ICU Medical Inc (ICUI) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ICU Medical, Inc., Q1 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to turn the call over to John Mills with ICR. You may begin.

Good afternoon, everyone. Thank you for joining us today for the ICU Medical financial results for the first quarter ended March 31, 2016.

On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Scott Lamb, Chief Financial Officer. Vivek will start the call with an overview of first-quarter results and operational improvements, and then Scott will discuss first-quarter financial performance in more detail. Finally, the Company will open up the call to take your questions.

Before we start, 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 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 have 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 statements, the reconciliation from GAAP to adjusted EBITDA, and adjusted EPS, are available on the investor portion of the website for your review.

Now with that, I will turn the call over to Vivek. Please go ahead.

Thanks, John. Good afternoon, everybody. Thanks for making the time to get updated on ICU today.

Q1 of 2016 was the most active quarter operationally since I've been here. It was a great test of our much-improved infrastructure and the strengthening of our overall Business.

We had a number of challenges and bumps thrown our way. We got through most of them, emerged stronger, and built on the positive financial and operational trajectory of the last few quarters. Most importantly, we continue to drive performance through revenue growth, gross and EBITDA margin expansion, and, following up on our acquisition of Excelsior in Q4, we continue to cautiously use our balance sheet for the long-term value creation in Q1 in the form of a stock buyback.

On today's call, in addition to the financial results, and the usual direct and OEM performance discussion, I wanted to provide an update on the operational execution going on at ICU, and how our activities, along with fundamentals of the Company, position us well for value creation in the medium and long term. In Q1 of 2016, we generated revenue, adjusted EBITDA and adjusted EPS slightly above our initial expectations. We finished the quarter with approximately $90 million in revenue, resulting in reported revenue growth of just over 10%.

The effect of currency on our revenue has substantially reduced for us, so we will just speak to the actual reported numbers, as constant currency would have improved results less than 100 basis points. Adjusted EBITDA came in at $33 million, which was growth of 26% year over year. And adjusted EPS came in at $1.14, which was growth of 12% over last year. Please remember, in Q1 of 2015, we had an unusually low effective tax rate, and that is why adjusted EBITDA growth is ahead of adjusted EPS growth when comparing rates.

We continued to have solid performance in our direct lines of infusion and oncology, which were slightly offset by critical care. In Q1, our direct operations continued to generate positive momentum, with 12% growth.

Specifically, our direct infusion and oncology segments performed well, with 14% and 40% growth, respectively. And critical care, as expected, offset this slightly by being down 5%.

In our infusion segment, for the moment, we continue to see positive utilization trends in our customer base. Our more focused selling efforts over the last 12 months have shown good results in getting back to the core value drivers of ICU around unique products, competitive value and customer service. SwabCap, the key product from our Excelsior acquisition, has fully met our initial direct sales goals, and we believe is on track to deliver our revenue commitments for the acquisition.

In our oncology business, we had very strong growth. On prior calls, we've stated that we believed we were in the early stages of a long-term opportunity in our oncology business, and have the leading products to enable hospitals to address the increased regulatory guidelines being adopted. This growth is largely driven by our historical product line, as our new ChemoLock product is still in early stages of production, and we don't expect it to be material until the end of this year and into next year.

Turning to our critical care segment, we reported Q1 declines of approximately 5%. The important piece of news here is that, as we had committed, we kept working with the FDA, and recently received 510(k) approval for our new hemodynamic monitoring system, Cogent.

While we do have an approval in hand, we are not 100% satisfied with the current format, so it is going to take some time on more application development and investment to get it in a format that best utilizes its technology for the customer and patient. So we'll keep working on it. We anticipated this process in our revenue guidance for the business, and we've profitized the business to its best level since ICU entered the segment.

Our OEM business grew approximately 8% in Q1. Our principal OEM customer grew 3% in Q1 year over year, and was down sequentially from Q4 of 2015. Obviously, we benefited from new OEM customers coming into the book during the first quarter, as our principal OEM customer continued to decrease as a percent of overall revenue.

