ICU Medical Inc (ICUI) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 ICU Medical Earnings Conference Call. (Operator Instructions) I would now like to introduce your host for today's conference, Mr. John Mills, partner at ICR. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us today for the ICU Medical financial results for the second quarter ended June 30, 2017. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Scott Lamb, Chief Financial Officer.

Before we start, I want to touch upon any forward-looking statements made during the call, including beliefs and expectations about the company's future results. Please be aware they are based on the best available information to management and assumptions that are reasonable. Such statements are not intended to be a representation of future results and are subject to risks and uncertainties. Future results may differ materially from management's current expectations. We refer all of you to the company's SEC filings for more detailed information on the risks and uncertainties that have a direct bearing on operating results and financial position.

Please note that during today's call, we will discuss non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into ICU Medical's ongoing results of operations, particularly when comparing underlying results from period to period.

We've also included a reconciliation of these non-GAAP measures for today's release and provided as much detail as possible on any addendums that are added back. In addition, the sales numbers that Scott will be covering as well as the company's financial statements, the reconciliation from GAAP to adjusted EBITDA and adjusted EPS are available on the Investors portion of the website for your review.

Also, we're having a presentation that accompanies today's remarks. You can view the presentation by going to our website at icumed.com and click on the Investor Events.

And with that, I'll now turn the call over to Vivek.

Thanks, John. Good afternoon, everybody. Our second quarter of 2017 was our first full quarter of owning Hospira Infusion Systems, and we're about to embark on staged integration execution to create a single unified company. We continue to drive legacy ICU revenue growth in Q2 and executed well through a large volume of commercial, operational and integration activity.

On today's call, in addition to explaining the Q2 2017 results and the most recent business segment performance, I wanted to provide a status review on the near-term goals we described on the last call; outline the current status of integration; discuss our expectations for the balance of 2017; and lastly, provide a sketch of how we're thinking about 2018 at a high level from both an income statement and balance sheet perspective and on the drivers for value creation and the return of our capital into the longer term.

In Q2 2017, revenues were generally in line with our expectations. Adjusted EBITDA and adjusted EPS were slightly above our initial expectations. Like Q1, we continue to have numerous transactional accounting impacts, particularly in gross margins, which make the results a little hard to follow. The short story is this: revenues continue to be slightly better than we thought due to hanging on to some of the business that we expected to go away and likely will; real cash operating expenses were in line with our estimates; and the actions we have taken to date will help improve the results for the balance of the year. We finished the quarter with approximately $332 million in revenue. Adjusted EBITDA came in at approximately $47 million, and adjusted EPS came in at $0.76. And we finished the quarter with $241 million of cash on our balance sheet.

The total company year-over-year comparisons are not relevant, and in the business segment commentary, I will try to provide the best segment color. But please remember, the delayed-close countries still impact our comps in the infusion consumables and infusion systems segments.

Turning to the 3 primary segments of our combined business. Let me start with what we expect to be our largest business over time, infusion consumables. This is essentially the legacy ICU business plus the Hospira consumables business, which was predominantly the distribution of ICU-manufactured products and a smaller amount of unique Hospira products. It's hard to get the exact revenue number due to the delayed-close countries, but our internal estimate, which will not fit exactly with the reported numbers, is the segment had revenues of approximately $111 million in Q2. That would imply the segment being down high-single digits quarter-over-quarter.

Legacy ICU was strong, with growth over 20% in oncology. Both legacy ICU and legacy Hospira businesses were strong internationally, and this was offset by legacy Hospira losses in the U.S. 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. At the moment, we expect Hospira losses to bottom out over the balance of this year as the major changes occurred in the third quarter of 2016 for the legacy Hospira business. We believe that this segment should be positioned for some growth in 2018.

It is important to spend a moment on the effects of the transaction on our results in this segment for 2017 as it will make an impact on our 2018 build. As mentioned on the previous call, we are not currently capturing the full margin in this business due to the combination until we have sold all the inventory Hospira purchased from ICU pre-transaction. To explain this a bit more from an accounting perspective, it's like ICU took a timeout from selling any product to Hospira for most of 2017. Since we became our customer, we don't capture the effective intercompany profit until all existing inventory is finished and newly built product is sold to the end customer. Based on our current view of 2018, even with the reduced Hospira demand, we believe this will have a positive $20 million EBIT impact year-over-year as we fully recapture this margin in 2018.

