Q2 2020 ICU Medical Inc Earnings Call
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Ladies and gentlemen, thank you free standing by and welcome to Qt Twentytwenty I feel medical Inc. earnings Conference call. At this time, all participants are in listen only mode.
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I would now I'll turn the call over to yours free Speaker Mr., John Mills Ice yard. Please go ahead Sir.
Thank you good afternoon, everyone. Thank you for joining us today to discuss the I see medical financial results for the second quarter of Twentytwenty.
On the call today, representing a few medical is was that Jane Chief Executive Officer in German and Brian, but no Chief Financial Officer.
I wanted to let everyone know we have a presentation accompanying today's prepared remarks could use a presentation. Please go to our investor page and go calling events calendar and will be under the second quarter 2020 events.
Before we start their remarks I wanted to touch upon any forward looking statements made during the call, including beliefs and expectations about the company's future results. Please be aware there based on the best available information to management.
Functions that are reasonable.
Such statements are not intended to be a representation of future results and are subject to risks and uncertainties.
You can results may differ materially from management's current expectations.
We refer all of you the company's FCC filings for a more detailed information on the risk and uncertainties that have a direct bearing on operating results and financial position. Please note that during today's call will also discuss non-GAAP financial measures, including resulting adjusted basis. We believe these financial measures can facilitate a more complete analysis.
Greater transparency and I see you 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 that's possible on any of them better added back and would that it's my pleasure to turn the call over to buyback.
Thanks, John Good afternoon, everybody and we hope you and your families are well.
For the last three years, we've been ending every call with the same comment about support from our customers and the ability of our employees to adapt to changing environment.
While it was never intended for the pandemic that belief was required in Q2 as we showed our resiliency going forward and adapted to inconsistent weekly demand due to the very real challenges faced by healthcare systems in our markets.
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 adjust to the new normal we will continue to offer our best support an execution.
On today's call we want to first comment on our Q2 results with a bit more product line color due to the effects of covert 19.
Explain the volume trends, we experienced during the quarter and at least what we're seeing through last week.
Described the high level knock on effects of the pandemic ice you medical and how we're adapting.
Reiterate our shorter term financial goals as stated on the last call.
Update on some housekeeping items, and lastly, articulate how we feel about our own conditioning in this environment any strategic implications and reflecting the criteria by which we are judging ourselves.
A short story on Q2 is as follows as we previewed on the last call we experienced a year over year drop in volume of 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 our most differentiated lines come a small amount of growth for the company.
In aggregate.
There were substantial differences between international markets and the U.S. market with many international markets largely being back to normal and we benefited from selling our most differentiated lines outside the U.S.
There was commercial stability in the sense there was not much customers switching which is both a positive at a 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 in 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 cost 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 a company our size.
We finished the quarter was 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 a better tax rate.
Basically we had various declines in utilization in the us market of dedicated pumps that Ivy consumables and I'd solutions and these were offset by higher Ivy pump hardware sales and continued oncology growth, albeit more driven by international markets as even oncology had some slowdown in U.S. volumes.
Cash on 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 our latest thinking on the revolver restructuring integration charges were half the level of Q1 [noise].
So let's go through the business as quickly and then come back to discuss covered 19 in the knock on effects starting as usual the infusion consumables, which is our largest business infusion consumables and 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.
Yes, we did not necessarily have predictable consistency in all places and product lines traditional Ivy 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.
We do not think we at any pandemic stocking in the quarter as reduced admission volumes and demand allowed for consumption on the small volume a pandemic ordering we saw towards the end of Q1.
The story for Q2 was really about US 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 we would have not considered this to be as elective as it was.
Pursuit vascular is clear God products delivered results as expected and we continue to be pleased with the acquisition.
Moving to infusion systems, which is primarily or LDP pumps and associated dedicated sets.
This segment did 92 million in adjusted revenue, which was growth of 15% on a constant currency basis, 12% on a reported basis. As a reminder, this segment captures not only infusion pump hardware, but also the lock in key dedicated pump sets.
Those pumps 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 this segment.
As we noted on the last call. We did have some pandemic specific stocking purchases as expected.
The balance for the most part was expansion at existing customers. We believe the customer expansion hard will be utilized in the pandemic government purchases were likely more onetime in nature.
