John Mills - IR, ICR Vivek Jain - Chairman and CEO Scott E. Lamb - CFO.

Thomas Gunderson - Piper Jaffray Jayson Bedford - Raymond James Chris Lewis - Roth Capital Partners Lawrence Solow - CJS Securities Mitra Ramgopal - Sidoti & Company.

Good day, ladies and gentlemen, and welcome to the ICU Medical, Inc. Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. John Mills, Partner at ICR, Inc. Sir, you may begin..

Thank you. Good afternoon everyone. Thank you for joining us today for the ICU Medical financial results for the fourth quarter ended December 31, 2015. 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 a brief overview of our fourth quarter results and then Scott will discuss fourth quarter financial performance in more detail. Finally, the Company will open up the call to your questions.

Before we begin, 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 representation of future results and are subject to risks and uncertainties. Future results may differ materially from management's current expectations.

We will 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 provide 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 Investors portion of the Web-site for your review. Now with that, I'll turn the call over to Vivek. Please go ahead, Vivek..

Thanks John. Good afternoon everybody. Hopefully our call should be shorter today. Our fourth quarter was a very active and successful quarter for our Company and we continued to drive operating performance, value and long-term sustainable growth.

On today's call, in addition to the financial results and more complete 2016 guidance, we wanted to provide; first, a recap of the important value creating activities over the last 18 months and why we are positioned well in the short-term; second, an update on our recent acquisition of Excelsior and the SwabCap product; third, our point of view and strategies on our large OEM customer as well as capital deployment; and lastly, highlight how all those items collectively along with the fundamentals of the Company position us well for value creation in the medium and long-term.

So starting with Q4, we previously talked about Q4 being slightly down to Q3. However, actuals for the fourth quarter exceeded third quarter results and our overall expectations as we generated stronger revenue, adjusted EBITDA and adjusted EPS than expected. In Q4, we had a little over $90 million in revenues and over $30 million in adjusted EBITDA.

Reported revenue growth was just about 13% on a reported basis and 15% on a constant currency basis. For the full-year 2015, we generated approximately $342 million in revenues and $114 million in adjusted EBITDA. Reported revenue growth was just over 10%, and 13% on a constant currency basis.

We continued to have solid performance in our direct lines of Infusion and Oncology, which were slightly offset by Critical Care. In Q4, our direct operations continued to generate positive momentum with 11% growth on a reported basis and 14% on a constant currency basis.

And for the year, direct revenue growth was 10% reported and 14% on a constant currently basis. Our OEM business, which did include a little OEM SwabCap revenue in Q4, increased 17% for the quarter and 18% constant currency. For the year, our OEM business grew 11% on a reported basis and 12% constant currency.

Before I get to the individual business segments, I want to recap the activities of the last 18 months and illustrate why the Company is positioned well in the short term. When I reflect on the full-year 2015, I focus on the following. We essentially had $32 million of revenue growth of which $12 million was OEM.

We had $40 million of adjusted EBITDA growth and adjusted EBITDA margins were just over 33% as compared to 20% in mid-2014. We have meaningfully improved our operating performance on our own direct operations.

From a balance sheet and activity perspective, we added $31 million in cash to our balance sheet in 2015 after using $32 million to buy the SwabCap business.

We settled all previous significant arbitrations, we onboarded the necessary commercial and technical competencies we needed, we accrued for the difficult restructuring choices on manufacturing, Slovakia was the high-hanging fruit I referenced in the past, and that should lead to deeper profitization of our core direct business.

And lastly, we signed a new Asian multiyear distribution deal with Terumo, all while we continue to have an over-capitalized and under-levered balance sheet relative to our size.

On the calls in late 2014 and early 2015, we tried to lay out two bookend scenarios, one with revenue headwinds, improved operations and possible capital deployment, and one with improving commercial execution, improving operational execution and capital deployment.

We feel at least for 2015 we demonstrated the ability to improve direct commercial execution and operational improvements, the items we said from the beginning that we control the most.

When we combine the actions taken in 2015 along with the core fundamentals of; one, the sticky nature of our products due to our innovation and customer orientation; two, our manufacturing processes and significant historical CapEx; and three, our cash flow generation for the upcoming period, we think we are well-positioned for the short term of 2016.

So now let's turn back to the business segments in Q4 and 2015, which will help frame 2016. For the fourth quarter, our Direct Infusion Therapy segment grew 19% on a reported basis or 21% on a constant currency basis. For the year, our Direct Infusion Therapy grew 16% reported or 19% on a constant currency basis.