The second segment to talk about is infusion systems, which is the business of selling pumps, dedicated sets and software, which is an important segment because it's the business that brings a lot of recurring revenues, and it was the largest customer of the legacy ICU OEM business. The same issues exist here in trying to be precise on the revenue number given the delayed-close countries and some accounting adjustments. Most of those delayed-close geographies, Latin America, parts of Europe and Asia, are all predominantly pump markets for us. Our internal estimate is the segment delivered $96 million in revenue, which would imply being down in the mid-single-digits range as the losses we outlined in the revised transaction are taking a bit longer to materialize.

The international business is holding together reasonably well, and we would expect this segment to bottom out in the U.S. sometime in 2018, with the lowest-level installed base in the last 20 years. Relative to where we're starting as the new owner, this segment is much smaller than historical levels and just improving ourselves a little to make a huge difference across our P&L. We've been focused both on our core group of loyalists here from a customer's perspective as well as the situations where we think we have market share risk and 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 basic marketing and defining our integrated value to the market.

This segment has had a historically high amount of resources and structural cost to support it, much more so than other businesses in ICU given its capital equipment. And we've been very aggressive in rightsizing the structural cost to align with the current reality.

The last segment that we acquired is the one we have the least familiarity with, infusion solutions. This segment reported approximately $113 million in revenues and declines in line with our previous estimates. We're really focused here on quality and capital expenditures and making sure we clean up a lot of the orphan business issues and stand-up activities. We're trying to operate with transparency to customers and illustrating the generic drug-like regulatory framework, high capital expenditures required and value in a healthy supply side situation to a business that was a bit of a historical anomaly at Hospira. And we're deeply focused on our separation from Pfizer here.

In Q2, we continue to hang on to some legacy business longer than we expected, but we do assume in our 2017 revised expectation that longer term, we will have losses, as previously described.

On the last call, we outlined our near-term goals of broadening the customer dialogue with an integrated commercial organization, aligning around the various additional cost-saving actions, making decisions on geographies, digging in on operational and quality reviews and fully planning the IT conversations and stand-up to allow us to exit TSAs from Pfizer and ensure that our R&D and CapEx investments were spent -- are spent wisely and with discipline. I wanted to give an update on those items.

On customers, it has really been about refreshing the message of why ICU Medical exists and the value we can add to the system and the value to the system in having us as a healthy participant. We have locked down our U.S. commercial team and have also finished our reorganization in Canada, which is an important geography. We have finished planning most of the commercial organization for the rest of the geographies. With these teams, we've been focused on, first, upping our commercial intensity, changing the commercial execution and improving the customer intimacy that deteriorated over the last few years at Hospira in these business lines. Feedback on the products continues to be solid. The products are necessary for the system and have been reliable for many years. We're trying to bring the historical ICU mentality of innovation and value to these categories.

We have found a core group of team members who deeply care about the customer and want to get out and fight every day. And we found a core group of customers who believe in the products, like the stability and, frankly, just want to do their jobs of delivering patient care and not particularly interested in the drama of one of their core suppliers. We just need to act with intensity here as we did at ICU over the last few years.

On cost savings, we have been very active. Towards the end of Q2, we undertook another deep round of cost savings initiatives. The first activities in Q1 were focused on the commercial activity. These actions were broader and centered around support areas and what I would call the luxury items for us at this moment in our history. The benefits of these actions will start to show later this year and help us reach our synergy targets for 2018.

We have been actively diving into each product line and each geography to understand where we make returns and organize the decisions that need to be made. We stated on the last call that those decisions may result in discontinuing certain product lines or even withdrawing from certain geographic markets. Each decision has to weigh the strategic merits versus the realistic financial plan.

Since the last call, we have decided to exit the Brazilian infusion pump market and some regional Middle East locations. More importantly, we have continued to move forward on investing where we believe returns can be generated. This morning, we signed a small acquisition of an Australian consumables company called Medical Australia. It's a net $8 million acquisition, but it helps us get more scale in the Australia market, where legacy Hospira have lost its footing. It is the company we were tracking for a long time at legacy ICU and felt it could help broaden our consumables business. And in the context of this integration, it allows us to leverage a bigger footprint in-country. It is a public company M&A deal, which is a little sub-optimal at this size, but we can manage the transactional execution at a low cost and believe it does not affect the specific integration of legacy Hospira in Australia. So welcome to our new mates in this market, and we look forward to joining -- having you join the ICU Medical team.

