driven by inventory. In the fourth quarter, we spent $28 million on CapEx for general maintenance, integration, and infrastructure, and $80 million for the year. For 2018 we expect to spend approximately $80 million to $90 million which includes continued investing in IT, integration, and infrastructure. Once we get past these activities over time, we expect expenditures to come down to approximately 3% to 5% of revenue. Regarding integration as Vivek already mentioned, we have already ticked off several go lives with the US to come later this year. We expect to spend approximately $60 million this year on integration with most of that spend coming in the first three quarters and this is built into our free cash flow estimate. So driven mostly by free cash flow and excluding any unforeseen events, we should end this year with approximately $400 million of cash and no debt. For 2018 we continue to believe we can hit an adjusted EBITDA midpoint of $250 million for the year with the range of $240 million to $260 million. Because of the new tax reform and lower tax rate, we now expect adjusted EPS to be in the range of $6.60 to $7.30. Now if you turn to Slide 5, I'll walk through the map on how we think about getting to approximately $250 million of adjusted EBITDA this year, which is similar to what we presented on our last call. We now believe the true normalized 2017 finish based on market conditions is between $195 million and $205 million. Through that we would add first the $20 million of intracompany profits I described in the consumables segment, second our previous goal of $35 million of 2018 operational synergies, is now $25 million year-over-year as we were able to realize synergies earlier than expected. And third, a normal expectation for legacy ICU which is now Hospira plus ICU, consumable earnings growth of $10 million for a reasonable assumption for TSA savings in 2018, which we would call $10 million today with most of these savings coming in the back half of the year. We would then subtract from that the losses of $10 million to $20 million we expect in infusion systems and IV solutions segments. This year as we continue to cut over systems at additional sites and continue to manage our way through the complexity of the task, we will create a very efficient integrated system with the ability to flex up as needed that will then allow us to focus even more on other aspects of the business and we look forward to a very positive 2018. And with that, I would like to turn the call over for any questions.

Certainly. [Operator Instructions] The first question comes from the line of Matthew Mishan from KeyBanc. Your line is open.

Hey, good afternoon. Thank you for taking the questions. I wanted to start with IV consumables, because I think that was at least in my model the biggest driver of the sales. Could you talk a little bit about the sequential increase from the third quarter to the fourth quarter with the flu conversions in new account seasonality and some of the moving pieces?

Hey, Matt. It's Vivek. How are you? You decided to hang around for a second call. Okay.

As long as you keep beating like this, yes.

It's not always up and to the right. I think our consumables, we have been so busy. We actually haven't been studying whether it's flu or not to be transparent. I think for us it was we own the business for seven or eight months. We got through the sales force integration. It was getting back some of the business that Hospira had lost due to some of the other industry events we are talking about and it was oncology continuing to grow. I mean that's where we had the most commercial merger integration here, right, where we had the most overlap and that was the first thing we changed right out of the box when we bought the company and so I think it's a combination of just time and seats getting the teams sorted out probably a little utilization and continued oncology growth.

And then shift it over to the IV solutions, I mean, we all know what the near-term dynamic looks like. But post these shortages, I mean, you have seen a decent amount of supply come on from some imports and from Baxter from Mexico. Post these shortages, is there going to be - is your view that there is going to be like too little capacity still or is the industry potentially kind of overcorrecting for it?

I don't know that we have a perfect answer. I don't think today the industry is overcorrecting for it. I think what we have tried to put out in our view of the world was our guidance is somewhat predicated on volumes before those industries' shortages happened and then corrected for a little bit more volume but at a different price. But I think we feel good about our platform operationally. We started out kind of under-absorbed so to speak. We are in a much better place and with the structure of the transaction from Pfizer, we are committed to investing in our own factory and if we can just run our own factory full, that creates a lot of value relative to where we started. And if there is additional capacity out there, we have that option with the secondary side in the relationship with Rocky Mount. So we feel like we have a pretty unique of flexing up or down in that based on how the cards play. I mean I think we have a potential if we were that committed and over that longer period of time we go back to what Hospira produced at its peak time, but it's not sensible to make that investment today.

Great. And lastly on the TSAs and I understand the execution is tough here and I don't think anyone wants to take anything for granted. But it does seem like if you do execute as you expect you can, the TSAs are going to come off a little faster than the $10 million that you have implied this year. Is the right way to think about it that you could potentially pull forward to some of the $30 million to $35 million in TSA savings or can you actually execute on a higher number of total savings?

