ICU Medical Inc (ICUI) 2017 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Q4 2017 ICU Medical, Inc.'s Earnings Conference. (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.

Great, thank you. Good afternoon, everyone. Thank you for joining us today to discuss the ICU Medical financial results for the fourth quarter and year-end December 31, 2017. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Scott Lamb, Chief Financial Officer.

We want to let everyone know that we will have a presentation accompanying today's prepared remarks, and to view that presentation, please go to our investor page and then click on Events Calendar, and it will be under the Fourth Quarter 2017 Events.

Before we start our prepared remarks, I want to touch upon any forward-looking statements made during the call, including beliefs and expectations about the company's future results. Please be aware, they are based on the best available information to management and assumptions that are reasonable. Such statements are not intended to be a representation of future results and are subject to 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. 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.

And with that, it's my pleasure to turn the call over to Vivek.

Thanks, John. Good afternoon, everybody. The fourth quarter of 2017 was our third full quarter of owning Hospira Infusion Systems, and we are balancing our time between active customer dialogues to improve our commercial execution and being deeply in the midst of an integration to create a single unified company. We continue to execute well through a large volume of activity, and operationally, we make progress every day on integrating Hospira Infusion Systems.

In addition to the financial summary on today's call, we wanted to provide a brief recap of 2017; comment on the sequential changes from Q3 to Q4 of 2017 and the most recent business segment performance trends; update everyone on the current status of integration and the progress and challenges since the last call; reiterate and explain our expectations for the medium term of 2018, with our best point of view as of today on the build for the year; and lastly, provide some thoughts on the longer-term value creation opportunity at a high level, from both an income statement and balance sheet perspective as the drivers become more evident.

2017 was a very unique year for ICU Medical. We completed an acquisition of a company 4x larger than us with closing the Hospira Infusion Systems deal. Over the course of the year, we, one, melded 2 commercial organizations that dramatically upsized our customer dialogue; two, converted substantial accounts receivable of inventory into cash; three, recruited hundreds of new employees and are building the infrastructure to integrate; four, adjusted both up and down our manufacturing capacity to adapt to dramatic shifts in the market environment; five, handled the FDA inspections at our newly-acquired facilities; and lastly, we are undertaking the most complex financial close on audit this company has ever had, and as Scott will describe, it's still going a bit.

And through all of that, I have seen our people work as hard as any public company I've ever been a part of. The benefits of these efforts for our customers and shareholders, again, showed itself more at the end of last year as we began to operate stronger, and it showed in our shipments and our profitability.

To start with financial performance, revenues and adjusted EBITDA in Q4 2017 were slightly better than our expectations. Adjusted EPS was dramatically impacted by tax-related positive adjustments from the transaction and other items, and we don't think it's a particularly relevant metric this quarter. Unlike Q1 and Q2, we had less transactional accounting impacts to revenues and operating earnings as we have closed all geography, and the reported results are starting to much closer resemble the actual manager reporting we run the business with.

We finished the quarter with approximately $353 million in revenue, adjusted EBITDA came in at approximately $70 million and adjusted EPS came in at $2.98, and we finished the quarter with net cash of $315 million on our balance sheet.

Sequentially, Q3 versus Q4, revenue was up $13 million and EBITDA was up $15 million.

The short story on the change is as follows. First, there was increased consumable sales, which has always had a good drop-through for ICU Medical. Second, some of the operational synergies expected in 2018 were realized a bit sooner. And third, the unique temporary market dislocation in IV solutions increased sales more than we expected, and we hung on longer to some business we expected to go away, all of which combined to improve our Q4 EBITDA and cash generation.

Turning to the individual segments, and please use Slide 3 in the posted deck for the base comparison because this is the highest level of manager reporting slides that we actually start our business reviews with.

So starting with what we expect to be our largest business over time, Infusion Consumables. This is essentially the legacy ICU business, plus Hospira Consumables business, which is predominantly the distribution of ICU manufacturing products and a smaller amount of unique Hospira products. Our internal estimate, which now almost tracks exactly with the reported numbers, is that the segment had revenues of approximately $121 million in Q4. That would imply the segment being slightly up quarter-over-quarter. Legacy ICU was strong, with growth over 20% in oncology. Both legacy ICU and legacy Hospira businesses were strong internationally, and the legacy Hospira U.S. business flattened out as we expected. This is a segment where we are the most advantaged now as a joint entity, and we're hard at work on rationalizing the product portfolio and bringing together the operational efficiencies of the combination. 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 previous calls, we stated that we expected Hospira losses to bottom out sequentially towards the end of 2017 and believe the total segment will be close to flat on an annual quarter-over-quarter basis towards the end of the year. And we believe that this segment should be positioned for some growth in 2018. Today, with another quarter under our belt, we think this segment can grow mid-single digits in 2018, which we sanity check by annualizing our Q4 exit run rate. As a note, this is the last quarter where we're going to talk about legacy Hospira sales separate from legacy ICU.

