Q1 2020 Earnings Call
In the context of the covert 19 environment.
Yeah, we'll come back on to provide his closing remarks, and then we will open it up for your questions.
At this point I'd like to turn the call over to Joe for his comments.
Thank you Tony.
These are clearly unprecedented times and as we operate through their co. Good 19 pandemic, our priority is the health and safety of our associates.
The onset of Gogan 19, we mobilized our global pandemic team and put in place strict safety measures and protocols to protect our associates and their families.
As an essential provider to the medical device industry and on a much.
Our scale the energy sector.
Dedication of our associates, especially our manufacturing associates, who continue to build products has been inspiring to all of us within integer.
It has taken a total team effort to manage in his new environment and I am proud of the agility and ingenuity. The team has demonstrated while we protect our associates and deliver for our customers.
To ensure the continuity of our operations, we have implemented many safeguards, including social distancing disinfecting workstations foreign teaming when necessary restricting travel and having employees work.
Remotely whenever possible.
We have also actively engaged with our global suppliers to ensure we have adequate supply chain capacity.
We maintain daily monitoring and communication with our suppliers to track and mitigate risk.
I'm pleased to report that we have had minimal disruptions within our global supply chain.
And I want to thank our suppliers for the cooperation and continued support during these challenging times.
We remain in closed end constant communication with our customers to respond to their evolving needs as they respond to the temporary decline in medical procedures.
Most of the changes have been reductions in demand, but there are some products rebuild that are now at higher demand, including components in service and lease for ventilators and patient monitors we have been ramping production to meet this accelerated demand.
Turning to our financial results, our first quarter was largely unaffected by coded 19.
We had a strong quarter inline with our expectations with sales up 4% and adjusted earnings per share up 25% over last year.
Our medical sales were particularly strong increasing 5%.
Whereas our electric in sales were negatively impacted by the significant downturn in the energy sector.
Jason will provide more color on our product line sales results later in the presentation.
Given the significant uncertainty created make over 19, we're suspending our financial guidance.
We will resume providing financial guidance once we have more certainty that the economic environment has stabilized and we can provide more reliable projections.
We will continue to provide as much insight clarity and transparency and our communications as possible. So that you understand how we're managing integer and the results we are delivering.
To provide more perspective on how we're thinking about Kobin 19, I'd like to offer commentary on three things.
Our view of how cobot 19 is impacting our industry, how we see it impacting integer and the actions we are taking to manage this impacts.
Given where integer is in the supply chain and the fact that we touched many of the medical device markets and almost every OEM in the industry.
Integer is in a unique position to provide insights into the industry trends.
First let me give you our perspective on how we see Kogan 19 impacting the industry.
Again, it is important to clarify.
Okay that visit our interpretation of the impact compiled from everything we are learning.
Though the Kogan 19 impact was being felt outside the us earlier in the first quarter the impact on the medical device industry began to be significantly felt when they use lockdown started on March 16.
As the industry Oems have shared during the recent earnings calls they felt this impact immediately with most experiencing dramatically lower volumes over the last two weeks of March.
There seems to be a clear consensus that the second quarter will be the most significantly impacted quarter of the year due to the prevalence of shelter in place orders and the ban on elective medical procedures in many locations.
Yes.
And improvement in the third quarter on a linear basis.
Barring a second wave of the virus in the fall or winter the industry could begin to approach normal run rate by the end of the year.
Turning to slide 10.
We point to some of the public statements that med device companies are making regarding the depth of the sales decline in the possible speed of the market recovery.
We have used what we're hearing from our customers to draw conclusions on the direction of the industry.
As you can see though there is general consistency in the expected timing of the decline in recovery companies are taking different manufacturing approaches to the volume decline.
From reducing production to align with reduced medical procedure volume the continuing to run factories at or near full capacity.
A word of caution. Please don't take these publicly available quotes as an indication that any of them has a disproportionate impact on integer.
We simply selected messages from our largest customers, which are disclosed in our FCC financial filings and a few others that we felt a representative of what the industry is saying about the impact of covert 19.
We've noted whether these codes came from press releases or earnings call transcript. So you have the source in the event you want to review the entire commentary by these Oems.
This slide is intended to provide a graphical depiction of the wide range of possible recovery outcomes for the industry.
