Good day ladies and gentlemen and welcome to the Second Quarter 2018 ICU Medical Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to introduce your host for today's conference Mr. John Mills partner at ICR. Please go ahead sir.

Thank you. Good afternoon everyone. Thank you for joining us today to discuss ICU Medical's financial results for the second quarter, 2018. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Scott Lamb, Chief Financial Officer. We want to let everyone know that we have presentation of company in today's prepared remarks. To view the presentation please go to our Investor page and click on the Events calendar and the presentation will be under the Second quarter 2018 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 for management's current expectations. We refer all of you to the company's SEC filings for more detailed information on the risk and uncertainties that have a direct bearing on operating results and financial position. Please note that during today's call we will also discuss non-GAAP financial measures including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency and ICD Medical's ongoing results of operations particularly when comparing underlying results from period to period. We've also included a reconciliation of these non-GAAP measures in today's release and provided as much detail as possible on any addendums that are added back. And with that it is my pleasure to turn the call over to the Vivek.

Thanks John. Good afternoon everybody. The second quarter of 2018 marked the first complete year-over-your quarterly comparison period of owning Hospira Infusion Systems and we continue to balance 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 make progress every day on integrating Hospira Infusion Systems. On today's call we wanted to first comment on the Q2 results and discuss our current view of the business and recent performance trends. Provide the latest status on our integration work and highlight some successes and a few changes to our schedule. Provide our latest view on financial expectations for the near term of 2018 and what could still possibly change in the near term. A few comments on certain strategic matters and lastly provide some thoughts on the longer term value creation at a high level from both an income statement and balance sheet perspective as margins and cash generation have improved. The short story on Q2 was it was probably the cleanest quarter we've had since owning Hospira as almost all the transactional noise is starting to get behind us. The income statement was straightforward with revenues that were almost exactly in line with the comments from our previous quarterly call with margins and a balance sheet that finished a little better due to a variety of drivers which I'll explain. We finished the quarter with approximately $341 million in adjusted revenue. Adjusted EBITDA came in a little over $77 million and adjusted EPS came in at 266, and we added approximately $54 million of cash to finish the quarter with net cash of $333 million on our balance sheet. Pro forma revenue growth was 5% quarter-over-quarter and we did benefit on the adjusted EPS line from some tax benefits which made adjusted EPS look a little inflated versus a more normal rate. I'll address the margin changes as we talk about the businesses and integration.

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 last call we stated we believe this segment could grow high single digits in 2018 and we continue to have that view. The sequential benefits of revenue growth in this segment combined with exits of some operational PSAs drove about half the sequential Q2 versus Q1 gross margin improvement. Second segments talk about is infusion solutions. This segment reported approximately $116 million in revenues equaling 4% year-over-year growth which was in line with our expectations as the unique temporary industry issues are resolving and our commercial actions have started to show. We've 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 pricing anomaly. From a value perspective we have sacrificed short-term revenues and profits for longer-term supply contracts which we believe offers us more NPV as it makes us a more competitive supplier over time. In Q2 revenues were down sequentially $10 million but we actually shipped and sold more units of IV solutions than we did in Q1. The sequential decline in revenues was roughly equally split between less sales of what we were calling the trading business and the impact of some of our long-term pricing decisions to secure committed volume. The benefits of increased production and volume in this segment roughly drove the other half of the quarterly sequential gross margin improvement. One area for improvement is on the smaller volume units where we were a bit short of our goals in Q2 due to low inventory levels from trying to serve as…

Thanks Vivek. And good afternoon everyone. I'll first walk down the income statement. Highlight key items impacting operating performance and finish with some added detail to our updated guidance for the year. As a reminder we closed our transaction of Hospira on February 3rd last year so this will be the first quarter since the acquisition that the year-over-year comparison is more of an apples to apples comparison. So to begin our second quarter 2018 GAAP revenue was 361 million when compared to 332 million in the same period last year. Also please remember that 361 million and 332 million includes 19 million and 21 million respectively of contracted solution sales to Pfizer which we sell to them at cost and so on a pro-forma basis revenue increased 5%. Adjusted diluted earnings per share for the second quarter of 2018 were $2.66 as compared to $0.76 for the second quarter of 2017 and adjusted EBITDA was 77 million for the second quarter of this year compared to 47 million for the second quarter last year. Now let's discuss our second quarter GAAP revenue by market segment. As a reminder the 2017 revenue data related to delayed closed entities was not available by product line and was recorded as other revenue. However, by the end of December all delay closed entities were closed and so for your reference the 2017 and 2018 pro-forma unaudited revenue numbers can be seen on Slide 3 of the presentation. So a GAAP sales of infusion consumables were 124 million versus 78 million last year. IV solution sales were 135 million excluding the previously mentioned contract sales to Pfizer IV solution sales were $116 million versus $112 million last year and just to reiterate what Vivek already mentioned this quarter we sought an increase in the…

Thank you. [Operator Instructions] Our first question is from Jayson Bedford with Raymond James. Your line is open.

