ICU Medical Inc

NASDAQ:ICUI

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Q4 2018 ICU Medical, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. John Mills from ICR. Sir, the floor is yours.

[John Mills, ICR]

Thank you. Good afternoon everyone. Thank you for joining us today to discuss ICU Medical's financial results for the fourth quarter of 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 as well. To view the presentation, please go to the Investor page and click on Events Calendar and it will be under the fourth 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 risk 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 growth 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.

[Vivek Jain, CEO & Chairman]

Thanks, John. Good afternoon, everybody.

The fourth quarter of fiscal 2018 marked the third complete year-over-year quarterly comparison period of owning Hospira infusion systems and we continue to balance our time between active customer dialogs to improve our commercial execution and finishing almost all of our integration work to move away from Pfizer and create a single unified company. We continue to execute well through a large volume activity and are near the full integration of Hospira infusion systems.

On today's call, we wanted to first comment on the Q4 results and quickly on the full fiscal 2018 results and discuss our current view of the business and the recent performance trends, provide what we believe is our final update on our integration work and cut over and highlight some successes and certain remaining open issues, outline some key activities that we're focused on in the first half of the year, remind everyone of the first half 2019 comparison and its effect on total company growth rates in the near-term. And lastly reiterate some thoughts on longer-term value creation at a high level for both an income statement and balance sheet perspective as margins and our cash position continue to improve.

The short story on Q4 was it was a hard cleanup quarter as we work through the heavy lifting of our U.S. systems cut over and its knock-on effects on the operations of our business. The income statement was very straightforward with revenues that were generally in line with our expectation for infusion consumables, a bit more than we had expected in Infusion Systems, and just a bit less than we'd expected in Infusion Solutions, and in aggregate was burdened with slightly more cost needed to manage through the systems cut over.

We finished the quarter with approximately $322 million in revenue, adjusted EBITDA came in at little over $69 million, and adjusted EPS came in at $2.07, and we added approximately $25 million of cash to our balance sheet to finish the quarter with a cash position of $384 million.

Pro forma revenue was down 9% quarter-over-quarter due to the period comparison of the peak of the IV Solutions shortage in Q4 2017 and because we still sold a little less than we desired in that segment.

On the last quarterly call, we talked about the impact of a few days of cut over, blackout from the cut over related to our systems conversions. And I'll describe more on the status of that shortly but we see Q4 as a normal quarterly look. We did catch-up on most of the open orders but we still had a few open orders at the end of the quarter and as we suspected, some of the more transactional sales did not come back in the quarter. So the net effect of the catch-up on shipments is largely a wash.

Turning to the individual segments and please use Slide 3 in the posted deck for the base comparison. Let's start with Infusion Consumables which is our largest business, Infusion Consumables got back to sequential growth and had revenues of $122 million in Q4 2018 which implied 1% growth year-over-year. Both core IV Therapy and Oncology grew and the growth was balanced U.S. versus OUS in Q4.

For the full fiscal year, this segment grew 8% which we were pleased with, and to be fair, we did have a small impact from our Australian acquisition. This is a segment where the most advantage now is a joint entity. We have largely rationalized the product portfolio and brought 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. We continue to feel positive about this segment into 2019.

The second segment to discuss is Infusion Solutions. This segment reported approximately $95 million in revenues equaling a 27% decline year-over-year as the peak of the IV shortage was Q4 2017 and as the unique temporary industry issues have largely been resolved.

For the full fiscal year, the segment was down 11%, with a huge swing between the first half of the year where the trade was in a shortage position to the second half where the traded had a bit more stocking with weaker underlying demand. Given what happened in Q3, we certainly did expect a new baseline level of sales as we'd outlined on the previous call but this was still just a little below what we expected.

The latest color as we're seeing it in the market was no significant customer shifts in Q4. Our committed customer order volume levels were generally okay with a little revenue catch-up from the blackout and continued but slower erosion of our trading book that we always expected to go away.

We said on the previous calls that investors should not assume that historical results should be annualized in this segment. We've been very focused on the longer-term but we want to be clear and verbatim from the first presentation on the transaction, even if revenues are a little volatile, we're going to make economically rationale decisions and not sell products at a loss.

