ICU Medical Inc (ICUI) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 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 to discuss ICU Medical financial results for the second quarter 2018. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Scott Lamb, Chief Financial Officer.

We want to let everyone know that we have a presentation accompanying today's prepared remarks. To view the presentation, please go to our Investor page and click on the Events Calendar, and the presentation will be under the Second Quarter 2018 Events.

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

Please note that during today's call, we will also discuss non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into ICU Medical's ongoing results of operations, particularly when comparing underlying results from period-to-period. We've also included a reconciliation of these non-GAAP measures in today's release and provided as much detail as possible on any addendums that are added back.

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

Thanks, John. Good afternoon, everybody. The second quarter of 2018 marked the first complete year-over-year quarterly comparison period of owning Hospira Infusion Systems, and we continue to balance our time between active customer dialogues to improve our commercial execution and being deeply in the midst of an integration to create a single, unified company. We continued to execute well through a large volume of activity and operationally make progress every day on integrating Hospira Infusion Systems.

On today's call, we wanted to first comment on the Q2 results and discuss our current view of the business and recent performance trends; provide the latest status on our integration work and highlight some successes and a few changes to our schedule; provide our latest view on financial expectations for the near term of 2018 and what could still possibly change in the near term; a few comments on certain strategic matters; and lastly, provide some thoughts on the longer-term value creation at a high level from both an income statement and balance sheet perspective as margins and cash generation have improved.

The short story on Q2 was it was probably the cleanest quarter we've had since owning Hospira as almost all the transactional noise is starting to get behind us. The income statement was straightforward with revenues that were almost exactly in line with the comments from our previous quarterly call, with margins in the balance sheet that finished a little better due to a variety of drivers, which I'll explain.

We finished the quarter with approximately $341 million in adjusted revenue. Adjusted EBITDA came in a little over $77 million, and adjusted EPS came in at $2.66. And we added approximately $54 million of cash to finish the quarter with net cash of $333 million on our balance sheet. Pro forma revenue growth was 5% quarter-over-quarter, and we did benefit on the adjusted EPS line from some tax benefits, which made adjusted EPS look a little inflated versus a more normal rate. I'll address the margin changes as we talk about the businesses and integration.

Turning to the individual segments, and please use Slide 3 in the posted deck for the base comparison. So let's start with Infusion Consumables, which, as we expected, became our largest business this quarter.

Infusion Consumables had revenues of $124 million in Q2 2018, which implied 13% growth year-over-year. Oncology continued to be strong with over 20% growth in that category, and the growth was more balanced to U.S. versus OUS in Q2. This is the segment where we're the most advantaged now as a joint entity, and we're hard at work on rationalizing the product portfolio and bringing together all the operational efficiencies of the combination. Commercially, we have all the pieces, all the technology and all the scale to compete globally and should be able to offer more value to the customer. On the last call, we stated we believe this segment could grow high single digits in 2018, and we continue to have that view. The sequential benefits of revenue growth in this segment, combined with exits of some operational TSAs, drove about half the sequential Q2 versus Q1 gross margin improvement.

Second segment to talk about is Infusion Solutions. This segment reported approximately $116 million in revenues, equaling 4% year-over-year growth, which was in line with our expectations as the unique temporary industry issues are resolving and our commercial actions have started to show. We've been trying to operate with transparency to customers by illustrating the generic drug-like regulatory framework, high capital expenditures and value in a healthy supply side situation to a business that was a historical pricing anomaly.

From a value perspective, we have sacrificed short-term revenues and profits for longer-term supply contracts, which we believe offers us more NPV as it makes us a more competitive supplier over time.

In Q2, revenues were down sequentially $10 million, but we actually shipped and sold more units of IV solutions than we did in Q1. The sequential decline in revenues was roughly equally split between less sales of what we were calling the trading business and the impact of some of our long-term pricing decisions to secure committed volume. The benefits of increased production and volume in this segment roughly drove the other half of the quarterly sequential gross margin improvement.

One area for improvement is on the smaller volume units, where we were a bit short of our goals in Q2 due to low inventory levels from trying to serve as many customers as possible during the shortage and due to some self-inflicted production challenges as we were ramping up early in the year, which have now been corrected.