Hi, good afternoon and thanks for taking the questions. Just a few. Similar to last quarter, it seemed like gross margin, at least to us, was the standout. Just so I understand the dynamic, the sequential improvement was due to better IV solutions volumes and the consumable mix? I was a little unclear as to whether or not the exit of TSA influenced the 2Q gross margin.

I think at the highest, it's Vivek, Jayson, hi and then Scott, jump in if I don't get it right. I think it was an equal split between the consumables business and the solutions business. The drivers in the consumables business were primarily volume and then some TSA exits and some operational TSAs that we've had on certain areas there. Then the other half was purely just volume and the volume in solutions.

Yes, that's correct.

Okay. It sounds like in the back half of the year, there will be a little bit of noise, but there was nothing effectively kind of one-timeish in nature here in the 2Q gross margin.

It's really clean. That's what we're seeing. The plant shut down. If you go back in Hospira history, Hospira always called out Q3, I think, because their plant shuts down. We've stayed on the same schedule. That's really the biggest item.

Jayson, those plant shutdowns will put a little bit of pressure on Q3.

Okay. Then I'm going to jump around a little bit here. On the consumables side, clearly some very strong growth. I think you mentioned you're still thinking high single-digit growth for the year, which implies a pretty sharp deceleration in the back half of the year. Is part of that due to the IT cutover and just leaving yourself a little buffer?

Maybe a little on that. These are deals too that take time to get implemented. We came off a number of wins. We got them implemented. It doesn't run uphill every single quarter. It might shoot up for one quarter and start running back uphill again. So, I don't think there's been a ton of time spent into the exact number. It's going in the right direction in consumables for us.

Okay. Last one and then I'll jump and Vivek, I appreciate your comments on the strategic dynamic out there, but I wanted to ask you about Smiths. It looks like their medical business has effectively been flat to down for the last eight or nine years in an industry that has seen some pretty good growth. Additionally, it looks like their profitability is declining this year. So, my question is what do you think ICU offers or what can the team to do turn around what appears to be a struggling asset?

First of all, I want this call to be about ICU. Look I mean I think our M&A criteria isn't different than anybody else's. We would prefer high-growth, high-margin revenue-accretive, earnings-accretive assets like everybody else. That doesn't really feel like our lot in life right now for where we are. We don't try to keep up appearances. We think we know what we are. I don't really want to talk about it specifically, more just the situational nature of it, which is there are opportunities out there where pieces and parts make sense, pieces and parts don't make sense. That's the kind of thing we've been good at. Opportunities like that, we thought we could add value to. I would just leave it at that.

All right. I'll jump back in queue. Thanks.

Thank you. Our next question is from Matthew Mishan with KeyBanc. Your line is open.

Great. Thanks for taking the questions.

Hey, Matt. You're still here. Call three.

I'm sure a lot of companies probably wish I wasn't.

We like it. You scared off everybody else.

I understand the conservatism with the EBITDA guidance and it makes sense, but assuming that nothing is impacted from the cutovers and they go as expected, should second half EBITDA be at or above first half?

Something always happens in the cutovers and always, always. So, I don't think we – we don't run the business saying each quarter has to be X-percent more than the other. We focus on getting the factories full, good value prop to the customer and the rest kind of follows. That's what we've been doing. So, I think it's the right thing to do to take a cautionary look with the systems cutover because we haven't done it before together as a company. We do think some of the choices that we made with pricing and contracting makes the revenue line a little bit bumpy, which works its way down the P&L. It's still the right thing to do NPV, but it's all playing out. We don't control the timing of all of it day to day. So, we just sort of felt this was the best place to be.

Okay. That's fair. Then on the consumables growth, oncology continues to be a standout. Can you talk a little bit about where we're at in the transition with closed system transfer devices and how much runway you'd have there?

Sure. I have a feeling I think this one we've talked about before, right? I think as each day goes by, more of the market, due to the regulatory tailwinds, which did get delayed in their implementation, but more of the market recognizes the need for these products. The current guidelines, while not enacted, is pushed toward the end of 2019. So, we think there's still some room left to run here. I think we probably have a more conservative view of the total market sizing opportunity than some of the other stuff we've seen out there in people's materials. And I don't know [indiscernible] most number. But we think it's maybe 60% converted, 50% to 60%. So, there's still some headroom left and there is still some wind left in terms of time to implementation, but it's a bit of a land grab right now.