It's more interesting to get it right and try to say it more from the right systems in the future where really there isn't going to be more this year. I don't want anybody to think that and we are not trying to say we got it all under control to the exact day. I mean a lot of these things are spinning until they are not and I don't think there is additional TSA savings this year, right. And the way it works with Pfizer and I mean it's too much detail. But unless we are truly off of something in every last corner of the planet, we are still paying holistically for that service and so that's why there is a lot of assumptions that have to get made of when you are coming off and there is a limited number of people working on this stuff. I'm not comfortable saying there is going to be anything much more interesting to saying if we do this right, we can go deeper in our processes in the future, but it's not about trying to game it for the third or fourth quarter of this year.

All right. Thanks Vivek and Scott. Thank you.

Thanks. Good to hear you.

Your next question comes from the line of Larry Solow from CJS Securities. Your line is open.

Hi, good afternoon guys. Just to follow up on that one on a question Matt asked, on the solutions side, I realized that you guys are normalizing your EBITDA for '17 assuming that shortage wasn't there. But wouldn't there be - isn't there potential outcome when maybe you don't capture all these extra sales going forward, but you don't necessarily lose more share as expected? I mean haven't you sort of built some goodwill and actually not provided contracted solutions where you may actually retain more business than you thought?

It's a good headlight. It's a good question. I think there was still business floating out. So it's a two-part answer. One part is you are correct. We have got some new volume with the ability to serve. Now we could still be serving better, right. We have a little bit of our own service issues that we battle every day to make sure we are doing the best we can. But also there is some business that we know which is scheduled to be lost or go to others, still may go there, right, and until that secure we can't say we are not at risk of that, right. So that bucket is still out there and that's why we are using the words we are using.

Got you. It just seems like double counting a little bit to me, but I totally get the points there. And on the -

Just to, Larry, to stick on that, like I don't - I guess I didn't think it was double counting, because the first correction is saying, hey, we got stuff that fundamentally belongs to somebody else. It just came our way, because that's going to be provided and then we are still something on book that we know was going to go to somebody else, which is the second piece of that.

Right, right. Well, I guess I double counted, but maybe there is an opportunity that you don't know what's going to happen, but maybe there is an avenue where you actually retain some of this business or something, an avenue from it.

We are certainly trying to put our best foot forward to try to do that, right, but until we've done a contract we are not talking about it.

And it sounds like you had, I guess, Hospira about a year under your belt. Obviously, you are in the thrones of the integration process, which sounds like [indiscernible]. It doesn't seem like your mid and long-term expectations, which remain goalposts between good to great haven't changed significantly, although on sort of the lot of the nuances and whatnot within that that? Is that sort of fair to say?

Yeah. I think 'great' isn't a word that you would be thrown around. I think good is in the cards and good to us - fundamentally good is about growth, right, until we really prove that, I wouldn't say that we're either. But certainly we can profitize what was there and we had to do it, because ICU - although ICU had so much associates, I feel like we had no choice and we are going to make sure we get our money back and we get our return on it and then good comes, can we actually change the revenues?

Right, right. Okay.

And I think in consumables I think we can. In solution, we got a little lucky, but we have a better chance to do than we had before and we still got to turn around the pumps.

Right. And how about specifically the pump business, which I know has got a little smaller, but I know you have stated that you think your products are as good. It's not better than competing products. You are losing share. Do you feel more comfortable eventually you can always stop the bleeding and maybe eventually you can grow that business?

Yeah. I mean the goal - right now the goal's been to say, stop the bleeding at some point this year, right. We want to do that in the middle of the year. That's exactly what we still say today. So before we talk about the second word of that, right, we would like to say that first let's show that we can stop just like we did here when we were bleeding a couple of years on ICU. So the first thing we got to do is show that we can do that.

Okay, got you. And then just lastly pretty good economy, inflationary pressures whether they would be raw material, rising raw materials and obviously you are making significant investments in the people in a tight labor market. Have those things impacted the pace of integration, operating performance, both of the above?

I think that's a great question. I'm kind of surprised more people aren't talking about that or maybe our situation is different. We feel some inflationary pressures on the production side and that's good. It's a robust economy out there and it's happening for the right reasons, but we are seeing that in not just US geographies but even in other spots and so the whole recruitment cost side of the equation, there are inflationary pressures out there, yeah. We are not seeing quite as much in raw materials which is interesting, because I think we have a lot of stuff in a long-term contract, but on some of the core personnel areas, yeah, we're - I mean it's priced into our guidance. But it affects our ability to move quickly sometimes. And so that's the first time that we have seen that over the last maybe 120 days since at least my time here.

Got it. Great. Thanks a lot.

[Operator Instructions] Your next question comes from the line of Jayson Bedford from Raymond James. Your line is open.

Good afternoon. Thanks for taking the questions, guys. I wanted to ask about gross margin and the strength in the quarter, the 39%, you called out that the shutdown of the Dominican Republic facility, but you didn't call out the impact of the consumables and just kind of burning through that legacy inventory. Just to be clear that didn't have an effect in the fourth quarter. You realize all that in 2018. Is that fair?