We've been closely monitoring the results of the companies that produce the devices that our products attach to and we believe the biggest driver of this growth continues to be increased utilization which is then supplemented by a more focused sales force. Q4 did start to include sales of the SwabCap product in our Infusion results.

We closed the acquisition in October and have been hard at work in integration. We just began the integration process into our sales force and are working hard to innovate in the category. We had two assumptions at the time of the acquisition and both were validated in the fourth quarter.

First, we knew the category was becoming more clinically relevant.

While we did not know the specifics at the time, an important clinical study was published in the December 2015 journal of Infection Control and Hospital Epidemiology showing that the use of the SwabCap disinfectant cap for needlefree connector offered important clinical and economic benefits.

That study was performed by clinicians at New York City's Memorial Sloan Kettering Cancer Center and you could find a full release of it on our Web-site. Second, we had a rough idea at deal time but has now been confirmed that we received certain significant tax related benefits in the transaction.

We knew the result of this in the same quarter that we made the decision to close Slovakia would significantly drive up our GAAP reported tax rate, but the cash value of those benefits in the transactions was much more valuable than the temporary high book tax rate.

As it relates to initial performance of the acquisition, it did not affect our Q4 operating earnings meaningfully and we stand by our initial comments on its contribution in 2016.

Scott will build back up to 2016 guidance at the end and will illustrate small pro forma adjustment to our direct versus OEM mix historically as we have some new customers in the OEM book of business, but we expect our Direct Infusion Therapy business including SwabCap to grow approximately 10% to 15% next year.

Our Oncology business in aggregate, meaning our direct and OEM oncology business combined, had growth of 19% reported or 25% on a constant currency basis in Q4. For the year, our total oncology segment grew 13%, or 21% on a constant currency basis.

We believe we are 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. Our new ChemoLock product is still in the early stages of adoption and we don't expect it to be material to our sales until late 2016.

For 2016, we would expect our Direct Oncology segment to also grow 10% to 15%. Turning to our Critical Care segment, we reported fourth quarter declines of approximately 5% on a reported basis and minus 4% on a constant currency basis. The business was basically flat for the year on a constant currency basis.

As I said earlier, this market is challenging with limited growth and tough competition. In the second half of 2015, we filed a 510(k) for our new hemodynamic monitoring platform, and following approval we will be able to be more competitive with some of the other players in this space.

We continue to work with the FDA on the approval process but it's taking longer than we would like. With this project nearing completion, we have profitized the business better as R&D requirements have begun to go down. The significant ramp-up in R&D over the last few years at ICU was largely due to these programs.

For 2016, we expect the business to be flat to down 5%. Before we get to OEM, I wanted to make a few quick comments on the rest of the P&L, and Scott will provide more detail. Gross margins in Q4 were down 40 basis points relative to Q3 as they were impacted a little bit by the Excelsior acquisition.

Once we get manufacturing integrated, we should get back to previous levels, and the next big driver aside from volumes is the integration of Slovakia manufacturing into the rest of our network at the end of this year, benefiting 2017. SG&A went up for the first time since I've been here.

That was largely due to the acquisition of SwabCap and the TSAs resulting on the sale of part of the business to Medline, and to a lesser degree some non-cash stock comp expense due to our retiring directors. We will not have these costs in 2016.

Scott will explain why our GAAP tax rate was 57% in the fourth quarter, how it depressed GAAP EPS and adjusted EPS in Q4 a bit and what the tax rate estimate will be in 2016. Okay, so now let's cover OEM. These results for the year ultimately turned out better than expectations all year.

For the year, which is more relevant, this book of business grew 11% on a reported basis and 12% on a constant currency basis. Our primary OEM customer was up approximately $12 million in 2015 but we continued to see disconnect between what we believe is the actual customer utilization versus our out-the-door shipments to them.

As a result, we believe our primary customer will be down at least $10 million in 2016.

Even though we continue to decrease the percent of overall revenue generated from a single OEM customer, having a single OEM customer of this size has always been an issue here and we've said in the last few calls that it needed to get dealt with in the medium term. As discussed on the last call, we started to make progress on this objective in 2015.

The acquisition of Excelsior created a second OEM customer providing SwabCap to Medline Industries under a long-term supply contract. The previously announced supply agreement with the Terumo Corporation of Japan added a third customer to this book of business.

Even though we expect our largest customer to be down $10 million in 2016, we expect to keep our aggregate OEM book of business flat for 2016. We expect our large customer would account for approximately 30% of 2016 revenues.