On quality, we went through a lot in the first 100 days of the year with full FDA inspections at both the Costa Rica pump facility and the Austin IV solutions facility. Additionally, we had over 10 notified body audits at a number of our sites, including Chicago, San Jose and San Diego for legacy Hospira and Salt Lake City and Ensenada for legacy ICU. Since the last call, we have received our official close-out relating to the 483s we received in Austin, and we've had another FDA -- successful FDA inspection at our San Clemente office here.

We continue to be actively deep-diving in all quality-related activities. I would say that not everything is to my satisfaction yet, and we have to err on the side of caution as the new owner, and it still could be bumpy. We are adopting a mindset of transparency around all historical issues, and we believe it's important for regulators, customers and suppliers to see us as continuously improving ourselves and cleaning up any historical issues with a cautious and conservative mindset. Just like I said for the first year at ICU, not until we have some time under our belt and we see success under our watch will we declare fundamental improvements. We continue to be cautious here with our budgeting and our intent is to build in conservatism on our P&L to handle these bumps.

Okay. On to the integration, IT migrations and TSA separation from Pfizer. We're deeply into the throes of integration planning. Philosophically, as the founder of ICU used to say, we are trying to measure twice and cut once. These IT system migrations are complex, filled with legacy issues and require great caution. I've personally been burned in prior experiences when these projects become more transformational versus migrational. And we have seen even the best-in-class industry companies that we deeply admire have issues with these challenges. So we are being very deliberate. Our plan is to start the execution phase soon in what I call the outer perimeter, countries and regions where we have less profit at stake but have to implement many of the same processes and procedures that we do here in the U.S. market. We think right now, it's best to be cautious and plan that we will not be off these systems until the end of the third quarter of 2018. It is vital in the value equation to have this happen. As we previously stated, there's between $30 million and $35 million in long-term savings moving away from Pfizer infrastructure, which we currently pay $85 million a year for.

The second part of integration is building the capabilities in-house as much as the planning and execution at the moment is done with expensive consultants and service providers, and we need to build the competency inside the company because efficient operations at ICU is what led to our attractive historical margins. To use a hockey analogy, I think our first line is set and part of our second, but we need to finish building out the second and third lines to make sure we can finish the game. We're actively recruiting to bring the right people into the company. We first solidified the general management and finance support for each segment, and now we're focused on this area.

Okay. I wanted to bring all this back to the topic of short-term results, how we think about the medium term of 2018 and longer-term value creation. Due to hanging on to some of the legacy Hospira revenues longer than we thought plus the cost savings initiatives today, we are modifying our 2017 adjusted EBITDA range to $180 million to $190 million versus the $170 million midpoint we had previously issued, and Scott will walk you down through EPS.

When we revised the transaction, we had talked about a goal of achieving a $250 million adjusted EBITDA run rate by the end of 2018. I wanted to outline how we are currently thinking about it, and hopefully, by our third quarter call, we could state a more specific range for 2018. Our current math for 2018 is as follows: if we assume to finish 2017 at the midpoint of our modified guidance at $185 million, to that, we would first add the $20 million of intercompany profits I described in the consumables segment; second, our previous goal of $35 million of 2018 operational synergies; third, a normal expectation for legacy ICU now -- Hospira plus ICU consumables earnings growth of $10 million; and a reasonable assumption for TSA savings in 2018, which we would call $10 million today. We would then subtract from that the losses we expect in the infusion systems and solutions segments. We think the losses will be felt more in the first half of 2018, leading to a better back half run rate. Again, there are a lot of moving pieces, but I wanted to directionally outline how we were thinking about it.

While adjusted EBITDA is a useful metric given all the noise of the transaction, it's important to get the real cash expenses of integration behind us and focus on the real free cash generation for longer-term value creation. We talked on previous calls how we would sacrifice margins this year and in the short term to improve working capital and the balance sheet. In Q2, we added $40 million of cash when EBITDA was $47 million due to certain improvements. We expect this trend to continue and should finish this year with approximately $300 million in cash and still owe Pfizer $75 million in January 2020. The way I think about it for long-time ICU shareholders is ICU is still adding the same amount of annual cash to the balance sheet, and essentially, Hospira is paying for its own integration, albeit the cash isn't coming in, in the exact same fashion.