On new customers, this was the busiest quarter so far from a regulatory perspective, with our team working to support our new relationship with the Terumo Corporation of Japan. We have been actively pursuing the necessary regulatory approvals in Japan, as well as pushing a number of other projects forward, including a busy period on Cogent, as I just described.

Our new relationship with Medline to supply SwabCap on an OEM basis worked well in the quarter. And lastly, we announced in March an expansion to the SwabCap distribution agreement with a company, B. Braun.

Just like last year, we have started the year out with our principal OEM customer reporting results slightly different than our previous view. I want to be extremely clear that we continue to believe that we will see declines in business from them, as previously guided, over the balance of this year. And just like last year, we will be able to come back in Q2 with a clearer view of what the full year will look like from a guidance perspective.

We believe, at this moment, there's a lot of customer movement amongst the big players. We believe we have good insight into the landscape, and we absolutely believe in being cautious and holding to our previous view. I'll make a few comments shortly about how we think about this in 2017 and beyond.

Now, let's get into more of the operational aspects of our Business and move to gross margins. We continued to make good progress, with gross margins approaching 55% in Q1 versus 52% in Q1 of 2015. We are getting some currency benefits here, but the combination of productivity gains and product mix are of equal impact.

I believe everyone saw the results of the first wave of operational improvements in 2015 that we said were deployed by the end of 2014 and started showing last year. Late in 2015, we mentioned a series of high-hanging fruit for the next wave of improvements, and we have been hard at work on those.

Those initiatives are comprised of: first, the completion of the closing of our Slovakian manufacturing facility, and integration into our Mexican operations. That work continues to be on track.

Second: the integration of our SwabCap production into our Salt Lake City operations. That work is vital because it provides a large chunk of the value of the acquisition, and is the primary reason we don't have a material earnings contribution from the acquisition in 2016.

Lastly, the normal issues on productivity gains and scaling up new products to ensure competitive positioning are always on the agenda of the operations team. These items are extremely important because they offer real value creation in 2017 and beyond, and are primarily linked to our direct operations to keep improving our direct business. And they provide cover as an offset if currency was to go away from us, and the effect of potential volume declines from our principal OEM customer.

The operations teams have been working very hard on these value drivers to ensure their timely completion, while running a business that has had good growth for a number of quarters now. But we did have some challenges in the midst of all this in Q1. We had a few self-inflicted production issues on a limited number of products that caused us to get a bit behind in our service level to customers. The team has been working relentlessly, and we are getting closer to normal levels.

I'm going into this detail because, first, I am very pleased with the way the Company responded, but also bringing it to everyone's attention because it will have some slight impacts on Q2. Gross margins will be a little lower than Q1, as we've been spending on freight, logistics, et cetera, at premium levels to make sure our service levels are as high as possible.

These are the normal bumps that I have always said we will hit one day. But because of solid improvements we've made to our infrastructure, we are performing well through them, and delivering great margins through it as well.

Over 2014 and 2015, you often heard me talk about the investments that needed to be made into quality. And we said on the last call that virtually all those investments are in. Well, in addition to all the regulatory, integration and production work just mentioned that was going on in Q1, we also had two full FDA inspections at both of our manufacturing plants. These were the normal inspections that you get several weeks advance notice for.

I'm very pleased to announce that we passed both inspections, with a number of 483s less than you could count on a single hand. The Salt Lake inspection was officially closed out in March, and all responses have been submitted for Ensenada, and we are awaiting final confirmation.

It is extremely positive for the Company and for the pursuit of new customers to get through these inspections. They are big undertakings for a small Company, and our team performed extremely well.

And just because we wanted to make it extra fun for ourselves, we had a long-standing upgrade to our ERP system scheduled for early February. And I would call this closer to almost a new implementation than an upgrade, as we were several years out of date. We pushed it off a few weeks to allow the inspections to complete, and the operations, IT and finance teams worked hard to complete the upgrade in March with minimal disruption, and it is working smoothly.

This was extremely important because it's part of the core infrastructure that has to be solid if we pursue more capital deployment and acquisitions in the future. We talked about the people that handle capital deployment historically, but it is also mandatory that the infrastructure can handle it.