We said on the last call that investors should not assume that 2018 just annualized the Q1 2018 or Q4 2017 run rate. We've been very focused on the longer term, but we want to be clear, verbatim from the first presentation on the transaction, we are going to make economically rational decisions and not sell products at a loss. We said for the medium term of 2018 that the run rate of this business was more in line somewhere between Q2 and Q3 2017 levels, i.e. before the market shortage occurred and appropriately corrected for us getting more contracted volume at less trading-oriented prices, which is exactly what happened in Q2. We continue to have that view in end-user demand, with the only lingering issue being tight on certain inventories.

There are 2 important value drivers in the segment to note. The first, we just talked about, more predictable revenue with better certainty and the ability to participate in market and contractual growth. But the second, which is equally important, is to optimize our production assets. At the outset of the acquisition of Hospira, we believe that we have lost a substantial amount of contracted business and significant production volumes in a fixed-cost manufacturing environment. The recent events, combined with a logical integrated value proposition, have enabled us to improve the amount of business we have under long-term contract and will allow us to fill up the factory we acquired in Austin with more volume. We have been heavily investing, as reflected in our CapEx, to increase our own domestic capacity, which can give us the option to dramatically further increase output when combined with our production option through 2024 with Pfizer Rocky Mount or to move away from Pfizer Rocky Mount if market conditions change. We believe that was one of the attractive aspects of the structure we laid out originally with Pfizer and allows us to keep maximum flexibility.

Lastly, we continue to be vigilant here on quality as Hospira and Pfizer investigated -- invested significant resources, which is mandatory to be in this business.

To finish the big 3, let's talk about Infusion Systems, which is a business of selling pumps, dedicated sets and software, which is important because it brings a lot of recurring revenues. This segment did $88 million in revenue and was down 5% year-over-year.

On the last call, we mentioned we had a few specific known customer losses or product conversions resulting in extra ordering of the disposables that customers needed in advance to convert away from us in Q1. Those sales came out of Q2, with the plus 2 in Q1 becoming a minus 2 for Q2. The international business is holding together reasonably well and, in our view, is generally unchanged from the previous call with the belief that the segment is close to bottoming out with the lowest-level installed base in the last 10 years.

Just to be clear, we measure bottoming out by the installed base of devices, not quarterly revenues. Revenues may bump both up and down due to timing on installations and capital revenue, but we care about the actual devices installed and running in the marketplace as this drives the recurring revenue for the business.

To finish the discussion on the segments, since we acquired Hospira, we've actually been calling on customers and trying to illustrate the value we can add to the system and the value to the system in having us as a healthy participant. While it's a long journey, we do believe the message is resonating. Feedback on the products continues to be solid. The products are necessary for the system and have been reliable for many years.

When we started the transaction with our defensive mindset for doing it, we looked at the business and saw roughly 50% of the total business, Infusion Consumables and the international portion of Infusion Systems, where we had a good offering and a right to win. Today, more than halfway into 2018, we see a somewhat better picture where we believe we have a right to win in most of the portfolio, with really the domestic portion of our Infusion Systems segment as the key challenged area, and we're working hard to address that business.

We've said many times we don't have a specific EBITDA margin target, rather it's just about trying to improve the business and invest enough, but we did finish this quarter above 22%. The biggest driver was the gross margin improvement, and the balance was really reduction in SG&A costs as we tried to also increase R&D spending. Scott will go through the SG&A walk as well as the cash catch-up from Q1.

On integration, a lot has happened since the last call, and we had now cutover all international markets with the exception of Chile, which was more than 15 countries in total. Since the last call, we finished off Europe, Australia and Asia, and while there's been bumps, we are improving the operations each day. All of this was leading up to the main event, which is the cutover of our U.S. order to cash process sometime in Q3. A change since the last call is that we have decided to delay the U.S. cutover a few weeks into late September versus starting last week on August 1. On the last few calls relating to systems cutovers, we said we were trying to measure twice and cut once as these IT system migrations are complex, filled with legacy issues and require great caution.