We have budgeted our earnings to try to anticipate bumps and just because of variances, we're not going to reshape our value proposition to the customer. Given the increased sales due to the industry shortage from Q3 2017 through Q2 2018, we expect this segment to have significant negative year-over-year results through the first half of 2019. We feel like we've been clear about this on previous calls but wanted to reiterate that as it will impact total company growth rate for the first half of 2019.

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 in a business that was historical pricing anomaly.

From a value perspective, we have sacrificed some 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.

We have discussed on previous calls, the benefits of increased production in a full manufacturing network, so the negative margin effect if there does turn out to be less volume or more volume over time has been on our minds.

We have been heavily investing as reflected in our CapEx to increase our own Austin capacity which can give us the option to 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. In the event that volume does not materially come back, we have the flexibility to move more into Austin and move away from Rocky Mount which would help offset the negative margin impacts of lower volume. That would consume a major item we had thought about for 2020 margin improvement. But we have to plan for all scenarios even if unknown today.

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

So to finish the Big Three, let's talk about Infusion Systems which is the business selling pumps, dedicated sets and software which is important because it's a business that brings a lot of recurring revenues.

This segment did $92 million in revenue in Q4 and was up 4% for the quarter and was up $11 million sequentially. This was mostly driven by timing of refresh of our existing installed base and to a minor degree some catch-up from the cut over and probably a few items that we thought would happen in Q1 2019 happening a bit early. The international business is holding together reasonably well and the big question has the installed base bottomed out and what does revenue stability look like going forward? We have no change from our last call with the belief that this segment is very close to bottoming out with the lowest level installed base in the last 10 years. But we feel that given our own refresh schedule and book that revenues have stabilized at or above the Q3 levels for the near future as we said in the last call. Even with the puts and takes in Q4, the segment was down low-single-digits for the full fiscal year versus low-to-mid-double-digits the last two years. Just to be clear, we're measuring bottoming out by the installed base of devices not quarterly revenues as we care about the actual devices installed and running in the marketplace. So 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 that message is resonating. Feedback on the products continues to be solid, the products are necessary for the system and 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 with two years of ownership under our belt, even with some bumpiness, 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 never assumed it was always a straight line up and even a little volatility doesn't turn our focus or commitment in the short-term decision. We will continue investing in R&D which we'll start talking about more in the future, appropriate capacity expansion in our production network and into commercial resources to serve our customers. The attractiveness of the industry structure and the commitment required to breakthrough a lot of inertia merits that point of view.

On the integration, even we are tired of talking about it. We spent all of Q4 cleaning up what we call the main event. The full stand-up of the U.S. order to cash, HR, service, quality, and learning systems to move away from Pfizer. We've also stood up our own Costa Rican manufacturing plant and the only remaining item is the Austin factory which runs on its older but separate system from Pfizer.

We now run a single instance globally of an ERP and quality and service platform. I can't really understand how much work this was. It was really the true integration of the business from Pfizer, Hospira, and even some legacy Abbott systems.

While we have a long punch list of items that require intervention, a number of still open item, these conversions have seen in numerous examples have brought companies to a standstill. And it's hard to find any public company examples that have scaled up in a carve-out transaction like we did. And even with all the challenges, we're still alive and running here having done all the systems in over 15 countries in under 24 months.

For real time perspective, we do have a handful of -- we do have a limited number of open items that we're still working on resolving. On the last call, we mentioned a handful of technical issues to mitigate in a series of what I would call synchronization issues across ordering, production, shipping, et cetera. Almost all of the technical issues have been addressed with the exception of some challenges in the service offering. We've made good progress on the synchronization and supply issues but still have some catch-up as we did not have all the right inventory in all the right places and that has improved substantially as of today. We still need to keep improving and optimizing each of the new systems which at times are still running slower in the business day-to-day.

As we've said before, our customers don't care about any of this unless it affects them negatively. So we're working flat out to clean up all the open issues. But we care about it because it first offers deep value in the form of operational improvements, and two, it sort of supersizes us for the ability to handle more on these platforms. We've been focused on both the TSA savings and certain deeper operational improvements as mentioned on the last call and we continue to feel both of these categories are in the ranges we described.

Okay, onto other housekeeping items and key activities. First, we have believed that a number of our sites were on our normal FDA inspection cycles for early 2019. These have not happened yet but we still believe they will and are prepared as our last FDA inspections were in early 2017.

