ICU Medical Inc

NASDAQ:ICUI

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the ICU Medical call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host today, Mr. John Mills of ICR. Please go ahead, sir.

[John Mills]

Great. Thank you. Good afternoon, everyone. Thank you for joining us today to discuss the ICU Medical financial results for the first quarter of 2020. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman; and Brian Bonnell, 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 it will be under the First Quarter 2020 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 operational 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'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, executive]

Thanks, John. Good afternoon, everybody, and we hope you and your families are well.

For the last 3 years, we've been ending every call with the same comment about support from our customers and the ability of our employees to adapt in our own journey. While it was never intended for the current environment, that belief is exactly what was and continues to be required in the current environment.

Like everyone in our industry, we want to start first by thanking our hospital customers for trusting us to serve you during these times. None of us know exactly what the new normal is, but we do know we will continue to adapt and offer our best support and execution.

Our own experiences of rapidly adjusting production up and down, new IT systems, new fulfillment models around the world and deep integration work has actually prepared us well for volatility. We'll try to be a bit brief on this call, as we know there's a lot of late in-quarter reporting happening in the market.

On today's call, we wanted to comment on Q1 results with and without the effects of COVID-19; describe the high-level knock-on effects of the pandemic to ICU Medical and how we're adapting; articulate how we feel about our positioning in this environment and any strategic implications; a view on timing and when we will have a better view of the year for our shorter-term financial goals and, at least, what assumptions we're making now; update on some housekeeping items, including quality audits, product approvals, the Austin factory cutover; and lastly, reflecting the criteria by which we are judging ourselves, as we described in the last call, as back to growing our differentiated product lines.

The first quarter of fiscal 2020 again showed sequential revenue improvement and commercial stability in our most valuable product lines, but did benefit from pandemic-accelerated purchases in certain lines and geographies. The company is operationally running well, the competitive environment seems to have frozen a bit, and we do not have any material production constraints, with all plants performing well. While we did have some COVID ordering benefit, we also had the knock-on effect of a strengthening U.S. dollar, which resulted in a large and, mostly, noncash impact on the income statement.

We finished the quarter with $316 million in adjusted revenue. Adjusted EBITDA came in at $63 million after absorbing $8 million in currency impact. From a management perspective, even after marking down some of the COVID purchases and the associated profit, we felt okay about the level of profitability. After adjusting for currency, the primary driver of decreased profitability on a year-over-year basis is price and volume mix in IV Solutions, as expected.

Adjusted EPS came in at $1.81, and cash was $440 million as we did draw down on our revolver in mid-March given the uncertainty, and Brian and I will describe some of the thinking there as it is a costly insurance plan. The vast majority of restructuring and integration charges were due to the Austin factory IT system cutover, as previously discussed.

So let's go through the businesses quickly and then come back to discuss COVID-19 and the knock-on effects. Starting with the usual, with Infusion Consumables, which is our largest business. Infusion Consumables had revenues of $124 million in Q1 2020, which was a 4% increase year-over-year adjusted for currency and 2% increase on a reported basis.

We had good consistency in most places and product lines. In oncology, we had a record quarter for growth in international markets as we were finally able to release more product into that channel, but it was slower in the U.S., as implementation slowed dramatically in March, and we had some burnoff from our Q4 implementations.

In traditional IV therapy, we saw a small amount of what we would consider excess purchases in the international markets due to the pandemic. For the majority of the U.S. market, volumes were as predicted, and there was not any material customer churn anywhere. Pursuit Vascular's ClearGuard products delivered results as expected.

Moving to Infusion Systems, which is primarily our LVP pumps and associated dedicated sets, this segment did $89 million in adjusted revenue, which was growth of 7% on a constant currency basis. Some of our largest market positions in this segment are in Spain and Italy, and we did benefit slightly from increased sales into those markets due to the pandemic in Q1. We will have benefit from COVID-19 demand in this segment again in Q2 primarily in the U.S. market.

