Good afternoon, ladies and gentlemen, and welcome to the Q4 2018 ICU Medical, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. John Mills from ICR. Sir, the floor is yours.

Thank you. Good afternoon everyone. Thank you for joining us today to discuss ICU Medical's financial results for the fourth quarter of 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 a presentation accompanying today's prepared remarks as well. To view the presentation, please go to the Investor page and click on Events Calendar and it will be under the fourth 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 from 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 growth 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 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 Vivek.

Thanks, John. Good afternoon, everybody. The fourth quarter of fiscal 2018 marked the third complete year-over-year quarterly comparison period of owning Hospira infusion systems and we continue to balance our time between active customer dialogs to improve our commercial execution and finishing almost all of our integration work to move away from Pfizer and create a single unified company. We continue to execute well through a large volume activity and are near the full integration of Hospira infusion systems. On today's call, we wanted to first comment on the Q4 results and quickly on the full fiscal 2018 results and discuss our current view of the business and the recent performance trends, provide what we believe is our final update on our integration work and cut over and highlight some successes and certain remaining open issues, outline some key activities that we're focused on in the first half of the year, remind everyone of the first half 2019 comparison and its effect on total company growth rates in the near-term. And lastly reiterate some thoughts on longer-term value creation at a high level for both an income statement and balance sheet perspective as margins and our cash position continue to improve. The short story on Q4 was it was a hard cleanup quarter as we work through the heavy lifting of our U.S. systems cut over and its knock-on effects on the operations of our business. The income statement was very straightforward with revenues that were generally in line with our expectation for infusion consumables, a bit more than we had expected in Infusion Systems, and just a bit less than we'd expected in Infusion Solutions, and in aggregate was burdened with slightly more cost needed to manage through the systems cut over. We finished the quarter with approximately $322…

Thanks, Vivek, and good afternoon everyone. I'll first walk down the income statement, highlight key items impacting operating performance, and finish with some detail to our guidance for 2019. So to begin, our fourth quarter 2018 GAAP revenue was $340 million compared to $370 million in the same period last year. Please remember that the $340 million and $370 million includes $19 million and $17 million respectively of Contract Manufacturing Solution sales to Pfizer which we sell to them at cost. As we expected, and as already described by Vivek, on an adjusted basis revenue decreased 9% year-over-year driven by IV Solutions which was down 27% offset by Infusion Consumables up 1% and Infusion Systems up 4%. In the past, we haven't talked much about the impact FX has had on revenue but in the fourth quarter alone, revenue was negatively impacted by over $4 million. So going forward, we'll be discussing constant currency performance in our year-over-year commentary. Adjusted diluted earnings per share for the fourth quarter of 2018 were $2.07 as compared to $2.98 for the fourth quarter last year which includes significant tax benefits from purchase price accounting and other discrete items. And as I mentioned on this call last year in a normalized tax environment based on last year's adjusted EBITDA of $70 million, adjusted EPS would have been approximately $2. And finally adjusted EBITDA was $69 million for the fourth quarter of this year compared to $70 million last year. Now, let's discuss our fourth quarter GAAP revenue by product line, and as a reminder, the 2017 revenue related to the delayed closing entities was not available by product line and was recorded as other revenue. However by the end of December, all delayed close entities were closed. So this will be the last time…

[Operator Instructions]. Your first question comes from the line of Matthew Mishan with KeyBanc.

Good afternoon and congratulations on grinding it out through a tough integration year.

Hey Matt, thank you.

Thank you.

Grind is the right word.

Maybe I missed it but it seems -- you seem less specific around consumables growth for next year. How should we be thinking about the IV Consumables growth going into next year? There was also a recently call it's hard -- it's hard to tell sometimes with these things but is that material?

So let's there is two questions in there. So let's do the first one which is consumables has been in 2017, right, the first year in the deal it was down 6% or 7%. And for the full-year, I think was up 8% in 2018. We continue to feel good about it and there's nothing structurally changing in the market. Obviously, the oncology stuff and some of the international pieces have been good drivers, those are going to continue. I don't know that we see it exactly today with a level of precision that we could say it's mid-single-digits or high-single-digits and so we just kind of said what we see right now. But there's nothing structurally that changes our kind of long-term view of it. On the recall, it's not economically material and we're contemplating on it. It's a little bit frustrating right because we -- we've got to keep up our position as kind of the lead innovator in that category and the high quality reliable supplier. What specifically happened was a well-known industry supplier changed tool and it's our responsibility to catch those things and we caught it very, very quickly. But a few pieces did make their way out into the market. And then our job is to make that right which is what we did. But it doesn't change the forecast of the Consumables business and stuff like that.

And then just a follow-up on that question, I know you can't really say if it's mid-single-digits or high-single-digits but is it fair to say it's at least the mid-single-digits?

