ICU Medical Inc

NASDAQ:ICUI

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for your standing by. And welcome to Q2, 2020 ICU Medical Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions]. Please be advice that today's conference is being recorded. [Operator Instructions]

I would now turn the call over to your first speaker Mr. John Mills, ICR. Please go ahead, sir.

[John Mills, Investor Relations, ICR]

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss the ICU Medical financial results for the second 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 Second 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 operation 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 Medicals 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, is my pleasure to turn the call over to Vivek.

[Vivek Jain, Chairman & Chief Executive Officer]

Thanks, John. Good afternoon, everybody. And we hope you and your families are well. For last three years we have been ending every call with the same comment about support from our customers and the ability of our employees to adapt in a changing environment.

While it was never intended fro the Pandemic that belief was required in Q2 as we showed our resiliency going forward and adapted to inconsistent weekly demand due to very real challenges faced by healthcare systems in our market.

Like everyone in our industry, we want to start first by thanking all of our hospital customers and their frontline workers for trusting us to serve you during these times. As we normally adjust to the normal, we will continue to offer our best support and execution.

On today's call we want to first, comment on our Q2 results with a bit more product line color due to effects of COVID-19. Explain the volume trends we experienced during the quarter and at least what we're seeing through last week. Described a high-level knock-on effects of the pandemic to ICU Medical and how we're adapting.

Reiterate our short term financial goals that stated on the last call. Update on some housekeeping items. And lastly, articulate how we feel about our own positioning in this environment, any strategic implications and reflect in the criteria by which we are judging ourselves.

The short story on Q2 as is follows. And previewed on the last call, we experienced a year-over-year drop in volume approximately plus or minus 10% for all of our hospital census based items, and we were able to offset this with a significant growth in most differentiated line have small amount of growth for the company in aggregate.

There were substantial differences between the market in the U.S. market with many international market largely being back to normal and we benefited from selling our most differentiated lines outside the U.S.

There was a commercial stability in the sensor. There was not much customer switching which is both a positive and negative. The company is operationally running well in the new normal, and we were pleased with our level of profitability given the reduction in volumes and our higher-margin products overlaid with the geographic mix. And we were able to add a good amount of cash to our balance sheet even after making the final payments to Pfizer as restructuring costs came down.

And while in Q2, we did not encounter any of the negative currency effects we felt in Q1. Currency does remain a fluid situation for company our size. We finished the quarter with $289 million in adjusted revenue, adjusted EBITDA came in at $58 million and adjusted EPS was $1.65 due to better profitability than expected and the better tax rate.

Basically, we had various declines and utilization in the U.S. market of dedicated pumps set, IV consumable and IV solutions and these are offset by higher IV pump hardware sales and continued oncology growth albeit more driven by international market as even oncology had some slowdown in U.S. volumes.

Cash in our balance sheet increased to $461 million including the revolver after building an additional $11 million of inventory sequentially and paying Pfizer and Brian will provide an update on the latest thinking on the revolver. Restructuring and integration charges were half the level of Q1.

So let's go to the businesses quickly and then come back to discuss COVID-19 and the knock on effects. Starting as usual, infusion consumables which are largest business,, infusion consumables had revenues of $111 million in Q2, 2020, which was a 5% decrease year-over-year adjusted for currency and a 6% decrease on a reported basis.

We did not necessarily have predictable consistency in all places and product lines. Traditional IV therapy was down near 10% globally, with the U.S. accounting for the vast majority of the decline.

Our oncology products grew near 15%. Again, with negligible gains in the U.S. We do not think we had any pandemic stocking in the quarter as reduced admission volumes and demand allowed for consumption of the small volume of pandemic ordering we saw towards the end of Q1.

The story for Q2 was really about U.S. volumes. There was no real customer churn and we've started to finally implement some pieces of new business in the last few weeks. An open question in our minds is the rate of oncology diagnosis and treatment in the U.S. markets. We would have not considered this to be as elective as it was.

Pursuit Vascular's ClearGuard products delivered results as expected and we continue to be pleased with the acquisition. Moving to infusion systems, which is primarily our LVP, pumps and associated dedicated sets. This segment did $92 million in adjusted revenue, which is growth of 15% on a constant currency basis, or 12% on a reported basis.