To ensure good comparisons going forward, we are going to publish a pro forma of historical results, which is basically moving the geographies that will be covered by Terumo into our OEM line historically. Scott will go into more detail but it's basically a $6 million adjustment out of direct and into OEM historically.

Going forward, we will not breakout our OEM business by market segment or new customer results. At a high level, we don't control this line and we've been focused on the controllable aspects of our business, which is our direct operations, seeking new corporate customers and capital deployment.

In a world of status quo where everything stays the same with our large OEM customer through the end of the contract in December 2018, our medium-term model has been; first, assuming our direct business to grow mid-single digits over the period; second, that we could find at least one $25 million revenue M&A opportunity every 18 months; and Terumo would come online and be possibly $15 million to $20 million in the 2018 timeframe.

That would add roughly $100 million of new revenues and make our largest customer roughly 20% of the Company at the end of 2018, and we would still be a company with hundreds of millions of dollars of capital and leverage capacity on our balance sheet to create value and make the right choices.

Now we suspect the question on people's minds is, will the status quo continue given the uncertainty around our large customer? Let me first reiterate the facts and then our current thinking. First, we have a contract that last another three years and we intend to honor it.

Second, and 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.

Over the past 18 months, you've seen this team create a track record of generating solutions and results that are beneficial to our shareholders, customers and partners by getting our foundation right and driving operational improvements in our business. Controlling what we can control has been the important driver for optionality.

Hopefully that helps explain how we think about this situation and why we are not going to prematurely react. We believe market share moves very slowly in this industry, we have unique products, great continuing cash flow generation to offer many shots on goal for value creation and protection for shareholders.

On capital deployment, broadly, nothing is really new. We're digesting Excelsior, this was a perfect acquisition for us, and our team has performed very well with the initial integration but we need time before we deploy additional capital.

We're always looking for the right value creating opportunity but we can't let our cash balance tempt us too much.

To summarize the 2016 guidance at the midpoint, and then Scott will go into more detail with the ranges, we see roughly $20 million of direct revenue growth and our OEM business as flat for a total of approximately $360 million in revenues. We believe that we will drop through $125 million of adjusted EBITDA.

CapEx will tick up a little as we move Slovakia, and we were below historic levels last year. And we expect through operational growth and working capital improvements that free cash flow will be approximately $70 million. As we said from the beginning, cash conversions are what we focus on.

We feel 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.

We do see the year 2016 building a little differently than 2015 as we think the potential drop-off from our large OEM customer will be more felt towards the end of the year, and as a result the quarters will be more balanced across the year.

We have a real value creating scenario with the improvements across the Company for medium-term opportunities of 2016 and beyond. I do think we're an interesting sized company that can strategically move in a number of directions and frankly one of an increasingly limited number of smaller med-tech 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 have said on previous calls that there will be 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 and we need to keep driving continuous improvements in quality. I do feel the Company is healthier and hungrier than we've been in many years. We are trying to take responsible action and break some of the inertia that many companies in our position face.

I really appreciate the efforts of all ICU employees to adapt, move forward and focus on improving results and our Company appreciates the support we have received from both our customers and our shareholders. With that, I'll turn it over to Scott..

Thanks Vivek. As Vivek already mentioned on our fourth quarter and full year results were above our expectations as we achieved gains in both our direct and OEM channels driven by both growth in our Infusion and Oncology segments and our gross margins as well as adjusted EBITDA were stronger than expected.

So now on to our results, total revenues for the fourth quarter increased 13% as reported or 15% on a constant currency basis to $90 million compared to $80 million in the fourth quarter of 2014.

GAAP net income for the fourth quarter was $5.5 million or $0.33 per diluted share, as compared to GAAP net income of $7.4 million or $0.46 per diluted share last year.

This decrease of approximately 26% was driven by approximately $8 million of restructuring expenses related to our plant closure in Slovakia as well as approximately $1 million related to the two transactions around Excelsior. Adjusted diluted EPS for the fourth quarter were $0.96 compared to $0.68 last year, an increase of 41%.

Fourth quarter adjusted EBITDA increased by 38% to $30 million, compared to $22 million last year. Increases in both adjusted diluted EPS and adjusted EBITDA were primarily due to positive top line growth and improved gross margin. Now let me discuss our fourth quarter revenue performance by direct and OEM as well as by market segment.