I wanted to go through all that because I think it's important to consider in the overall context of value creation at ICU Medical. For two years we have been talking about our fundamentals of ICU encompassing, first, the sticky nature of our products; two, our manufacturing processes and significant historical capital expenditures; and three, our cash-generating ability as a small Company. But I think it's equally important to focus on our operational value drivers.

I believe the main two operational value drivers at ICU Medical going forward are: first, the intersection of revenue growth and gross margin; and second, the ability to handle deployment of the balance sheet. The operating expenses of the Company are at a level where any changes will be minor to value creation. These improvements in gross margin, and the potential improvements for next year with even modest revenue growth, are very important for the next wave of earnings growth.

If I was to compare Q1 2016 with Q1 2015, you would see that our principal OEM customer is up $1 million in revenues, but our overall adjusted EBITDA is up $7 million. If you would compare Q1 of this year to Q2 of 2014, you would see our principal OEM customer was up $2 million in revenues in Q1 2016, and our adjusted EBITDA over that same period is up $16 million.

The improvements in gross margin and the expense base have deeply profitized our own Business. And going forward, we expect gross margins and revenue growth to be more powerful drivers than expense reduction. On the balance sheet, it's why getting through our FDA audit, improving our IT systems and infrastructure, getting experience with the SwabCap integration, are the foundational items to show we can handle deployment of the balance sheet over time.

As it relates to our primary OEM customer, there's not much new information. We believe it is their intent to fully honor the almost three years remaining on the contract, and that certainly is our intent as well. As we've previously described, the contract survives any change of control, as it did in 2015.

We continue to be optimists, and believe that logic will prevail and that the customers' interests will drive decisions. Most importantly, we believe customers are being well served with excellent products and unique value propositions that we both offer to different customer segments. The only party that really wins in any sort of customer disruption is competitors.

I think it's important to understand all these variables to make the case for long-term value creation at ICU Medical. Our enhanced profitability, leading to significant cash generation over the next few years, combined with new products coming into the mix, improved infrastructure, and a diversity of customers creates many shots on goal for us.

Very practically, we expect declines with our primary OEM customer coming later this year, and our early view is a higher chance of stabilization at a lower plateau when comparing 2017 to 2016. And if that turns out to be the case, if we continue to drive good direct revenue growth with improved margins, we will be operationally very well positioned. And we have protected ourselves the best we can by driving returns on our own Business, controlling what we can control on our own direct business, getting our foundation right, and improving the team to create optionality for capital deployment in the future.

Okay, that brings me to our balance sheet. Q1 is the quarter we usually make meaningful payments against some of our accruals. However, we still had a very strong cash-generation quarter. We finished the quarter with approximately $383 million in cash on the balance sheet, after we bought back approximately 1% of the Company at an average price of $88.

We had an open authorization, and while we've been waiting to deploy the capital, we felt the market volatility earlier this year pushed the logic of absolute valuation for any range of expected outcomes in ICU, so we took advantage of it. If we added the cash deployed in the Excelsior acquisition and this recent buyback, it's close to deployment of all of 2015's free cash generation. We continue to see very strong cash generation in the balance of 2016, expect the cash position at the end of Q2 to be over $400 million, and approaching $450 million towards year end.

After the last call, we did have some questions on our balance sheet regarding inventory levels and AR, et cetera. To be very clear, at the moment, we have a series of different things going on, including the closing and moving of two factories -- Slovakia and SwabCap from New Jersey -- new global customers being onboarded, a volatile US market where we need to be able to serve as opportunities present, and for our OEM partners to be ready to enter markets. And as a result of all of this, it makes sense to carry a little more inventory to ensure smooth transitions.

We're very focused on revenue growth, gross margins and customer satisfaction, so it's a prudent decision to increase our inventory levels to ensure all of these areas. That said, our AR did improve, and Scott will go through it a bit more. And the improvements will happen over the balance of the year. That will help us approach the $450 million in cash, assuming no additional capital deployment.

On our view for the year, we want to basically follow the same road map as last year, and we'll update our guidance on our Q2 call. It is too early, and please recognize there is volatility out there with our OEM business. We continue to believe a goal of $125 million of adjusted EBITDA, and free cash flow of $70 million, delivers solid adjusted EBITDA and cash growth, while allowing the necessary investments to continue to perform in our direct business over the medium term.