Even before the pandemic, we're holding the best amount of rollover and competitive signings. We had in many years. The challenge continues to be getting into hospitals in 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 plan LTP technology is positioned well as evidenced by the recent clinical guidelines around Ivy pumps, we've gotten back to the core marketing messages around our plum Lv pump as these independent and clinical reviews have validated our differentiation.
As for the non LDP products, which include our PCN ambulatory pumps, nothing has changed with PA pumps into last call and regarding ambulatory.
Our goal and we're getting close just have enough demand and expansion to finally jump over the annual declines we've had in ambulatory pumps. The infusion systems 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 mention the last call we had five to 6 million of endemic purchases in Q1, and we felt the after effective this combined with lower volumes and census us hospitals.
To give a bit more color by volumes on some of the sub categories 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 Ivy solutions in Q1 is a bit biased by the pandemic orders, we mentioned, but we think it does illustrate what happened.
Our SVP 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 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 LDP products, which were really only down sequentially in units related to the over ordering in Q1.
I think thats a lot of words to basically say the products tied to Readmissions electives, our 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 Dan We bought the business were healthy on safety stock 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 custom.
We hope the recent events of 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 distribution agreement with griffo, the multinational Spanish company, whereby gryphons will supply as a variety of PVC free Ivy solution products. Today. These products represent a small minority of the us Ivy solutions consumption, but they do matter.
Our overtime 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 simply immediately supply customers with a broader portfolio and it was more sensible the new capital expenditures as we do not believe the category merits additional capacity investments as excess capacity already.
This, particularly with the conservation efforts by customers over the last few years combined with lower end user admissions.
Okay to give a little more color on what we experienced throughout the quarter.
International markets have generally less volatility even from the start of April the US market. However was a bit of a barbell across the quarter.
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 so ordering running at 25 percentish below normal for our sense is driven items.
June improved dramatically cutting the made declines in half.
Like other medical device companies have set 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 this subs 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 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.
Moving on to some of the Kobin 19 knock on effects the company and what we're doing to adapt.
Commercially we've organized well to respond to various government tenders and adapting to the new normal and sales hospitals and only started to showing willingness for onsite 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 are using our time for training and a business and selling environment that will be fundamentally deferred going forward.
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 plan, we've invested in employee safety and provide an incremental compensation, we've focused on securing our supply of raw materials.
And components and we've invested an incremental inventory at the buffer for unforeseen disruptions as a reminder, our primary manufacturing locations are in Texas, Utah, Costa Rica, and Ensign out of Mexico, which is 90 miles south of two on it.
From an expense perspective, our incremental direct costs related to covert 19, and our savings continued to be awash on a cash basis.
We have had increased expenses as we just described but weve also in savings with discretionary expenses less TNT 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 variance 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 carry.
Through for the year with the assumption that the Pandemics impact on hospitals does not worsened from the current level.
We continue to be cautious on admission numbers and expect that we offset that slightly by gains in 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 solutions segments, it's probably the opposite for infusion systems.
As we are unlikely to have a quarter with so much additional hardware unit.
Our profitability will be most impacted by hardware sales as a percent of the overall mix and the extra production cost. We added in Q2 now being incorporated into the gross margin the products bridal talk both about the tax rate favorability in our view on repaying the revolver.
Moving on some housekeeping items again in Q2, we had excellent global fulfillment rates to our customers. The cutover Austin I T systems has exited hyper care and is running well we're fully stood up not only away from Pfizer, but now of 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 onsite audits and we would potentially expect inspections over the next few months.
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 earn out 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 addressed a litany of issues that came with Hospira, we feel comfortable with our position and will address the inquiry with our usual thoroughness.
To synthesize all of 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 Ivy consumables and Ivy 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 is exposed in the healthcare supply chain add to the argument for all participants to be healthy in 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 us manufacturer that is deeply vertically integrated and as core redundancy and products that we do not produced domestically between end sonata in Costa Rica.
We do believe the market broadly defined does not want a winner take all setup in these essential item categories. So thats before each category is assessed on its own innovation clinical outcomes et cetera.
In the new normal or coated 19 world, where supply chain resiliency and diversity matters. We believe are essential items logically benefit in our most differentiate items are still differentiated.
So we focus on what we can control in these moments, having the best list of supported healthy customers.
Keeping our employee safety, 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 healthcare workers are pushed our company appreciates the role each of you just had to play.
With that I'll turn it over to Brian.
