Good day, ladies and gentlemen, and welcome to the Q1 2019 ICU Medical Inc. Earnings Conference Call. [Operator Instructions]. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, John Mills of ICR. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss the ICU Medical financial results for the first quarter of 2019. 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 have a presentation accompanying today's prepared remarks. To view the presentation, please go to our Investor page and click on Event Calendars, and it will be under the first quarter 2019 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 risks 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 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 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 first quarter of fiscal 2019 was our first quarter after 2 years of difficult integration work, and we spent our time primarily on active customer dialogue to improve our commercial execution and implementation of some of the operational improvements to protect and improve our P&L over time and, to a lesser degree, residual cleanup efforts related to all the integration activities. We continue to execute well through a large volume of activity and see an increasing amount of our time is now spent on external activities. On today's call, we wanted to comment on Q1 results and discuss our current view of the business and recent performance trends; provide an update on the open residual integration issues we mentioned on the last call; outline some of the key activities and housekeeping items that we are focused on in the first half of the year; remind everyone of the first half 2019 comparison and its effect on company growth rates in the near term; and lastly and briefly, reiterate some thoughts on the longer-term value creation. The short story on Q1 was - internally, it was an operationally easier quarter for us versus Q4 as our system integration work stabilized and our customer service levels improved. But externally, as we had said on the previous call, it was average from a commercial standpoint. The income statement was straightforward, with revenues that were generally in line with our expectations and earnings that were a bit higher as TSA savings are being realized and the cost for the systems integration were lighter on the P&L. We finished the quarter with approximately $311 million in adjusted revenue. Adjusted EBITDA came in at $78 million, and adjusted EPS came in at $2.58. And similar to previous years, cash decreased…

Thank you, Vivek, and good afternoon, everyone. To begin, I will first walk us down the P&L and then talk a little about cash and the balance sheet. As we mentioned on our last call, we're going to begin reporting the effects of FX on revenue going forward now that it is meaningful to do so. So to begin, our first quarter 2019 GAAP revenue was $331 million compared to $372 million or down 11% over last year or 9% on a constant-currency basis. For your reference, the 2018 and 2019 pro forma unaudited revenue numbers, which exclude contract manufacturing sales to Pfizer at cost, can be seen on Slide #3 of the presentation. Our pro forma revenue for the quarter was $311 million compared to $354 million last year, down 12% or 9% on a constant-currency basis. Infusion Consumables were up 1% or 3% on a constant-currency basis, but this increase was offset by IV Solutions, which we primarily sell in the U.S., down 27%. Infusion Systems was down 9% or 5% on a constant-currency basis, and Critical Care down $1 million, 10%, or 8% on a constant-currency basis. Adjusted diluted earnings per share for the first quarter of 2019 were $2.58 compared to $2.29 for the first quarter last year. Our tax rate this quarter was favorably impacted by excess tax benefits related to equity compensation, and we continue to estimate our tax rate for the full year to be in the range of 21% to 23%. And finally, adjusted EBITDA increased 6% to $78 million for the first quarter of this year compared to $73 million last year. Now as you can see from Slide #4 of the presentation, for the first quarter, our adjusted gross margin was 43.9% compared to 42.1% for the first quarter last…

[Operator Instructions]. And our first question comes from the line of Larry Solow with CJS Securities.

Vivek, I know you don't guide quarterly per se, but - and clearly, you're sort of sticking with your second half guidance of certainly improving on a year-over-year basis. But just as we look out just sequentially, sort of broad brushing all your segments, do you - and I know BD and Baxter both reported sort of a little bit softer Q1s as well, but both expects sort of improvement in the back half of the year. Do you - on a sequential basis and not just from easier comp, do you share that enthusiasm? Or any color on that?

I mean, I think we felt like Q1 was average on the last call, and I think we're probably a little more cautious, Larry. All in progress are our own stuff. I don't - from a macro perspective, we haven't seen senses changed that much, and in the U.S., we saw the big drivers like employment and stuff. We don't know it's going to get much better. So there are opportunities for new market creation in some of the categories we're in, and we're really focused on those. We're not, I'd say, competing in the same exact way. That obviously offers growth in some of our lines. In some of the more competitive lines, we feel like it's a tighter market. So we're probably a little more cautious, and we didn't really try to stack the deck or build the year up from our guidance. We just - we kind of - we landed kind of proportionally. We thought we were, but there is volatility in Solutions, and we have put [indiscernible] money in the fulfillment stuff, which doesn't show up right away. And so we have to cover that with some of these other operational improvements or find a little bit more growth.

Right. And how about just on the Systems piece? I know you said it was sort of in line with your expectation, and they're impacted by currency more than you really got in the segments or end markets. But is that a little bit more than I thought it would be sequentially? I know you mentioned you have some strong differentiation there as well as, obviously, Consumables. What - as you look at maybe not the next couple of quarters but sort of next couple of years, what are the impediments to growth of them sort of - just obviously, it's a sticky market, which helps and hurts you. So other than that, why can't you at least sort of grow with the market?

Certainly, I think it's a more competitive market than it's been probably in the last decade. It's a good time in the market in that regard. I do feel like there's assets in the business that are - worked for us, which is that the business, if you're focused on it, really has a strong incumbent advantage that all participants benefit from. But then it's our job to develop a strong case for change on the features and merits of the product and its value, sometimes on its own and sometimes integrated with other things we can offer. And that's the basis in which we compete. But fundamentally, our story on the Plum family of products and the things that we have been investing our R&D dollars into is around safety and workflow and the themes that people are willing to make change for on infusion or at least willing to continue to work with you if you're holding some book. And I mean that's the point we were making. We felt like historically, the company we bought got away from some of those points. The product was very solid in that regard, and we released - gotten back out there with some of the guidelines and other things you've seen, have tried to reestablish ourselves in those topics.