Please note. This is our estimation and aligned in the middle of the range is not intended to be a precise predictions or the most probable outcome, but simply the midpoint of what is a reasonably wide range of potential outcomes.
Generally this curve supports everything we are hearing and seeing.
The second quarter should experienced the most severe impact on the industry.
Third quarter is better than the second quarter, which still down on a year over year basis.
In the fourth quarter continues to show improvement, but is still below.
The prior year.
Only in the most optimistic scenarios does the fourth quarter actually grow on a year over year basis.
The shape of this curve assumes a gradual reopening of not only economies in society, but of hospitals as well.
The opening of hospitals to elective procedures is obviously a key variable.
But the willingness of patients.
Well spread as society begins to reopen.
Now, let me turn to how the shape of the industry recovery will impact integer.
Note that the.
Impact on integer will be more than just how medical procedure volumes decline.
Fine and recover.
So.
Also include a blend of how our CFO.
Okay.
Customers manage this cycle, including their inventory levels.
We expect based on experience today.
There is a one to two month delay between the time medical procedures decline, which is what our customers volume declines and when we see a corresponding decrease in our sales.
The fact that we did not see a change in our orders for the second half of March is evidence of this delay.
As you heard on a number of earnings calls already we also expect to see a temporary contraction in our margin rates during the quarters, we experienced a decline in sales.
Sudden and short volume declines have a greater impact on margins as it takes time to put in place the necessary actions to match less variable or even fixed cost with volume.
Jason will cover this topic in more details in his review of the financials.
Let me turn back to the shape of the industry curve and the correlation to integer.
On this slide the overly integer on the industry curve, which we showed earlier.
This graph includes the expected one to two month delay on integer compared to the industry and our customers.
As reported on many of our customer earnings calls their volumes began to decline significantly in mid March when the U.S. shelter in place orders began.
It takes our customers time to identify the sales decline determine how they are going to react to the decline rescheduled their manufacturing plants and then communicate to their suppliers.
While this process is occurring integer continues to shift the previously order product, which causes inventory builds that our customers, which is evident in the reported inventory levels.
This is depicted in the area between the industry and integer curve during the second quarter.
Our customers have begun to adjust the orders with integer to achieve their targeted inventory levels.
Which results in the decline in our sales that you see beginning in mid.
Our customers approaches to the decline could lead to Ensinger, having similar sales in the second and third quarters, which would be different than the overall industry.
We expect that by the fourth quarter, our sales will be on more similar trajectory as the industry.
I'll offer some perspective on our preliminary April sales.
Which is not representative of medical procedure volumes.
However, it does provide some indication of what to expect for the second quarter.
Our April sales were down about 20% versus last year, which we believe does not yet reflect the full impact of the medical procedure volume decline.
With the delayed impact on integer and the blend of customer responses to Kobe 19, we believe our third quarter, maybe similar to our second quarter.
By the fourth quarter, we expect our sales to align more closely with the industry trajectory as the delay and inventory management approaches become less impactful.
There are too many uncertainties at this time to provide guidance, but this is how we're currently thinking about our sales trajectory for the rest of this year.
We estimate that approximately 75% of our sales are tied to either moderately elective or more urgent medical procedures I.
I noticed stating the obvious but the elective procedures on the left hand side of this slide have seen the most dramatic decline in demand from our customers.
Our product mix will help us whether this pandemic and we will be ready to support our customers and their patients as medical procedures return to normal levels.
So what are we doing to manage the temporary sales decline.
First and foremost we continue to execute the strategy we launched in 2018.
Our strategic focus on customers cost and culture has positioned us to withstand the temporary impact of cobot 19.
We have a resilient business model and a strong financial position with ample liquidity.
It is this financial strength that will allow us to continue to invest in critical capacity and capabilities for growth.
We are taking necessary actions to address our variable and discretionary costs related to the temporary volume decline.
But it is important to note that we will not take any actions that will impact our ability to grow our business over the long term.
Our confidence in our ability to continue our journey to excellence is based on the progress we have made in executing our strategy.
First and foremost we have the leadership team in place to carry out this strategy and continue to strengthen our culture of accountability and commitment to excellence.
Next we have been making significant strides in our manufacturing excellence strategic imperative.
Evidenced by the meaningful improvements on our quality and on time delivery.
In 2019 versus 2017.