There are some investments we want to make in commercial infrastructure, and new and continued areas of R&D investment. And if we have the ability to deliver our commitments for 2016 and additionally invest for future growth, we will do that.

As we have said before, we're not chasing any given margin level. Our margin improvements, operational execution, increase in OEM partners, and increasing cash balance illustrates how we can grow off this base into 2017. And if our principal OEM customer does, in fact, find a plateau in 2017, the results could be even better.

We will absolutely provide clarity on our Q2 call on what the year will look like, and there's no reason to get ahead of that, given the current market uncertainties. And we are comfortable with our previous stated guidance.

We have real value-creating scenarios with improvements across the Company for 2016 and beyond. I do think we are an interesting sized Company that can strategically move in a number of directions, and one of an increasingly limited number of smaller medtech companies that can compete globally.

Things are moving fast. We're trying to improve the Company with urgency. But I wanted to remind everyone, as I've said on previous calls, there will be normal bumps in the road, as we are still a small Company. But we will overcome them and emerge stronger.

We have solidified the Company in certain technical competencies, as evidenced by our recent execution. I really appreciate the efforts of all ICU employees to adapt, move forward, and focus on improving our results. And our Company appreciates the support we receive both from our customers and our shareholders.

With that, I'll turn it over to Scott.

Thanks, Vivek.

As Vivek mentioned, we are pleased with our revenue, gross margin, adjusted EBITDA and net income results in the first quarter, as we achieved growth in both our direct and OEM channels. Our first-quarter 2016 revenue increased 10% to $90 million, compared to $82 million in the same period last year.

GAAP net income for the first quarter of 2016 was $15.9 million or $0.96 per diluted share, compared to GAAP net income of $9.7 million or $0.60 per diluted share for the first quarter of 2015. As a reminder, Q1 2015 results included both a one-time $7.1 million charge related to a legal settlement, and an unusually low 16% tax rate that included discrete tax items.

Adjusted diluted earnings per share for the first quarter of 2016 were $1.14, as compared to $1.02 for the first quarter of 2015. Adjusted EBITDA was $32.7 million for the first quarter of 2016, compared to $26 million for the first quarter of 2015. The increase in adjusted EPS and adjusted EBITDA was primarily attributable to continued top-line growth, improved gross margins, and improved leverage in our operating expenses.

Now, let me discuss our first-quarter revenue by market segment, and then more specifically by direct and OEM. We provided full-year guidance on our direct business by specific market segment, as that is what we control the most, and guidance for our OEM business on an aggregate basis. And as always, we also have these results posted on our website.

As we mentioned on our fourth-quarter conference call, for these comparisons, beginning in 2016, we will report our revenue for the Terumo-related geographies in Asia, and SwabCap sales to Medline in our OEM business, and no longer in direct, as it is an apples-for-apples comparison to 2015. This is a relatively minor adjustment, but for modeling purposes we will be posting a revenue table on our website under Investor Relations that includes the past three years of revenue, recast in this new format.

Direct sales totaled $57 million or 64% of total revenue, while OEM totaled $33 million. Our principal OEM partner's share of overall revenue decreased to 34%, compared to 36% for the same period last year. And we continue to expect them to be in a 30% range for the full year.

For the first quarter, sales in infusion therapy were $65 million, an increase of 11% from the same period last year, and represented 72% of our total sales. Direct infusion therapy sales were $36 million, an increase of 14% from the same period last year, and were primarily due to strong international sales, increased same-customer sales, and through the addition of our SwabCap product line, which was acquired through acquisition in October 2015.

Sales in oncology were $12 million, an increase of 34% from the same period last year, and represented 13% of revenue. Direct oncology sales were $8.4 million, an increase of 40%, and were due to increases in both existing and new-customer sales. Sales in critical care, which are essentially all direct, were $13 million, which is a decrease of 5% for the same period last year, and represented 15% of our sales.

Our first-quarter sales for domestic and international were as follows: domestic sales were $62 million, an increase of 7% from the same period last year. International sales were $28 million, an increase of 18% from the same period last year, and were driven by sales in infusion therapy.