As we recycled testing in July, we just did not reach our confidence interval, which we define through various financial and operational execution criteria that cleared our hurdle to start. We felt we needed another 4 to 6 weeks to test more and with a broader variety of situations. We had budgeted cautiously and believe that we can do this and still be off Pfizer systems in Q4. We are being very deliberate as I've personally been burned in prior experiences when these projects become more transformational than migrational. This transaction was so unusual in that it was not like buying a business that came with IT systems or even people who provided what we would call support functions. It was literally -- it literally was the acquisition of manufacturing plants, product lines and local commercial organizations that were run by disparate legacy systems. We are actually uniting all of this onto a single integrated system.

And let's be clear. Our customers don't care about any of this unless it affects them negatively. But we care about it because it, first, offers deep value in the form of operational improvements realized over time; and two, it sort of supersizes us with the ability to handle more on these platforms through this integration. But the consequence of doing this, and practically, we had no choice because that was the deal, is that it can be bumpy during these cutovers. There is some small chance that we don't feel comfortable with the testing in late September and we delay further. We really do not want to undertake these activities later in Q4 from a stocks and audit perspective, nor do we want to have any delays, which impact our savings assumptions for 2019. But we will still make the right decision driven by customer impact.

Okay. To bring all this back to the topic of short-term results, how we think about the medium term of 2018. Through the first 6 months of 2018, we produced adjusted EBITDA of $150 million, which makes our $240 million to $260 million EBITDA annual guidance seem a bit out of proportion. It's really hard to say right now exactly what Q3 looks like given the cutover. We literally have an operational blackout in the U.S. for 3 or 4 days as we convert, but we want to make sure we get all that done in Q3 to try to have a clean Q4. A single day in the U.S. is worth about $4 million in revenue. And we do think Q3 revenues, even if fine through today, will be choppy in September. We continue to think being cautious is appropriate given the activities and the competitive environment, so we would adjust our range to $270 million to $280 million of EBITDA for the year, with the single largest variable being just the smoothness of the cutover.

Revenues came out in Q2 pretty much as we said on the last call, with Consumables increasing sequentially and IV Solutions normalizing back to historical levels. We think, generally, those trends continue in Q4, and we can say that we believe Q4 revenues will be better than Q3. We just don't know exactly -- and honestly, we aren't spending a ton of time modeling it, how much Q3 gets impacted by all these global cutovers. Hopefully, our long-term investors see us doing the same thing as previous years, addressing annual guidance on our Q2 call and then coming back after Q3 if there's any new information.

Okay. On to some strategic matters. Anyone who has followed us for a long period of time knows we kind of minimize our public statements or releases to when something happens of substance. As an example, we've averaged 2 press releases a year for the last 4 years, excluding financial results. There has obviously been much ado about a reported public transaction with us from others in the market, and we don't understand how it benefits any operator in competing or recruiting on that basis. We are committed to not commenting on rumors or reports about transactions that may or may not happen, but we feel compelled now to comment to avoid any speculation, which can be harmful to our long-term shareholders. So our comments are as follows: It is unfortunate that we have not been able to find common ground on the usual topics. We felt we had a tax-efficient proposal that allowed for continued value capture by keeping assets working and making a more predictable pure play-rated company with a balance sheet to protect shareholders. We thought that this is what long-term value-oriented shareholders desired toward the end of a long market cycle where predictable small and mid-cap companies are scarce, and we felt there was a brief window in the market that allowed for alignment.

We also believe that the U.S. healthcare market is rapidly maturing and brutally competitive, where they're the equivalents of AT&T and Verizon in our industry. And we think our slice of healthcare is no different from other industries, where the typical market logic is smaller players align to compete against the big players. But we are biased by being very close to the competitive end market environment and with our own histories of corporate separations, carve-outs, quality experiences, et cetera. These aren't easy things, and it's never just one business or one system, and in the background, the competitors are well managed, well capitalized and committed. As a management team, we have some M&A experience, and we believe these different views is what makes the market, and we respect it when operators believe in their own value creation or better alternatives. We remain strategically interested in assets that are logical for us as we finish our integration. As has been our practice, we do not intend to make any future comments.

