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ICU Medical, Inc. (NASDAQ:ICUI)
Q2 2018 Earnings Conference Call
August 9, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to the second quarter 2018 ICU Medical 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 be given at that time. If anyone should require operator assistance, please press * then the 0 key on your telephone keypad.

I would now like to introduce your host for today's conference, Mr. John Mills, Partner at ICR. Please go ahead, sir.

John Mills -- Partner, ICR 

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss ICU Medical's 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 risk 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 in ICU Medical's ongoing results of operations, particularly when comparing underlying results from period to period. We also included reconciliation of these non-GAAP measures in today's release and provided as much detail as possible on any addendums that are added back.

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

Vivek Jain -- Chairman and Chief Executive Officer

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, we 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 and a 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 $266 million. We added approximately $54 million in 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 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 -- please use slide three 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 US versus OUS in Q2.

This is the segment where the most advantage now is a joint entity. We're hard at work on rationalizing the product portfolio and bringing together all of the operational efficiencies of the combination. Commercially, we have all the pieces, all the technology, and all 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 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 MPV 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 the 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 earlier 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 continued to have that view on end user demand with the only lingering issue being tight on certain inventories.

There are two important value drivers in this segment to note. The first we just talked about, more predictable revenue with better certainty and the ability to 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 volume in the 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've 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 invested significant resources, which is mandatory to be in this business.

To finish the big three, let's talk about infusion systems, which is the 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 have 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 Q2. Those sales came out of Q2 with a 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 a belief that the segment is close to bottoming out with the lowest level install base in the last ten years. Just to be clear, we measure bottoming out by the install 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 segment, since we acquired Hospira, we've actively 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 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 system segment as a 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 cost as we try to also increase R&D spending. Scott will go through the SG&A walk as well as cash catch up from Q1.

On integration, a lot has happened since the last call and we have now cut over 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.

While there have been bumps, we are improving the operations each day. All of this was leading up to the main event, which was the cutover of our US order to cash process sometime in Q3. A change since the last call is that we have decided to delay the US cutover a few weeks in the late September versus starting last week on August 1st.

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 recycle 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 four to six weeks to test more and with a broader variety of situations. We had budgeted cautiously and believe 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 that migrational.

This transaction was so unusual in that it was not like buying a business that came with IP systems or even people who provided what we call support functions. It literally was the acquisition of manufacturing plants, product lines, and local commercial organizations that were run by disparate legacy systems. We are actually uniting all of this onto a single integrated system.

Let's be clear -- our customers don't care about any of this unless it affects them negatively. 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 for the ability to handle more on these platforms when we're through this integration.

The consequence of doing this -- 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 in Q4 for from a SOX and audit perspective nor do we want to have any delays which impact our savings assumptions for 2019. 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 six 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 US for three or four days as we convert and we want to make sure we get all that done in Q3 to try to have a clean Q4.

A single day in the US is worth about $4 million in revenue. We do think Q3 revenues, even if fine through today, will be choppy 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 in 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 believe we can say Q4 revenues can be better than Q3. We just don't know exactly -- 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, adjusting 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's followed us for a long period of time knows we try to minimize our public statements or releases to when something happens of substance. As an example, we've averaged two press releases a year for the last four 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 midcap companies are scarce and we felt there was a brief window in the market that allowed for alignment.

We also believe that the US healthcare market is rapidly maturing and brutally competitive, where they're the equivalents of AT&T and Verizon in our industry. We think our slice of healthcare is no different from other industries, where the typical market logic is smaller players aligned 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, carveouts, quality experiences, etc. These aren't easy things and it's never just one business or one system. 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 differing views is what makes the market. 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, one quality, we did go through a pretty thorough notified body inspection season over the last four months, including the new MDSAP audits and we successfully navigated through all of these. Second, we did want to remind everyone that we have now passed the Pfizer lockup expiry. They have been great supporters and we view them as sophisticated investors and bound as any VC would be. 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 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 the last two quarters have given us a look into what that opportunity could 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 can be added to the margin profile we have shown in the more normal, recent revenue environment. Then we see a case for a 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 ABITDA is a useful metric given all the noise of the transaction, it's important to get these real cash expenses of integration behind us and focus on the real free cash generation for longer-term value creation.

We believe we handle 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 zero 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 topline 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 capital we deployed due to the levers I just mentioned.