We have also strengthened our customers relationships and now have over 60% of our sales under some form of a multiyear agreement.
And we have the financial strength to execute this strategy.
Over the last three years, we have significantly reduced our debt leverage.
And have the liquidity needed to.
Having eight these uncertain times.
As outlined on our year end earnings call, we've continued to make investments to fuel our growth.
And during the past.
Cemig our strategy will not change.
We will continue to make investments in lean manufacturing to drive margin expansion and our Salesforce to drive topline growth post cobot 19.
And in R&D to create a robust pipeline growth opportunities.
Furthermore, we will continue to look for inorganic bolt on opportunities, where we can add technologies for.
For capabilities.
We believe these continued investments will allow us to strengthen our market leadership position and elevate integers importance as a critical supplier to our customers.
Let me now turn the call over to Jason to review the financial results.
Thank you Jeff.
Good afternoon, everyone and thank you again for joining our call.
Ill provide more highlights on our first quarter 2020, adjusted financials, and then share our perspectives on why we believe we are well positioned to weather the pandemic as well as offer more clarity and transparency on how we are taking a balanced approach.
The managing costs during what we believe will be a temporary reduction in our sale.
As Joe highlighted we delivered strong first quarter results that were mostly unimpacted by covered 19.
Sales increased by 4% to $328 million and consistent with our strategic financial objectives. Our profit grew greater than twice the rate of sales with adjusted operating income increasing 10% to $59 million.
Adjusted EBITDA increased 8% on a reported basis.
New from prior earnings presentations, we have now included adjusted operating income. We believe this metric comprehensively reflects our performance in managing all operating costs in the business.
We will continue to show EBITDA to that you can see both measures.
Finally at $41 million adjusted net income grew 26% and adjusted earnings per diluted share grew to one dollar and 25 cents an increase of 25 to 10 or 25% on a year over year basis.
On the next slide.
Let me offer some more color around the 25 cents of adjusted earnings per diluted share growth.
The largest driver or 20 cents is generated through sales growth in operational improvements in productivity.
Both of which more than offset pricing inflation headwinds.
The operational improvements are evidenced by the year over year improvement in gross margins of 150 basis point.
And the more comprehensive view of adjusted operating income.
There's a margin rate improvement of 100 basis points year over year building on the progress we achieved in 2019.
Our sustained debt reduction in interest rate management lowered interest expense by $3 million and contributed eight cents of growth.
Our strategic tax planning resulted in an adjusted effective tax rate of 16.7% down 60 basis points versus last year and contributed one penny of adjusted earnings per share increase.
The first quarter also benefited from favorable foreign exchange impact.
As we strive to be transparent and the impact that the curve in 19 pandemic is having on our business. We saw an approximate six cents per share drag in the first quarter.
Half of this is due to the impact of increased cost and implementing in operating in a social distance environment in our manufacturing plant.
The other half is due to the decline in Electrochem sales, which includes curve at 19 and the broader impact of the energy market decline.
We'll now turn to review of our product line sales results.
As a reminder, slide 22 reflects trailing four quarter organic adjusted sales growth rate.
We believe this is a more meaningful indicator of our growth trend in how we're performing in the market versus an individual quarter, which may contain anomalies, resulting from the timing of customer purchasing decision.
With cardio and vascular being the largest contributor we finished the first quarter two.
2020, with trailing four quarter adjusted sales up 3% in the first quarter led by strong increase in peripheral vascular demand driven by customers continued launch of an existing program into a new geography, coupled with.
Okay.
Our contract on existing business, which contributed about one third of the year over year growth.
Even without this customer contract cardiovascular delivered double digit sales growth.
As it relates to cardio and vascular the impact of Covidien.
19 was negligible in the first quarter.
On the next side you can see that organic sales in the cardiac neuromodulation product line were down 8% in the first quarter driven entirely by decline in Neuromodulation.
Most of the Neuromodulation decline was caused by 6 million dollar a year over year headwind from new vectors bankruptcy as well as other customers 2019 supply agreement commitments that are reducing demand in 2020.
The cardiac rhythm management portion of this trial.
Product line was up slightly year over year as a result of strong growth from product launches an increase battery demand, partially offset by last year's signing of a customer contract on existing business.
The first quarter impact of Kobe 19 was also negligible for this product line.
Slide 25 shows the final part of our medical segment.