As always, we also have these results posted on our Web-site. Direct sales totaled $58 million or 65% of total revenue while OEM totaled $32 million. For the fourth quarter, sales in Infusion Therapy were $66 million, an increase of 17% as reported and 19% on a constant currency basis and represented 73% of our total sales.

Direct Infusion Therapy sales were $38 million, an increase of 19% as reported and 21% on a constant currency basis. Sales in Oncology were $11 million, an increase of 19% as reported and 25% on a constant currency basis and represented 12% of revenue.

And as expected, sales in Critical Care were $13 million, which is a decrease of 5% as reported and a decrease of 4% on a constant currency basis and represented 14% of our sales. Our fourth quarter sales for domestic and international were as follows.

Domestic sales were $66 million, an increase of 21% from the fourth quarter of the same period last year. Due to the strong dollar in the fourth quarter of 2015, overall international sales were negatively impacted by approximately $2 million. International sales decreased 3% to $24 million as reported.

However, revenue increased 3% on a constant currency basis to $26 million.

Our gross margin for the fourth quarter was 53.4% compared to 49.7% last year, and the increase in gross margin was primarily due to favorable customer and product mix, operational efficiencies and favorable foreign exchange rates on our operation expenses due to a decline in exchange rate of the Mexican peso to the U.S. dollar.

SG&A expenses decreased over 50 basis points to 24.9% as a percent of revenue due to lower sales, promotion and legal expenses. However, costs were up on a sequential basis due to transition costs associated with Excelsior and retirement of two of our directors. We expect the transition cost to start decreasing after Q1.

Our research and development expenses decreased 20% year-over-year to $4 million and this decrease in R&D was primarily from lower R&D project expenses related to the development of Cogent, our hemodynamic monitor for Critical Care.

Also in the fourth quarter, we accrued one-time expenses of approximately $4 million related to the previously announced planned shutdown of our factory in Slovakia and approximately $1 million of transaction cost related to the acquisition and partial sale of Excelsior.

In addition, we had a one-time expense of approximately $4 million related to the impairment or the fair market write-down of our factory building in Slovakia for which the accrued impairment is not subject to any tax benefit. Our annual tax rate was approximately 35% as compared to a tax rate for the quarter of 57%.

The increase in the fourth quarter tax rate was principally attributed to the four decisions that occurred in the quarter, which included the cost associated with the shutdown of our Slovakia facility and the write-down of our factory building that provided no tax rate benefit; the direct tax impact of the disallowance of various transactional expenses related to the acquisition and partial sale of Excelsior; and indirect tax impact limiting certain manufacturing tax credits as part of the Excelsior transaction.

Now while our GAAP tax rate of 57% was unusual, please note some of the tax attributes assumed in the Excelsior acquisition were realized in the fourth quarter and our annual cash tax rate was approximately 21%. For 2016, we expect our tax rate to be between 32% and 33%, being higher in the first half of the year.

Now moving on to our balance sheet and cash flow, as of the end of December, our balance sheet remained very strong and with no debt. We generated $12 million of operating cash flow during the quarter and ended the year with cash, cash equivalents and investment securities of $377 million.

This equates to approximately $24 per outstanding common share, and over the course of the year we generated $114 million of adjusted EBITDA and $45 million of free cash flow.

Now turning to our fiscal 2016 guidance, as Vivek already mentioned, going forward we will begin to report our revenue with Terumo related geographies in Asia and SwabCap sale to Medline in our OEM business and no longer in direct.

In 2015, there was approximately $6 million of direct revenue that under this reclassification would be reported as OEM going forward. In 2015, we reported $136 million for Direct Infusion. Under this reclassification, revenue would have been $131 million.

We expect our Direct Infusion Therapy business including SwabCap direct sales to grow approximately 10% to 15% over last year. In 2015, we reported $28 million for Direct Oncology. Under this reclassification, revenue would have been $27 million. We expect our Direct Oncology business to grow approximately 10% to 15% over last year.

And we expect our Critical Care business to be flat to down around $2 million. I recognize this is a minor adjustment but we wanted to make sure everyone could model accurate historical comparisons. Going forward, we intend to provide market segment guidance for our direct business which we control and an aggregate OEM guidance number.

Overall, we expect our direct revenue to increase 6% to 11% and OEM which now includes revenue in Asia and SwabCap to Medline to be flat, 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. This year we plan to spend approximately $20 million on CapEx more than we did last year which includes an expansion to 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. As Vivek mentioned, the management team and ICU Medical employees have been working hard to transform the Company which has set us up for a good 2016 and beyond.