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. We want and need that mentality to continue, particularly through these system conversions, not to talk down or talk up to 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. Our company appreciates the support we've received, both from our customers and our shareholders. 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, been 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.

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

Scott Lamb -- Chief Financial Officer

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 with Hospira on February 3rd 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.

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 $0.76 for the second quarter of 2017. 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. So, for your reference, the 2017 and 2018 pro forma unaudited revenue numbers can be seen on slide three of the presentation.

So, GAAP sales of infusion consumables were $124 million versus $78 million last year. IV solution sales were $135 million. Excluding the previously mentioned contract sales to Pfizer, IV solution sales were $116 million versus $112 million last year. 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 of 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. As you can see from slide number four, 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.

Just to note, we had our routine factory shut downs for maintenance from all four of our factories in July, which will put slide 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 three months ended June 30th and were mostly related to our integration of the Hospira business.

In addition, there was a $6 million non-cash 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%. 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 cashflow. This was largely driven by cash earnings a decrease in non-cash 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 time out for 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 spend $21 million on CapEx for general maintenance, integration, and infrastructure. Whenever it creates the best ROI, we like to vertically integrate our manufacturing so that coupled with capacity expansion in three our of our four 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. As we 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.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press * then the number 1 key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the # key. Again, to ask a question, that's *1.

Our first question is from Jayson Bedford with Raymond James. Your line is open.

Jayson Bedford -- Raymond James -- Analyst

Hi, good afternoon and thanks for taking the questions. Just a few -- similar to last quarter, it seemed like gross margin, at least to us, was the standout. 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.

Vivek Jain -- Chairman and Chief Executive Officer

I think at the highest, it's -- Vivek, Jayson, hi 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 GSAs that we've had on certain areas there. Then the other half was purely just volume and the volume in solutions.

Scott Lamb -- Chief Financial Officer

Yeah, that's correct.

Jayson Bedford -- Raymond James -- Analyst

Okay. It sounds like in the back half of the year, there will be a little bit of noise, but there was nothing effectively kind of one-timeish in nature here in the 2Q gross margin.

Vivek Jain -- Chairman and Chief Executive Officer

It's really clean. That's what we're seeing. The plant shut down. If you go back in Hospira history, Hospira always called out Q3, I think, because their plant shuts down. We've stayed on the same schedule. That's really the biggest item.

Scott Lamb -- Chief Financial Officer

Jayson, those plant shutdowns will put a little bit of pressure on Q3.

Jayson Bedford -- Raymond James -- Analyst

Okay. Then 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?

Vivek Jain -- Chairman and Chief Executive Officer

Maybe a little on that. But you know, these are deals too that take time to get implemented. We came off a number of wins. We got them implemented. It doesn't run uphill every single quarter. It might shoot up for one 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.

Jayson Bedford -- Raymond James -- Analyst

Okay. Last one and then I'll jump -- 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 eight or nine years in an industry that has seen some pretty good growth. 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 to do turn around what appears to be a struggling asset?

Vivek Jain -- Chairman and Chief Executive Officer

First of all, I want this call to be about ICU. 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. We don't try to keep up appearances. We think we know what we are.

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 don't make sense. That's the kind of thing we've been good at. Opportunities like that, we thought we could add value to. I would just leave it at that.

Jayson Bedford -- Raymond James -- Analyst

Alright. I'll jump back in queue. Thanks.

Operator

Thank you. Our next question is from Matthew Mishan with KeyBanc. Your line is open.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Great. Thanks for taking the questions.

Vivek Jain -- Chairman and Chief Executive Officer

Hey, Matt. You're still here. Call three.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

I'm sure a lot of companies probably wish I wasn't.

Vivek Jain -- Chairman and Chief Executive Officer

We like it. You scared off everybody else.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

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

Vivek Jain -- Chairman and Chief Executive Officer

Something always happens in the cutovers, always. So, I don't think we -- we don't run the business saying each quarter has to be X-percent more than the other. 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. 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.

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 the P&L. It's still the right thing to do NPV, but it's all playing out. We don't control the timing of all of it day to day. So, we just sort of felt this was the best place to be.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

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

Vivek Jain -- Chairman and Chief Executive Officer

Sure. I have a feeling I think this one we've talked about before, right? As each day goes by, more of the market, due to the regulatory tailwinds, which did get delayed in their implementation, but more of the market recognizes the need for these products. The current guidelines, while not enacted, is pushed toward the end of 2019. So, we think there's still some room left to run here.