Also, it's important to spend a moment on the effects of the transaction on our results in the segment for 2017 as we did not capture the full margin in the segment due to the combination until we sold all of the pre-deal inventory Hospira purchased from ICU. The transactional effects of this segment are now behind us, and we should also capture the full margin in 2018.

The second segment to discuss was our largest segment in Q4, Infusion Solutions. This segment reported approximately $130 million in revenues and did have some unexpected growth, both sequential and year-over-year, due to the unique temporary industry issues that have been widely reported in the press and, therefore, I don't need to detail it on this call. We have 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 price anomaly.

From a value perspective, we have sacrificed short-term profits for longer-term supply contracts, which we believe offers us more NPV as it makes us a more competitive supplier, over time. Practically speaking, this means you should not assume that 2018 just annualizes at the Q4 run rate. We've been very focused on the longer term, but we want to be clear, verbatim from the first presentation of the transaction that was 18 months ago, we are going to make economically rational decisions to not sell products at a loss. We continue to hold some excess capacity, but it's kind of like a utility company. You cannot just turn it on or off as it requires heavy labor and quality investments as well as long-term partnerships to make it work.

In the medium term of 2018, we see the run rate of this business more in line somewhere between the Q2 and Q3 2017 levels, i.e. before the market shortage occurred and appropriately corrected for us getting more contracted volume at a less trading oriented price.

If we pick the midpoint of the range of Q2 and Q3 of 2017 and annualize that, it would imply a flattish business in 2018, but with more business under long-term contract.

There are 2 important value drivers in this segment to note. The first, we just talked about, more predictable revenue with better certainty and the ability to participate in markets and contractual growth. But the second, which is equally important, is to optimize our production assets. At the outset of the acquisition of Hospira, we believe that we have lost a substantial amount of contracted business and significant production volume in a fixed cost manufacturing environment.

The recent events, combined with the logical integrated value proposition, have enabled us to improve the amount of business we have under long-term contract and will allow us to fill up the factory we acquired in Austin with more volume.

This continues into 2019 and 2020 as, we heavily invest to increase our own capacity, which can give us the option to move away from Pfizer Rocky Mount if market conditions change or add more capacity if the need arises. We believe that was one of the attractive aspects of the structure we laid out originally with Pfizer.

Lastly, we continue to be vigilant here on quality even as Hospira and Pfizer invested significant resources, as it's mandatory to be in this business.

To finish the Big 3, let's talk about Infusion Systems, which is the business of selling pumps, dedicated sets and software, which is important because it's a business that brings a lot of recurring revenues and it was the largest customer of the legacy ICU OEM business.

Our internal estimate is this segment delivered $89 million in revenue, which would imply being down near 10% again as the losses we outlined previously are happening. The international business is holding together reasonably well, and we continue to expect this segment to bottom out the U.S. sometime in 2018 with the lowest level installed base in the last 10 years.

Relative to where we are starting as the new owner, this segment is much smaller than historical levels and just improving ourselves a little can make a huge difference across the P&L. We've been focused on our core group of loyalists here from a customer perspective, as well as the situations where we have market share risks and are beginning the process of focusing on how to offset those risks. We think Hospira forgot a lot of the reasons customers like the products, and we're going back to work on the basic marketing and to finding our value to the market.

This segment has a high amount of resources and structural cost to support it, much more so than other businesses in ICU given its capital equipment. We have been aggressive in rightsizing structural costs to align with current business reality.

For IV System, our view is unchanged from previous views, with the segment continuing to have declines through the middle of 2018.

To finish the discussion on this segment, since we acquired Hospira, we've been actively calling our customers and trying to illustrate the value we can add to the system and the value to the system in having us as a healthy participant. While it's a long journey, we do believe that this message is resonating. Feedback on the products continues to be solid, the products are necessary for the system and had been reliable for many years. When we started the transaction with our defensive mindset for doing it, we looked at the business and we saw roughly 50% of the total business, Infusion Consumables and the international portion of Infusion Systems where we had a good offering and a right to win.

Today, heading into 2018, we see a somewhat better picture where we believe we have a right to win in most of the portfolio, with really the domestic portion of our Infusion Systems segment as a key challenge area and we're working hard to address that business.

Okay. Onto integration and related activities. There's really nothing new on cost savings, just about everything we wanted to do has been done. We closed our small acquisition in Australia in December and have begun our three-way commercial integration there. All of our country commercial leaderships have been secured. With these teams, we've been focused on, first, upping our commercial intensity, changing the execution and improving the customer intimacy that has deteriorated over the last few years of Hospira in these business lines. We've had a great number of new experienced teammates joined.