Now we look forward to keeping everyone updated on our next quarter's earnings call, and with that, I would like to turn the call over for any questions..

[Operator Instructions] Our first question comes from the line of Tom Gunderson with Piper Jaffray. Your line is open. Please go ahead..

So, Vivek, you've mentioned the OEM supplier and the contract good till December 2018 and you plan to stay with the contract. Still it generates a lot of interest from your investors.

And so could you just recap a little bit on the contract and how it changed if at all when it went from Hospira's, an independent to Pfizer owned? And second, if Pfizer were to divest, and as far as I can tell, this is a single journalist saying, maybe they will maybe they won't, if they were to divest before 2018, does the contract stay whole?.

I think like all companies, we too do not want to comment on rumors and don't necessarily believe everything we read on single-story articles either. The contract survives a change in control, and so the contract transferred seamlessly from Abbott to a new company and then from a new company to Pfizer, and the same would happen here.

The provisions around it are no different. As we think about the situation, what we really want is a committed customer. More than anything else, we want somebody who deeply cares about growing market share in the category and is willing to allocate capital and time and energy to win.

And if the business stays in, we hope that they want to do that, and if they chose not to, then it finds a home with somebody who really does. That's a great thing for ICU if that happens.

We fully plan on honoring the contract, and we think we're deeply correlated at the customer level, and we think we have a great value proposition to customers and it's very sticky, and we've seen that competitively, and I have personal experience of that with other product lines I've managed. It's hard to displace this market share.

And so I think we have a lot of aligned interest in making sure customers are treated well here..

Thanks. And then, Vivek, maybe you could comment a little bit on international markets? We're always at the mercy of the latest news items and the strong dollar seems to be upsetting some with regard to being able to sell in international markets.

Can you comment a little bit about what you see in 2016 going forward for ICU?.

It's a great question. That was the one reported number. I felt like this quarter people like you might ask, why was international growth a little bit lower than it was, frankly, and I wanted to explain that a bit, which was when Scott talks about our international versus domestic that includes also our OEM business, it's the aggregate of the two.

And so the number we really look at is direct international. And so direct international for us continued to be very good, our international OEM business was down a little bit. As we've said on previous calls, the competitive set is changing globally.

We feel pretty good about where we are and I think one of the hidden bet is here in ICU, one is obviously on the manufacturing and the currency tailwinds we have on peso versus dollar, the other positive thing is we sell dollars in most of the rest of the world to our distribution customers, and we don't really have that currency exposure.

That said, those customers after many years of currency on the wrong way here are feeling pressure and so we want to make sure they are successful but we don't feel end market paying because of currency or P&L paying because of currency, frankly..

Got it.

And then last just on a smaller note, the medical device tax, I assume that's included in your guidance but is that anything that changed your way of how you look at 2016, are you reinvesting, letting it flow to the bottom line to small the matter?.

It's super small for us. I think it's a transient thing obviously and we stand by what we've talked about before, which is we feel like whether it's 33% or 34%, whatever these adjusted EBITDA margins are for us, we feel pretty good about it, we care a lot more about can we reinvest in the business for growth, we're not trying to perfect margins.

So we didn't take it to the bottom line. We assumed it was going to get absorbed and invested it in R&D people or technical people or sales people or something that can move the top line over time. That's just where we are right now and what we got to keep doing..

Got it. That's it for. Thanks..

Our next question comes from Jayson Bedford with Raymond James. Your line is open. Please go ahead..

A few. Just on 2016, the EBITDA guidance was a little stronger than we expected. So I want to ask you about gross margin. You mentioned the quarter was impacted by the Excelsior integration, so two questions.

What's the assumption for gross margin in 2016? And then second, what's left on the Excelsior integration and what do you still need to do?.

Okay.

You want to go through your full list, Jayson, or you want to talk about that one first?.

Let's start with that one and then we can….

So I'll let Scott answer first on the gross margin and then I'll get to integration..

So it's only 40 basis points in the fourth quarter. Obviously once we get Excelsior fully integrated towards the latter part of the year, that will help. We don't see much change overall in our gross margins year-over-year..

So, Jayson, the two points just going back to EBITDA there, there will be a little bit of improvement, as Scott said, once we get Excelsior in. So what's left for Excelsior, again, we have to get the manufacturing into our network. It's not in our network and it won't be until really the end of this year, towards the end of this year.

When that happens, we get some pickup on that, the typical synergies that we model into a transaction. So that helps. And then the other thing on EBITDA, I think Scott was trying to talk about Cogent a little bit on the Critical Care side. As that rolls off, that was consuming a real significant amount of R&D dollars.