Okay. A few other housekeeping items. First, on quality, we did go through a pretty thorough notified body inspection season over the last 4 months, including the new MD staff audits, and we successfully navigated through all of these. Second, we did want to remind everyone that we have now passed the Pfizer lock-up expiry. They have been great supporters, and we view them as sophisticated investors and bound as any [BC] would be, and we will support them in any way we can to minimize any disruption and have been thinking about that for a while.

Lastly, we do finally expect these restructuring and integration charges, meaning real cash, to slow down after Q3, and we want to get back to the bare minimum of non-GAAP adjustments basically in line with what ICU did pre-deal.

Independent of the strategic comments we just made, into the longer term of 2019, we continue to have a view that we can improve our profitability regardless of the revenue environment. We believe that the last 2 quarters have given us a look into what that opportunity can be. Longer term, if we made the assumption that the combined effect of the operational synergies and TSA savings, plus future margin improvements based on integration, the high-hanging fruit, collectively to be added to the margin profile we have shown in the more normal recent revenue environment, then we see a case for margin improvement without significant revenue growth assumptions. We have to execute well in 2018 to allow for these to be available, and likely, it will not all be a straight line in getting there.

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

We believe we handled the contract cleanup situations from the last call well, and as expected, got back to adding cash to our balance sheet. If we can have the strongest balance sheet possible in 2019, which we believe will be $500 million cash on hand at some point in 2019 plus 0 debt, and have an infrastructure as a company that can handle more and have continued margin improvement opportunities in our base business with minimal revenue growth assumptions, we think we have a case for continued value creation and the ability to protect our long-term shareholders.

Our goals are just like our previous experiences: to first enhance margins and then improve overall growth. In the best case, we'll have better execution to improve our top line performance over time, drive operational improvements and improve cash 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 just like ICU historically, there are a number of continuing intrinsic value drivers, including high-quality or hard-to-reproduce production assets, sticky product categories and the opportunities for more cash generation. But what is different than our previous experience at ICU is the sheer size and scale of the work we have to do. We have been lucky on a few items, but it is about as challenging a corporate project as many of us have faced.

We feel that we've been very transparent with investors on our plans over the last few years and cautious with our own expectations. And we want and need that mentality to continue, particularly through these systems conversions. Not to talk down or talk up the circumstance, just to be realistic on what we have ahead of us.

As always, I'd like to close with, things are moving fast. We're trying to improve the company with urgency, and we're trying to take responsible actions and break some of the inertia that many companies in our position face. We may hit some bumps as we take some of these actions, but we will overcome them and emerge stronger. I really appreciate the efforts of all combined company employees 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.

And one last comment today before I turn it over to Scott. A number of our employees have been impacted by some of the fires here in Orange County, even suffering some horrible commutes and other issues, and we wish them well, and hopefully, we get some better weather relief here in the next couple of days to make things better.

And so with that, I'll pass it over to Scott.

Thanks, Vivek, and good afternoon, everyone. I'll first walk down the income statement, highlight key items impacting operating performance and finish with some added detail to our updated guidance for the year. As a reminder, we closed our transaction of Hospira on February 3 last year, so this will be the first quarter since the acquisition that the year-over-year comparison is more of an apples-to-apples comparison.

So to begin, our second quarter 2018 GAAP revenue was $361 million when compared to $332 million in the same period last year. Also, please remember, the $361 million and $332 million includes $19 million and $21 million, respectively, of contracted solution sales to Pfizer, which we sell to them at cost. And so on a pro forma basis, revenue increased 5%.

Adjusted diluted earnings per share for the second quarter of 2018 were $2.66 as compared to $0.76 for the second quarter of 2017. And adjusted EBITDA was $77 million for the second quarter of this year compared to $47 million for the second quarter last year.

Now let's discuss our second quarter GAAP revenue by market segment. As a reminder, the 2017 revenue data related to delayed closed entities was not available by product line and was recorded as other revenue. However, by the end of December, all delayed closed entities were closed. And so for your reference, the 2017 and 2018 pro forma unaudited revenue numbers can be seen on Slide 3 of the presentation.

So GAAP sales of Infusion Consumables were $124 million versus $78 million last year. IV Solutions sales were $135 million. Excluding the previously mentioned contract sales to Pfizer, IV Solutions sales were $116 million versus $112 million last year. And just to reiterate what Vivek already mentioned, this quarter, we saw an increase in the supply of larger bags of IV solutions coming back into the market.