I don't really have anything new to add to the last couple of quarters' commentary on quality other than we continue to dive deeply into all quality-related activity and we are at the outset of our notified body inspection season.

On the integration activities of IT cutovers and the TSA separation from Pfizer, we are now in all-out execution mode. Philosophically, as the founder of ICU used to say, we're trying to measure twice and cut once. These IT systems migrations are complex, filled with legacy issues and require a great caution. I've personally been burned in prior experiences, when these projects become more transformational than migrational. Even in this month's medical device reporting cycle, we've seen companies have challenges in these cutovers. So we are being very deliberate. We have started the execution phase in what we call the outer perimeter, countries and regions where we have less profits at stake, but we have to implement many of the same processes that we do here in the U.S. market. We have cut over the majority of the European countries to our instance of Oracle, which is working reasonably smoothly. We have cut over Canada 3 weeks ago or so, which is our second largest country and it's still challenging and a work-in-process. And literally, this week, we're cutting over France, Taiwan, Peru and Colombia. We still need a number of weeks to stabilize Canada, and we have learned a lot. All of this leads up to the largest cutover, which is the main event, the cutover of our U.S. operations sometime in Q3.

We know a lot of companies that have more M&A experience than us don't get into this much detail on integration and systems conversions because it spoofs everyone. It's not as exciting as revenue growth or synergies, but it is important that we explain what we are literally doing. This transaction was so unusual in that it was not like buying a business that came with IT systems or even people providing what we would call support functions. It literally was the acquisition of manufacturing plants, product lines and local commercial organizations that were run by disparate legacy systems. We're actually uniting all of this onto a single integrated system.

And let's be clear, our customers don't care about any of this unless it affects them negatively. But we care about it because it first offers deep value in the form of operational improvements realized over time; and two, it sort of super-sizes us for the ability to handle more on these platforms when we are through this integration. But the consequence from doing this, and practically we have choice because that was the deal, is that it could be bumpy during these cutovers.

We think, right now, it's best to be cautious and plan that we will not be of these systems until the fourth quarter of 2018. The current count is that we are off about half the TSAs in absolute number, but the big dollar higher complexity ones related mostly to IT will continue into Q4.

Okay. To bring this back to the topic of short-term results, how we're thinking about the medium term with 2018 and longer-term value creation. We believe our actual 2017 performance, if we adjusted the unique market dislocation of IV Solutions out, was in the $195 million to $205 million EBITDA range. On the last call, we stated we expected a range of $240 million to $260 million of EBITDA for 2018. We continue to believe that is the right range handicapping for all the integration, system cutovers and other challenges this deal has thrown at us. But of course, it's already March, and we do have some views on the Q1 revenues and performance. We don't expect Q1 2018 to look that different from Q4 2017 from a profitability perspective, maybe just a little lighter as the NPV choices we made start to be implemented. And we expect those TSA exits to drive some savings in Q4 of 2018 as we previously described.

So that would imply lower earnings in Q2 and Q3 versus Q1. For what we know right now, with the duplicate expenses we have to add and the rapidly changing marketplace, that is the right assumption for us, and we are very serious about that.

We also want to make sure we do not skimp on infrastructure investments that allow us to handle more, and we're playing the long game. We know the transaction was valuable for us. Those investors have been with us a long time. We'll see the exact same annual behavior from us when we address the back half on our Q2 call. This year, it is extremely important to be cautious as we work through the U.S. integration in the summer right around the time of our Q2 call.

Now with all that said, into the longer term of 2019, we continue to have a view that we can improve our profitability regardless of the revenue environment. We believe that Q4 of 2017 gave a look as to what the opportunity can be.

Longer term, if we've made the assumption that the combined effect of the operational synergies and GSA savings previously discussed, plus future margin improvements based on the integration, the so-called high-hanging fruit, if those items can collectively offset the NPV choices we've made and the temporary revenue benefits we received in 2017, then what we saw in Q4 of 2017 is not an unrealistic profit mark after we're done with integration.

We don't have it all penciled out, but we believe directionally that is the case, and we know what the EBITDA margin was in Q4 and what the opportunity is here. And that does not make any revenue growth assumptions. We have to execute well in 2018 to allow for these to be available and likely, it will not be all a straight line in getting there.

As always, what really matters to us for value creation in the longer-term outside of servicing our customers is real free cash generation. While adjusted EBITDA is a useful metric, given all the noise of the transaction, it's important to get these real cash expenses of integration behind us and focus on the real free cash generation for the longer-term value creation.