Thanks, Vivek and good afternoon, everyone to begin a first walk down the PNM and then talk a little about cash flow in the balance sheets. 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 in 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 289 million compared to $290 million last year, essentially flat year over year or up 1% on a constant currency basis.
Fusion consumables were down 6% or 5% on a constant currency basis I'd be solutions, which we sell primarily in the US was down 7% on both a reported and constant currency basis infusion systems was up 12% or 15% on a constant currency basis and critic.
Will care up 14% on both a reported and constant currency basis.
As you can see from slide number for the presentation for the second quarter. Our adjusted gross margin was inline 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.
Appeared 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 infusion systems hardware and lower sales of our higher margin disposables across all product categories.
The balance of the year reflects the impact of additional one time co bid related manufacturing costs that were incurred during the second quarter, but will not be recognized on the piano.
Until the third quarter.
As well as the impact of continued infusion system hardware implementations.
As she may expense was 22% of revenues during the second quarter, which is flat compared to last year on a sequential basis compared to Q1 question a was down $5 million due to reductions in teeny and delays in other spending as a result of coated.
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 in 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 decreases going forward.
We expect total restructuring integration in strategic transaction expenses for the full year to be around $30 million.
Adjusted diluted earnings per share for the second quarter of 2020, $1.65 compared to $1.99 last year.
This years Q2 results were favorably impacted by excess tax benefits related to equity compensation, which contributed approximately 15 cents to a benefit to EPS with this discrete tax benefit in Q2, we now estimate our tax rate for the full year to be in the range of nine.
18% to 21% with the non-GAAP rate at the higher end of this range diluted shares outstanding for the quarter were 21.5 million in for modeling purposes 21.6 million can be assumed for the full year.
And finally, adjusted EBITDA decreased 13% to $58 million for the second quarter of this year compared to 67 million last year.
Now moving onto cash in the balance sheets for the quarter free cash flow was $16 million, which included the previously discussed onetime 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 an 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 ended the first quarter, except for a slight increase in inventory of $11 million.
As mentioned on last quarter's 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 in capacity expansion at our facilities as well as placements of revenue generating infusion pumps with customers outside the U.S.
Although the second quarter spend was a bit less than our historical rate. 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 buildout to build out of our new Dallas distribution Center.
In March of this year as the cobot situation was causing the deterioration in the financial markets, We preemptively drew $150 million on a revolving credit facility and expected to hold the proceeds as cash while the cobot situation in 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 revolver borrowings between now and our next earnings call.
During last quarter's call, we updated our full year guidance for adjusted EBITDA and adjusted EPS terrific to reflect 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 can mostly absorb the commercial and operational downsides from coated with a combination of additional demand for infusion pumps and cost savings and.
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 in adjusted diluted earnings per share of 595 to 665.
In closing it has been a challenging 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 topline 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.
And at this line if you would like to ask any questions you need to press star one on your telephone keypad.
Your first question comes from the line of Jason Bets Lords from Raymond James Your line is working.
Hey.
Hey, good afternoon.
So I guess, if a few questions.
On the infusion systems side, you did mention some stocking on palms related to.
Cobot 19, I apologize if I missed this but you did you quantify the amount.
We did not quantify the amount, Jason but I would say the amount of business, we did with kind of governments in some of the stockpiles was probably.
About 35% to 40% of our overage and pumps number like that.
Okay, and just to baseline the overages that off of what level.
I mean, each quarter historically, we've sold somewhere between 15 $20 million of hardware quarter in our.
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Okay.
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've been able to recognize any revenue from those installs and then generally can you talk about visibility into the pipeline of capital installations.
Sure.
In Q1, we get 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.
As I said in his 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 comp country different systems are have different levels of utilization and priorities. So it's a little bit inconsistent right now, but we are holding up some we would like to get installed this year.
Okay, Okay on the consumable side.
I think you said oncology grew near 15% worldwide with Us Didnt grow which is why is it pretty strong international.
Is that true demand is or pull forward, there and just a little surprised at how strong international was on the oncology side.
Candidly, we are probably a little back ordered 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 a catch up and there was a very strong number probably higher than we would expect on the other and we didn't expect to use to be quite as low as it was but you're exactly right that it was a bigger number international than.
Efforts.
The fundamentals and drivers are still in place for to support us market adoption within oncology correct. This is just a co bid related wide.