As a reminder, this segment captures not only infusion pump hardware, but also the locking key dedicated pump sets. Those pump sets were also down ballpark 10% with utilization, but both for the reasons we've been talking about on the last few calls, and the pandemic we were able to sell a substantial amount of hardware, which dramatically improved results for the segment.

As we noted on the last call, we did have some pandemic specific stocking purchases as expected, and the balance for the most part was expansion at existing customers. We believe that customer expansion hard will be utilized in the pandemic government purchases were likely more one time in nature.

Even before the pandemic, we were holding the best amount of rollover and competitive signings we had in many years. The challenge continues to be getting into hospitals and implementing these conversions. We continue to believe we've stabilized the 10 plus year decline of our install base. We still know that safety is a critical factor when choosing an infusion pump.

We believe our Plum LVP technology is positioned well. As evidenced by the recent clinical guidelines around IV pumps. We've 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 PC and ambulatory pumps, nothing has changed with PCA pumps since the last call. And regarding ambulatory. Our goal and we're getting close is to have enough demand and expansion to finally jump over the annual declines we've had in ambulatory pumps.

The infusion system segment total will deliver revenue growth this year, but it's difficult to predict the exact installation timelines as our customers are battling on many fronts. Finishing the segment discussion with infusion solutions, we had $74 million in adjusted revenue, down 7% year-over-year and down substantially sequentially.

We did match on the last call, we had 5$ million to $6 million of pandemic purchases in Q1. And we felt the after effect of this combined with lower volumes in census at U.S. hospitals.

To give a bit more color by volumes on some of the subcategories to make an opinion on where the volume shortfall was, and the year-over-year is a bit inconclusive, given all the other dynamics we've lived through an IV solutions and Q1 is a bit biased by the pandemic quarters we mentioned, but we think it does illustrate what happened.

Our SVPs or Small Volume Presentations were up 30% year-over-year, and close to flat sequentially. These are the products used in admixture to deliver routine medications. Our irrigation products which are our largest volume presentations were down near 30% year over year and sequentially.

These products are much more tied to both surgeries and emergency room visits, which are obviously down dramatically. The remainder was normal LVP products which were really only down sequentially in units related to the overall ordering in Q1.

I think that's a lot of words to basically say, the products tied to admissions, electives, OR visits really suffered, and the rest was generally stable. We continue to believe the quality of our book has improved with us holding the best list of sustainable relationships versus the day we bought the business.

We're healthy on safety stock, and since the last call, our new national distribution center has come online in Texas to help improve supply chain costs longer term and to provide enhanced supply chain services to our customers. We hope the recent events have illustrated the value of having a healthy and diverse supply chain in this country.

One item of note you'll see a rare press release from us today. We have entered into a different distribution agreement with Grifols, the multinational Spanish company, whereby Grifols will supply us a variety of PVC free IV solution products.

Today these products represent a small minority of the U.S. IV solutions consumption, but they do matter over time and are part of an integrated oncology preparation offering to the pharmacy.

We felt this alignment was a logical move, as it allows us to move away from Pfizer Rocky Mount for these items. Immediate supply customers with a broader portfolio. And it was more sensible than new capital expenditures, as we do not believe the category merits additional capacity investments, as excess capacity already exists, particularly with the conservation efforts by customers over the last few years, combined with lower end user emissions.

Okay. To give a little more color on what we experienced throughout the quarter, international markets had generally less volatility even from the start of April. The U.S. market however, was a bit of barbell across the quarter.

The first two weeks of April were very strong. And those were followed by a very weak five or six week period nearing the end of May. That's ordering running at 25%-ish below normal for our census driven items.

June improved dramatically cutting the May declines in half. Like other medical device companies have said on their calls, we don't want to get in the habit of real time sales explanations, and it is about the long term for us. But July was a subset sequential improvement to June.

August, in our experiences here in prior places, was always a bit of a low summer month. It's hard to assess right now how much of the activities catch up versus do it well and do it while you can in the current market. We're much happier with what we felt over the last few weeks versus the end of April and the first few weeks of May.

Moving on to some of the COVID-19 knock-on effects of the company and what we're doing to adapt. Commercially, we've organized well to respond to various government tenders, and are adapting to the new normal in sales.