Even before the pandemic, we were holding the best amount of rollover and competitive signings we had in many years. The challenge now is predicting the ability to actually get into hospitals and implement these conversions. We continue to believe we've stabilized the 10-plus-year installed base decline. We still know that safety is a critical factor when choosing an infusion pump. We believe our Plum LVP technology is well positioned, as evidenced by the recent clinical guidelines around IV pumps. We have gotten back to the core marketing messages around our Plum LVP pump, as these independent and clinical reviews have validated our differentiation.

As for the non-LVP products, which include our PCA and ambulatory pumps, since the last call, supply of PCA vials has been consistent, and we do not see backward slippage in that line. We do believe our ambulatory product sales will decline. But given recent LVP wins and our current best estimate of installation time lines, we do believe we can finally have growth this year in our Infusion Systems segment net of currency impact.

Finishing the segment discussion with Infusion Solutions, we had $91 million in adjusted revenue, down 1% year-over-year and up $10 million sequentially. Like last quarter, we did see and feel some more stable footing gear on the base business. We did see some excess COVID ordering here in the last 2 weeks of March in the U.S. We estimate that was about $5 million to $6 million or around 50% over-ordering for the last 2 weeks of March.

Our business is a mix of direct and distributor fulfillment. On the direct business, roughly half the overage was to committed customers and half was open market purchases. We do not yet know on the distributed business. We continue to believe the quality of our customer book has improved, with us holding the best list of sustainable relationships versus the day we bought the business. We are still healthy on safety stock. And since the last call, our new distribution center has come online in Texas to help improve our longer-term supply chain costs.

Okay. That's a bit on the segments. I'll come back to some of those points when we discuss our current model. There has been a number of impacts to the company from COVID-19, and I will just run down the list. Commercially, we moved very quickly to respond to European tenders for pump hardware and demand for dedicated sets. In the U.S. market, we have participated in selected national stockpile sales and have responded to selected state RFPs for pumps. The challenge is to balance sales for continuing care versus stockpiles. We do believe most of the pumps we sold in Q1 into Europe were for actual care delivery.

Operationally, as we mentioned on the Q4 call, the early signs from China did cause us to accelerate some raw material purchases, so we have been prepared. From a plant perspective, just as many others have experienced, the pandemic has required additional planning on our operational footprint, shift hours, local transportation and redundancy plans. We invested in additional PP&E reasonably early and have focused on employee safety. We also added extra compensation to our team members in our production and service operations, who had to perform their duties in states or countries where shelter-in-place requirements were in place. As a reminder, our primary manufacturing locations are in Texas, Utah, Costa Rica and Ensenada, Mexico, which is 90 minutes South of Tijuana.

From an expense perspective, our incremental direct costs related to COVID-19 and our savings are probably awash. We've had increased expenses as we just described, but we've also had savings with discretionary expenses, less T&E and a higher overall job vacancy rate. We were struggling with extremely low unemployment rates in Utah and Austin prior to the outbreak. Freight costs have increased as capacity has been reduced from the system.

Strategically, as we've thought through the implications of COVID-19 and the realities of the health care system it has exposed, we believe it aligns with much of our commentary since we became a full-line supplier. We make essential items that require significant clinical training, high capital expenditures and, in general, are items that customers do not want to switch, unless they have to. We are a U.S. manufacturer that is deeply vertically integrated and has core redundancy on products that we do not produce domestically between Ensenada and Costa Rica. We think the weakness is illustrated in the health care supply chain that either drove manufacturing to be unpredictable or offshore will all get reassessed in the new normal. We don't make any assumptions about minimum supply chain holds or think that will be immediately implemented, but we do believe the market broadly define does not want a winner-take-all setup in these essential items categories, and that's before each category is assessed on its own innovation, clinical outcomes, et cetera.

And so we focus on what we can control in these moments. For us, it's having the best list of supportive healthy customers we can. It's having the best liquidity we can for a company our size. We're not that big but are necessary to the system, and we need to be prepared for whatever realignments or opportunities arise.