But the other important driver for value creation in the longer term, even if we don't have growth, are capital expenditures and tax rate. On the last call, we said 70% of our business or so, going forward, the infusion consumables business and the infusion systems business, does not have as much of a CapEx need as historical Hospira. The declines in volume across the network and having duplicative manufacturing assets allows us to be more optimized here. At the moment, we think we'll require a little less CapEx than originally anticipated. Scott will talk about tax rate, but the combination should have materially improved tax rate versus historical ICU.

Longer term, heading into 2019, there are, again, items that I would call the high-hanging fruit or synergies dependent on IT separation that allow us to get more efficient with our processes and infrastructure. We have to execute well in 2018 to allow for these to be available. If we can also have the strongest balance sheet possible at the end of 2018, we can use it to help returns. Along with capturing these high-hanging items, we think we have a case for longer-term value creation. Today, high level, when we look at the business, we see roughly 50% of the total business, infusion consumables and the international portion of infusion systems, where we have a good offering and a right to win. And we have 50% of the business where we need to improve the situation. Like our experience at ICU, we believe the Hospira businesses, with just some basic operational rigor, can improve its P&L in the medium to long term. Our goals are just like our previous experiences: to first enhance margins, 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 improved cash conversions and returns. In the worst case, we continue to fight headwinds on the top line, but we can 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 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 opportunities for more cash generation. But what is different than our previous experience in ICU is the sheer size and scale of the work we have to do. It's very rare when the $400 million lean corporate player buys the $1 billion revenue customer. This is a complex corporate carve-out and has aspects of a turnaround in certain of the business lines, at the same time, while kind of being a public LBO just without any debt. We do get to do this from a position of strength and stability in our base business, but it is about as challenging of a corporate project as many of us had faced.

With that said, on all the previous calls, we talked about the offensive and defensive reasons for the transaction, the need to control our own destiny. And even with all these challenges, we believe there's real intrinsic value in the asset we have created. We feel that we've been very transparent with investors on our plans over the last few years and cautious with our own expectations, and we want and need that mentality to continue. Not to talk down or talk up the circumstance, just to be realistic on what's ahead of us.

Short-term outperformance is not likely with this transaction, and it is important that people understand that. As we said on the previous calls, the results for the acquired businesses in the short term will get worse before they get better, similar to our first year here at ICU. We expect the back half of 2017 to be a little lighter than the first half of the year, even with the cost savings efforts that are now being realized. As we 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. 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 can be generated quickly, like ICU.

In closing, 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 still left real room for value creation for investors. And if you're an existing ICU investor, we appreciate your support in advance and hope you feel that these actions provided sensible capital deployment and an opportunity for increased value in the medium to long term.

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 action and break some of the inertia that many companies in our position face. We may hit some bumps as we take on some of these actions, and we will overcome them and emerge stronger. I really appreciate the effort of all the combined -- I really appreciate the effort of all employees at the company to adapt, move forward and focus on improving results, and our company appreciates the support we've received both from our customers and our shareholders.

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

Thanks, Vivek. So the second quarter was our first full quarter as a combined company, which makes this period a bit more representative of what the next few quarters could look like, although there are a number of moving parts, such as the effects of purchase accounting and TSAs with Pfizer.

I will first walk down the income statement then discuss all the various adjustments and then highlight the key items impacting operating performance versus transactional accounting. So to begin, our second quarter 2017 revenue was $332 million when compared to $97 million in the same period last year. GAAP net loss for the second quarter of 2017 was $37 million or a loss of $1.87 per diluted share compared to GAAP net income of $17 million or $0.98 per diluted share for the second quarter of 2016.

Adjusted diluted earnings per share for the second quarter of 2017 were $0.76 as compared to $1.15 for the second quarter of 2016. And adjusted EBITDA was $47 million for the second quarter of this year compared to $33 million for the second quarter last year.

Looking at the difference in our sequential performance this year of adjusted EPS of $1.68 compared to quarter 2 of $0.76, was a $10 million tax benefit in Q1 versus only a $2 million benefit in quarter 2 and higher depreciation in quarter 2 versus quarter 1 due to the acquisition.

Now let's discuss our second quarter revenue by market segment. And for your reference, the 2016 pro forma unaudited revenue numbers can be seen on Slide #4. And as a reminder, revenue will be reported by the following 4 market segments. The first is infusion consumables. This includes the non-dedicated sets and accessories, such as the SwabCap, and will include the traditional ICU IV therapy in oncology segments. Second is infusion systems, which includes the infusion pump hardware, software, dedicated pump sets and service revenue. And third is IV solutions; and fourth, critical care.