Hospitals have only started to show unwillingness for on site implementation or discussions in the last few weeks. We believe the whole concept of sales will not flip back to the established model quickly, and such we're using our time for training, and a business and selling environment that will be fundamentally different going forward. That means adapting our tools training and mentality just as everyone has to do.

Operationally, as we mentioned on the last two calls, the early signs from China did cause us to accelerate preparation from a production perspective. We've adapted our operational footprint shift hours, local transportation, redundancy plans, we've invested in employee safety and provide an incremental compensation.

We focused on securing our supply of raw materials and components. And we've invested in incremental inventory as a buffer for unforeseen disruptions. As a reminder, our primary manufacturing locations are in Texas, Utah, Costa Rica and Ensenada, Mexico which is 90 miles south of Tijuana.

From an expense perspective, our incremental direct costs related to COVID-19 and our savings continue to be a wash on a cash basis. We have had increased expenses as we just described, but we've also had savings with discretionary expenses, less T&E, lower insurance costs and a higher overall job vacancy rate. Freight costs have increased as capacity has been reduced.

Regarding our near term financial results, we think we largely spoke our piece on the last call and have no change to our previously stated guidance, currency being the largest variants to our original 2020 earnings expectations.

We felt like we sounded the alarm bell on admissions on the last call, and think the model we laid out then carries through for the year with the assumption that the pandemics impact on hospitals does not worsen from the current level.

We continue to be cautious on admission numbers and expect that we offset that slightly by gains at our most differentiated lines. We also continue to be cautious on implementation timing for system installs. We do think Q2 was the low point for our consumables and solution segments.

It's probably the opposite for Infusion Systems, as we're unlikely to have a quarter with so much additional hardware in it. Our profitability will be most impacted by hardware sales as a percent of the overall mix, and the extra production costs we added into to now being incorporated into the gross margin of the products Brian will talk both about the tax rate favorability and our view on repaying the revolver.

Moving on to some housekeeping items. Again in Q2, we had excellent global fulfillment rates to our customers, the cutover of Austin IT systems has exited hypercare and is running well.

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 again have had a number of successful notified body audits.

The FDA has announced the intention to resume on site audits, and we would potentially expect inspections over the next few months. The product approvals we mentioned on the last call are moving their way into production.

One new item to note in our 10-Q, it will reference a dispute notice received in Q2 from Pfizer regarding the calculation of performance targets related to our earnout payment. Pfizer has been a solid partner and we're working with them to provide additional details pursuant to our agreement.

Pfizer was obviously an equity participant here and our board of directors. And we've tried to treat them well at every step as we address the litany of issues that came with Hospira. We feel comfortable with our position and we'll address the inquiry with our usual thoroughness.

To synthesize all these comments on the business segments, the pandemic and how we're trying to judge ourselves, we've stated for a while that 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 IP solutions.

We've talked about the industry structure attractiveness for years, why we fit in the puzzle, and that our products are in a good position from a technology, quality and manufacturing perspective.

While the pandemic has introduced substantial volatility, strategically, we do think the weaknesses it is exposed in the healthcare supply chain. Add to the argument for all participants to be healthy and stable, which has been our commentary since we became a full line supplier.

We make essential items that require significant clinical training, capital expenditures and in general are items that customers do not want to switch unless they have to. We are a US manufacturer that is deeply vertically integrated and has core redundancy in products that we do not produce domestically between Ensenada and Costa Rica.

We do believe the market broadly defined does not want a winner take all setup in these essential item categories. And that's before each category is assessed its own innovation, clinical outcomes, et cetera.

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 differentiate items are still differentiated.

So we focus on what we can control in these moments. Having the best list of supportive healthy customers, keeping our employees safe while delivering the best operational stability for our customers, making sure we drive differentiation in the most valuable categories.

Having the best liquidity we can for a company our size, using all of the above to be prepared for whatever realignments or opportunities arise and trying to ensure our own commercial execution.

Our company has emerged stronger from all the events over the last few years. Thank you to all the employees, customers, suppliers, frontline health care workers. Our company appreciates the role, each of you has had to play.

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

[Brian Bonnell, Chief Financial Officer]

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 second quarter 2020 GAAP revenue was $303 million compared to $312 million last year, which is down 3% or 2% on a constant currency basis.