In Q4, we added $64 million of cash when EBITDA was $70 million due to certain working capital improvements, tax benefits, et cetera. We finished the year with net cash of $315 million and no debt. In 2017, we added about $200 million in cash from our opening balance sheet during the year, while absorbing nearly $80 million in restructuring and integration cost, which is real cash cost, and it's added to our model on the transaction line.

Scott will talk about both the tax impact that stemmed from the transaction and the implication of tax reform in ICU Medical. My brief comment on this is that it's good, and we will receive benefits from items such as accelerated depreciation, while we are in investment and integration mode.

If we can have the strongest balance sheet possible at the end of 2018 with over $500 million of liquidity, which is our cash on hand plus our revolver, have an infrastructure as a company that can handle more and have continued margin improvement opportunities, our base business, with minimal revenue growth assumptions, we think we have a case for continued value creation. We believe we have created a more valuable asset, and when we prove we can integrate, we will earn the right to think broader. But for today, we are solely focused on the task at hand.

Our goals are just like our previous experiences, to first enhance margins and then improve overall growth. In the best case, we'll have better execution to improve our top line performance over time, drive operational improvements and improve cash conversion and returns.

In the worst case, we continue to fight headwinds in the top line, but we could still drive operational improvements and generate solid cash returns over time, relative to the capital we deployed due to the levers I just mentioned.

And just like ICU historically, there are a number of continuing intrinsic value drivers, including high-quality or hard-to-reproduce production assets, sticky product categories and the opportunity for more cash generation. But what is different than our previous experience from ICU is the sheer size and scale of the work we have to do. It is very rare when the minnow swallows the whale. This is a complex corporate carve-out and has the aspects of a turnaround in certain of the business line, at the same time while being kind of a public LBO, just without any debt. We've been lucky on a few items, but it is about as challenging a corporate project as many of us have faced.

We feel that we've been very transparent with investors on our plans over the last few years and cautious with our own expectation, and we want and need that mentality to continue, particularly through these system conversions, not to talk down or talk up the circumstance, just to be realistic on what we have ahead of us. As we've said on previous calls, the first few quarters under our ownership will be subject to all the expected difficulties of a carve-out and the bumps that come along. There is a lot of execution in 2018 that has to happen well, and we still have to improve or clean up certain legacy Hospira situations. If you're an investor that wants the predictability that ICU has offered in recent years, that will be difficult to repeat over the near term. But when we get it right, long-term returns could be generated quickly just like ICU.

We believe that this was a logical evolution for both businesses. We feel we've been able to put together a final transaction that didn't risk the enterprise, and it still left a real room for value creation for investors. As always, I'd like to close with things are moving fast. We're trying to improve the company with urgency and we're trying to take responsible actions and break some of the inertia that many companies in our position face. We may hit some bumps as we take some of these actions, but we will overcome them and emerge stronger. I really appreciate the effort of all combined company employees to adapt, move forward and focus on improving results. And our company appreciates the support we've received from both our customers and our shareholders.

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

Thanks, Vivek. I'll first walk down the income statement, highlight key items impacting operating performance, spend a few moments discussing the new U.S. tax law and its impact and the, lastly, discuss in more detail our full year 2018 guidance.

So to begin, our fourth quarter 2017 GAAP revenue was $370 million when compared to $96 million in the same period last year. And please remember, this $370 million includes $17 million of contract sales at cost to Pfizer. Adjusted diluted earnings per share for the fourth quarter of 2017 were $2.98 as compared to $1.20 for the fourth quarter of 2016, and for the quarter, includes significant tax benefits that I'll talk to you later on.

Adjusted EBITDA was $70 million for the fourth quarter of this year compared to $34 million for the fourth quarter last year.

Now before I go any further, I want to mention that because of the scale and complexity of the purchase accounting related to the Hospira transaction, there will be a delay of a week or so in the filing of our Form 10-K. It just requires a little more work to complete certain disclosures and analysis. We do intend to file the Form 10-K within the allowed extension period provided by the SEC, and we don't expect any material changes to the numbers we're discussing today. That said, there are 3 items on the GAAP P&L that are subject to change based on final purchase accounting adjustments.

Typically, any final purchase accounting changes, up or down, would be a balance sheet reclass, but because we have a bargain purchase gain, any adjustments end up flowing through our GAAP P&L.

At this time, there's a potential change to 2 items on the P&L that could affect net income. The first is bargain purchase gain, which would be approximately $10 million. The related tax impact would be up to $1.4 million and the impact to our net income for diluted common share would be up to $0.48.

Please note, in our adjusted EPS, we have always excluded any gains from the bargain purchase for this transaction.

Now let's discuss our fourth quarter GAAP revenue by market segment. As a reminder, the 2017 revenue data related to delayed closing entities is not available via market segment. However, by the end of December, all delayed closed entities were closed. Because of this, we are able to allocate the majority of the other revenue to its respective market segment, primarily Infusion Consumables and Infusion Systems, with other revenues being only $4 million in the fourth quarter.