For the second quarter, sales of infusion consumables were $78 million. Sales of infusion systems were $73 million, and solutions sales were $134 million. As we mentioned on our last call, we are a contract manufacturer to Pfizer for certain IV solution products that we'll make and sell to them at cost for at least a 5-year period. Excluding $21 million of contract sales to Pfizer, solution sales were $113 million. As Vivek mentioned, we continued to hang on to some legacy infusion systems, consumables and solutions business in the second quarter. Critical care sales were $12 million compared to $13 million last year. And the remaining $35 million of sales is primarily made up of sales to delayed-close countries and isn't traceable back to a specific market segment.

For the second quarter, our GAAP gross margin was 27% compared to 52% for the same quarter last year. The year-over-year decline is due to the acquisition of the Hospira business, which has certain historically lower gross margins and certain transaction-related items.

SG&A expenses increased for the 3 months ended June 30, 2017 as compared to the same period in the prior year primarily due to the impact of the Hospira acquisition. R&D expenses increased for the 3 months ended June 30, 2017 as compared to the same period in the prior year due to the acquisition of Hospira and were 4% of revenues this quarter compared to 3% for the second quarter last year.

There are temporary impacts to our P&L that are both operational and transactional, so I wanted to take you through these, beginning with operational items related to decisions we've made on how to temporarily operate the business. As we've already mentioned, reported revenue from the delayed-close countries is not reportable by market segments, and most of these countries should close by the end of this year.

Next is gross margins. The planned inventory reduction from product we acquired in the Hospira transaction is the decision we made to improve working capital efficiencies. So while this helps free cash flow, this will cause a temporary loss of fixed overhead absorption in the factories starting in the second quarter and should continue into the fourth quarter this year.

By the end of this year, we expect to have inventory levels in line with our expectations. In addition, we expect to improve SG&A in absolute dollars through synergies and standing up the business over time. But in the short term, we will have duplicative headcount as we prepare to exit the TSAs. And as we mentioned on our last call, we do expect expenses to go up before they start to come down.

The temporary impacts to the P&L that are transactional accounting-related are: first, in January, prior to closing the transaction, ICU shipped 1 month of product to Hospira and recognized gross profit on those shipments. However, in the second quarter, the profit we would have recognized prior to the acquisition now gets delayed until that product ships to the customer. This had a temporary effect on margins and earnings in the second quarter and will also affect the third quarter of this year, until we start shipping this product to our customers.

Second is the purchase price step-up of inventory purchased in the transaction. As you can see from Slide #3, when you back out the effect of purchase accounting on a non-GAAP basis, our gross margin was 36% or 9 percentage points above our GAAP gross margin. We'll see this type of impact to a lesser degree in the third quarter, until we have finished shipping this acquired inventory and the fact that we included 3 months of certain lower-margin legacy Hospira product shipments in the second quarter versus only 2 months in the first quarter this year.

Restructuring, integration and strategic transaction expenses were $20 million for the 3 months ended June 30. Restructuring and integration charges were $8 million, and these charges were related to severance and integration costs to stand up the business from Pfizer. We do believe we are making good progress on our integration as we see a clear path forward to standing up the legacy Hospira business from Pfizer with a heavy emphasis on systems integration. Strategic transaction expenses were $12 million for the 3 months ended June 30 and were mostly related to our acquisition of the Hospira business.

In addition, there was a noncash adjustment to the carrying value of our contingent consideration payable to Pfizer if we reach 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 tax rate benefit was approximately 5% in the second quarter of this year compared to 31% tax rate expense in the second quarter last year. Excess tax benefits recognized were on stock option exercises, research tax credits and the mix of taxes in domestic versus foreign jurisdictions. These are partially as a result of the Hospira acquisition, and they all contributed to the overall tax benefit for the quarter. For these reasons, we expect our annual tax benefit for 2017 to be between $7 million and $9 million. And next year, we believe our tax rate should be at a historical low, excluding any discrete items, to be in the mid- to high 20% range.

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 $37 million of free cash flow. This included a reduction in inventory by $45 million. Now while we don't expect to be able to continue to bring inventory levels down the rest of this year at the same rate as we did in the second quarter, we will continue to work towards improving our working capital.

In the second quarter, we spent $11 million on CapEx, and for the full year, we expect to spend approximately $70 million on CapEx, and this includes investing in IT integration and infrastructure.