Gross margin increased to 54.8%, as compared to 52.2% for the same period last year. This increase continues to be driven by improvements in mix and the good currency tailwinds we have right now due to a stronger dollar and weak peso. Vivek referenced a number of good operational initiatives that are improving our gross margin line, but we do want to be clear that some of this effect is currency.

SG&A expenses increased $1.8 million in absolute terms, but decreased 30 basis points to 24.5% of revenue, as compared to 24.8% the prior year. The $1.8 million increase was in part due to filling positions that were open during 2015, additional employees retained as part of the acquired SwabCap product line, the general hiring and recruitment of new employees, and costs incurred in the first quarter of 2016 related to a transitional services agreement associated with the October 2015 acquisition of Excelsior Holding Corp. As we mentioned on our last call, these fees will begin to taper off in the second quarter.

R&D expenses decreased 23% to $3.3 million. This decrease was primarily due to lower R&D project expenses related to our Cogent hemodynamic monitoring system, which now received US FDA 510(k) clearance. We continue to be cautious on spending on these programs, as we still need to do more work to get the final product right.

Our tax rate was approximately 34% in the first quarter of 2016, and 16% in the first quarter of 2015. Our 2015 Q1 tax rate benefited from discrete tax items related to the conclusion of federal tax examinations, and changes in estimates of tax reserves. We continue to expect our tax rate to be between 32% and 33% for the full year of 2016, with the first half of the year at a higher tax rate than the back half of the year.

Now, moving on to our balance sheet and cash flow, as of the end of March, our balance sheet remained very strong, and with no debt. We generated $14.8 million of operating and $10.8 million of free cash flow during the quarter, and ended the quarter with cash, cash equivalents and investment securities of $383.7 million. This equates to approximately $24 per outstanding common share.

And as Vivek already mentioned, during the first quarter we purchased 174,885 shares of our common stock for $15.4 million, at an average price of $87.76. As of March 31, 2016, we had $7.2 million remaining under our current authorization.

Accounts receivable decreased $2.2 million from the end of the year, and DSO decreased to 56.5 as of March 31, 2016, compared to 59.2 as of December 31, 2015. As of March 31, 2016, accounts receivable from Pfizer decreased as a percent of consolidated accounts receivable to 34% from 40% as of December 31, 2015. And as expected, inventories as of March 31, 2016, increased, primarily due to building finished goods safety stock to support better customer-service levels, raw materials related to our Slovakia plant closure, and the related transfer to our Mexico plant, as well as the inventory associated with the acquired SwabCap product line.

Now, turning to the remainder of 2016, we obviously had a solid first quarter, but we continue to be cautious, and believe we will have declines with our primary OEM customer over the balance of the year. We still believe OEM will be flat for the full fiscal year, and we will have greater clarity on the Q2 call around our OEM business. So currently, we see no changes to our overall expectations for 2016.

Additionally, as Vivek said, there are some minor additional investments we may want to make for future growth, if we have the flexibility this year. But it's difficult to predict exactly when the right people become available, or how fast we can increase R&D investment. We continue to expect our direct revenue to increase 6% to 11%, and total revenue to be in the range of $355 million to $365 million. We expect adjusted diluted earnings per share to be in the range of $4.34 to $4.46, and adjusted EBITDA to be in the range of $123 million to $127 million.

Please allow us the time to get a full handle on the OEM business for the year, get completely caught up on some of our production and investments, and, just like last year, we will provide the most accurate picture on our Q2 call. We continue to expect to spend approximately $20 million on CapEx, which includes expansion of our manufacturing facility in Mexico. We expect to generate $70 million of free cash flow, which includes a portion of the tax benefit from the purchase of Excelsior last year.

We hope everyone sees our commitment to improving operations, and the responsible way we are trying to diversify and manage the Company. So thanks for listening in today, and we look forward to updating everyone on our next call.

And with that, I would like to open the call to take your questions. Operator?

(Operator Instructions)

Our first question comes from Chris Lewis of Roth Capital Partners. Your line is open.

Hey, guys, thanks for taking the questions.

Hi, Chris.