Sales in Infusion Systems were $88 million versus $73 million last year. But on a pro forma management basis, sales were down as expected due to known lost contracts. And Q2 sales of Critical Care were up $1 million year-over-year to $13 million.

For the second quarter, our GAAP gross margin was 42.1% compared to 26.6% for the same quarter last year. And as you can see from Slide #4, backing out the contract manufacturing sales to Pfizer, our adjusted gross margin was 44.5% versus an adjusted gross margin of 36.3% last year. The year-over-year increase was helped in part by the temporary margin impacts related to the purchase accounting of last year. The 240 basis point sequential margin improvement from Q1 this year is due to increased manufacturing overhead absorption and favorable product mix, driven by Consumables. And just to note, we had our routine factory shutdowns for maintenance for all 4 of our factories in July, which will put slight pressure on our gross margins in the third quarter, and we believe adjusted gross margins should remain between 43% and 44% for the year.

Year-over-year, SG&A decreased $2 million and went from 26% to 23% of revenues as we started to realize a little sooner than expected some of the TSA savings from Pfizer, slightly offset by an increase in standup and stock compensation expenses. To be clear, our expected $10 million TSA savings estimate for 2018 hasn't changed. We recognized some TSA savings a little sooner than expected, but due to the delay in some of our system cutovers, the remaining TSAs will take a bit longer to ramp down.

R&D expenses increased approximately $1 million year-over-year but were flat as a percent of revenue at 4%.

Restructuring, integration and strategic transaction expenses were $19 million for the 3 months ended June 30 and were mostly related to our integration of the Hospira business. In addition, there was a $6 million noncash adjustment this quarter to the carrying value of our contingent consideration payable to Pfizer. This is based on reaching a certain cumulative earnings target by the end of 2019. 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.

This quarter, our tax rate benefit was helped by an overall lower tax rate on earnings due to the new tax legislation as well as tax credits related to R&D and option exercises. We believe our tax rate for the second half of the year should be approximately 20% to 22%. And for modeling purposes, we expect our full year average fully diluted share count to be approximately 21.5 million shares.

Now moving on to our balance sheet and cash. We continue to concentrate on cash earnings and free cash flow, and in this quarter, we generated $80 million of operating cash and $59 million of free cash flow. This was largely driven by cash earnings and a decrease in noncash working capital.

As a reminder, on our last call, Vivek mentioned that both we and Pfizer were spending a disproportionate amount of time estimating cash collections to us and then subsequently chewing up the calculation. We, together, decided to take a timeout from this process for a couple of weeks in Q1 and rather have Pfizer send us the actual collections and skip a bunch of middle steps. This negatively impacted cash in Q1 and Q2 was a bit higher than a normal period for collecting cash. By the end of the year, we expect to have between $375 million and $400 million in cash.

In the second quarter, we spent $21 million on CapEx for general maintenance, integration and infrastructure. And whenever it creates the best ROI, we like to vertically integrate our manufacturing so that, coupled with capacity expansion in 3 out of our 4 plants, we are accelerating our CapEx spend from the $90 million we said on our last call to up to $100 million for this year. And as we've said on our last call, over time, we expect expenditures to come down to approximately 3% to 5% of revenues.

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

(Operator Instructions) Our first question is from Jayson Bedford with Raymond James.

Just a few. Similar to last quarter, it seemed like gross margin, at least to us, was the standout. And just so I understand the dynamic, the sequential improvement was due to better IV Solutions volumes and the consumable mix? I was a little unclear as to whether or not the exit of TSA influenced the 2Q gross margin.

I think at the highest -- it's Vivek, Jayson, and then, Scott, jump in if I don't get it right. I think it was an equal split between the consumables business and the solutions business. The drivers in the consumables business were primarily volume and then some TSA exits, and some operational TSAs that we've had on certain areas there. And then the other half was purely just volume and solutions.

Yes, that's correct.

Okay. And it sounds like in the back half of the year, there'll be a little bit of noise, but there was nothing effectively kind of onetime-ish in nature here in the 2Q gross margin.

It's really clean.

Yes. That's what we're saying.