But in the medium term, the pandemic does make us concerned about the economics in the broader health care system. Our products are tied directly to hospital admissions. And like everyone else, we see the rapid deterioration of elective procedures and ER visits, which are tied to admissions. The knock-on effects have led to lost selling time and delays in implementations for products that need on-site training and enhances inertia when people don't have time to deal with change. For that reason, we are cautious on what the balance of the year will bring, excluding upside in our Infusion Systems segment in Q2.

It was unclear in mid-March whether this would also have knock-on effects to liquidity, so we chose to draw down on our revolver, which is unusual for a company that was in our balance sheet position and in our product categories, but we did not want to be the last to ask. We know there is a negative short-term impact of this if we keep it drawn and that, when combined with the currency impacts, result in the revision to our guidance range. But we do run the company, production plan, compensation plan, et cetera, to a forecast that is our latest view.

To describe our current model relative to our initial year assumptions, first, we have more sales in Infusion Systems than originally planned; plus, two, some likely savings through discretionary costs; three, some operational improvements, all of which are combined and then offset by declines in solutions and consumables directly related to lack of hospital admissions, currency impact, again, of which a big chunk is noncash, and some incremental COVID-related expenses. Electives drive ballpark 1/3 of admissions, and we're already seeing our customers segmenting those cases into time critical versus time sensitive, which means they're not all coming back in our opinion.

It is too early to say with certainty what this means for the fiscal year. Our current model has made significant adjustments downward in Q2 and Q3 tied to utilization, which is incorporated into our current view, and we'll all know more in 90 days. I would say a wide range of outcomes is possible, but we still want to run the company to a baseline model as we're not that big, and the new normal does need to incorporate more volatility.

Moving on to housekeeping items. Again, in Q1, we had excellent global fulfillment rates to our customers. The cutover of Austin systems happened, is working well and being supported in Q2. We're fully stood up, not only away from Pfizer, but now have modern connected systems across all business lines.

From a quality perspective, we've had a number of notified body audits over the last 4 months in San Clemente, San Diego, Costa Rica and Salt Lake City, all done remotely. These were regarding the MDSAP and CE Mark annual certs, all went well with no major findings, and there are a few remaining sites on the agenda for me. There will be a small announcement on a recall of one lot of IV Solutions produced in mid-2019 by our contract manufacturing partner in Rocky Mount, and there's no economic impact.

On product approvals, we did receive 510(k) approvals for our swab-tip male cap to complement our SwabCap business and a new 2-way transfer device to add to our IV Solutions offering. We need to cut both items into production still.

To synthesize all these comments on the business segments, COVID-19 and how we're trying to judge ourselves. On the last call, we said we have the ability to improve our position in our most differentiated businesses of IV Consumables and IV Systems, and we have to prove stability in our less differentiated business of IV Solutions. We talked about the industry structure attractiveness for 2 years, while we fit in the puzzle, and our products are in a good position from a technology, quality and manufacturing perspective. While it may add volatility in the short term, we do think the weaknesses exposed in the health care supply chain add to the argument for all participants to be healthy and stable in IV Solutions.

We feel we have the best right to win in IV Pumps that we've had since we bought the business. The competitive positioning of the consumables business has not changed nor the value of the oncology category as a result of COVID-19, but it is really hard to see what the next few quarters will bring. In the new normal or COVID-19 world, where supply chain resiliency and diversity matters, we believe our essential items logically benefit, and our most differentiated items are still differentiated.

We said in the last call that 2019 was the most difficult year our team has faced. The company did emerge operationally stronger from that experience and has taught us all how to adapt. Thank you to all the employees, customers, suppliers and frontline health care workers. Our company appreciates the role each of us has had to play.

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

[Brian Bonnell, executive]

Thanks, Vivek, and good afternoon, everyone.