Again, Matt, we've been -- we really have never given direct revenue guidance. Again, I think we feel good about the segment and you can look at what's happened in the past and make your own conclusions. I don't think right now the business is much larger now. So know exactly which one it's harder to say.

Okay, fair enough. In the Contract Manufacturing that you do for Pfizer out of Austin that you're currently making, what are you currently making for them and manufacturing for them? Why was that the one piece of the IV Solutions business that they ended up keeping and just follow-up on multipart question, has anything changed in that business?

Long story as to why it was split the way it was. It was more about what the actual compounds were. They essentially kept part of the -- we make two different things when we make the advantage line for them which is a differentiated convenient use packaging format for some of their sterile IV, for some of their injectable drug. And we make some of the pre-mixed medicated IV Solutions for them. The view was those were closer to pharmaceutical items at the time of the transaction. Nothing's really changed in that business for a very long time. There has been some new market entrants there and so that feeling is really new.

And lastly, just without really going into specifics especially I know you don't want to do that around the new products but can you give us a sense of the breakdown of what you're looking at. Are they new platforms, is it a majority of it consumables, recurring revenue or entering like new adjacencies. How should we think about like how you're looking at like new products going into next year?

I mean, I think big picture we're trying to say bluntly which is the day it's coming here where we are going to peak out on margins and performance and we need to start feel a little bit more normal. We lap all these issues or you have normal growth rates and you have new product innovation and you talk about that when you can stop talking about integration. That's what we would like to do when we lap these items. From a budget perspective, I would say there hasn't been a material change in the consumables spend, so if you went back and looked at ICU's R&D line pre-deal it was $15 million, $16 million, ballpark that's still on the consumables side of the business. The rest is largely on the hardware side of the business because you can't spend that much on solutions. And I would -- I think it's probably safer to say, it's more refresh and innovation around the core things that we're in necessarily new adjacencies with the exception of some of the products related to oncology and Diana that are little more pharmacy oriented where really just trying to build adjacency.

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

Hey thanks. Just a few follow-ups on the consumables just in the Q4 number although it did sound like there was some impacts but just a flat year-over-year sales. Was that more of a timing thing and then a little bit from the cut over and you mentioned the Australian distributor too, but any more color on sort of that?

Not really. I mean I think, Larry, we've said at the end of the Q2 call, we had said Q3 was going to be way down because of the cut over stuff and then we expected Q4 to look like Q2. Obviously, it didn't happen in solutions but it did in the other lines and so it might be a million or two off. And I think that's more just being a little backed up with a cut over and stuff and there was nothing really materially different there.

Okay. And the Australian distributor too?

I mean, the numbers, back in the mid-single-digits or high-single-digits, the numbers starting to get larger in Q4 of 2017, right. That's when we started to turn the corner a little bit in consumables. So it’s just -- it's a bigger denominator.

Right. Okay. And just how about without going into specifics, it sounds like Solutions obviously year-over-year will be down for the next couple of quarters. I know you mentioned you thought maybe at the bottom maybe we were at the bottom was a little bit too low, artificially low. Does it sound like you feel like it will bounce a little bit sequentially and then longer-term or sort of mid-term, do you see this sort of as a stable to slightly growing piece of the business?

I mean I think there is utilization growth here. We first need to make sure every part of our book is as stable as committed as it could be. And then you've just kind of have utilization that follows that. I do think it's a different sized business than we were thinking about the middle of last summer, right. So we tried to correct for on the Q3 call. I think right now, we would take it just even at these levels a little below, little bit high just for the next bit of time to be stable, so we can make the decisions around Rocky Mount and Austin and what we want to do, right, and if it turns out to be better than we have a lot of flexibility.

And then on the systems side, I know you've called out sort of installed base, it appears to be bottomed a couple of quarters back. And I know you've spoken to the -- your pumps and software not being inferior to the competition. So with the market still growing any reason to believe that this segment or this end market can return to some modest growth as we look out?

Yes, I mean I think there, the market share of the business we bought was cut in half over a six year period. And so from a product that used to be very well liked, I know we've tried to tune that back up and so we're out there fighting and competing. You should believe that there's opportunity obviously everybody else says they have lots of opportunity and we're just trying to say we're holding where we are and I think we're going to continue that line until we show something, we're going to continue with that line until we show something different.

Okay. Can you just tell us what's the contract settlement that's in the P&L can you give us any more color on that?

Sure, Larry. This is all related to the two core contracts settlement that we made in the first quarter and this is mostly all non-cash items.

Okay, okay. So --

This is the settlement we had with a different manufacturer. In Q2, we spent $30 million, $35 million last year in cash to settle that. There were some balance sheet items that came with it and this was the final resolute disposition.

Got it. So yes I know you already announced this Q Core a couple of quarters ago, so this is sort of just the end of that sort of?