First, Vivek, on the production issues you mentioned, maybe you can just elaborate what those were, what type of impact it had on the first quarter? It sounds like it's going to have a little carry-over effect perhaps on margins in 2Q. So maybe just talk about where that is today, if those have been resolved, and expectations going forward? Thanks.

Yes, sure. I would say those are just the normal bumps that happen in running a manufacturing Company. We had some tools sort of not running enough capacity, or had a tool go down for a couple of weeks early in the quarter. We caught up largely on all these issues towards the end of the quarter. We were just spending a little bit of money to make sure our products got where they needed to be, and it happens.

You don't feel that pain in the same quarter necessarily, right? So our catch-up will effect us this quarter. We're largely through it. It went on, I would say, maybe into two weeks into April or so, and we've been pretty healthy since then.

And Vivek, in the direct, you continue to show strong growth there. I guess, specifically, infusion, growth of 14%, oncology growth of 40% year over year. Can you just elaborate on what you are seeing in the direct infusion segment? And what continues to drive that sustained momentum in that business?

Sure. On direct infusion, we did get the benefit of SwabCap, which is not a huge number, but some of that is SwabCap in there. So we want to be transparent about that; that wasn't pure 14% organic. We are seeing good organic growth, and I think that's by focusing on the customers we have, how deep we can go with them.

And getting back to the roots of what makes the ICU product offering unique, right? Where can we play different than some of the bigger people? And we've been spending a lot of energy on that for the last five or six quarters. And what types of customers, and what classes of [trading] centers? I think we've just tried to revamp what we're doing on the direct side for a year and a half now.

Great. And just one more for me, and then I will hop back in queue. The B. Braun distribution agreement -- maybe give us an overview of what we should expect for this year and perhaps medium to longer term with that? And are there other products that you think could be potential candidates for similar types of distribution agreements in international territories going forward? Thanks.

Sure. The expansion around SwabCap with B. Braun, it was a legacy agreement we picked up from Excelsior. And we certainly assumed that they may not want to continue with us. It, frankly, turned out to be the opposite, and they did want to continue with that product. And we're very happy to serve them, and we're actually going to get to access more markets with them with that product, which is great. I don't think it changes our SwabCap forecast that we put out for the deal for this year. But as we get closer to the end of the year, we will see if there is any impact in the future with them.

And as it relates to international, we're always searching for the right partners, geography by geography, whether that's a local distributor or a multinational like Terumo. And I've said before, our international growth has been very strong, and continued to be this quarter. But it's where we lack scale in a lot of places. So we need to keep figuring out how to maximize the value of our products. So we're always looking for new partners in different geographies.

Thank you. Our next question comes from Mitra Ramgopal of Sidoti. Your line is open.

Hi, good afternoon. First, Vivek, on the critical care side, I know you're going to hold off in terms of the launch of the hemodynamic system. I was wondering, what's your sense as to when you think you will have that segment growing again?

I don't think it's an easy situation there, as we have said for a long time. It is a Herculean effort for a small Company to get a new piece of capital hardware approved. We had double-digit millions into that program over the last number of years, and it's a big victory to get it through the FDA. I think there's a difference between launch, in the sense of limited market release and talking to customers about it, letting the world know that there is innovation coming, versus having it absolutely ready from a software [broad] stand-up service perspective. That's going to take a little bit longer.

I'm not comfortable saying there is going to be growth in that business. Certainly not for this year, right? Our guidance didn't reflect that. And again, that's one of those we would come back later in the year, when we see where we are with getting the product ready in it's a final version, to make a comment about the future. But I don't want to give a specific date for a return to growth in critical care.

No, that's fair. And I know there is only so much you can say about your OEM relationship. But have you noticed any change in the tone, now that, for example, Pfizer has to focus more on Hospira again?

No, I think that things for us are pretty much status quo. I don't think there's anything very different.

Okay, that's it for me. Thanks again.

Our next question comes from Brooks West of Piper Jaffray. Your line is open.

Hi, can you were me?

Yes, perfect. Hey, Brooks, how are you?