To begin, I'll first walk down the P&L and then talk a little about cash flow and the balance sheet. So starting with the revenue line, our first quarter 2020 GAAP revenue was $329 million compared to $331 million last year, which is down 1% or flat on a constant currency basis. For your reference, the 2019 and 2020 adjusted revenue numbers, which exclude contract manufacturing sales of Pfizer, can be found on Slide #3 of the presentation.

Our adjusted revenue numbers for the quarter were $316 million compared to $311 million last year, up 2% or 3% on a constant currency basis. Infusion Consumables were up 2% or 4% on a constant currency basis. IV Solutions, which we sell primarily in the U.S., was down 1% on both the recorded and constant currency basis. Infusion Systems was up 4% or 7% on a constant currency basis. And critical care, down 4% or 3% on a constant currency basis.

As you can see from Slide #4 of the presentation, for the first quarter, our adjusted gross margin was 40% compared to 44% for the first quarter last year. The Q1 gross margin was in line with our expectations. The largest driver for the year-over-year decrease is similar to last quarter and reflects the impact from lower sales of higher-priced noncommitted business in IV Solutions, along with lost manufacturing overhead absorption from lower production levels compared to a year ago.

SG&A expense was 22% of revenues during the first quarter, which is flat compared to last year. This was slightly less than expected due to a combination of spending controls and currency.

R&D expenses were $11 million for the quarter, down $2 million year-over-year. And we expect R&D to be around 4% of revenue for the full year.

Restructuring, integration and strategic transaction expenses were $12 million in the first quarter versus $24 million last year. The first quarter 2020 spending related primarily to the system cutover for our Austin manufacturing facility and also included cost to restructure certain foreign commercial operations. The Austin system cutover took place during the quarter and was the final step in the system integration plan related to the Hospira acquisition. We now expect total restructuring, integration and strategic transaction expenses to be a bit lower for the full year, at $30 million to $35 million, with the majority of the spend coming in the first half of the year.

Adjusted diluted earnings per share for the first quarter of 2020 were $1.81 compared to $2.58 for the first quarter last year. Please note that the prior year results were favorably impacted by excess tax benefits related to equity compensation. We continue to estimate our tax rate for the full year to be in the range of 21% to 23%, with the non-GAAP rate at the higher end of this range. Diluted shares outstanding for the first quarter were 21.5 million. And for modeling purposes, this same number can be assumed for the full year. And finally, adjusted EBITDA decreased 19% to $63 million for the first quarter of this year compared to $78 million last year.

During the first quarter, the strengthening of the U.S. dollar, which was brought on by market reaction to the COVID-19 global pandemic, had a negative impact to our P&L in a couple of different ways. These impacts are further described in Slide #5 of the presentation. We estimate that the combined effect in Q1 was a reduction in adjusted EBITDA of $8 million and a reduction in adjusted EPS of approximately $0.30.

First, as compared to our original 2020 guidance, the impact of foreign exchange from the translation of our foreign entity financial statements into U.S. dollars for purposes of financial reporting, reduced adjusted revenue by $3 million, adjusted EBITDA by $2 million and adjusted EPS by $0.07.

Second, in addition to the translation impact, we also incurred foreign currency transaction losses of $6 million during the quarter, which are reflected in the other expense and income line of the P&L, and reduced adjusted EBITDA by $6 million and adjusted EPS by $0.23. These transaction losses relate primarily to balance sheet exposures from intercompany receivables and payables among our various legal entities and were caused by a significant weakening of certain currencies, mostly in Latin America, Asia and South Africa. Although these transaction losses are noneconomic in nature, as they result from intercompany balances, they do impact our reported results. Excluding the impact of currency, we believe that the level of profitability in Q1 relative to revenues is appropriate.

Now moving on to cash flow and the balance sheet. For the quarter, free cash flow was $14 million. Working capital reflected continued decreases in both DSOs and days of inventory on hand. These improvements were offset by a reduction in the accounts payable due primarily to timing of vendor payments. Note that the onetime payment to Pfizer of $22 million, which we originally expected to make in the first quarter, will be made in the second quarter of this year.