You will recall in July 2018 buying acquired are asked to know product line.
The advanced surgical orthopedic and portable medical product lines shown today includes sales under supply agreements with Viant.
First quarter sales declined 1% versus the prior year driven by decrease in portable medical battery demand, partially offset by increased end market demand for advanced surgical and orthopedic based products.
The first quarter impact of curve in 19 was also negligible for this product line.
Portable medical is working to ramp up production of components in sub assemblies to support existing ventilator and patient monitoring customers, which could be a partial offset to the broader impact of curve in 19 on this overall product line.
Finally, slide 26 summarizes electrochem, our non medical segment Electrochem sales declined 25% in the first quarter driven by severe decline in the energy market.
Due to both an oversupply of oil early in the first quarter end demand reduction from the curve in 19 pandemic through the latter half.
We anticipate the market downturn and the reduced demand for our products in this segment could the prolonged and we have responded with actions to reduce costs in April we implemented furloughs and reductions in for us in our Electrochem business unit to adjust to this new market environment.
So we are suspending guidance because the uncertainty created by the curve in 19 pandemic, we will continue to provide.
Transparent communication regarding our strong financial position any actions, we're taking to not only protect integer but to continue to grow integer.
As our philosophy on cash management, leveraging cost management are central to our financial strength, Let me offer more details about these in my final three slides.
I'll start with our first quarter cash flow debt in leverage results as the foundation of our financial position.
We generated $32 million and cash flow from operating activities and $18 million in free cash flow in the first quarter.
Even though the first quarter normally has the lowest cash generation during the year due the timing of our annual bonus and customer rebate payments, we did see an improvement versus the first quarter of 2019.
$16 million of the year over year, increasing cash flow from operating activities was driven by enter Jerry initiating funding from a customer sponsored financing program.
This program accelerates receivables payments at a discount rate lower than integers weighted average interest rate.
This is up $5 million from operational improvement.
Free cash flow did not see the same operational year over year improvement as Capex spend was up given our increased investments in our strategy that Joe referenced earlier.
In the first quarter, we lowered our net total debt, which is debt minus cash on hand to $804 million, which further reduced our debt leverage ratio to 2.8 times adjusted EBITDA.
I'll offer for reasons why we believe we are well positioned financially to whether this pandemic.
Ample liquidity as the first reason.
Instead of making accelerated debt payments in the first quarter like we would normally do we allowed our cash balance to grow from $14 million to $37 million. Then early in the second quarter, we executed a $160 million drawdown on the remainder of the revolver balance to protect against.
Actual financial market illiquidity in the event of a pro long pandemic.
With that we currently have $198 million of cash on hand, the cost of this revolver draw down for six months is only approximately five cents of adjusted EPS. We see this has inexpensive insurance and prudent protection against a prolonged black Swan event.
Second we have established track record of generating strong cash flows and expect to continue generating positive cash flows for the remainder of 2020.
Further the financial strength of our customer base gives us confidence in our customers' ability to whether this pandemic.
Third our much improved leverage over the last few years has reduced our risk profile and we finished the first quarter with $124 million of adjusted EBITDA cushion on our bank covenant.
And fourth we have a relatively small fixed debt payment requirement for the remainder of the year and we have over two years before our debt matures. Additionally, our interest expense has been reduced by declining interest rates positioning us with $190 million of adjusted EBITDA cushion on our interest coverage.
Covenant.
Based on these for financial metric, we believe we are well positioned to withstand a prolonged pandemic and our strong financials afford us the ability to maintain critical investments that will make a stronger post courbet 19.
Finally, before I turn the call back to Joe to wrap up our discussion I wanted to share more about how we're managing costs do an expected, but temporary reduction in sales Utica of in 19.
We will act to match, our very well cost reduction at the same.
Aim rate of sales reduction.
Taking necessary labor reductions and working with suppliers to reduce material input.
Our indirect labor and overhead are less variable, but we will also take steps to reduce activities that are more closely tied to production.
While we maintain important support for our continuous improvement programs and maintain our facility infrastructure, we expect fixed costs will remain constant.
We're controlling discretionary spending, but we are not reducing has seen a in R&D any can measure it with a temporary sales decline.
These resources, including the addition of strategic talent are crucial to the execution of our long term strategy.