Second, we have certain new product developments that will either begin entering limited market release or into regulatory submission processes in the first half of this year. We plan to start discussing these items more when we have feedback from our limited releases or regulatory approvals in hand.

Lastly, we did address the Pfizer ownership in Q4 and we did want to thank investors for trusting us to manage that overhang responsibly.

Okay. Back to the topic of earnings results and how we think about 2019 and the future. At a high level, we continue to follow the math we laid out in the last call and applied to Q4. We based our 2019 view on a EBITDA run rate around the Q3 or Q4 2018 levels and adding to that the various TSA and operational cost savings and the earnings growth from at least some consumables growth. It's really important to us to be clear that because of the IV Solutions shortage in the first half of 2018, our total company growth will look abysmal in the first half. And even though that is suboptimal, from our perspective two years into the acquisition, we believe, we have a chance based on items that we directly control to deliver year-over-year adjusted EBITDA and EPS growth again, have our EBITDA be 2.5 times larger than the most recent pre-deal fiscal year, and have a cash balance sometime in 2019 that will be in excess of our pre-deal cash on hand.

Yes, we do wish we were selling $40 million or $50 million more annualized and IV Solutions than we currently are but we would not have done anything differently.

Right now, we see Q1 2019 as sort of average plus cost savings. We see consumables at or above Q4 levels, Infusion Systems is somewhere between Q3 and Q4 2018 and Infusion Solutions is still bouncing around a bit. We expect to operate the same as the last four years where we provide any new information on our Q2 call. And just like our calls from early 2017, and early 2018, we would say it's early in the year and a lot of things can change between now and December. We've said for a number of quarters that we can continue to have a view that we can improve our profitability regardless of the revenue environment and that the improvements shown over the last year have given us a look as to what that opportunity can be. And we certainly know that this formula does not work forever. And this is likely the final transitionary period for us due to the IV Solutions shortage timing.

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

We are adamant about 2019 being the final catch-up integration CapEx year. If we can have the strongest balance sheet possible which we believe will near $500 million cash on hand at some point in 2019, no debt, and have an infrastructure as a company that can handle more and have continued near-term earnings improvement opportunities in our base business with minimal revenue growth assumptions for at least this year, we think we have a case for continued value creation optionality and the ability to protect our long-term shareholders which are essentially the same points we made about ICU pre-transaction.

And all of this is in an consolidated industry structure with a number of intrinsic value drivers including high quality or hard to reproduce production assets, sticky product categories, and the opportunities for more cash generation. In the best case, we will have better execution to improve our top-line performance over time, drive operational improvements, and improve cash conversion and returns. In the worst case we'll 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've deployed due to levers we just mentioned.

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. As always I'd like to close with, things are moving fast. We're trying to improve the company with urgency. We're trying to take responsible actions and break some of the inertia that many companies in our position face. We did hit some of our largest bumps in the back half of 2018 but overcame most of them and still delivered our integration and financial goals. The company will be stronger from the experience. I really appreciate the effort of all employees to handle the bumps, move forward, and focus on improving results. And our company appreciates the support we received both from our customers and our shareholders.

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

[Scott Lamb, CFO]

Thanks, Vivek, and good afternoon everyone.

I'll first walk down the income statement, highlight key items impacting operating performance, and finish with some detail to our guidance for 2019.

So to begin, our fourth quarter 2018 GAAP revenue was $340 million compared to $370 million in the same period last year. Please remember that the $340 million and $370 million includes $19 million and $17 million respectively of Contract Manufacturing Solution sales to Pfizer which we sell to them at cost.

As we expected, and as already described by Vivek, on an adjusted basis revenue decreased 9% year-over-year driven by IV Solutions which was down 27% offset by Infusion Consumables up 1% and Infusion Systems up 4%.

In the past, we haven't talked much about the impact FX has had on revenue but in the fourth quarter alone, revenue was negatively impacted by over $4 million. So going forward, we'll be discussing constant currency performance in our year-over-year commentary.

Adjusted diluted earnings per share for the fourth quarter of 2018 were $2.07 as compared to $2.98 for the fourth quarter last year which includes significant tax benefits from purchase price accounting and other discrete items.