And our next question comes from the line of Jayson Bedford with Raymond James.

A few questions. Hey, Vivek, maybe just a follow-up on the Systems side. There was, I think, a competitive - competitor recall during the quarter. Do you see that as an opportunity?

I think this whole industry lives in a glass house, right? We should be very careful on comments there. I feel like one of the things we learned at our experience in this industry was just it's a competitive advantage to making sure you're in a good regulatory position. I wouldn't jump to any major conclusions that, that situation changes the landscape dramatically because all these companies are competing, and they have lots of resources and kind of an infinite amount of infrastructure and financial flexibility to deal with the problems. So we still have to win. The product still has to be better, right? I mean historically, I think people did well because others fell down. I don't really think that's going to be the case anymore, right? We have to actually win proactively. That's how we feel about it.

Okay. Fair enough. Just on the Consumables side, you mentioned you're capacity-constrained with respect to oncology. I think you made a reference to this will be resolved in the second half of the year. Is that kind of when you expect supply to meet demand? Or are you - is this still going to - dynamic still going to impact Q2?

It's still probably going to impact Q2 a little bit. I think 2 things happened. One, the underlying growth is still great. It was still great in this quarter. It's just been slow bringing on a few tools. And that recall, which had kind of no financial impact to us a couple of months ago, you saw, we did have to swap out some parts, some new parts from old parts. And that probably grabbed a little bit of inventory from us that would have been able to be commercially sold and get that extra $1 million we wanted and expected in the quarter. That's the downside of being a little bit small, right? But that's what it was.

Okay. On Solutions, you mentioned volatility. And I realize it's tough to gauge quarter-on-quarter here, but is supply and demand fairly matched right now? And is the volatility you're talking about here either on price or short-term share, gain or loss?

I think it's probably more on we believe that there is adequate and, perhaps, excess supply in the marketplace, and so that's different than before. And there is obviously a short-term share thing that's going on that's probably a bigger driver than the other topics. So the first and second points there. And it's our job to make sure we continue to be competitive or rational in the face of that.

Okay. And then I guess my last one here. You mentioned that if the - obviously, since volumes don't pick up, you bring manufacturing from Rocky Mount. Where are you in that status? And would you be ready to produce products in Rocky Mount in the fourth quarter? Or is that more of a 2020 event?

No. Austin, you mean?

Sorry, yes. Sorry.

So CapEx has been heavy into Austin. We haven't taken our foot off the gas on that. By the time it's validated and up and running, it's going to be into next year. But it's still is - nothing happens quickly here. It's still plenty of runway for us to step down Rocky Mount and move more into Austin if we so desire. So we have the flexibility.

And our last question comes from the line of Matthew Mishan with KeyBanc.

I was going to start off with the IV Solutions and just make sure I understand it a little bit more. Is this now the normalized level of sales for IV Solutions going forward? Or are customers still holding back purchases because inventory is too high?

I'm not sure we have a perfect answer. Our situation is a little different probably. I think the trade is probably a little bit more normalized. We still have a little bit of that trading float business that's out there that's obviously rapidly deteriorated over the back half of last year. There's still a little bit of some of that left, and there's some of the share trading that's going on out there. So I don't know that we can exactly say this is the new normal, and I don't want to make a mistake on that. I feel like that's the one sentence we really got wrong here, where we thought, towards the last year, it'd be somewhere else. So we don't want to declare something where we are right now.

Okay. I think that's fair enough. And can you also give us a sense of the percentage of sales directionally at Austin versus Rocky Mount?

I don't know if we want to give an exact number, but I - it was like - I'm looking at Scott, 3:1 and, plus or minus, 15%, 20% variance on that or something. Most likely 10% variance on that.

I mean - yes, you can - I mean, you can back out the MSA contracts of the Pfizer on your own to kind of get close to that answer.

Okay. And on capital allocation, it's kind of like the bigger piece of the story going forward. But I'm just curious, if M&A activity doesn't necessarily materialize, when do you think about either share buyback or dividend?

Dividend? Haven't heard that word in a long time. I don't know. We don't know. I mean we would say people were very patient, which we appreciated, with us in the 3.5 years that we didn't do anything with the cash we had at a much smaller enterprise value. And the broader world seems like it's a little bit more bumpy right now, so it feels prudent to us to kind of see where things settle out a little bit before we have to decide on that. I don't think we're one of the big guys that has the luxury of saying we can absolutely commit to buy back and still do everything else. We wouldn't have that ability, so - and we believe people would want us to, if logical, deploy it effectively.

And we do have a follow-up question from the line of Larry Solow with CJS Securities.

Quickly, just a follow-up, a housekeeping for Scott. What was the - you mentioned [indiscernible] over the year, unchanged guidance. But for the quarter, what was that rate?

Let's see. On a GAAP basis, it was - I've got that.

Yes, the GAAP basis, I can figure out. It's in the press release, right? But what about on a non-GAAP?

Non-GAAP, I think, was - just a sec.

And that does conclude today's question-and-answer session.

Oh, hang on.

Hang on a second. We're getting....

7%.

My apologies.

Larry, are you there? You got it? We may have lost Larry. Okay. So the answer to that was 7%, Larry. So we benefited, as Scott said, from some of the equity comp stuff in the quarter. Okay. Well, thanks, everybody. We appreciate it. A quicker call today. We'll try to keep it that way. And we look forward to updating everybody as well as on the full year in our Q2 call. Thanks very much for the support of the company. Bye.

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