We are doing everything we want to do in R&D on our Infusion and Oncology businesses and we just don't need to spend as much. So that will come down a little bit too which helps build up to that EBITDA. It's coming from other areas of the P&L next year, but not at all at the expense of the future..

Okay.

And just Slovakia, the benefit from lower overhead, is that more of a 2017 benefit than in 2016?.

Absolutely. It's going to take the balance of 2016 to get it in here. We've said we kind of get our money back in two years, which can give you some idea of relative to the capital we have to put up to do this, what's it worth to us. I don't think – again, we're not chasing it for 2016. It's the right thing to do.

You also got to make sure it happens the right way. So we're being mindful of that. But I think if we can get Excelsior in, get Slovakia into our network and keep delivering what we're having from a growth perspective with OEM at least staying flat over the period, meaning next year too, we should see margin improvement in 2017..

Okay, that's helpful.

Just on the OEM, can you talk about the timing of Terumo and when they all roll in? And then, is there any kind of redundant revenue in Japan or Asia that will be cannibalized as Terumo comes on?.

What we're doing with the adjustment that we talked about, that $6 million adjustment, we're essentially taking what we sell in the geographies covered by Terumo and pushing it out of direct and into OEM. So I don't think it would be cannibalized so to speak. We are converting those distributors to Terumo today.

So they are walking into those customers as if it was their business, any day now frankly. In terms of real impact in terms of growth relative to where the historic numbers were, that won't start phasing in until the end of this year. Again, we're not hyper-concerned with Terumo on a month-to-month basis.

We're very concerned how big could this be in late 2017, in 2018. And on the model, our building around on OEM basis, we got to set a number that we expect there for a team. That's certainly our target..

Okay. And then maybe I'll just last ask one last one and then jump back in the queue. Your direct IV therapy was strong, I want to say is up 20%-21%. You cited increased utilization, but I'm guessing there's probably a little bit more to that.

So is there anything else you can give us, whether it'd be new markets? Just I'm guessing there are some share gains, just better execution.

Can you just give us a little bit more color on what looks like a pretty strong acceleration throughout the year in direct IV therapy?.

I mean I think we've been focused on everywhere we can sell our products, right, and we really made a number of changes on the sell side and we're 18 months into that. I think we've got people who are getting their sea legs underneath them. That's all good stuff. On a contracting level, we've been trying to upgrade what we're doing.

I don't think there's any one deal to talk about. There's a lot of little things and I think there's more people doing their jobs in the right way and we see volumes as pretty good, frankly.

And so I've been very interested in just earnings reports, which all looked pretty good to me, over the last couple of weeks here and the utilization numbers that people are talking about versus what people seem to be predicting. So we haven't seen any change on our end..

Okay, that's helpful. Thanks guys..

Our next question comes from the line of Chris Lewis with Roth Capital Partners. Your line is open. Please go ahead..

I wanted to start on OEM. You talked about the main partner being down about $10 million I think this year versus 2015.

Vivek, maybe you can just elaborate on how you kind of came to that outlook, what type of visibility you feel you have on that today?.

Sure. I study just with Scott and the management team here, we study what we're provided end-user demand reports from our partner on what actually makes it to a customer. And over a long period of time, what leaves the dock and goes to them should match up with what's happening at the end customer.

And for a couple of quarters in a row, we've seen demand at the end customer as flat, which frankly given what was going on in 2014 or 2013 is great, which means we believe they are holding their market share and can move up from here, which is really good for us.

But we don't see end-user demand growth and our out-the-door fulfilments have been growing, and we estimate the gap between what's really needed to serve the customer versus what's been ordered is that amount that the forecast should be coming down in our estimation. That's how we calculate it..

Okay, nice. And then on the Critical Care monitor, I think you talked about that maybe taking a little bit longer than expected to get through the FDA process.

Maybe you can just elaborate on that and provide any updated timing expectations for approval with that product?.

I think it's on us candidly.

I think we're just, we're still a little thin resource-wise in having a hands-on-deck to respond timely, et cetera, and it's nothing unique about the dialog with them and they are, frankly, asking all the right and very fair questions, we just don't have as many resources on it right now and so it's going to take a little bit longer.

There's not much else to it than that. We want it out as soon as possible, right. We were shooting for approval at the end of the year. It's sitting there. It might take a couple of turns with them. I'm a little bit reticent to put out a date just because things seem to go slower with this program than we would like..