So GAAP sales of Infusion Consumables were $120 million versus $82 million last year, which includes the legacy ICU Infusion and Oncology Consumables business.

Q4 represents the first full quarter where we were able to recognize the full intercompany revenue and profit in our consumables business on products we had previously sold to Hospira that had not yet shipped, post-acquisition.

On a GAAP basis, IV Solutions sales were $147 million. Excluding $17 million of contract sales to Pfizer, IV solutions sales were $130 million and, just to reiterate, we continue to benefit from unique industry circumstances in the fourth quarter.

Sales of Infusion Systems were $88 million, where we continued to see expected loss of business, and critical care sales were $13 million, the same as the fourth quarter last year. And as I already mentioned, the remaining $4 million of sales was made up of sales to delay closed countries and isn't traceable back to its specific market segment.

For the fourth quarter, our GAAP gross margin was 37% compared to 53% for the same quarter last year. The expected year-over-year decline is due to the acquisition of the Hospira business, which has historically lower gross margins. As you can see from Slide #4, in the previous 3 quarters, there were temporarily transactional accounting impact due to the acquisition that affected our gross margin, which are now behind us.

The only remaining item is our minimum 5-year agreement with Pfizer to provide certain solution-related products at cost. As you can also see from Slide #4, backing out the impact of those sales, our gross margin was 39%, a sequential 230 basis point improvement as we started to see positive results from actions we are taking to improve cost, such as the shutdown of our factory in the Dominican Republic.

SG&A expenses increased for the 3 months ended December 31, 2017, as compared to the same period in the prior year, primarily due to the impact of the Hospira acquisition. This includes the cost of TSAs to Pfizer and new hires to help standup the Hospira business. We do expect SG&A cost to increase through the third quarter as we continue to hire people to stand up the business from Pfizer, then see a drop off in TSA cost by the end of the year as we migrate off of Pfizer's system.

R&D expenses increased year-over-year due to the acquisition of Hospira and, as a percentage of revenue, R&D spend increased to 4% compared to the fourth quarter of last year at 3%.

Restructuring, integration and strategic transaction expenses were $10 million for the 3 months ended December 31 and were mostly related to our acquisition of the Hospira business. Just as we said on our last call, we're making consistent progress on our integration as we continue to see a clear path forward to standing up the legacy Hospira business from Pfizer with a heavy emphasis on systems integration. And as Vivek already mentioned, we had our next wave of successful system cutovers in Canada, our second largest market, and several smaller countries.

In addition, there was $5 million noncash adjustment to this quarter to the carrying value of our contingent consideration payable to Pfizer.

This is based on reaching a certain cumulative earnings target by the end of 2019. This change is created by many factors including the discount factor, time value of money and the probability of reaching this target. These changes impact our GAAP earnings, but are excluded from our adjusted earnings since this has nothing to do with the operational performance of the business.

Our 2017 tax benefit was largely driven by the cost of integrating Hospira and purchase -- and the purchase price accounting. As a reminder, the bargain purchase gain is excluded from the tax calculation. Additionally, the overall tax benefit included U.S. tax benefits from stock compensation, including the option exercises that went through the tax rate and R&D tax credits.

The impact to our tax rate related to the new federal reform was minimal. It included an estimated onetime transition tax payable of $2 million related to mandatory repatriation of foreign earnings, payable over an 8-year period and the remeasurement of the deferred tax liabilities of $1.1 million.

Historically, our average tax rate of 35% has been one of the highest in the industry. By taking advantage of the new corporate tax legislation and the Hospira transaction that provides the opportunities to lower our tax rate through lower tax jurisdictions, we believe our tax rate for 2018 should be at a historical low and be approximately 20% to 22%.

I know 2017 tax was difficult to follow, but we did receive a lot of valuable benefits. And just to simplify, in a normalized environment, based on a tax rate of, say, 21%, we would expect adjusted EBITDA of $70 million to generate approximately $2 of adjusted EPS versus the $2.98 reported.

Now moving on to our balance sheet and cash flow. We continue to be very focused on cash earnings and free cash flow. And in this quarter, we were able to generate $61 million of free cash flow and ended the year with $315 million net cash after paying off our $75 million note to Pfizer and absorbing approximately $80 million of integration cost. This positive free cash flow was driven primarily by cash earnings and the reduction in working capital as we again significantly reduced inventory in the fourth quarter and improved trends to 3x.

We believe we have worked up most of the large inventory balance we purchased from Pfizer and believe networking capital this year will increase 1 or 2 percentage points, mostly driven by inventory.

In the fourth quarter, we spent $28 million on CapEx for general maintenance, integration and infrastructure and $80 million for the year.