Finally, we also want to ensure that it's clear that given our fixed cost structure and our protection of SGN a resources in R&D any investments, we will see a temporary contraction of margin range even.
Even with the reduction in variable costs.
But as we continue to invest in lean manufacturing and business process excellence through the pandemic will be well position post of in 19.
With that I'll turn the call back to Joe. Thank you.
Thank you Jason.
Especially during these uncertain times. It is important met all of our stakeholders understand how we continue to lead integer.
Everything starts with taking care of our associates, our frontline teammates who build the products for our customers and their patients.
I want to take this opportunity to once again, thank our manufacturing associates and our site leadership teams, who continue to put themselves at risk everyday for our customers and their patients. They are our integer heroes during their part to support humanity. During this crisis.
We will continue to implement every social distancing and protective measure available to protect them, while they deliver for the patients who need our products.
And to all of our Nonmanufacturing associates, who continue to support our operations, mostly from remote locations are managing through the personal aspect of this crisis. While also continuing to ensure all of our business processes are performing during this pandemic.
I'd like to extend my gratitude for everything they are doing to support our manufacturing operations, our customers and the patients. They continue to serve it is inspiring to witness the team worked during this pandemic.
We believe our strategy is built for managing uncertainty we have a strong leadership team who is accountable committed and passionate about what we do.
We are clear on how we're leading into during these unprecedented times.
We will not let Tobin 19, and this temporary sales decline impede the execution of our strategy.
We see this uncertainty as an opportunity to demonstrate our contribution to an important industry that serves society, especially during the crisis.
We are confident our journey to excellence will continue during this pandemic and we will be stronger post covert 19.
Thank you for joining our call. This afternoon I will now turn the call back to the moderator to facilitate the QNX.
As a reminder, if you would like to ask a question Press Star then number one that is star one for question, we'll pause for just a moment to compile the culinary roster.
The first question comes from the line of Matt Mission with Keybanc.
Hey, guys. This is Brent theres been on for Matt. This evening, congrats on a solid quarter here and hope everyone is doing well and hanging in there. All my first question is around the elevated growth in cardio and vascular from the first quarter can you provide a little bit more detail on some of the major drivers of the acceleration downplay sounds like there.
And exciting activity around new product launches and expansions, which is definitely good to hear.
Certainly breads Joe. Thank thank you for thank you for the for the greetings and hope you and matter doing well as as well.
On on cardiovascular we has if you look back at the growth rate that we had during 2018 into the first half of 2019, we were growing solid double digit high single digit low double digit and then we had a couple of quarters in the middle of 2019, where we were flattish during the second and third quarter and in the momentum.
On pick back up again in the fourth quarter of last year at 6% and now this this quarter it at 17.5% for the quarter.
What we saw last year was we had we had a couple of phenomenon as one one in particular being a good electrophysiologist program that was going end of life that had a fairly meaningful impact on us in there there were a few other items that were causing the second third quarter decline during the fourth quarter. We started the started to get beyond that and pick up the momentum again and into the first call.
Order you can see very strong growth about about a third of that growth came from signing a contract or the actually the beginning of a contract that we signed last year that gave us some additional revenue in the first quarter similar to what we had in the first quarter in fourth quarter of last year in a couple of other the product lines.
But even with without that we still had strong double digit growth in cardiovascular it was driven by the acceleration of the peripheral vascular program, which was a customer launch. They started last year. When we began to see that in the second half in particular in the fourth quarter that continued well into the first quarter and then broadly across the cardiovascular.
Products, we had very strong growth overall, so we feel that the cardiovascular product line for us as a strong franchise, we demonstrated very strong growth in that product line over a number of years and we feel that we're back on that growth trajectory now now we have coded which is obviously going to cause some disruption there.
But we feel it's the underlying strength of the products as well as the investments that we've been making in the business to penetrate the faster growing faster growing markets that we've been focusing on in particular in peripheral vascular and electrophysiologist structural heart.
That's great and then I am looking a little bit further ahead and I know you touched on this up in the prepared remarks, but.
For the most part how are the majority of your largest customers managing their inventory levels with the understanding that it's definitely a little bit different on a case by case basis, but like for the most part our most of them sell ordering the expectation that procedures come back in 2020 or have you seen like more of a slowdown or essentially caution around the piece of recovery.