For your reference, the 2019 and 2020 adjusted revenue figures, which exclude contract manufacturing sales to Pfizer can be found on slide number three of the presentation. Our adjusted revenue for the quarter was $280 9 million compared to $290 million last year, essentially flat year over year or up 1% on a constant currency basis.

Infusion consumables were down 6% or 5% on a constant currency basis. IB solutions which we sell primarily in the U.S. was down south 7% on both a reported and constant currency basis.

Infusion systems was up 12% or 15% on a constant currency basis and critical care, up 14% on both a reported and constant currency basis. As you can see from slide number four of the presentation for the second quarter our adjusted gross margin was in line with our expectations at 38% compared to 42% for the second quarter last year.

For the full year, we now expect gross margins to be in the range of 38% to 39%, which is one percentage point lower than our original guidance for the year. Compared to our original guidance, the variance in Q2 was driven by a product mix shift in the quarter that saw a significant increase in sales of lower margin in fusion systems hardware and lower sales of our higher margins. disposables across all product categories.

The balance of the year reflects the impact of additional one time COVID-related manufacturing costs that were incurred during the second quarter, but will not be recognized on the P&L until the third quarter, as well as the impact of continued infusion system hardware implementations.

SG&A expense was 22% of revenues during the second quarter, which is flat compared to last year. On a sequential basis compared to Q1 SG&A was down $5 million due to reductions in T&E and delays in other spending as a result of COVID.

R&D expenses were 10 million for the quarter, down $1 million year over year. We continue to expect R&D to be around 4% of revenue for the full year. Restructuring, integration and strategic transaction expenses were $6 million in the second quarter versus $37 million last year.

The second quarter 2020 spending related primarily to post go live support for the system cutover for our Austin manufacturing facility that went live in Q1, and was the final step in the system integration plan related to the Hospira acquisition. The second quarter spend of $6 million was the lowest level since the Hospira acquisition, and we anticipate further decrease as going forward.

We expect total restructuring, integration and strategic transaction expenses for the full year to be around $30 million. Adjusted diluted earnings per share for the second quarter of 2020 were $1.65, compared to $1 99 last year.

This year's Q2 results were favorably impacted by excess tax benefits related to equity compensation, which contributed approximately $0.15 of benefit to EPS. With discrete tax benefit in Q2, we now estimate our tax rates for the full year to be in the range of 19% to 21%, with the non GAAP rate at the higher end of this range.

Diluted shares outstanding for the quarter were $21.5 million. And for modeling purposes $21.6 million can be assumed for the full year. And finally, adjusted EBIT decreased 13% to $58 million for the second quarter of this year, compared to $67 million last year.

Now, moving on to cash in the balance sheet. For the quarter, free cash flow was $16 million, which included the previously discussed one-time payment to Pfizer of approximately $20 million. It was another strong quarter of cash flow generation. In fact, over the past four quarters, the company has generated over $80 million of free cash flow after investing almost $90 million in CapEx and additional $40 million in restructuring, integration and strategic transaction expenses.

Net working capital at the end of the second quarter was generally flat compared to the end of the first quarter, except for a slight increase in inventory of $11 million. As mentioned in last quarters call, as we continue through the year, we do expect to maintain a higher level of inventory in the near term to ensure we can continue to meet any surges in customer demand, as well as provide a buffer in the event of any supply chain interruptions.

In the second quarter, we spent $13 million on CapEx for general maintenance and capacity expansion at our facilities, as well as placement of revenue generating infusion pumps with customers outside the U.S.

Although the second quarter spend was a bit less than our historical rates, the decline was due mostly to the timing of payments and consistent with our original guidance, we still expect to spend $85 million to $90 million this year, which includes expenditures related to transferring a portion of the contract manufactured solutions from Pfizer to our Austin manufacturing facility, as well as build out -- the build out of our new Dallas distribution center.

In March of this year, as the COVID situation was causing a deterioration in the financial markets, we preemptively drew a $150 million on a revolving credit facility and expected to hold the proceeds as cash while the COVID situation and market conditions remained uncertain.

Since then, the financial institutions have demonstrated adequate liquidity to meet funding needs of the market. We've seen continued improvement in customer demand for our products, and our internal operations have remained stable. As such. If the current conditions don't worsen, we could be in a position to repay the full amount of the borrowings between now and our next earnings call.