For 2018, we expect to spend approximately $80 million to $90 million, which includes continued investing in IT integration and infrastructure.

Once we get past these activities over time, we expect expenditures to come down to approximately 3% to 5% of revenue.

Regarding integration, as Vivek already mentioned, we have already ticked off several go-lives with the U.S. to come later this year. We expect to spend approximately $60 million this year on integration with most of that spend coming in the first 3 quarters and this is built into our free cash flow estimate.

So driven mostly by free cash flow and excluding any unforeseen events, we should end this year with approximately $400 million of cash and no debt. For 2018, we continue to believe we can hit an adjusted EBITDA midpoint of $250 million for the year, with a range of $240 million to $260 million. Because of the new tax reform and lower tax rate, we now expect adjusted EPS to be in the range of $6.60 to $7.30.

Now if you turn to Slide #5, I'll walk through the math on how we think about getting to approximately $250 million of adjusted EBITDA this year, which is similar to what we presented on our last call. We now believe the true normalized 2017 finish, based on market conditions, is between $195 million and $205 million. To that, we would add first the $20 million of intercompany profits I described in the consumables segment; second, our previous goal of $35 million of 2018 operational synergies is now $25 million year-over-year as we were able to realize synergies earlier than expected; and third, a normal expectation for legacy ICU, which is now Hospira plus ICU consumable earnings growth of $10 million; fourth, a reasonable assumption for TSA savings in 2018, which we would call $10 million today, with most of these savings coming in the back half of the year. We would then subtract from that the losses of $10 million to $20 million we expect in the infusion systems and IV solutions segments.

This year, as we continue to cutovers systems at additional sites and continue to manage our way through the complexity of the task, we will create a very efficient integrated system with the ability to flex up as needed that will then allow us to focus even more on other aspects of the business, and we look forward to a very positive 2018.

And with that, I'd like to turn the call over for any questions.

(Operator Instructions) Your first question comes from the line of Matthew Mishan from KeyBanc.

I want to start with IV consumables because I think that was, at least versus my model, the biggest driver of the sales beat. Can you talk a little bit about the sequential increase from the third quarter to the fourth quarter, [with it flew] conversions of new account seasonality? Some of the moving pieces there.

Matt, it's Vivek. You decided to hang around for a second call.

As long as you keep beating like this, yes.

Not always up into the right. I think our consumables, we've been so busy. We actually haven't been studying whether it's flu or not, to be transparent. I think, for us, it was -- we own the business for 7 or 8 months. We got through the sales force integration, it was getting back some of the business that Hospira have lost due to some of the other industry events we were talking about and it was oncology continuing to grow. I mean, that's where we had the most commercial merger integration here right where we had the most overlap and that was the first thing we changed right out-of-the-box when we bought the company. And so I think it's a combination of just time and fees, it's getting the team sorted out, probably a little utilization and continued oncology growth.

Okay. And then shifting over to the IV solutions. I mean, I think we all know to what the near-term dynamic looks like. But post these shortages, I mean, you have seen a decent amount of supply come on from some imports and from Baxter, from Mexico. Post these shortages, is there going to be -- is your view that there's going to be, like, too little capacity still? Or is the industry potentially sort of over correcting for it?

I don't know that we have a perfect answer. I don't think today, the industry is over correcting for it. I think what we've tried to put out, in our view of the world, was our guidance is somewhat predicated on volumes before those industry shortages happened and then corrected for a little bit more volume but at a different price. But I think we feel good about our platform operationally. We started out kind of under absorbed, so to speak. We're in a much better place and with the structure of the transaction from Pfizer, we're committed to investing in our own factory and if we can just run our own factory full, that creates a lot of value relative to where we started. And if there's additional capacity out there, we have that option with a secondary site and our relationship with Rocky Mount so we feel like we have a pretty unique way of flexing up or down in that based on how the cards play. I mean, I think we have a potential, if we were that committed over the long period of time, you go back to what Abbott Hospira produced at its peak time, but it's not sensible to make that investment today.

That's great. And lastly, on the TSAs. And I understand the execution is tough here and I don't think anyone wants to take anything for granted, but it does seem like if you do execute as you expect you can, the TSAs are going to come off a little faster than the $10 million that you have implied this year. Is the right way to think about it that you could potentially pull forward some of the $30 million to $35 million in TSA savings? Or can you actually execute on a higher number of total savings?