Yes, it's a it's a great question, we tried to port provide the different perspectives that our customers have provided publicly and then we tried to paint a picture of how we see the industry in aggregate shaping up and as I noted in the remarks, there's there's no one customer and Warner approach.
Yes, thats going to disproportionately drive our results.
We provided the curve as to how we think the industry is going to react. We do we do absolutely expect that customers will take different approaches with respect to their inventory levels and.
And we think it's going to even be very tailored to the specific market specific procedures, where maybe a customers looking for an opportunity to potentially gained some share during the rebound.
Maybe they want to strategically build inventory levels in certain regions certain geographies. So that they can be more aggressive and each customer's going to decide their own strategy and what we're going to make sure. We do is that we're there to support them and enable their success and enable the execution of their strategy in aggregate, we think that the second quarter for.
For us is going to have a little bit less of an impact than maybe the whole industry because of the delay in our customers adjusting and developing their strategies in the modifying their manufacturing plans and the translating that into into let their suppliers need to do to support that and that's why we think that.
It potentially our third quarter in second quarter May look more similar which we think might be different than the industry, leading the industry is likely to show improvement in the third quarter versus second quarter, and then by the fourth quarter. We think we're on the same trajectory as the industry. Obviously it will all depend on how our customers decide ultimately to manage their inventory what their product may.
It looks like and it's just too uncertain at this time to have enough.
Understanding of that in order to provide more specific guidance than that.
Alright, thanks, Thanks, very much of that detail and then.
Last one from me from a longer term perspective have you seen any opportunity here to potentially key market share with either existing or new customers. The potential challenges other suppliers, maybe having as a result on the crisis and if not as it's something that you're it really paying active attention too.
Well, certainly we're paying or we're definitely aggressively looking for those opportunities, where our customers need additional support where reaching out and offering additional help additional support in areas that maybe maybe we're not we don't have as big of a share as we'd like or maybe areas that we'd like to penetrate more.
Than we have or even areas that are new to us and so we're being very very aggressive with our sales team. We continue to add sales leaders Weve added several several sales leaders during the last couple of months. We're building, we think a very strong sales leadership team and the team underneath them and they're being very very aggressive in proact.
During this time, we think there will be opportunities I think from a practical perspective, given how early we still are into the pandemic that having those those opportunities materialize in into anything substantive or or tangible at the moment. It's just too early but we think there will be opportunities. We also think our approach to continuing to invest aggressively.
During the pandemic, specifically in our strategy and in the capabilities that we've been investing in.
We think thats going to play to our advantage when we come out of Cobot 19.
We've been working with a lot of customers on new product development programs R&D development programs that pipeline Hatless strong going into co bid it hasn't slowed down our customers continue to be very focused in fact in many cases, they've asked us to accelerate those development programs, we suspect is because they.
They've had capacity freed up potentially but we see that that strong pipeline of development programs, continuing and we're continuing to add resources in that area. We think this as an opportunity for us to take advantage of this window, where others may not be taking the same same approach. So we're definitely looking for.
Those opportunities it's it's too early in the in the period of uncertainty that we're all end to point to anything tangible but hopefully in a few quarters, we'll be able to share something with you.
Alright sounds great. Thanks very much.
Again, if you will like thank you my question first start than in number one that is star one for question and next question comes from the line of Jim Sidoti Sidoti.
Good afternoon, good to hear your voice quite everybody's okay. There.
Thanks, good during wells.
So.
From a high level it sounds like.
The industry is going to see some some postponements over the next two quarters, but.
Can you give us a sense the products you you manufacture our those procedures that those products are used in our those things where people can.
Okay, and put them off indefinitely or at some point will those procedures have to get done.
Jim It's a great great question, I think we share that view with with our customers and many others in the industry that.
It is unlikely that the majority of these procedures can can be put off indefinitely in fact.
The harm to patients who don't receive these these treatments in a timely manner can only worsen Kent can significantly worse in their condition.
Even in some of the more elective procedures. After some period of time, they big shift into more urgent.
And Thats, what what we think we're going to see more of that it's unfortunate and it's why it's so important that we're able to the reopened the the hospitals and begin to to perform these procedures. So we do not see these procedures not being done. The question that I think everyone is wrestling with is over what time period.
And the procedures that have been delayed be be recovered over what time period.