I think we'll recognize much more of that in 2018 than we did in the fourth quarter. It was really more around the cost reductions that we have been putting in place since we started this integration and the Dominican Republic was just one example of those.

Okay. And then - I'm maybe off here, my math maybe off, but it looks like you are assuming that the IV solutions shortage dynamic effectively had a one-time impact of what $18 million to $28 million in EBITDA in '17. Is that correct? I'm just taking the difference between the reported 223 in your normalized 195 to 205.

I think that's cadence for that. I think that's fair, plus or minus a little. I mean there is a couple of components out there, but there is some of that in there, yeah.

And that was all realized in the second half when the shortage became more acute.

Generally speaking, yes.

Generally speaking, yeah.

Okay. And just to clear too, the contract manufacturing, there is no EBITDA associated with that, correct?

That's correct.

Okay. What's the anticipated spend level on TSAs in '18?

We haven't talking about what that - the breakout of that number is. All in, we were going to be spending about $145 million over the 18 months or so and it steps down - it's not linear, Jayson. So you can't just divide that by 18 and get to what the monthly amount would be. And then on top of that, you have to keep in mind that there are standup costs that will be duplicative to those TSAs as we start to wind them down.

Okay. That's it from me. Thanks.

Thanks, Jayson.

Your next question comes from Mitra Ramgopal. Your line is open.

Yes. Hi, good afternoon. Just two questions, Vivek, I was wondering based on some of the benefits you've got regarding the shortage in terms of sell in and then one of your competitors having some production regulatory issues. I mean did you see any sort of long-term benefit in terms of solidifying some customer relationships and maybe gaining some share that you will see and will be a little more sticky?

Hi. Yeah, I think we - that's what we're trying to say, we traded for some NPV-oriented actions that was trying to re-secure some of that business and I think the industry challenges, I mean, the company we bought was and has been the number two market participant in this category for as long as I have been working and we play a vital role there and I think what happened in the last few years in Hospira, people tried to almost punish Hospira for some of the things that happened in the marketplace. And when there is a systemic issue and by the way we are not appending over that punishment is fair or unfair. But when there was that systemic issue out there, I think there was a realization that there was a role for Hospira to play and we tried to jump back in there in better stand and prove our value. It doesn't work every time, but at least it gave us the opportunity to add more conversations.

Okay. That's great. And on the international front, I was wondering I don't know if you gave this and I just missed it, but how much of the business in 2017 was international and based on, I think you had mentioned you are probably in about twice the number of countries now that you are in Hospira and you have a lot of opportunities there. How do you see that revenue mix changing from geographically?

Actually Mitra, our international sales make up about 20% of our overall revenue. And so while we added a significant number of countries outside the US and actually outside the US commercially we continue to do well, this business just started with such a large US presence and continues to have a large US presence.

And you got to find the right balancing act, I mean, between being committed to a lot of the disparate geographies and I think when a lot of people know in the medical and device industry know which is there are some set of countries that drive a lot of the profits, right. And so we are trying to play big and it enables us play bigger, but just because we are there it doesn't mean you are making money everywhere.

Right, right. And then maybe a little color on maybe - to a more relationship, I know there was something in that you thought would really be a nice opportunity in terms of expanding distribution in Asia.

It's moving along, it's our long term partner. We have another six years or five years on our contract. I would say it's probably going a little bit better in the oncology area than the core IV area in terms of meeting the goals we set, so I think everybody's working hard on to make the changes just - you've got business over there, sometimes things are little bit slower from a regulatory perspective. I think we feel good about oncology, but IV we're still pushing along probably not towards satisfaction yet.

Okay, thanks. And then finally on the sales force, I was wondering now as you enter 2018, all of the restructuring, re-org et cetera, as you look at your sales force going forward, are you pretty satisfied that you have pretty much what you want in place?

I think in parts of it - of the company, like if I use the domestic consumables portion of the business, I feel - we feel really good about what we have and that's been like sharpening our spear there because that's been our core. I think on device business we've changed a lot of people and the people that are with us today, we believe in strongly, we believe in fully, but we've had a couple of rounds of iterations to try to get it right and we keep trying to improve every day. And internationally there are still countries that require work.

Okay, thanks again for taking the questions.

I'm showing no further questions at this time. I'd now like to turn the conference back to Vivek.

Okay, thanks everybody. It's been a - 2017 was a really interesting year, really a neat year. It's also been a year which our people worked incredibly hard just disclose process and leading up to this decision to take a couple or more days on the case. It's been a kind of a nonstop ride and we certainly expect it to continue that way. We are working incredibly hard through it, the whole team is and company is working hard and we appreciate everybody's support and we will talk to you and sorry for the call being so late in the quarter here. We'll literally talk to you in eight weeks on the Q1 call. So thanks everyone.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.