As of the end of June, our balance sheet remained strong with cash and cash equivalents of approximately $241 million and net cash of $166 million. And we should end the year with $290 million to $300 million in cash and $75 million in debt. We are reiterating our full year 2017 revenue guidance to be in the range of $1.2 billion to $1.25 billion.

In addition, based on our results through the first 6 months of this year and expectations for the remainder of 2017, we are modifying our adjusted EBITDA expectations from the previous range of $165 million to $175 million to $180 million to $190 million. We are also modifying our adjusted EPS guidance from the previous range of $3.55 to $3.90 to $3.80 to $4.20 range.

I just want to be clear. We're now only 6 months into the acquisition, and there's still a lot of moving parts, both operationally and transaction-related, including stand-up costs of new hires, IT migrations, et cetera, and it could be bumpy.

In 2018, we'll be clear of many of the accounting impacts, such as the delay of capturing our full margin for our consumables business, which, combined with no more purchase accounting, should improve the performance of the company, and we look forward to keeping everyone updated on our progress on our third quarter earnings call.

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

(Operator Instructions) Our first question is from the line of Larry Solow of CJS Securities.

Vivek, a lot to digest, but just in summary, it sounds like just from a high level, revenues or year-to-date or even in the quarter, perhaps, slightly better than expected, but -- and the difference being above that slightly better on the core is that some of the Hospira revenues are -- you're holding on, on some of those markets where you contractually expected to drop over the next couple of quarters. And then on the cost side, things are, perhaps, coming in faster, a little bit better integration, faster than expected, and that, I guess, bodes well for next year. Is that sort of a good way to look at it?

I think on revenues, it's what you said. It's -- we're hanging on to stuff a little bit longer. We do expect it to go away, and then we were able to take out some costs, which impacts this year and will help next year. That's different than saying the integration is going well, right. I mean, the cost reductions are going well. The integration we're about to start, which is all the stuff about running the back end of the business, we believe we planned for it well but the execution is just about to start.

And what is -- just on the Hospira side, any reason why you think it's holding on? And what -- is it just contractually, just some of these purchasing matters having been off -- takes a little bit -- there's a bit of a lag which seems what they do and what the contracts said they should be doing and why do you think this will change?

I think to a large degree, it's a lot of inertia, right, to be brutally honest about it. And on some situations, we're in there. We're fighting and we're to stay alive. And even if we can keep the conversation going for a little bit longer, that's still cash that we're generating to our account, so we're trying to do that. But I don't think it's a lot more complicated than that.

And then you sort of gave us a ballpark of where you think next year lays out on EBITDA basis. And then I know you -- the loss from the Hospira business, so any additional losses sort of on the gains that were held on this year, is there -- can you ballpark what you, sort of, think that number might be? Is that like another $10 million less EBITDA type thing? Or is it more than that?

I mean, if you added up the pieces we said there of the adding off the base of this year, that took us to some number like 2 60 and we don't know exactly. It's doing a couple percentage points better than we thought this year, what we're hanging onto. And when we revised the deal in January, said some of these losses will continue into '18. So it's probably what we're hanging onto plus a little bit for next year, right. And so at that gross margin, it could be $15 million or $20 million of risk around that, right.

Right. And then just last question on the...

I would say the run rate in the back half, and hopefully those losses first half of the year.

So it sounds like, yes, you're -- instead of using the run rate $250 million, it sounds like maybe you're hopeful of getting closer to that $250 million if losses are in a $10 million, $15 million year-over-year.

I'm not leading in and saying it's going better than we think in integration. I'm not saying we're taking anything except right now we've improved, we think, this year. And we tried to give the color as to why we think we can stand by the $250 million run rate we set before.

Okay. So most of the numbers are really run rate, that type of thing, and not a full year number per se? Is that right?

As of now, that's how we're stating it.

Okay. And then just lastly, I know you -- I think -- I know you said legacy oncology ICU was up 20%. Is there anyway -- I don't know if you -- can you figure out legacy just on the infusion therapy side? Is there any way to sort of -- that sounds like it's still growing low double-digit range? Is that fair to say?

No. Not legacy ICU.

Excluding Hospira adjustment sort of if...

No. But even not legacy ICU infusion therapy. It wasn't double digits towards the end of last year, right. So it's doing fine. It's growing, but it's all co-mingled in the same pot now. It's 1 segment, so we're not going -- we've got to stop talking about legacy. We're not even setting up our systems to look at things that way.