Doing well. Thanks for taking the questions. Vivek, I wanted to start higher-level. We're coming into the tail-end of earnings here, and we've seen maybe some of the best Q1 growth out of med tech, at least that I can remember, and particular strength in the hospital supply segment. And I wonder if I could just get you to speculate on what do you think is going on? And do you feel like we're actually seeing true volume growth return? And does this feel sustainable, just at a macro level?

We study a lot of different things. We study -- like many businesses, it's sometimes easier to go deeper with the customers you have sometimes, than get new ones. Certainly as our product offering broadens, we're able to go deeper with our existing customers across different categories. So it's not all the necessarily volume increases. You have categories like oncology are being created. Categories like SwabCap are being created. So we get to participate in the creation of certain new markets.

On the regular day-to-day infusion therapy products, we see differences regionally. We see differences with states that took funding, that didn't take funding, from the government. And it's difficult to pinpoint that there is a very black and white national answer. We do see the bigger systems winning, and we are growing faster with those customers that are growing. But I'm not sure we would have a smarter point of view than one of the big multi-line suppliers.

Okay, thanks for that. And then maybe just a follow-up question on infusion again, kind of a market question. Are you seeing actual share shifts within the big pump players? And I'm just coming off the Baxter Investor Day; they're launching a new line of pumps. I'm just wondering what you are seeing in terms of share shifts within the hospital, and how that might be impacting your business both near term and longer term? Thanks.

We have a -- there is a direct -- I mean, it kind of goes back to the first comments certainly when I got here two years ago. We feel direct pain if an OEM customer of ours is unable to gain infusion pump market share, right? And if they have less pumps, they have less sets that our parts are on. And we've felt that pain. As you look at our OEM infusion therapy results over the last couple of years, that's exactly what we've experienced. There was a lot of shift in our minds.

We are being cautious and are kind of saying, both through what we feel in the market and know about the market, and what we saw last year in orders to us, versus what we believe underlying demand is, that, that doesn't match up. And either share is going to continue to shift, or there's just a mismatch between products that's been ordered and how long it's going to take to make its way out into the system. But I think there's a number of globally focused competitors in this space now, and the market dynamics have changed.

That's very helpful. Thanks, Vivek.

(Operator Instructions)

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

Hi, good afternoon. This is actually Lee Jagoda for Larry.

Hey, Lee.

Just one quick one for me. Now that you've done a smaller-size acquisition and bought some stock back opportunistically, how should we think about your desire to deploy more meaningful capital ahead of any decisions by your key customer?

It's a great question, Lee, it's one we wrestle with every day. And it's not just a key customer, it's where are we in the grand scheme of valuations and available assets and other things we deal with every day? I think, to start with the first one, on buyback versus M&A, I think it's the intent of small companies to grow. And our needs are a little bit even more acute than that.

Because we've had historical customer concentration now, we think we will get down to 30% here or in the high-20%s when this contract ends, as we talked about it before, right? And our profits have changed so much from what we make on our own. But the money still, in our minds, is still better spent in the name of growth and add-on acquisitions and diversification, right? And our needs are different than others in that. Buyback to us was -- you said the right word -- it was much more opportunistic. And it looked like there was a lot of fear out there in February, and we should take advantage of that. We'd do the same thing again.

And then in terms of anything with our customer, I think we have to be optimists and plan for the best with them. So we don't necessarily believe what we read in the newspaper. We have to spend our capital wisely, and we are accumulating it at a very nice rate right now. And we know that's not going to be able to be held onto forever, right? But we think we've got enough growth certainly for the balance of this year, and what we're saying with margins, et cetera, for next year, that we have some time to do the right thing.

Okay. And I just want to make sure I heard it right earlier. In terms of Hospira, you were saying this year you would expect them to stabilize, and next year we should expect some growth, but then stabilize at a higher level? Is that how to think about that?

No, I am sorry if I wasn't clear. We are confirming what we said in our previous two calls, which is, we expect them to be down roughly 10% or $10 million, 2016 over 2015. What we believe, to the previous question, on what's going on in the broader market, we do see a lot of share and customer activity happening. But we see kind of a bolus of that going on right now, and we think that will settle down heading into next year. And we believe there will be more of a plateau next year.