I mean, the plant shutdown which -- if you go back in Hospira history, Hospira always called out Q3, I think, because of their plant shutdown. And we've stayed on the same schedule. That's really the biggest item.

And so, Jayson, those plant shutdowns will put a little bit of pressure in Q3.

Okay. And I'm going to jump around a little bit here. On the Consumables side, clearly, some very strong growth. I think you mentioned you're still thinking high single-digit growth for the year, which implies a pretty sharp deceleration in the back half of the year. Is part of that due to the IT cutover and just leaving yourself a little buffer?

Maybe a little on that. But these are deals, too, that take time to get implemented, and we came off a number of wins. We got them implemented, then it doesn't run uphill every single quarter. It might suit up for 1 quarter and start running back uphill again. So I don't think there's been a ton of time spent into the exact number. It's going in the right direction in Consumables for us.

Okay. Last one, and then I'll jump. And, Vivek, I appreciate your comments on the strategic dynamic out there. But I wanted to ask you about Smiths. It looks like their medical business has effectively been flat to down for the last 8 or 9 years in an industry that is seeing some pretty good growth. And additionally, it looks like their profitability is declining this year. So my question is, what do you think ICU offers? Or what can the team do to turn around what appears to be a struggling asset?

First of all, I want this call to be about our Q. Look, I mean, I think our M&A criteria isn't different than anybody else's. We would prefer high-growth, high-margin, revenue-accretive, earnings-accretive assets like everybody else. That doesn't really feel like our lot in life right now for where we are. And we don't try to keep up appearances. We think we know what we are. It just -- I don't really want to talk about it specifically, more just the situational nature of it, which is there are opportunities out there where pieces and parts make sense, pieces and parts all make sense. That's the kind of thing we've been good at. And opportunities like that, we felt, we could add value to. I would just leave it at that.

Our next question is from Matthew Mishan with KeyBanc.

I understand the conservatism with the EBITDA guidance, but -- and it makes sense. But assuming that nothing's impacted from the cutovers and they go as expected, should second half EBITDA be at or above first half?

Stuff always happens in the cutovers and -- always, always. And so I don't think -- we don't run the business like saying each quarter has to be x percent more than the other, right? We focus on getting the factories full, good value prop to the customer and the rest kind of follows. That's what we've been doing. And so I think it's the right thing to do to take a cautionary look with the systems cutover because we haven't done it before together as a company. And we do think some of the choices that we made with pricing and contracting makes the revenue line a little bit bumpy, which works its way down to P&L. It's still the right thing to do NPV, but it's all kind of playing out. We don't control the timing of all of it day-to-day. And so we just sort of felt this was the best place to be.

Okay. That's fair. And then on the Consumables growth, Oncology continues to be a standout. Can you talk a little bit about where we're at in like the transition with closed system transfer devices and how much runway you have there?

Sure. I'd summarize the feeling. I think that this one we've talked about before, right? I think as each day goes by, more of the market, due to the regulatory tailwinds, which did get delayed in their implementation, the more of the market recognizes the need for these products, the current guidelines, while not enacted, is pushed toward the end of 2019. And so we think there's still some room left to run here. I think we probably maybe have a more conservative view of the total market sizing opportunity in some of the other stuff we've seen out there in people's materials. And I don't know that we have the most precise number, but we think it's maybe 60% converted, 50% to 60%. So there's still some headroom left, and there's still some wind left in terms of time to implementation, but it's a bit of a land grab right now.

All right. And on the Solutions piece, I mean, some of the contracts you've been awarded where you've sacrificed near-term price for long-term volume guarantee, how should we be thinking about the cadence of that volume? Is that in numbers? Or is there a steady ramp over the next several years as you get more capacity online?

I mean, I think, right now, we're just happy to fight to get back to what we've gotten. So we haven't -- and fill up the factory, which we're not quite at yet. We will be when we put up our own equipment to move away from Rocky Mount. I don't think we planned on a lot of additional stuff beyond where we stand today, minus what's in these contracts and the like. So we continue to compete. We have available capacity to bring on new business, but we haven't made a lot of assumptions about that.

Okay. And then the last one, and I know you wanted to talk about ICU specific, but I just wanted to clarify, are you still in talks with Smiths Medical? Or had they concluded and the parties have moved on?