Right. I know it's not that easy to cancel. But is there any change? The market obviously was red hot last year. Is there any change in, sort of, the macro or anything of meaning or material?

I mean, right now, utilizations continue to look okay to us and fairly balanced. And there isn't outliers in any part of the country. So we haven't seen major utilization shifts. I mean, we're paying a lot of attention to census. Census was a little bit lighter but nothing dramatic.

(Operator Instructions) Our next question is from Jayson Bedford of Raymond James.

I guess just to finish up the last discussion. The message on 2018 EBITDA around run rate of $250 million you gave us a few more components. But it sounds like you're endorsing that comment or reiterating the goal of $250 million EBITDA run rate. Is that...

I mean, we said -- hi, Jayson. We said $250 million when we cut the deal. We obviously felt that was a tough time and we're trying to say we believe what we said at that moment and illustrate the components to help us get there.

Right. That's what we're trying to do.

Okay. Is there any way you could bridge us from the first -- from the gross margin, the adjusted gross margin in 1Q of, what, 45% to the 2Q gross margin of 36%? Can you just give us the components?

I will whole-handedly throw that one to you, Scott.

Jayson, there's a couple of components to that, that we mentioned. One is if you remember in the first quarter, we shipped 1 month of product to Hospira that had the full profit in it in the first quarter versus we did not get to recognize any of that profit in the second quarter. The second is the fact that we are bringing down inventory levels, as you can see, and that had an impact on the factory's absorption of fixed overhead. That's the 2 primary reasons for it.

And the profit on the products sold to Hospira, I have to believe that's a few million dollars. So the vast majority of the gross margin draw down here from 1Q to 2Q is this, I guess, it's a drawdown in inventory is effectively what it is.

I don't know if I would characterize that as such. I mean, as Vivek mentioned, there's $20 million there.

It's not a small amount of money, Jayson. It impacts the gross margin by more than 100 basis points, right, the recapture of that. It's a big deal.

They both were impactful, Jayson.

But Jayson, it's what we said, which is we would slow down production and try to sell what we acquired in the transaction. And we're trying to do that. What I said about Hospira's funding itself for its integration, we're still putting cash on the balance sheet in the midst of crazy integration spending.

And if you're just looking at margin not GP, but margin, for example, remember, there are certain legacy Hospira products that have lower gross margins than do the legacy ICU. And we had 3 months of legacy Hospira versus only 2 months last quarter. So you could look at that as mix as well.

Okay. Scott, what's the tax rate associated with the $0.76 in adjusted EPS that you reported?

So you -- there's the tax benefit of the $2 million. And then I believe the rate in adjusting out the tax effect, like if adjusted out, is around 27%, 28%.

Okay. I'm just trying to get to the disconnect between -- it seems like the EBITDA was a lot bigger than the -- from an upside perspective, than the adjusted EPS. I'm just trying to figure out what the delta is there. So maybe I could take that offline.

Sure.

I guess from just lastly from me in terms of closing the international countries, do you have any -- your accounting for a portion of that in the other bucket as you played out in the press release. Is there any idea of how much you're, kind of, leaving on the table? Meaning how much you'll recognized when these countries' are indeed closed?

So Jason, if you look at the face of the P&L, it shows, I believe, $34 million, $35 million in Other. That is almost all primarily related to these delayed closed countries. And so that revenue is not allocable to the 2 market segments of consumables and systems. And so what we tried to do in this call was to estimate what we thought that allocation might be to get it by market segment. And so we're basically realizing the overall revenue on the face of the P&L that's in the total revenue line. But it's just not allocable to the different market segments until we bring them into the ICU fold, so to speak.

Okay. And just maybe bigger picture, maybe for Vivek. What has the ownership of the Hospira portfolio done for the legacy ICU business? Meaning, I guess, I'm specifically thinking of the kind of independent nondedicated set business that you had outside of your Hospira relationship. Has it helped, hurt or status quo?

It's too early to say it's done anything. It's certainly not going to hurt. I think the things that we're excited about there, we said, look, we do believe we'll have growth in the -- you guys know it, it's a word that's hard to come by in the last few months here. We were talking about doing okay in that segment next year. One area of excitement for us is in our oncology business, Hospira had exclusive access to a large portion of the market. And so we are unleashing our folks on that portion of the market and getting it's full attention, which is good. Second thing is the international opportunity and focus. ICU was doing okay internationally, but Hospira brought a bunch of countries where they had real scale, and we want to put all the products in their hands. And this Australian thing is kind of an example of that like where we've got to just do better and there's more market available to us. And in the U.S. -- and it's not something you want to wear on your sleeve, but the fact that we're vertically integrated and capture the full top to bottom margin allows us to be more competitive in some situations. We're trying to just get in a dialogue so we can be in those situations, but it does position us better. I mean, those are the 3 real drivers for us on consumables.