And as I mentioned on this call last year in a normalized tax environment based on last year's adjusted EBITDA of $70 million, adjusted EPS would have been approximately $2. And finally adjusted EBITDA was $69 million for the fourth quarter of this year compared to $70 million last year.

Now, let's discuss our fourth quarter GAAP revenue by product line, and as a reminder, the 2017 revenue related to the delayed closing entities was not available by product line and was recorded as other revenue. However by the end of December, all delayed close entities were closed. So this will be the last time we mentioned it. And for your reference the 2017 and 2018 pro forma unaudited revenue numbers can be seen on Slide number 3 of the presentation. So GAAP sales of Infusion Consumables were $122 million versus $120 million last year or up 1.5%.

IV Solutions sales were $114 million and excluding the previously mentioned manufacturing contract sales with Pfizer, IV Solution sales were $95 million versus $130 million last year.

GAAP sales of Infusion Systems were $92 million compared to $88 million last year and this year-over-year increase was the result of pump refreshes with existing customers and the timing of these which can be lumpy quarter-to-quarter. And lastly, Q4 sales of critical care were flat year-over-year at $13 million.

As you can see from Slide number 4 of the presentation, for the fourth quarter our adjusted gross margin was 42% compared to 39% for the fourth quarter last year. The largest driver for the year-over-year increase was increased plant volumes. On a sequential basis, Q4 adjusted gross margin was down 220 basis points due equally to increased logistics costs related to the system cut over and mix with more capital sales in Infusion Systems.

As expected, year-over-year SG&A increased approximately $2 million and went from 21% to 23% of revenues. The increase came primarily from stand-up costs as we finally separated from Pfizer.

R&D expenses were basically flat year-over-year at 4% of revenue and should remain at approximately 4% to 5% in 2019.

Restructuring, integration, and strategic transaction expenses were $41 million in the fourth quarter which was higher than prior period due to some one-time Pfizer separation and TSA exit costs. The remaining spend was mostly related to our integration of the Hospira business. And now that most of our significant system cut overs are complete, other than our self-contained manufacturing facility in Austin, we will see these integration cost decline as we move through 2019.

For modeling purposes, we believe our tax rate for 2019 should be approximately 21% to 23% and our full-year average fully diluted share count to be approximately 21.8 million shares. And as we stated on our last call, we should continue to see growth in earnings and believe our adjusted EBITDA should be in the range of $315 million to $340 million for 2019.

For adjusted EPS, we believe, we should be in the range of $9 to $9.90.

Items impacting 2019 adjusted EPS when compared to 2018 are as follows: In 2018, we had a small tax benefit for the year versus a more normalized tax rate for 2019 and due to the new systems, we have implemented to run a fully integrated business, depreciation is increasing $9 million year-over-year.

Also beginning in 2019, our adjusted EPS will no longer exclude interest income or expense in order to better align with industry norms. And for 2018, this exclusion reduced our adjusted EPS by approximately $0.70.

Now moving onto our balance sheet and cash. In the quarter we generated $50 million of operating cash and $33 million of free cash flow and ended with $384 million in cash and investments, which was largely driven by cash earnings and by the end of 2019, we expect to have nearly $0.5 billion in cash.

In the fourth quarter, we spent $18 million on CapEx for general maintenance, system integration, and capacity expansion. And as we said on our last call, we still expect to spend this year similar to what we spent last year or approximately $100 million as we continue to spend on additional IT system integration and capacity expansion. But over time, we still expect expenditures to come down to approximately 3% to 5% of revenue.

And finally, I'd like to say that this has been an unbelievable effort from everyone and we're just now starting to realize some of the benefits of running on a single integrated system and we look forward to even better things to come.

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

[Operator]

[Operator Instructions].

Your first question comes from the line of Matthew Mishan with KeyBanc.

[Matthew Mishan, KeyBanc]

Good afternoon and congratulations on grinding it out through a tough integration year.

[Vivek Jain, CEO & Chairman]

Hey Matt, thank you.

[Scott Lamb, CFO]

Thank you.

[Vivek Jain, CEO & Chairman]

Grind is the right word.

[Matthew Mishan, KeyBanc]

Maybe I missed it but it seems -- you seem less specific around consumables growth for next year. How should we be thinking about the IV Consumables growth going into next year? There was also a recently call it's hard -- it's hard to tell sometimes with these things but is that material?