While we are pleased with our progress to reduce both DSOs and days of inventory on hand, we also recognize that the COVID-19 pandemic could pressure both of these metrics over the remainder of this year. Our hospital customers, many of whom we service directly, are dealing with the financial implications of lower hospital admissions and procedures, which could result in slower payments in the future. Additionally, we may look to maintain higher levels of inventory in the near term to ensure we can continue to meet any surges in customer demand.

In the first quarter, we spent $25 million on CapEx for general maintenance, system integration and capacity expansion. Consistent with our original guidance, we still expect to spend $85 million to $90 million this year, which includes expenditure related to transferring a portion of the contracted solutions products from Pfizer to our Austin manufacturing facility as well as the build-out of our new Dallas distribution center.

ICU has historically maintained a conservative capital structure, and we feel that the uncertainty the market is experiencing today validates that strategy. As the COVID-19 situation caused a deterioration in the financial markets during the month of March, we preemptively drew $150 million on our revolving credit facility. We plan to hold the proceeds from the revolver draw as cash, while the COVID-19 situation and market conditions remain uncertain. Including the $150 million of proceeds from the revolver draw, as of March 31, our cash and investment balances totaled $440 million and were in line with our expectations after considering the revolver proceeds and the delay in the $22 million Pfizer payment.

During the month of March, the Federal Reserve cut interest rates by 150 basis points in order to provide relief and stability during the pandemic. This reduces the yield on our cash and investment balances. As shown on Slide #5, the impact of lower interest income on cash balances, combined with the incremental interest expense from the revolver draw, is expected to reduce full year adjusted EPS by $0.15.

As Vivek referenced in his remarks, we are updating our 2020 adjusted EBITDA and adjusted earnings per share guidance to reflect what we know now, which is the expected nonoperational impacts for currency and interest income and expense. As a result, after adjusting for the $10 million negative impact from foreign currency, we now expect adjusted EBITDA to be in the range of $230 million to $250 million for the year. Additionally, after adjusting for the combined impact from foreign currency and interest income and expense of $0.55, we now expect adjusted diluted earnings per share of $5.95 to $6.65.

While our updated guidance does include a set of assumptions related to the commercial and operational impacts of COVID-19, I want to emphasize Vivek's earlier comment that the range of potential outcomes is wide. However, we will do what we always do and provide an update on our view of the full year as part of the second quarter earnings call when we expect to know more.

In closing, I'd just like to say that it's an unusual time to be stepping into the CFO role, but I feel fortunate to be at a company whose products are essential to the health care system, and I take comfort knowing we are well positioned to handle whatever challenges may come.

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

[Operator]

[Operator Instructions] And you do have a question from Jayson Bedford from Raymond James.

[Jayson Bedford, analyst]

Can you hear me okay?

[Vivek Jain, executive]

Perfectly. Jayson, go ahead.

[Jayson Bedford, analyst]

So a lot to unpack here. I guess let's just start on COVID. The $5 million to $6 million in IV Solutions, sounds like that's the benefit. In that, the benefit on the pump side sounds like it's not necessarily onetime. Is that a fair characterization?

[Vivek Jain, executive]

I think that's a fair characterization that it wasn't that much revenues into Spain and Italy on the pumps. And we expect them to -- longer term, to continue to be pumping. On the solutions piece, certainly, the part that was not to our -- overage in our existing committed customers, that was excess, right?

[Jayson Bedford, analyst]

Okay. Can you speak to 2Q and the potential impact there? I think you mentioned participating in selected ordering in U.S. stockpiles. I'm just wondering, in terms of 2Q and the potential net benefit from COVID, care to quantify that?

[Vivek Jain, executive]

I don't know if we'd want to quantify it, Jayson. I would say it's really going to show, if anywhere, in the pump -- in the IV Systems line, but that needs to be balanced against the IV Consumables and Solutions businesses, where it has been a very volatile ordering pattern for the last 4 weeks or 5 weeks. Not in a good way.