During last quarters call, we updated our full year guidance for adjusted EBITDA and adjusted EPS to reflect the expected impact of two items. The first was foreign exchange, most of which related to transaction losses on intercompany balances during the first quarter.

The second was lower interest income on cash balances, and higher interest expense from the $150 million revolver draw. We felt we could mostly absorb the commercial and operational downsides from COVID with a combination of additional demand for infusion pumps, and cost savings, and our outlook today remains the same.

For the full year, we still expect adjusted EBITDA to be in the range of $230 to $250 million and adjusted diluted earnings per share of $5.95 to $6.65. In closing, it has been a change first half of the year, but we take comfort in having a strong balance sheet with ample liquidity, improving cash flows from declining restructuring and integration spending, and on a currency adjusted basis, having demonstrated top line growth for the business as a whole, for both the first and second quarters. And moving forward, our primary goal is to get each of our four businesses growing at the same time.

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 Jayson Bedford from Raymond James. Your line is open.

[Vivek Jain, Chairman & Chief Executive Officer]

Hey, Jason.

[Jayson Bedford, Raymond James]

Hey, Vivek. Good afternoon. So I guess a few questions. On the infusion system side, you did mention some stocking on pumps related To COVID-19. I apologize if I missed this. But did you quantify the amount?

[Vivek Jain, Chairman & Chief Executive Officer]

We did not quantify the amount, Jason. But I would say that the amount of business we did with kind of governments in some of the stockpiles was probably about 35% to 40% of our overage in pumps number something like that.

[Jayson Bedford, Raymond James]

Okay. And just to baseline, the overage, is that off of what level?

[Vivek Jain, Chairman & Chief Executive Officer]

I mean, each quarter historically, we've sold somewhere between $15 million to $20 million of hardware a quarter in our infusion.

[Jayson Bedford, Raymond James]

Okay. Fair enough. On the -- just -- I guess, actually, maybe on the pump side. You had talked earlier in the year about some competitive wins from late last year. Have you been able to recognize any revenue from those installs? And then generally, can you talk about visibility into the pipeline of those capital installations?

[Vivek Jain, Chairman & Chief Executive Officer]

Sure. In Q1, we did install some. We did get some of those things rolled into Q1. We did not get a lot of competitive installations in Q2. Things are slower and delayed. We -- as I said in the script, we are holding a number of them and we are hoping to get them installed. But it is really hard because in different parts of the country, different systems have different levels of utilization and priorities. So it's a little bit inconsistent right now. But we are holding some we would like to get installed this year.

[Jayson Bedford, Raymond James]

Okay. On the consumable side, I think you said oncology grew near 15% worldwide, but the U.S. didn't grow which implies a pretty strong International. Is that true demand? Is there pull forward there? And this little surprise, but how strong international was on the oncology side?

[Vivek Jain, Chairman & Chief Executive Officer]

Candidly, we were probably a little backordered because we were short on supply. Remember we talked about late last year, it only really started resolving itself towards the end of last year. It was probably a little bit of catch-up in there. It was a very strong number, probably higher than we would expect. On the other hand, we didn't expect the U.S. to be quite as low as it was. But you're exactly right that it was a bigger number international than -- it was the biggest number ever.

[Jayson Bedford, Raymond James]

The fundamentals and drivers are still in place for to support U.S. market adoption within oncology. Correct? This is just a COVID related lag?

[Vivek Jain, Chairman & Chief Executive Officer]

I mean, it's hard to know. We didn't really see this as an elective category. We have been looking at the other folks trying to get screening going again in some of the advocacy work that's going on. It sounds generic, but there is probably some deferral of diagnosis and less people coming to the system, et cetera, et cetera. But we can't pinpoint it. So it still feels a bit squishy to us.

[Jayson Bedford, Raymond James]

Okay. And did I hear you correctly on the consumable side, I think you mentioned new pieces of new business over the last few weeks, which I assume the last few weeks weren't realized in the June quarter?

[Vivek Jain, Chairman & Chief Executive Officer]

Now, there's been a few things. We couldn't get in to do installs, we finally had the ability.

[Jayson Bedford, Raymond James]

Okay.

[Vivek Jain, Chairman & Chief Executive Officer]

Whether it was consumable. So again, its much more about what's happening with the baseline admission right now than anything else, right? That's like, much bigger driver.