Can they be caught up and that gets too you didn't you have to look at the capacity is in the hospitals in the surgery centers that capacity in the Cath labs, the capacity of the healthcare professionals.
The healthcare professionals many of them have been through very trying times.
Although many of those performing these procedures are not as deeply involved in coated 19. So it's a big question Mark and I don't know that anybody has declared first of all to be able to predict that perfectly.
That's why we will be portrayed the industry curve.
We think there is the possibility by the fourth quarter.
We think it's the more optimistic scenarios, but by the fourth quarter, we're seeing some of those procedures not only we get back to more normal levels, but start to catch up.
And then and then you have the potential than in the fourth quarter to be back above what the run rate was before we were going into to the Kobin 19 I.
I think everybody believes that by the time, we get into 2021.
Assuming there isn't a meaningful resurgence of of the virus in the fall or winter that we would be able to to operate as an industry at above the run rate prior to going into Govan 19, but again, it's there's so many variables and it's it's uncertain at this time, but I think the general view is these these procedures.
We'll be caught up will be recovered the question is at what rate.
And do you expect hospitals, who will extend hours extend days.
These are profitable procedures for them don't you think that though.
They will do everything they can get as many procedures in as possible once things have opened up.
That's absolutely what I think is the also the consensus the need for the hospitals.
To to be able to generate the income in order to be able to support the cobot patients in the operate their hospital. They need these more profitable elective procedures in order to continue to survive.
So yes, we absolutely think that there's a strong incentive within the hospitals in order to to catch up on these procedures and we believe there will be looking for every every creative way they can in order to create the capacity to do that.
I, Jim I think the the other big variable is at what rate do patients return at what point do patients feel comfortable and confident going back into the hospitals. The surgery centers to have these elective procedures performed and that's what the I think the fit where the creativity ingenuity and discipline and rigor of the.
Hospitals in surgery centers is going to come into play in is going to have to create that confidence for patients to return.
All right and then on the non medical business.
Obviously the.
Price of oil is impacting that can you give us a sense on what percentage of Electrochem sales are tied to oil production.
Sure. It's about two thirds of that business is tied to oil production and so our first quarter sales were at about $10 million in the non medical business.
We think thats, probably the run rate plus or minus something.
But that seems to be the run rate of the business. When we go back to the 2015 time period in the last oil downturns that looks like about where that business performs in this kind of a cycle. Although this this is a pretty unprecedented time with.
The estimated demand of oil has dropped somewhere between 20, and 35% overnight, which is a pretty incredible thing to have happened.
And the excess supply and the lack of storage capacity for oil we are planning for and assuming that the oil downturn is prolonged and that's why we took the actions we did to adjust the cost structure in the non medical business. So we're assuming that continues well into 2021, and we think the raw.
On rates at the businesses on in the first quarter is probably the run rate for the foreseeable future.
Alright, and then the last one for me back on the medical side if.
Things do play out the way they are we discussed and there is.
An increase in Q4 and into two to 2021.
You have the capacity to meet your customers' needs and how quickly can you ramp back up.
Well, we absolutely feel that that we have the capacity we it's a big part of the reason why we continue to make the investments that we have had been doing.
We reported on our earnings call at the end of the fourth quarter. After the first quarter that our capital spending was going to increase up to $60 million to $70 million that thats not the current guidance, we're not giving guidance.
Push it out because of what we're going through so some portion of that we'll have to re align with the current environment, but it's real lining because of the environment not because we we've chosen to cut it it's because it's it's not it's not possible or practical to execute on it and so we we think that we absolutely we'll have the capacity and the capability. We also think.
That we're we're going to have more capabilities, which is part of the the investment plans and part of the addition of additional R. and D. engineers that we've been adding and we've been building up our sales force and we we think we've got great traction with our customers and and a strong pipeline of opportunities. So we absolutely think that we can meet their their increased demand and we're ready to.
So.
Right. Thank you.
Oh.
Thank you Jim.
Thanks him.
Again, if you like to ask one question plus style I didn't and number one.
Yeah.
Oh, I wouldn't know tend to call back over to Tony <unk> <unk>.
Oh, Thank you and I know are prepared remarks for that long to decide but hopefully found them informative and transparent.
You can listen to the replays, let's call it a website.
Thank you for your continued interest in her and above all else. Please state state.
You have that concludes the call.
Oh.
You may now disconnect.
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