Look, we may be wrong on that. We've been -- for two years, we've been fairly reticent to have a long-term view on that. But I think we've just seen enough share shift, and we think we're going to bounce off the bottom here somewhere. And we kind of feel like that could be next year.

Okay, very helpful. Thank you.

Thank you. We have one more question from Jayson Bedford of Raymond James. Your line is open.

Good afternoon. Thanks for squeezing me in here. I guess, I just wanted to revisit the production issue you mentioned in the first quarter. I was a little unclear. Was there an impact on first-quarter sales or gross margin in the quarter?

No, there wasn't really an impact in sales in the quarter, Jayson. But the remediation of that, which was playing catch-up a little bit in March and into early April, will affect Q2.

On the sales or gross margin line, Vivek?

On the gross margin line in Q2.

Okay. And I also wanted to ask you about the strength in gross margin. You mentioned a few factors, I think -- the shutdown of Slovakia, the integration of SwabCap in Salt Lake City. I always thought they were more back-half 2016, kind of 2017 drivers. But your gross margin clearly in the first quarter was probably the highlight of the quarter. So I'm just wondering outside of, I'm guessing, some contribution from FX, what were the other sources of the gross margin strength in the first quarter?

Well, I was hoping the $7 million of EBITDA growth. (laughter) I will let Scott pile on. I would think about it as, gross margin was half currency, half production gain on the floor. I think we will have a little bit -- the number were talking about, the numbers are small movements here -- but downward pressure in Q2 as a catch-up. And then get back to these kind of levels later in the year.

And at the point I was trying to make around Slovakia and SwabCap, the high-hanging fruit, was, those are tough choices, and we should be getting the benefit of that next year. That could be taken from us if currency went away from us or we have volume declines that are different from our current OEM expectations. But we're trying to see if there has been a multi-year journey here on gross margins. So Scott, I don't know if --?

No, I wouldn't add anything to that. I think that is spot-on.

Okay. And I realize you don't want to get into much detail on 2017 here. But as I look to the level here in the first quarter and we look at 2017, you are adding on benefits from the SwabCap integration, as well as the full Slovakia shutdown. There's no reason to believe that it's going to claw back from these levels outside of the blip next quarter?

Correct. But if currency changed on us, it would have clawed back from that, right? Or production volumes changed drastically, that would cause it.

Right.

Right, okay. And then just curious as to the impact of SwabCap? Is it having any effect either re-invigorating your sales force or helping pull through additional connector revenue somewhere?

I think its two things on that. It's actually work for the sales force, and it's -- the Company is very lean, as we have said, in a good way. And that's why margins have gone up. But it's a lot of work to manage the conversion to -- remember, Covidien was a legacy distribution partner there; we're doing that all ourselves. Getting that cut over, and then some of the new implementation, it's asking a lot of our folks. And obviously, they are rewarded for that, and excited about that. But it's making us reflect a little bit on the overall resourcing level.

And that's why I made some comments that should we be making other investments. That's a good problem; that means there's revenue out there to get. And on the pull-through, I think there is a series of customers we never got access to, and it's a new product that gives us a right to be -- accounts that we did not have a relationship with historically, because they weren't interested in Clave or whatever it may be. And I think that's a good thing.

Okay. If I (multiple speakers). Lastly, and I apologize if I missed this, but Cogent -- when will you actually launch the device?

I think right now, Jayson, we will be out there talking to customers about it in a limited market release, in a soft launch. But in terms of booking a dollar revenue, which I consider the real launch, that's not going to happen until some point later this year, until we get this [some of our pictures out]. And that could even drift into late this year.

Don't get me wrong. We are super-happy we got the 510(k) in hand. But it takes time to go from a 510(k) to commercialization. But I view it as another operational commitment we made, and we got it done.

All right, thank you.

Thanks, Jayson.

Thank you. At this time, I am showing no further questions. I would like to turn the call back to Vivek Jain for closing remarks.

Thanks, everybody, we appreciate it. We feel great about Q1. We think, just like last year, Q2 is going to be a really informative call. And we appreciate everybody's support and interest in ICU. Feel free to contact us afterwards if you have any other questions. Thanks very much.

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