[Jayson Bedford, analyst]

Okay. In terms of just sticking with the pumps, were you able to install any of the pumps tied to the share gains in 2019 that you'd previously mentioned?

[Vivek Jain, executive]

Not a lot.

[Jayson Bedford, analyst]

Okay. And I know this may be a difficult question, but at what point do you think hospitals get back to deciding on new pump platforms?

[Vivek Jain, executive]

It's difficult to know. I mean, certainly, right now, people don't want to deal with things that they don't absolutely positively have to deal with. For us, it's about just -- we've lost time in the last 6 weeks, 8 weeks with what's gone on here. Obviously, it's a secondary issue. And we just need to at least be able to get out there and talk, and we don't really see that happening in a real way. The hospitals haven't even figured out how to allow people in, and there's not a common set of rules for that even. We don't see that happening for about 4 to 6 weeks until you can even get out there in a meaningful, meaningful way.

[Jayson Bedford, analyst]

Right. Okay. Maybe a couple of quick ones for Brian. Gross margin, should we assume that 1Q here is the trough for the year?

[Brian Bonnell, executive]

No. I don't think that's necessarily the right assumption just given the potential volatility in volumes over the course of the rest of the year.

[Vivek Jain, executive]

Please remember, Jayson, if we install more pumps, that's a negative to gross margin. Or if things deteriorate even beyond what we anticipate at the moment, and we'll update everybody on the Q2 call just like we always do, it just comes down on the other 2 business to what admissions look like. But if pumps were -- if admissions went down and volumes went down, which is going to happen, it's just a debate about how much, and pumps went up, your mix would be negatively impacted from that, marginally negatively impacted. In that period, you'll obviously get -- do better with pumps over time pumping.

[Jayson Bedford, analyst]

Right. Okay. And then maybe just last one. Back to the FX dynamic, I'm still a little unclear, meaning even the companies, I think -- or the countries that you cited in the PowerPoint, I think you manufacture more product than you sell into those countries. So I'm still a little puzzled as to why a stronger U.S. dollar wouldn't be a tailwind. So maybe if you could -- don't mind going through some of the dynamics there that led to the revision.

[Vivek Jain, executive]

Yes. It's a fascinating topic. Hold on. I'll let Brian talk.

[Brian Bonnell, executive]

Yes. So the majority of the impact due to currency on the EBITDA line comes from balance sheet exposures that we have related to intercompany receivables and payables. Specifically, a number of our foreign entities have intercompany payables through our U.S. entity in U.S. dollars. Many of these foreign entities experienced significant impacts to their currency. And as a result, that liability in U.S. dollars increased as a result, and that results in a loss to the other income and expense line of the P&L. Jayson, does that...

[Jayson Bedford, analyst]

Yes. So we're going to -- and now we're going to see it on the other income line.

[Vivek Jain, executive]

Yes, that's what it is. That's what it is. Longer term, to your other point, historically, for ICU, strength against the peso was a good guy. We've got a bunch of different places now. And we hedged -- we thought it was a portion of it might be as good as it could get, and we had to sell that too historically. So...

[Operator]

And your next question comes from Matthew Mishan from KeyBanc.

[Matt Mishan, analyst]

I just want to make sure -- it's been a long day, so I just wanted to make sure I understand. You guys aren't necessarily reiterating your guidance, excluding the FX and interest. You're going to update it in next quarter, and there's a range of outcomes. I'm just -- is the range of outcomes, where that may fall in the middle, where some are actually a positive outcomes and some are negative outcomes? I'm just trying to understand what that range of outcomes looks like and make sure I fully understand what you're saying.

[Vivek Jain, executive]

Sure. It's okay to be blunt here, right? Our concern was if we -- the one thing we knew for certain was the currency and interest expense, right? We could pay off the revolver, and that could go if we wanted. We didn't want anybody to presume that if we withdrew, that it would be better, right, because it is a very unpredictable and difficult situation out there. We have built in some downside to our current view of the balance of the year that delivers it, but it could get worse. Maybe there are some outcomes where it could get better, but we don't -- this might be the new normal. We don't want to pull and put it out again. With each year, we've laid out in the beginning of the year. We've adjusted if we had to in the middle of the year. And things we knew right now were the currency, the interest expense and, at least, some assumption on what deterioration from Q2, Q3 could be. That's all it was. And that's probably fair to ask. We're just -- we're trying to rerun a model. We're not that big. We want everybody to at least be transparent and say this is what we're running towards with a higher degree of risk right now.