[Jayson Bedford, Raymond James]

Okay. Just Lastly, on the Grifols announcement. When are they expecting approval for the Dextrose IV solutions. And then, can you just help us size the U.S. market?

[Vivek Jain, Chairman & Chief Executive Officer]

Yes. I don't think we'd want to comment on somebody else's approval cycle and they're been working on it and are working on it. I don't know the exact number. But I would say in the U.S. market, less than 20% of all IV solutions may be less than 15% are PVC free, but it's an important in certain clinical areas. And it's important to some systems. And we were procuring it from Pfizer and some as it relates to the historical part of the deal, and now this helps us get away from them. And it's a broader base supplier that is committed to the category.

[Jayson Bedford, Raymond James]

Okay. Thank you.

[Operator]

[Operator Instructions] Your next question comes from Larry Solow from CJS Securities. Your line is open.

[Larry Solow, CJS Securities]

Great. Thanks. Good afternoon. Just a couple of follow-ups there to Jason's questions. On the on the overage, I guess, you mentioned 35%, 40% is sort of government stockpiling. So, we could assume that that those products, I mean, they may be utilized initially, but in theory, you may not get the dedicated disposables on those, but the remaining whatever that may be 10, 12 those should start to flow through and not normal, whatever, six to 12 month lag or wherever it's implemented, I guess?

[Vivek Jain, Chairman & Chief Executive Officer]

I think that is our view, Larry, what's hard to say is, if it was stuff on the margin that people need to -- is it going to be running at the exact same rate as a typical pump is running. So it will likely be utilized, but it may be not -- it may not be running at the x hundred dollars that we typically expect per year per pump set. It might be a little bit lower than that, but it's still very, very NPV positive, it's pumping.

[Larry Solow, CJS Securities]

Right. So in that mixture basically, but some of that whatever that 10, 12 produced. Some was to -- or probably maybe the majority of that 10, 12 was to existing customers and a piece was two new implementations I guess, right?

[Vivek Jain, Chairman & Chief Executive Officer]

Most of it this quarter was either to existing customers or stockpiles [Indiscernible].

[Larry Solow, CJS Securities]

Okay. I got you. And on the implementations I realize the challenge you guys are having. How about just getting into hospitals, talking to -- talk sales pitching as all of these contracts are coming up on the solution side and just selling, now that you have capacity on oncology side. Sounds like international that's okay. U.S., can you sort of give us an update, not implementation with just discussions? Is that starting to improve?

[Vivek Jain, Chairman & Chief Executive Officer]

I think everybody's adapting and so the hospital customers also adapting to the online world. Though they too are bit zoomed out like the rest of us. I think in certain parts of the entry on-site discussions are happening again. Though, I would say it's still 25% of the calls, if that, right? We'd be happy if that what it ran at a week right now. Slowly, it's slowly starting to come back. But it's -- I don't think our assessment is, I was trying to dress in the comments is that it's going to go back to normal anytime soon. And I think for all companies, we're going to have to figure out what is sales mean exactly going forward.

[Larry Solow, CJS Securities]

Right. And then, just on hospital utilization census, you mentioned obviously, April, May was tough. June, you've come back, good amount, and then July has come back with even more. And I think that's what we've kind of heard from just general hospital utilization commentary, sort of, I mean, can you ballpark? Again, that 10% number is that about what we would -- I thought we were down more than that for the -- I known in April May, but sort of, what do you think hospital utilization is at the end of the quarter? Any sort of guesstimate on that or…?

[Vivek Jain, Chairman & Chief Executive Officer]

Well, I mean, I think at least relative to our results and our kind of stuff, we call -- recent baseline like, forget Q1, just what was Q4, something like that.

[Larry Solow, CJS Securities]

Right.

[Vivek Jain, Chairman & Chief Executive Officer]

We were down for the quarter kind of on the consumables items, 10% from baseline. We said, July is a little, and that sort of -- and June was better than May. And we said, July was a little bit better than June. It's somewhere in that between 10 and normal. but that's what I'm trying to say in the script. Clearly, some of it is catch up and do it while you can. So there is no assurance that everything stays at that level. It's much more about what the baseline stays at than anything else right now.

[Larry Solow, CJS Securities]

Yes. No, I totally get that and sort of hard to guess exactly what that is. Just last question.