There could be some commercially related one or two more quarters where probably just one more quarters worth and not at this level though.

Okay. And then just, how should we look on just on the cost side, I assume gross margin was -- it sounds like was impacted a little bit certainly at the end of the year, with some of the crossover expenses and maybe that had some increased freight because of other things, do you expect independent of getting off the TSA to whatnot some improvement --- underlying improvement in gross margin?

It's -- again, we started this journey, it was like we're just hoping to get to our 40, and then we hit 43 or 44. So I think it should be better to the extent our logistics cost that we spent like crazy in the fourth quarter to keep all the trains moving when these things were going on millions of dollars more than we normally spend in that. And so we need to be healthy to not spend that that should help in quarters where you have more pump capital that goes out there, that's going to be a negative to gross margin. But it's the right NPV thing to do. And so you don't see that on the big suppliers' income statement because it is so large, you see it on ours. And ultimately, it's about volume right. And so if volumes can stay or get better, we have a lot of economics, so we run very full factories, right.

Great. Okay. And then just lastly I know Baxter announced recently I just heard that the U.S. has closed the IV Solutions antitrust probe. Can we assume that the investigation into you guys into Hospira has also been closed?

Yes. So in our K, you'll see the same -- you'll see the same commentary. We just didn't talk about it; it will be in the game.

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

Hi guys, good evening. Hey thanks for taking the questions. So just one quick one to follow-up on the gross margin, so the increased logistical costs that you mentioned in explaining the down quarter-over-quarter gross margin, is part of that non-recurring, it kind of sounded that way but I'd just like to clarify that?

Yes, as Vivek mentioned on the logistics side, I mean we are still hustling to catch-up from the third quarter. So there were still some additional logistics spend in the fourth quarter that eventually does get behind us. And going forward that should just be more one-time in nature.

Okay, okay.

I mean some of products dropped some of our products, Jayson, traveled very well in the fourth quarter and we got to do that because customers on the other end of it are people have short memories right. We were very, very high quality service for forever and this cut over does bump things around a little bit, right. So we put dollars in trying to be healthy.

Sure, sure, understood. And just as a follow-on to that and as it relates to the cut over from last quarter, was it still an issue, I was a little unclear from the comments meaning were you fulfilling all the orders or was there a revenue impact in 4Q from the cut over?

I think the fourth quarter was pretty true. We got some. We closed out a number of the open orders but not all of them. So we entered Q1 with a little bit. And remember last time we said we had two to three days of kind of order free days at the end of Q3. Some of those orders in fact never came back, right, the more transactional day-to-day stuff. So I feel like rather than debate it to the extent of a day one direction or the other, I think it feels pretty normal.

Okay, okay, clear. On Solutions, I appreciate the commentary around no significant customer shifts. Curious there has obviously been some concern around inventory in the channel. Can you just comment on the current supply demand environment as you see it in Solutions?

I don't know exactly the supply demand, right, it depends what manufacturers are holding. But I would say that was in the trade channel and end user demand, so trades versus out the door kind of discussion lines are looking more on top of each other they have it in a while. So it looks like it's getting more balanced between the wholesale channels and end user or end user supply and wholesale channel.

Okay. On Consumables, the 1% growth I think you mentioned Core IV Therapy grew, Oncology grew, what didn't grow and maybe you can comment on oncology growth out of curiosity?

There was some parts in certain legacy Hospira's use that faded away a little bit. And so some of those went out and the growth was more of the legacy and then we don't want to say those words anymore right. The growth was more of a legacy ICU items. Oncology clipped along again at a very nice rate. We're not in that north of 20 like we were for a long time but it was a very solid year in aggregate for oncology and we're selling every piece we can make right now. So that's probably all I would want to say about that one.

Did you feel like you're supply constrained at all in consumables?

A little bit. I mean we're investing like crazy and it's getting better every single day. I think we were actually a little supply constrained in Q4. I mean we went out and talked to some customers they probably would. Some people might say, but I think it's a very different answer today but we did feel that pinch a little bit.

Okay. So that supply constraints to the extent that it exists in the fourth quarter is pretty much lifted now and you feel comfortable with meeting all orders you get?

I mean again it's a high class problem right. We have a lot of demand for some of these items. So I wouldn't say it's absolutely perfect yet but we're putting lots and lots of money and resources and expanding capacity quickly because things get better every single day. But I mean people want the stuff which is good.

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

Okay that was a short call and hopefully quick and direct and to the point. We appreciate everybody's support last year 2018 was really toughest year, I think in this company's history and I think we did what we wanted for an integration perspective, we did what we wanted from a financial results perspective and what we started the beginning of the year, we thought we actually delivered. And even with some of the volatility, we've set ourselves up for 2019 and the optionality that we have. So we appreciate it and we'll talk to everybody quickly after the end of Q1. Thanks.

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