And then for Oncology you mentioned ChemoLock being a bigger contributor kind of in the back half of this year.

I guess how is that launch going at this point relative to expectations and how should we think about the contribution there?.

I think our number that we set for our Direct Oncology growth includes what we think ChemoLock will do. I think for us, we're focused on just as many trials and customers as we get going. We're just slowly ramping up the production. We're not really there yet.

So I don't think it's all that meaningful P&L-wise, even the growth number for the first or second quarters of the year, but I hope by Q4 we can be talking about it saying, it's contributing a healthy amount of our quarter over quarter growth.

I don't know and I think I've seen that burned historically making lots of promises on new products and perfecting it to a single quarter. I mean I think the product is in its final form now, which is great. Its production process is in final form, tools are in its final form, et cetera, all the right things are happening..

Okay, thanks for the time..

Our next question comes from the line of Larry Solow with CJS Securities. Your line is open. Please go ahead..

Most of my questions have been answered, Just a few follow-ups. Just on the ChemoLock, just a question on that. So it sounds like you're hopeful that you'll get some contributions by the end of the year, but perhaps there's not much built into that 10% to 15% Oncology expectation for growth.

Is that fair to say?.

I would say there's not a ton built into that, I would say there's not a ton..

Right, okay. Back to on Direct Infusion sales, obviously 21% growth in the quarter with 19% for the year, so things actually even accelerated a little bit.

It's probably hard to break it up, to bucket it, but would you say it seems like a combination of the two but more just strong end markets and customers doing well or is that sales force realignment, increased focus perhaps [it's really a] [ph] part of that, but maybe as you go forward, does that sales focus take more of a leading stance in getting growth or some of the low hanging fruit already been pulled or how you look at that as you look out into 2016 and beyond?.

Two things. It's a great question. The first is, there was SwabCap started rolling in Q4. So that added a little bit. That's why those numbers look so good for Q4. So we should be transparent about that.

The second issue is, and I think I said it before, as we got going here at ICU, there was a bunch of stuff on the operation improvement side that was job number one, there was some low hanging fruit, there was some high-hanging fruit.

I think there was a bunch of low-hanging fruit on the revenue side too where we just treated customers or distributors poorly or in a disorganized way, and we fixed a lot of those items and those went on to the Board and that helped a lot.

I think the next level is higher hanging and we should still fight hard to go get it but I don't think the conversion speed is going to be quite as what we had in 2015. So I think all the right things are happening where we're just being [overly] [ph] cautious on it..

Got it. And the SwabCap, so the 10% to 15% in 2016, I think you had said earlier $18 million to $20 million in total revenues from that company.

So if I'm not mistaken, it's more than two-thirds direct and it's like $5 million or so going to OEM?.

Ballpark. You might be off a little bit..

Okay. And then just translating that into the OEM forecast, the $10 million loss from Hospira, that's offset by what you're getting from Excelsior and then the transition of the $6 million from direct to OEM.

Is that right?.

No, because that's exactly what we didn't want. I don't think that's a fair way to look at it, right. I think you have to take the historical sales that are now flipping to Terumo out of your base year. I don't think you can just add all the incrementals here because still we're selling in the region before.

So we're going back and adjusting what was in direct and OEM as if it was there historically, which actually ups our OEM for 2015, and we're saying with the primary customer down, we'll still stay flat to that 2015 through growth from Terumo over the historical baseline and what SwabCap brings..

So essentially the $10 million is Excelsior and is being made up by – the $10 million drop from Pfizer-Hospira is made up from Excelsior and Terumo?.

I guess the fancy way of saying it or less fancy [indiscernible], one third of the business that we don't control, we're trying to fill the bucket with new customers..

Got you.

So you do have some, a little contribution from Terumo, really is my question in 2016, to the back half?.

Yes, that's exactly [indiscernible]..

Got it. And then the Pfizer-Hospira, just to clarify, you had said that you expect performance to sort of sequentially go down a little bit I guess as they drawdown inventories through the year.

Is that…?.

Again, I think it takes people time to realize. Sometimes there is a disconnect between the end-user demand and the inventory levels, all that kind of stuff, and given how much extra we think is out there, we suspect it might take another quarter or two. I think we are very active in this.

Before we talked about it with Chemo and the OEM disconnect not clearing out mid-summer last year. I think it's happened the way we said it would and I think we feel the same way about what's gone on here. I think we've gotten smarter in how we look at that picture.