[Vivek Jain, CEO & Chairman]

So let's there is two questions in there. So let's do the first one which is consumables has been in 2017, right, the first year in the deal it was down 6% or 7%. And for the full-year, I think was up 8% in 2018. We continue to feel good about it and there's nothing structurally changing in the market. Obviously, the oncology stuff and some of the international pieces have been good drivers, those are going to continue. I don't know that we see it exactly today with a level of precision that we could say it's mid-single-digits or high-single-digits and so we just kind of said what we see right now. But there's nothing structurally that changes our kind of long-term view of it.

On the recall, it's not economically material and we're contemplating on it. It's a little bit frustrating right because we -- we've got to keep up our position as kind of the lead innovator in that category and the high quality reliable supplier. What specifically happened was a well-known industry supplier changed tool and it's our responsibility to catch those things and we caught it very, very quickly. But a few pieces did make their way out into the market. And then our job is to make that right which is what we did. But it doesn't change the forecast of the Consumables business and stuff like that.

[Matthew Mishan, KeyBanc]

And then just a follow-up on that question, I know you can't really say if it's mid-single-digits or high-single-digits but is it fair to say it's at least the mid-single-digits?

[Scott Lamb, CFO]

Again, Matt, we've been -- we really have never given direct revenue guidance. Again, I think we feel good about the segment and you can look at what's happened in the past and make your own conclusions. I don't think right now the business is much larger now. So know exactly which one it's harder to say.

[Matthew Mishan, KeyBanc]

Okay, fair enough. In the Contract Manufacturing that you do for Pfizer out of Austin that you're currently making, what are you currently making for them and manufacturing for them? Why was that the one piece of the IV Solutions business that they ended up keeping and just follow-up on multipart question, has anything changed in that business?

[Vivek Jain, CEO & Chairman]

Long story as to why it was split the way it was. It was more about what the actual compounds were. They essentially kept part of the -- we make two different things when we make the advantage line for them which is a differentiated convenient use packaging format for some of their sterile IV, for some of their injectable drug. And we make some of the pre-mixed medicated IV Solutions for them. The view was those were closer to pharmaceutical items at the time of the transaction. Nothing's really changed in that business for a very long time. There has been some new market entrants there and so that feeling is really new.

[Matthew Mishan, KeyBanc]

And lastly, just without really going into specifics especially I know you don't want to do that around the new products but can you give us a sense of the breakdown of what you're looking at. Are they new platforms, is it a majority of it consumables, recurring revenue or entering like new adjacencies. How should we think about like how you're looking at like new products going into next year?

[Vivek Jain, CEO & Chairman]

I mean, I think big picture we're trying to say bluntly which is the day it's coming here where we are going to peak out on margins and performance and we need to start feel a little bit more normal. We lap all these issues or you have normal growth rates and you have new product innovation and you talk about that when you can stop talking about integration. That's what we would like to do when we lap these items.

From a budget perspective, I would say there hasn't been a material change in the consumables spend, so if you went back and looked at ICU's R&D line pre-deal it was $15 million, $16 million, ballpark that's still on the consumables side of the business. The rest is largely on the hardware side of the business because you can't spend that much on solutions. And I would -- I think it's probably safer to say, it's more refresh and innovation around the core things that we're in necessarily new adjacencies with the exception of some of the products related to oncology and Diana that are little more pharmacy oriented where really just trying to build adjacency.

[Operator]

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

[Larry Solow, CJS Securities]

Hey thanks. Just a few follow-ups on the consumables just in the Q4 number although it did sound like there was some impacts but just a flat year-over-year sales. Was that more of a timing thing and then a little bit from the cut over and you mentioned the Australian distributor too, but any more color on sort of that?

[Vivek Jain, CEO & Chairman]

Not really. I mean I think, Larry, we've said at the end of the Q2 call, we had said Q3 was going to be way down because of the cut over stuff and then we expected Q4 to look like Q2. Obviously, it didn't happen in solutions but it did in the other lines and so it might be a million or two off. And I think that's more just being a little backed up with a cut over and stuff and there was nothing really materially different there.

[Larry Solow, CJS Securities]

Okay. And the Australian distributor too?