It's more interesting to get it right and try to save more from the right systems in the future where it's really -- there isn't going to be more this year. I don't want anybody to think that and we're not trying to say we got it all under control to the exact day. I mean, a lot of these things are spinning until they're not and I don't think there's additional TSA savings this year, right? And the way it works with Pfizer, and I mean, it's just too much detail, but unless we're truly off of something in every last corner of the planet, we're still paying holistically for that service. And so that's why it was a lot of assumptions that have to get made when you're coming off and there's a limited number of people working on this stuff. I'm not comfortable saying there's going to be anything to look forward. I'm much more interested in saying if we do this right, we can go deeper in our processes in the future, but it's not about trying to game it for the third or fourth quarter this year.

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

Just following up on that one, on the question Matt asked on the solution side. I realized that you guys are normalizing your EBITDA for '17, assuming that shortage wasn't there. But wouldn't there be -- isn't there a potential outcome when maybe you don't capture all these extra sales going forward, but you don't necessarily lose more share as expected? I mean, haven't you sort of built some goodwill and actually now provided contracted solutions where you might actually retain more business than you thought?

It's a good -- Larry, it's a good question. I think there was still business floating out, so it's a 2-part answer, one part is you are correct. We have got some new volume with the ability to serve. Now we could still be serving better, right? We have our -- a little bit of our own service issues that we battle every day to make sure we're doing the best we can. But also, there is some business that we know was scheduled to be lost or go to others. That's why it may go there, right? And until that's secure, we can't say we're not at risk of that, right? So that bucket is still out there and that's why we're using the words we're using.

Got you. It just seems a little -- it was like double counting to it, a little bit to me, but I totally get the points there. And on the...

No, no. Just to be -- Larry, just to go on there, I don't -- I guess, I didn't think it was double counting because the first correction is saying, "Hey, we've got stuff that fundamentally belong to somebody else, it just came our way because it's going to be provided." And then there was still stuff in our book that we know was going to go to somebody else, which was the second piece of that.

Right. Right. Well, I guess you're not double counting, but maybe there's an opportunity that you don't know what's going to happen, but maybe there is an avenue where you actually retain some of this business.

Certainly, we're trying to -- we're certainly trying to put our best foot forward to try to do that, right? But until it's under contract, we're not talking about it.

And it sounds like you have, I guess, Hospira about a year under your belt, obviously, you're in the throngs of integration process, which sounds like it's Herculean, to say the least. It doesn't seem like your mid and long-term expectations, which remain goal post between good to great haven't changed significantly, although I'm sure there are a lot of nuances and what not within that. Is that sort of fair to say?

Yes. I think great isn't a word that should be thrown around. I think good is in the cards and good, to us -- fundamentally, good is about growth, right, until we really prove that, I wouldn't say that one either. But certainly, we can profitize what was there and we had to do it because ICU -- although ICU has so much exposure, so I feel like we had no choice and we're going to make sure we get our money back, and we get a return on it and then good comes, and we actually change the revenue -- revenues.

Right, right.

And I think we're saying, in consumables, I think, we can. In solution, we got a little lucky, but we have a better chance to do it than we had before and we still got to turnaround the pumps.

Right. And how about specifically the pump business, which I know has gotten a little smaller, but I know you stated that you think your products are as good, if not better, than competing products yet you're losing share. Do you feel more comfortable that eventually you could at least stop the bleeding and maybe eventually even grow that business?

Yes, I mean, the goal right now -- the goal has been to say wish we could stop the bleeding at some point this year, right? We said we wanted to do that in the middle of the year. That's exactly what we still think today. So before we talk about the second part of that, right? We'd like to say the first one, let's show that we could stop, just like we did here when we were bleeding a couple of years ago in ICU. So the first thing we got to do is show we can do that.

Got you. And then just lastly. A pretty good economy. Inflationary pressures, whether they'd be raw materials, budgeting raw materials or obviously, making significant investments in the people in a tight labor market. Have those things impacted your -- the patient integration, operating performance or both of the above?

I think that's a great question. And then I'm kind of surprised more people aren't talking about that or maybe our situation is different. We are -- we feel some inflationary pressures on the production side. And that's good. It's a robust economy out there. It's happening for the right reasons, but we're seeing that in not just U.S. geographies but even in other spots. And so the whole recruitment and cost side of the equation, there are inflation -- inflationary pressures out there. Yes. I don't -- we're not seeing it quite as much in raw materials, which is interesting because I think we have a lot that suffered a long-term contract. But on some of the core personal areas, yes. We are -- I mean, that's apprised into our guidance, but it affects our ability to move quickly sometimes. And so that's the first time that we've seen that over the last maybe 120 days since, at least, my time here.

(Operator Instructions) Your next question comes from the line of Jayson Bedford from Raymond James.

I wanted to ask about gross margin and the strength in the quarter, the 39%. You've called out the shutdown of the Dominican Republic facility, but you didn't call it the impact of the consumables and just kind of burning through that legacy inventory. Just to be clear, that didn't have an effect in the fourth quarter, you realized all that in 2018? Is that fair?