Our next question is from Mitra Ramgopal of Sidoti.

Just a couple of questions. Vivek, you talked earlier about doing a deep dive into the product lines and the geographies, and one of the things you decided was to exit Brazil and some of the other Middle East locations. I was just wondering, is this sort of an annual review you'll be doing? Or is this more sort of good for the next maybe 3 to 5 years out in terms of what you...

Please. Look at the infusion business over the last 3 to 5 years. No, I mean, I think it's every day. It's our job, right. It's just, it's big. It's 3 or 4x the size of us. And so we've got to get it right on the people. We've got to get it right on the products and the systems. And with every available monitor, we're looking at it every day. And there's a lot of good people there who are getting us up to speed fast and adding value, but it's not a static thing where we just -- you followed us here for years. We didn't just check the box where it say it's all okay, right? It's just not what it's going to be. But what I'm happy about is there was a lot of good work and analysis done. It just doesn't necessarily make its way to the top. There's a lot of people who have a lot of history and knowledge about the business, in the segment, et cetera, and we're just trying to let those people get out in the sunlight and show themselves a little bit.

Okay. No, totally understood. I know you mentioned markets like Canada being pretty important now, the small acquisition regarding the Australian market. But are there other geographies you think you need to be in? Or -- and again I know you're always evaluating that, but anything that...

I think there are geographies like this Australia things. It's small. I mean, we don't spend too much time talking about it, but there are geographies that are important that -- we were relying on Hospira and Hospira wasn't executing well, and so we need to fix those geographies. Canada was an example of where they're executing well and there's a great team, et cetera. That wasn't the case in every market. And so in the markets where we have a great team, we've got to leverage out in markets that we were both a little bit less on. We have to invest in certain markets. It's just as like that in the Middle East stuff we're talking about and the Brazilian pop market. If you're not of a certain size, get out. And we just have to make those decisions. And regardless of what, maybe, a 10-year growth opportunity, we can't subsidize it today. I think in the margin, there's probably a rebalancing. There's probably a few more places to get a little less weighted on and a few more places to invest more in.

Right. And when we look at the product line, I know critical care is something you're going to be bringing on some new products looking at the first half, maybe, versus a year ago, et cetera. It seems like it's still not quite where you want it to be.

It is not from a P&L perspective where we want it to be. It continues to be roughly flat. I think it was down, and we're not trying to disrespect critical care here. It just hasn't been at the forefront in the last few months. It was down a little bit. But the big thing happened, which is the product Cogent was launched. It made its way to markets. It's at customer sites. A little bit like our attitude was on ChemoLock 18 months ago or 2 years ago. We're not going to talk about until we get some real amount of sales, but it's done. It's being produced. It's out the door, and that is different then. We've got approval a year ago, and it took a year on some of these capital equipment projects to get them out there. But that is happening. That's a really good thing for that business.

Right. And finally, I know you're only about 6 months into the whole process. You've already gone through the FDA inspections, identified a lot of cost savings, et cetera. How would you characterize where you are in the process in terms of where you expect it to be looking back at the transaction 6 months in? Would you say you're pretty much where you want to be? Or you're maybe ahead, maybe a little behind? How would you view things right now?

We don't have so much time these days to be introspective about that stuff. I feel like we are -- we're good -- we did an okay job on the easy stuff, right. We did an okay job on the cost reductions, which are tough choices, but a manageable set of decisions. I think the next 6 months, as we start these IT migrations, will be a much more telling period if our planning was solid or not. And so I think the things that protect the shareholder and protect the P&L in terms of cash generation, managing inventory, working capital, cost reduction, hanging on to business, that stuff we've done okay at, some through luck and some through our actions. And now the execution around the integration is going to, kind of, be the next test, right. And that's a real test when you start turning off systems and turning on systems on your own watch.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Vivek Jain for any further remarks.

Thanks, everybody, for listening to our Q2 call. We hope you see we're working hard to try to create value around this large undertaking in transaction that we did. We look forward to updating everybody on our third quarter call, and we hope everybody enjoys the balance of the summer. Thanks very much.

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