I think we probably have a more conservative view of the total market sizing opportunity than some of the other stuff we've seen out there in people's materials. I don't know that was have the most [inaudible] number. But we think it's maybe 60% converted, 50% to 60%. So, there's still some headroom left and still some wind left in terms of time to implementation, but it's a bit of a land grab right now.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Alright. And on the solutions piece, some of the contracts you've been awarded, you 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 on line?

Vivek Jain -- Chairman and Chief Executive Officer

I think right now, we're just happy to fight to get back to what we've gotten 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.

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

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

Vivek Jain -- Chairman and Chief Executive Officer

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

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Thank you very much.

Vivek Jain -- Chairman and Chief Executive Officer

Thanks, Matt.

Operator

Thank you. As a reminder, ladies and gentlemen, if you wish to ask a question at this time, please press *1. Our next question is from Larry Solow with CGS Securities. Your line is open.

Larry Solow -- CGS Securities -- Managing Director

Great. Thanks. Vivek, on the consumables piece, obviously, driving a good amount of the strength on the revenue side and 12% growth year to date, whether or not it slows 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 help us qualitatively -- what is driving that acceleration? Is it Hospira, improvement from the Hospira side, your direct side? Obviously, the oncology side is helping too, bus is the market growing faster? Are you taking more share? Can you just give us a little color on that?

Vivek Jain -- Chairman and Chief Executive Officer

Sure. It's a good question. A couple of drivers -- if I was to pick the first three drivers, and these aren't necessarily in order of impact -- remember, for many years, 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 US and certain countries, where they had the right to call on these products.

One of ICU's gripes was that we didn't think the product was getting attention. When we announced the deal, we said value to us was being able to call on the full market available opportunity. 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 are a few spots in the world where the technology is still new -- not many, but there are some. That's been helping. Then three, the consumables products are in the US market inherently linked to solutions for some portion of the market, sort of the non-ICU part, legacy ICU part. If we've gotten something back there, it generally helps on both sides. Those are probably the three drivers.

Larry Solow -- CGS Securities -- Managing Director

Okay. On the margin question or the 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, it sounds like, from your prepared remarks. Is that fair to say?

Scott Lamb -- Chief Financial Officer

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

Larry Solow -- CGS Securities -- Managing Director

And have you guys seen any impact, maybe not direct, but indirect from cost of goods, inflationary issues from tariffs, cost of goods, or just non-tariff-related, any inflationary issues on your labor?

Vivek Jain -- Chairman and Chief Executive Officer

That is a great question, Larry. I'm surprised more companies aren't talking about that. We do feel -- again, it's incorporated in our gross margin guidance -- but we do feel tightness in the labor market not just in our US factories, but at our international factories also. I think a lot of places in the world are humming. So, we feel a little of those pressures.

And on the tariff, there's no tariff-specific stuff. There are issues in the supply chain that come from some of those decisions. Like everybody else, we're scrambling. There are a few ones that hurt that you try to be prepared for. There are little bumps and bruises from that. We're working to make sure we're clear every day. We're not completely out of the woods on that.

Larry Solow -- CGS Securities -- Managing Director

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

Vivek Jain -- Chairman and Chief Executive Officer

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 would not be able to happen before that timeframe.

I think the confident answer is 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 OK. We always said we ought to peak our heads up for the first time in 18 months and look around and we'll see what's out there.

Larry Solow -- CGS Securities -- Managing Director

Absolutely. Okay. Great. Thank you.

Vivek Jain -- Chairman and Chief Executive Officer

Thanks, Larry.

Operator

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

Vivek Jain -- Chairman and Chief Executive Officer

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. I know our company is going to be working hard right through it, but we're enjoying it. So, thanks, everybody. We'll talk to you soon. Bye.

Operator

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

Duration: 45 minutes

Call participants:

John Mills -- Partner, ICR 

Vivek Jain -- Chairman and Chief Executive Officer

Scott Lamb -- Chief Financial Officer

Jayson Bedford -- Raymond James -- Analyst

Matthew Mishan -- KeyBanc Capital Markets -- Analyst

Larry Solow -- CGS Securities -- Managing Director

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