[Vivek Jain, CEO & Chairman]

I mean, the numbers, back in the mid-single-digits or high-single-digits, the numbers starting to get larger in Q4 of 2017, right. That's when we started to turn the corner a little bit in consumables. So it’s just -- it's a bigger denominator.

[Larry Solow, CJS Securities]

Right. Okay. And just how about without going into specifics, it sounds like Solutions obviously year-over-year will be down for the next couple of quarters. I know you mentioned you thought maybe at the bottom maybe we were at the bottom was a little bit too low, artificially low. Does it sound like you feel like it will bounce a little bit sequentially and then longer-term or sort of mid-term, do you see this sort of as a stable to slightly growing piece of the business?

[Vivek Jain, CEO & Chairman]

I mean I think there is utilization growth here. We first need to make sure every part of our book is as stable as committed as it could be. And then you've just kind of have utilization that follows that. I do think it's a different sized business than we were thinking about the middle of last summer, right.

So we tried to correct for on the Q3 call. I think right now, we would take it just even at these levels a little below, little bit high just for the next bit of time to be stable, so we can make the decisions around Rocky Mount and Austin and what we want to do, right, and if it turns out to be better than we have a lot of flexibility.

[Larry Solow, CJS Securities]

And then on the systems side, I know you've called out sort of installed base, it appears to be bottomed a couple of quarters back. And I know you've spoken to the -- your pumps and software not being inferior to the competition. So with the market still growing any reason to believe that this segment or this end market can return to some modest growth as we look out?

[Vivek Jain, CEO & Chairman]

Yes, I mean I think there, the market share of the business we bought was cut in half over a six year period. And so from a product that used to be very well liked, I know we've tried to tune that back up and so we're out there fighting and competing. You should believe that there's opportunity obviously everybody else says they have lots of opportunity and we're just trying to say we're holding where we are and I think we're going to continue that line until we show something, we're going to continue with that line until we show something different.

[Larry Solow, CJS Securities]

Okay. Can you just tell us what's the contract settlement that's in the P&L can you give us any more color on that?

[Scott Lamb, CFO]

Sure, Larry. This is all related to the two core contracts settlement that we made in the first quarter and this is mostly all non-cash items.

[Larry Solow, CJS Securities]

Okay, okay. So --

[Vivek Jain, CEO & Chairman]

This is the settlement we had with a different manufacturer. In Q2, we spent $30 million, $35 million last year in cash to settle that. There were some balance sheet items that came with it and this was the final resolute disposition.

[Larry Solow, CJS Securities]

Got it. So yes I know you already announced this Q Core a couple of quarters ago, so this is sort of just the end of that sort of?

[Vivek Jain, CEO & Chairman]

There could be some commercially related one or two more quarters where probably just one more quarters worth and not at this level though.

[Larry Solow, CJS Securities]

Okay. And then just, how should we look on just on the cost side, I assume gross margin was -- it sounds like was impacted a little bit certainly at the end of the year, with some of the crossover expenses and maybe that had some increased freight because of other things, do you expect independent of getting off the TSA to whatnot some improvement --- underlying improvement in gross margin?

[Vivek Jain, CEO & Chairman]

It's -- again, we started this journey, it was like we're just hoping to get to our 40, and then we hit 43 or 44. So I think it should be better to the extent our logistics cost that we spent like crazy in the fourth quarter to keep all the trains moving when these things were going on millions of dollars more than we normally spend in that.

And so we need to be healthy to not spend that that should help in quarters where you have more pump capital that goes out there, that's going to be a negative to gross margin. But it's the right NPV thing to do. And so you don't see that on the big suppliers' income statement because it is so large, you see it on ours. And ultimately, it's about volume right. And so if volumes can stay or get better, we have a lot of economics, so we run very full factories, right.

[Larry Solow, CJS Securities]

Great. Okay. And then just lastly I know Baxter announced recently I just heard that the U.S. has closed the IV Solutions antitrust probe. Can we assume that the investigation into you guys into Hospira has also been closed?

[Vivek Jain, CEO & Chairman]

Yes. So in our K, you'll see the same -- you'll see the same commentary. We just didn't talk about it; it will be in the game.

[Operator]

[Operator Instructions].

Your next question comes from the line of Jayson Bedford from Raymond James.