[Matt Mishan, analyst]

That's right. That's right in this environment. You were planning towards a $75 million to $80 million run rate on IV Solutions over the course of the last, like, 6 months before this. What are you thinking now? And how do you kind of view the manufacturing footprint between Austin and Rocky Mount? Has that changed?

[Vivek Jain, executive]

Let's do it in reverse. Nothing has changed. The team is actively, and that's where a lot of CapEx is gone, to get the lines up and running in Austin to allow moves away from Rocky Mount that is necessary in our long-term model. So that hasn't changed at all. And yes, the base business was probably a little bit higher than $80 million in Q1. I wouldn't make much of it other than it was a -- and you kind of go back to Q4, it was a reasonable flu season, et cetera, before the pandemic. And the winter is usually a heavier months, just a couple of million dollars. I wouldn't draw any conclusions from that.

[Matt Mishan, analyst]

Okay. And on your commentary around you believe the market doesn't want a winner-take-all. What is -- I'm just trying to understand, where does that -- where did they not want a winner-take-all? I mean will -- are you talking specifically around the solutions there? Or is it more around -- you take a hospital and want to use like multiple pump manufacturers going forward as well?

[Vivek Jain, executive]

I think it applies to all these categories. And I look at the insanity of what we've all been living through, and there aren't that many factories that make a lot of these products. And there aren't that many vendors. And it's not good for the system to be overboard to any one situation. And so whether we're the beneficiary or the -- on the negative end of that, if we were in charge, that's how we would think about the categories. And certainly, the message we're trying to deliver out there. Obviously, your products will stay on their own merits, their technology, et cetera. But we see the larger systems thinking about that a lot right now. And whether it was beds or PPE or any of these other categories that we've been associated with, all those categories in our previous experiences, we do think people are going to do a little bit more reflection on that.

[Matt Mishan, analyst]

And I guess the same question, like almost like backwards, I guess, as you look at the rumors of you and Smiths, and you look at the U.K. and then how important the manufacturer is to be based in a country -- to supply a country, do you now look at a potentially large acquisition like that and say, "I don't know if going forward, it wouldn't even be feasible in this kind of environment?"

[Vivek Jain, executive]

I think we haven't thought about anything outside of the last 90 days, except about our own business and making sure we're taking care of our customers. That stuff will sort itself over time on what's required in a given place or not. But I do -- I really do believe it's good for the system to have some diversity in the supply chain, whether that helps us get something, that helps us something done, that's secondary, right? A lot of these categories that are -- all these categories that you're reading about every night, I mean, they didn't leave local manufacturing by accident. They left because they've got overweight, either misvalued or overweight of a certain direction that they wanted. That's not good for me.

[Operator]

And your next question comes from Larry Solow from CJS Securities.

[Lawrence Solow, analyst]

Vivek, maybe a couple of questions on -- just some follow-ups. Most of my questions have been answered. But in terms of sort of your assumptions, clearly, some of the biggest drivers are hospital admissions. And you said things could get worse. And obviously, that would be on the elective surgery side. Could things get worse on the elective surgery side? Or is it more that you're worried that this continues to be sort of blacked -- almost blacked out for a longer period of time?

[Vivek Jain, executive]

I don't know, I don't know. First, I don't know if it's just elective surgeries, Larry. I mean ER visits are important, too. ER visits are down. I mean, we read the public hospitals' transcripts, the 400, 500 that are unavailable. And they've all been very candid about it. They're obviously all hoping, right, that electives come back, everybody in the system is. The economics of the system depend on it. But what guarantees that the ER visits are going to be the same? I mean what guarantees that electives will ever get back more than 75% of what they were for the foreseeable future? That has a big impact on admissions. And people are throwing around numbers much better than that in the third quarter. Like I don't know that we have enough to believe it -- believe that. And we have to run plants -- production plants and all stuff based on the numbers. That's why we run the model.