I think we all recognize much more of that in 2018 than we did in the fourth quarter. It was really more around the cost reductions that we've been putting in place since we started this integration and the Dominican Republic was just one example of those.

Okay. And then I may be off here, my math may be off, but it looks like you're assuming that the IV solutions shortage dynamic effectively had a one-time impact of, what, $18 million to $28 million in EBITDA in '17. Is that correct? I'm just taking the difference between the reported $223 million in your normalized $195 million to $205 million.

I think that's -- Jayson, so I think that's fair, plus or minus a little. I mean, there's a couple of components of it, but there's some of that in there, yes.

And that was all realized in the second half when the shortage become more acute?

Generally speaking, yes.

Yes.

Okay. And just to be clear, too. The contract manufacturing, there's no EBITDA associated with that. Correct?

That's correct.

Okay. What's the anticipated spend level on TSAs in '18?

We haven't talked about what that -- the break out of that number is. All in, we were going to be spending about $145 million over the 18 months or so. And it steps down. It's not linear, Jayson, so you can't just divide that by 18 and get to what the monthly amount would be. And then on top of that, you have to keep in mind that there are stand up costs that will be duplicative to those TSAs as we start to wind them down.

Your next question comes from Mitra Ramgopal.

Just 2 questions. Vivek, I was wondering, based on some of the benefits you got regarding the shortage in terms of saline and then one of your competitors having some production regulatory issues, I mean, do you see any sort of a long-term benefit in terms of solidifying some customer relationships and maybe gaining some share that you will see will be a little more sticky?

Yes. I think we -- that's what we're trying to say when we traded for some NPV oriented actions that was trying to resecure some of that business. And I think the industry challenges, I mean, the company we bought was -- it has been the #2 market participant in this category for certainly as long as I've been working and we play a vital role there. And I think what has happened the last years of Hospira, people tried to almost punish Hospira for some for the things that happened in the marketplace. And when there's a systemic issue and, by the way, we're not opining over the punishment is fair or unfair, but when there was that systemic issue out there, I think, there was a realization that there was a role for Hospira to play, and we try to jump back in there in better stead and proved our value. It doesn't work every time, but at least it gave us the opportunity to have more conversations.

Okay. Now that's great. And on the international front, I was wondering, I don't know if you gave it and I just missed it, but how much of the business in 2017 was international based on, I think, you'd mentioned you're probably in about twice the number of countries now than you were in pre-Hospira, and you have a lot of opportunities there? How do you see that revenue mix changing from geographically?

Actually, Mitra, our international sales make up about 20% of our overall revenue. And for a while, we added a significant number of countries outside the U.S. And actually, outside the U.S., commercially, we continue to do well. This business just started with such a large U.S. presence and continues to have a large U.S. presence.

And you've got to find the right balancing act, I mean, between being committed to a lot of the disparate geographies and I think what a lot of people in the medical device industry know, which is there are a subset of countries that drive a lot of the profits, right? And so we're trying to do -- we're trying to play big and it enables us to play bigger. But just because we're there doesn't mean you're making money everywhere.

Right, right. And then maybe a little color on maybe the Terumo relationship, I know that was something that you thought would really be a nice opportunity in terms of expanding distribution in Asia.

It's moving along. It's a long-term partner. We have another 6 years or 5 years in our contract. I would say it's probably going a little bit better in the oncology area than the core IV area in terms of meeting the goals that we've set. But I think everybody's working hard on to make the changes. It's just if you've done business over there, sometimes things are a little bit slower from a regulatory perspective. I think we feel good about oncology. IV, we're still pushing along, probably not to our satisfaction yet.

Okay. And then finally, on the sales force, I was wondering now as you enter 2018, all of the restructuring, reorg, et cetera, as you look at your sales force going forward, are you pretty satisfied that you have pretty much what you want in place?

I think in parts of it, of the company, like, if I use the domestic consumables portion of the business, I feel -- we feel really good about what we have and that's been like sharpening our spear there because that's been our core. I think on the device business, we've changed a lot of people and the people that are with us today, we believe in strongly and we believe in fully. But we have had a couple of rounds of iterations to try to get it right, and we keep trying to improve every day. And internationally, there's still countries that require work, right. There's still countries that require work.

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

Okay. Thanks, everybody. It's been a -- 2017 was a really interesting year, a really unique year. It's also been a year which our people worked incredibly hard, just as closed process, and leading up to this decision to take a couple of more days on the K. It's been a kind of a non-stop ride, and we certainly expect it to continue that way. We are working incredibly hard through it. The whole team is, the company's working hard and we appreciate everybody's support, and we will talk to you. Sorry for the call being so late in the quarter. We'll literally talk to you in 8 weeks on the Q1 call. So thanks, everyone.

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