[Jayson Bedford, Raymond James]

Hi guys, good evening. Hey thanks for taking the questions. So just one quick one to follow-up on the gross margin, so the increased logistical costs that you mentioned in explaining the down quarter-over-quarter gross margin, is part of that non-recurring, it kind of sounded that way but I'd just like to clarify that?

[Scott Lamb, CFO]

Yes, as Vivek mentioned on the logistics side, I mean we are still hustling to catch-up from the third quarter. So there were still some additional logistics spend in the fourth quarter that eventually does get behind us. And going forward that should just be more one-time in nature.

[Jayson Bedford, Raymond James]

Okay, okay.

[Vivek Jain, CEO & Chairman]

I mean some of products dropped some of our products, Jayson, traveled very well in the fourth quarter and we got to do that because customers on the other end of it are people have short memories right. We were very, very high quality service for forever and this cut over does bump things around a little bit, right. So we put dollars in trying to be healthy.

[Jayson Bedford, Raymond James]

Sure, sure, understood. And just as a follow-on to that and as it relates to the cut over from last quarter, was it still an issue, I was a little unclear from the comments meaning were you fulfilling all the orders or was there a revenue impact in 4Q from the cut over?

[Vivek Jain, CEO & Chairman]

I think the fourth quarter was pretty true. We got some. We closed out a number of the open orders but not all of them. So we entered Q1 with a little bit. And remember last time we said we had two to three days of kind of order free days at the end of Q3. Some of those orders in fact never came back, right, the more transactional day-to-day stuff. So I feel like rather than debate it to the extent of a day one direction or the other, I think it feels pretty normal.

[Jayson Bedford, Raymond James]

Okay, okay, clear. On Solutions, I appreciate the commentary around no significant customer shifts. Curious there has obviously been some concern around inventory in the channel. Can you just comment on the current supply demand environment as you see it in Solutions?

[Vivek Jain, CEO & Chairman]

I don't know exactly the supply demand, right, it depends what manufacturers are holding. But I would say that was in the trade channel and end user demand, so trades versus out the door kind of discussion lines are looking more on top of each other they have it in a while. So it looks like it's getting more balanced between the wholesale channels and end user or end user supply and wholesale channel.

[Jayson Bedford, Raymond James]

Okay. On Consumables, the 1% growth I think you mentioned Core IV Therapy grew, Oncology grew, what didn't grow and maybe you can comment on oncology growth out of curiosity?

[Vivek Jain, CEO & Chairman]

There was some parts in certain legacy Hospira's use that faded away a little bit. And so some of those went out and the growth was more of the legacy and then we don't want to say those words anymore right. The growth was more of a legacy ICU items. Oncology clipped along again at a very nice rate. We're not in that north of 20 like we were for a long time but it was a very solid year in aggregate for oncology and we're selling every piece we can make right now. So that's probably all I would want to say about that one.

[Jayson Bedford, Raymond James]

Did you feel like you're supply constrained at all in consumables?

[Vivek Jain, CEO & Chairman]

A little bit. I mean we're investing like crazy and it's getting better every single day. I think we were actually a little supply constrained in Q4. I mean we went out and talked to some customers they probably would. Some people might say, but I think it's a very different answer today but we did feel that pinch a little bit.

[Jayson Bedford, Raymond James]

Okay. So that supply constraints to the extent that it exists in the fourth quarter is pretty much lifted now and you feel comfortable with meeting all orders you get?

[Vivek Jain, CEO & Chairman]

I mean again it's a high class problem right. We have a lot of demand for some of these items. So I wouldn't say it's absolutely perfect yet but we're putting lots and lots of money and resources and expanding capacity quickly because things get better every single day. But I mean people want the stuff which is good.

[Operator]

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

[Vivek Jain, CEO & Chairman]

Okay that was a short call and hopefully quick and direct and to the point. We appreciate everybody's support last year 2018 was really toughest year, I think in this company's history and I think we did what we wanted for an integration perspective, we did what we wanted from a financial results perspective and what we started the beginning of the year, we thought we actually delivered. And even with some of the volatility, we've set ourselves up for 2019 and the optionality that we have. So we appreciate it and we'll talk to everybody quickly after the end of Q1. Thanks.

[Operator]

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