[Vivek Jain, Chairman & Chief Executive Officer]

I feel like we reported late after Q1, so we had a little bit more of insight with those couple of weeks.

[Larry Solow, CJS Securities]

Right. Just on the expense run rate, you sort of gave us some guidance on the gross margin. SG&A, I think we're looking for a little bit higher, more of a flattish sequentially. And it came down a little bit. Maybe, Brian, if you have any thoughts on sort of --is this sort of a good number with a little bit of growth as maybe sales come back a little bit?

[Brian Bonnell, Chief Financial Officer]

Yes. I mean, I think for the rest of the year, we'll see this probably creep up a little bit, maybe not to the same level that we saw in Q1. But Q2 is probably the low point for the year on SG&A.

[Larry Solow, CJS Securities]

Okay, great. Thanks a lot.

[Vivek Jain, Chairman & Chief Executive Officer]

There's a lot of like, not only T&E savings, but healthcare spend and other things that we also, just like everybody else out there, right, there are things we're benefiting from.

[Larry Solow, CJS Securities]

Yes, absolutely. Okay, great. I appreciate it. Thanks, guys.

[Operator]

[Operator Instructions] Your next question comes from Matthew Mishan from KeyBanc. Your line is open.

[Matthew Mishan, KeyBanc]

Brian, how you guys are doing?

[Brian Bonnell, Chief Financial Officer]

Hi, Matt, good.

[Matthew Mishan, KeyBanc]

Hey, so just saw the guidance, pretty clear 2Q and 3Q, it seems like you're much more comfortable around where those quarters have come in. Just thinking about your model, what does that say about what you're thinking about the end of the third quarter into the fourth quarter?

[Brian Bonnell, Chief Financial Officer]

Its like, is there going to be school in the fall. It's hard to -- its hare to know right now. I mean, I think our customers sincerely want to be busy. They're really trying. And in terms of patient recruitment and getting full and getting people to the ER and getting awareness up. I think everybody's trying to do the right thing. But I don't think we could sit here and say, it's going to snap back. It doesn't feel that with the other employment, all the other broader economy things we know that are being driven out there.

So I think we have a baseline for our consumables view. We've kind of spoken to that. And the variance is going to be an how much installs we can do on the hardware piece. And I think we could see clear to the next two, three, four, five, six weeks of hardware scheduling. Beyond that, it gets a little bit more hazy right now.

[Matthew Mishan, KeyBanc]

I think that's fair. And then you can really gone from one abnormal event to just an even bigger abnormal event from year over year. The last one had implications that became headwinds for several quarters afterwards around manufacturing absorption, supply chain costs. Where are -- have you now fully annualized those headwinds? And as we get into 3Q and 4Q here, I think you talked about the gross margin headwind you all experienced there. Are there any other implications or headwinds we should be thinking about as you get past 3Q and maybe even that could affect 2021?

[Vivek Jain, Chairman & Chief Executive Officer]

Yes. I think in the short term, and I know you asked on 2021 there. In the short term, it's about some of the extra costs we put into the factories. It's right thing to do. We do it again. Those kind of now cut into the product costing. It's about how much hardware we place. That's still NPV positive. But could be detriment to gross margins. That's really all there is to talk about, for the most part, volumes and solutions. I mean, we've taken our medicine on the resetting that we did last year. And there's a couple other issues that we have to secure with just some of -- making sure, volumes are right in the factory and the cost structure, et cetera, but that's really it.

[Matthew Mishan, KeyBanc]

Okay. And on Pfizer, I mean, does or could that dispute impact some of your other manufacturing agreements with them?

[Vivek Jain, Chairman & Chief Executive Officer]

We don't think so. We think is very separate, very separate discussion.

[Matthew Mishan, KeyBanc]

Okay. Thank you.

[Vivek Jain, Chairman & Chief Executive Officer]

Thanks Matt. Hope you're doing well.

[Operator]

[Operator Instructions] And there are no further questions at this time. I would turn the call back to Mr. Vivek Jain.

[Vivek Jain, Chairman & Chief Executive Officer]

Okay. Thanks, everybody. I hope folks are enjoying as much as they can in the summer of 2020. And it's been obviously an awkward and challenging time for everybody. I appreciate everybody rallying at the company here. And we look forward to talking everybody at the end of Q3. Thanks