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.

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.

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…

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…

[Operator Instructions] Your first question comes from the line of Jayson Bedford from Raymond James. Your line is open.

Hey, Jason.

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?

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.

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

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

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?

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.

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?

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.

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?

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.

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?

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

Okay.

admission :

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?

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.

Okay. Thank you.

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

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?

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.

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?

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

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?

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.

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…?

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.

Right.

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.

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

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

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?

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.

Okay, great. Thanks a lot.

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.

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

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

Brian, how you guys are doing?

Hi, Matt, good.

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?

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.

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?

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.

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

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

Okay. Thank you.

Thanks Matt. Hope you're doing well.

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

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