I guess it's probably not proper to comment on that. I think I would say, we've -- obviously, a lot of this had been public stuff, and we feel like we're in a reality TV show. I think people know where we stand, right? Because we were very transparent with investors, very transparent with Pfizer. We did that. I think people know where we stand, and we're kind of focusing on our business, I would say that.

(Operator Instructions) Our next question is from Larry Solow with CJS Securities.

Vivek, on the Consumables piece, obviously, driving a good amount of the strength on the revenue side, and again, 12% growth year-to-date. But whether or not it slows a little bit in the second half, which sounds like at least you're assuming that on a full year basis and maybe that's conservative. But just -- can you just help us qualitatively, what is driving sort of that acceleration? Is it Hospira improving it from the Hospira side, your direct side? Obviously, the Oncology side is helping, too. But is the market growing fast? Are you taking more share? Can you just sort of give us a little color on that?

I mean -- sure. I think it's a good question. A couple of drivers. If I was to pick the first 3 drivers, and these aren't necessarily in order of impact. Remember, for many years, and you're -- you've been around the company a long time. The relationship with Hospira was Hospira had exclusive market access for a large portion of the U.S. in certain countries where they had the right to call on these products, and one of ICU's gripes was that we didn't think the product was getting attention. And when we announced the deal, we said a value to us was being able to call on the full market available opportunity. And so point one is at least we've been focused on it where we didn't feel like it was getting focus before. Two has been international. There's a few spots in the world where the technology is still new, not many, but there are some. And that's been helping. And then three, this product is inherently -- the Consumables products are, in the U.S. market, inherently linked to Solutions for some portion of the market. That's sort of the non-ICU part and legacy ICU part. And if we've gotten something back there, it generally helps on both sides. Those are probably the 3 drivers.

Okay. And on the margin question, the sort of sustainability of the margins. It does sound like absent what happens in Q3, which would be a temporary blip one way or the other, these margins are sustainable as we look out into '19 with potential for improvement, sounds like from your prepared remarks. Is that fair to say?

Yes, I mean, I don't think I'd say anything different at this point in time. We're focused on gaining the best operational efficiencies out of our factories as possible, and I don't see anything changing at the moment.

And have you guys seen any impact, maybe not direct, but indirect from cost of goods -- inflationary issues from tariffs on cost of goods or just nontariff-related? Any inflationary issues on your labor or inability to get lift?

That is a great question, Larry. And I'm surprised more companies aren't talking about that. I mean, we do feel -- again, it's incorporated in our gross margin guidance, but we do feel tightness in the labor market, not just at our U.S. factories but at our international factories also. I mean, I think a lot of places in the world are humming. And so we feel a lot those pressures. And on the tariffs, there's no tariff-specific stuff. To us, there is issues in the supply chain that come from some of those decisions, and like everybody else, we're scrambling. And there are a few ones that hurt you try to be prepared for. But there's a little bumps and bruises from that, and we're working to make sure we're clear every day and we're not completely out of the woods on that.

Okay. Then just lastly, on a potential acquisition, whether it be Smiths or -- it sounds like the ball is still up in the air on that one, but -- or another large type size like that. It does sound like you're confident that the Hospira integration is far enough down the road that you would be able to take on another project like that one.

I think our view is, with the exception of the factories that were delivered with IT systems that work and don't need to be switched, we can switch on our own calendar, will be through the Hospira Systems integration by, the worst case, early next year. So anything strategic we do wouldn't -- would not be able to happen before that timeframe. I mean, I think the confidence answers -- we'll answer that when we're all done. But I think it's enough that we have a strong balance sheet. We're doing okay, right? We already said we're going to pick our heads up for the first time in 18 months and look around at least what's out there.

And that does conclude our Q&A session for today. I'd like to turn the call over to Mr. Vivek Jain for any further remarks.

Thanks, everybody, for participating in our Q2 call. We've got a lot of things ahead of us here in the next couple of weeks and months. We look forward to updating everybody on Q3, and I hope people have a nice August and get a little time off in the summer. Our company is going to be working our way through it, but we're enjoying it. So thanks, everybody. We'll talk to you soon. Bye.

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.