So it should tail off by the end of the year, the other guys come online, there might be a little bit of a gap in there, but that's why it will be much more balanced over the full year. And I think we feel pretty good about what we've – you're putting outside the direct, right, which the numbers we think speak for themselves.

We feel pretty good about the strategy we've been trying to run and we tried to illustrate in my comments there that there is a formula here to keep with a little bit of capital employment, hopefully what is reasonable mid-single digits growth as assumption over long-term to keep building around, right, and then see where all this, what's going out [indiscernible]..

Right, okay. Just on Oncology, I know this is sort of a much longer term and hopefully we are in the early stages of a nice growth trajectory, any update on, it's probably an early thing [indiscernible], how this agreement you had with McKesson and the U.S.

Oncology Network, is that doing anything yet?.

Again, I think everything we said, 10% to 15% growth on a direct basis there, everything that we have talked about, factor into it those examples. We're not going to talk about any customer situations. Those examples just say there is momentum in the markets were positioned well and when these conversion markets start to happen, they'll ask for what.

We're very pleased about that. So it's super-competitive, don't get me wrong, but at least it has less players floating around than the [indiscernible]..

Right. Just last on the operating expenses, the SG&A was a little higher than expected but you sort of outlined why that was. R&D I thought was going to maybe drop a little bit more than it did.

Did it not because the Critical Care piece is still, you're still putting a little more money into that than you thought, or maybe I was off in my assumptions that it would drop a little bit [indiscernible]?.

With all due respect, I don't know what your particular [indiscernible]..

I thought I was [indiscernible] $13 million, more like a $13 million to $14 million full year run rate, is that…?.

I think we said what we felt like we needed to spend. We didn't really think about it that much. SG&A was, when we sold the portion of the business back to Medline, they act as a contract manufacturer for us until we get the products into our own network and there's cost associated with that. That's why obviously I'm hyper-sensitive to SG&A.

That went up, and then you know the Company did the right things. Some directors retired to create space which was really terrific of them and that also led to some increased costs. But again, all the right things to do..

Absolutely. Okay, great. Thank you, Vivek. Appreciate it..

Our next question comes from the line of Mitra Ramgopal with Sidoti. Your line is open. Please go ahead..

Just a couple of quick questions. Vivek, I was just wondering on the Critical Care segment, I know you expect it to be flat to maybe down a little in 2016.

In terms of just trying to get that business turned around, is it pretty much just waiting for the FDA approval on the new hemodynamic system or any other things you can do?.

We've done a lot. It takes longer to show itself here and it's harder. We have retooled what we're doing from a marketing and sales perspective. We've done all the basic stuff of digging through where have we been mis-pricing products or not having value aligned with price in certain categories.

We've been focused on our manufacturing of certain disposals, can we improve the margins. We started with kind of philosophy of can we stop losing money here, and I think we have certainly got to that point and then some. But it's going to be – just like the IV business, it's going to be about revenue growth and that's what we need to focus on.

It is not credible for us to say that we can be deeply competitive on the revenue side until we get the new piece of hardware out there, and that is what we're focused on..

Okay, thanks. And then quickly on acquisitions, I know you're limited in how much you can say but I think you mentioned something in the vicinity of $25 million annual revenue would kind of work, kind of like what we saw with Excelsior.

Would that span all the three segments or are you basically focused in any area? I don't know if you can give any color on anything in terms of focusing more on product versus distribution, et cetera..

I said, look, what if we could do one Excelsior every 18 months, which there's not a lot of science behind that other than that seems like it should be doable for a company our size. And if we were able to do two of those plus when we have an organic growth plus new customers, that builds around a lot of the current situation we have.

I don't know that we would – I think I said on previous calls we get scared by anyone that's not in your knitting, when you don't bring some value to the party.

But if it's a good situation and it's innovative and is growing and we think we can add value to it, even if it's not something [indiscernible] it has to be one of your three, it doesn't have to be.

I think it's unlikely [if we go] [ph] outside of those three, but I would never want to constrain us just hanging, because it's pretty narrow pickings in some of the areas in our three..

Okay, thanks, great..

Thank you and I'm showing no further questions at this time and I would like to turn the conference back over to Vivek Jain for any closing remarks..

I'd just like to thank everybody for their interest and support of the Company. We felt 2015 was a great year for the Company. A lot of improvements went on and I hope investors see that with our careful use of capital, our respect for the P&L and the amount of earnings we've been able to drive.

So we look forward to keeping everybody up to date and we'll talk to you soon after Q1. Thanks. Bye..

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..