[Lawrence Solow, analyst]

But maybe -- and what are you guys sort of from a high level, are you incorporating sort of we stay the course on the elective side and admissions sort of slowly come down more as hopefully COVID subsides a little bit? Is that sort of your view? And down the middle, I would say, is that -- would that be like sort of down the middle view?

[Vivek Jain, executive]

Yes. I think we are probably a little bit more cautious than down in the middle. I mean I think -- we think Q2 could be really challenging and Q3 could also be challenging. If there's any hope, it's certainly later in the -- it's later in the year.

[Lawrence Solow, analyst]

Right, right. And how do -- you mentioned sort of -- obviously, this whole pandemic sheds a light on sort of the importance of the industry. How do you think -- does it impact you guys specifically over the sort of mid- to long term how you'll operate your business assuming COVID is -- if it's a couple, hopefully, a 2-year to 3-year thing and then it's somewhat under control? Do you -- from a really high level, do you see things you could do better? Any thought there.

[Vivek Jain, executive]

Look, from a really high level, it doesn't actually change that much what we were doing, right? We were just -- this was our business, and it is our business. And we have to tweak production up and down. We have to stop/start on installation stuff. It doesn't actually change that much what we're doing. There are product features that we want to deliver on in our development roadmaps in each of the segments, and it maybe sharpens thinking around some of those. And it's -- we grind, right? We know that we're not going to go away in the system. We grind away for the next opportunity to present itself.

[Lawrence Solow, analyst]

Right. And then on the pump side...

[Vivek Jain, executive]

We make sure we have customers that have -- are on the best footing, right, that believe in what we're doing.

[Lawrence Solow, analyst]

Right. Absolutely. And on the systems side, you mentioned sort of you came into the year with probably your greatest opportunity or positioning in a long time to continue to begin to take some share. Obviously, this holds you back a little bit. But has the competitive environment or your opportunity really has -- will that -- could that potentially slip through your hands? Or does that kind of just shift to the right? I know your competitor also has spacing issues, regulatory issues that probably won't be -- sounds like won't be resolved too soon.

[Vivek Jain, executive]

I think, like we said on the last call, we don't really want to comment on it. It has been -- we lost time with what's gone on, and so we don't know whether we get time back or not. We just have to get out there and execute. But we still believe the opportunity is as good as it's ever been for us. I mean do work on products and figure it out, right? We have the full portfolio with all the consumables that go along with it. So we feel like we're well positioned, and we just have to execute.

[Lawrence Solow, analyst]

Okay. And then just last question on the oncology piece. You mentioned that you've gotten some better traction outside the U.S. It sounds like you don't expect to really get too much traction in the U.S. until things calm down on that.

[Vivek Jain, executive]

It's been a little bit of a more complicated story. We were short product for most of the last year. We released it first into the U.S. market. We had a big surge of product taken in the U.S. market in Q4, and then we released it to the international market at the beginning of this year. As a result of all of that release into U.S., we didn't have quite the same store reordering in the U.S., plus, then the pandemic hit and slowed things down from an implementation perspective. That probably flips. The U.S. starts to look a bit more normal. International probably cooled off a bit. Now they've put some products out there for the next 90 days or so. But it is very dependent on the ability to get into hospitals in service, train and switch people over, and that has been challenging. Obviously, last 6, 7 or 8 weeks, we've lost time.

Okay. If that's it, we appreciate very much. We know everybody is busy. It's a difficult time out there. We appreciate everything that all participants are doing here. We appreciate people's interest in our company. And just like we have in previous years, we'll come back on Q2 and then tell you exactly where we think the world is. Thanks very much, folks. Appreciate it.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.