All right. And on the solutions piece, some of the contracts you've been awarded where you sacrificed near-term price for long-term volume guarantee. How should we be thinking about the cadence of that volume? Is that in numbers or is there a steady ramp over the next several years as you get more capacity on line?

I think right now, we're just happy to fight to get back to what we've gotten and so we haven't – and fill up the factory, which we're not quite at yet. We will be when we put up our own equipment to move away from Rocky Mount. I don't think we planned on a lot of additional stuff beyond where we stand today minus what's in these contracts and the like. So, we continue to compete. We have available capacity to bring on new business but we haven't made a lot of assumptions about that.

Okay. And then last one and I know you wanted to talk about ICU specifically, but I just wanted to clarify are you still in talks with Smith Medical or have they concluded and the parties have moved on?

I guess it's probably not proper to comment on that. I think I would say obviously, a lot of this has been public stuff and we feel like we're in a reality TV show. I think people know where we stand. We were very transparent with investors, very transparent with Pfizer. We did that and I think people know where we stand and we're kind of focusing on our business. I would say that.

All right. Thank you very much.

Thanks, Matt.

Thank you. [Operator Instructions] Our next question is from Larry Solow with CGS Securities. Your line is open.

Great. Thanks. Vivek, on the consumables piece, obviously, driving a good amount of the strength on the revenue side and again 12% growth year to date, whether or not it slows a little bit in the second half, which sounds like at least you're assuming that on a full-year basis and maybe that's conservative, but just help us qualitatively what is driving that acceleration? Is it Hospira, improvement from the Hospira side, your direct side? Obviously, the oncology side is helping too, but is the market growing faster? Are you taking more share? Can you just give us a little color on that?

Sure. It's a good question. A couple of drivers. If I was to pick the first three drivers, and these aren't necessarily in order of impact, remember, for many years, you've been around the company a long time, the relationship with Hospira was Hospira had exclusive market access for a large portion of the U.S. and certain countries, where they had the right to call on these products and one of ICU's gripes was that we didn't think the product was getting attention. When we announced the deal, we said value to us was being able to call on the full market available opportunity. So, point one is at least we've been focused on it, where we didn't feel like it was getting focus before. Two, has been international. There are a few spots in the world where the technology is still new; not many, but there are some. That's been helping. And then three, this consumables products are in the U.S. market inherently linked to solutions for some portion of the market that's sort of the non-ICU part, and legacy ICU part and if we've gotten something back there, it generally helps on both sides. Those are probably the three drivers.

Okay. And on the margin question or the sustainability of the margins, it does sound like absent what happens in Q3, which would be a temporary blip one way or the other, these margins are sustainable as we look out into '19 with potential for improvement, it sounds like, from your prepared remarks. Is that fair to say?

Scott I want you to --

Yes. I don't think I'd say anything different at this point in time. We're focused on getting the best operational efficiencies out of our factories as possible. I don't see anything changing at the moment.

And have you guys seen any impact, maybe not direct, but indirect from cost of goods, inflationary issues from tariffs, cost of goods, or just non-tariff-related, any inflationary issues on your labor and ability to get less?

That is a great question, Larry. I'm surprised more companies aren't talking about that. We do feel again, it's incorporated in our gross margin guidance but we do feel tightness in the labor market not just at our U.S. factories, but at our international factories also. I think a lot of places in the world are humming. So, we feel a little of those pressures. And on the tariff, there's no tariff-specific stuff. To us there are issues in the supply chain that come from some of those decisions. Like everybody else, we're scrambling. There are a few ones that hurt that you try to be prepared for. There are little bumps and bruises from that. We're working to make sure we're clear every day. We're not completely out of the woods on that.

Okay. Just lastly on a potential acquisition, whether it be Smiths or it sounds like the ball is still up in the air on that one or another large size like that, it does sound like you are confident that the Hospira integration is far enough down the road you'd be able to take on another project.

I think our view is with the exception of the factories that were delivered with IT systems that work and don't need to be switched we can switch on our own calendar will be through the Hospira systems integration by the worst case early next year. So, anything strategic we do would not be able to happen before that timeframe. I mean I think the confident answer is we'll answer that when we're all done. But I think it's enough that we have a strong balance sheet. We're doing okay. We always said we ought to peak our heads up for the first time in 18 months and look around and we'll see what's out there.

Absolutely. Okay. Great. Thank you.

Thanks, Larry.

Thank you. That does conclude our Q&A session for today. I'd like to turn the call back over to Mr. Vivek Jain for any further remarks.

Thanks, everybody for participating in our Q2 call. We've got a lot of things ahead of us here in the next couple of weeks and months. We look forward to updating everybody on Q3 and I hope people have a nice August and get a little time off in the summer. I know our company is going to be working hard right through it, but we're enjoying it. So, thanks, everybody. We'll talk to you soon. Bye.

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