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,…

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.…

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.