I mean, it's it's hard to know we didn't really see this as an elective category I mean, we've been looking at the other folks trying to get screening going again in some of the advocacy work that's going on.
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Yes, it sounds generic but that there is probably some.
Deferral of diagnosis and less people coming to the system et cetera, et cetera, but we can't we can't pinpoint and so 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 were realized in the June quarter.
No there isn't a few a few things we couldn't get in to do installs, we finally others okay.
Whether it was cut symbol on.
So I wouldn't me.
It's it's much more about what's happening with the baseline at emissions straighten out than anything else Ryan that's slate.
Much bigger driver.
Okay.
Just lastly on the grateful announcement.
When when are they expecting approval for the Dextrose RV solutions and then can you just help us size the us market.
Yes, I don't I don't think we'd want to comment on somebody else's approval cycles than they've been working on it and are working on it.
I don't have the exact.
Number, but I would say in the us market.
Less than 20% of all Ivy solutions, maybe less than 15% are.
PVC free, but it's an important in certain clinical areas and it's important to some systems and we.
We were procuring yet from Pfizer in some.
As it relates the historical part of the deal and now this helps us get away from them and it's and it's a it's a broader based supplier that is committed to category.
Okay. Thank you.
Yeah.
And again, if you would like to ask any questions you need to press star one of your telephone keypad.
Next question comes from Larry Cielo.
From CJS Securities. Your line is open.
Great. Thanks. Good afternoon, just a couple of follow ups. There that suggests questions on the on the overage I guess, you mentioned 35, 40% and sort of government.
Stockpiling. So you can assume that the dose products I mean, there may be utilize initially but.
Thank you may not get to dedicated disposals disposables on those but the remaining whatever that may be 10 12.
Go straight start to flow through and not normal whatever 610 month lag or whatever to implement that I guess.
Yes, I think that is our view Larry what is hard to say it if it was stuff on the margin that people need to for its going to be running of 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 pumps that it might be a little below that but.
It's still very very NPV positive its pumping.
Right. So in that mix, you're basically so but some of that whatever that sense hope that is.
Some was.
We're probably maybe the majority of that 10 12 was to existing customers in a piece was too.
New implementations I guess right.
Most of it this quarter was either to existing customers or stop sales.
What kind of touching and on the implementations I realize the challenge you guys, having how about just.
Getting into hospitals talking to.
Book sales pitching has all been of these contracts are coming up on on the solution side and then just selling.
Now the capacity oncology side.
Sounds like internationally Thats Ok us.
So to give us an update non implementation would 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 a bit zoomed out like the rest of us.
I think in certain parts of the country onsite discussions are happening again, though I would say it is still.
25% of the calls if that right we'd be happy if that what it ran at a week right now.
Right slowly slowly started.
Come back, but it's I don't think our assessment is I was trying to address the comments that it's going to go back to normal anytime soon and I think for all companies are going up to figure out what is sales mean exactly going forward.
And then just on hospital utilization essentially you mentioned, obviously April may be was tough.
June.
Come back good amount and then july's comeback level even more.
And I think thats, what weve kind of heard from not just general hospital utilization commentary sort of I mean can you ballpark again that 10% number is that about what we would we were down more than that for the I know what April may but sort of what do you think hostile utilization is at the end of the quarter any sort of guesstimate on that.
Matter.
Well I mean, I think it leases at least relative to our results in our kind of stuff.
[music].
We called bait and if we if we send base I'd like forget Q1, just what was Q4 or something like that right right.
We were down for the quarter kind of on the consumables items, 10% from baseline.
We said July is a little and Thats sort of end 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.
Yes, I was trying to say in the script.
Clearly some of it is catch up and do it while you can.
No assurance that everything stays at that level, it's much more about what the baseline state that than anything else.
Yeah, I don't I totally get sort of hard to guess exactly what that is just last question and I am just like we reported late.
After Q1, so we had a little bit more insight so with those couple of weeks where.
Right I would just on the expense run rate.
You sort of give some guidance on the gross margin.
SGN A. I think we're looking for a little bit a little bit higher more of a flattish sequentially and it came down a little bit.
Hey, Brian if you have any thoughts on sort of.
Is this sort of a good number was a little bit of growth as maybe sales come back a little bit.
Yes, 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 us.
Okay great.
Thanks, So there's a lot of theres a lot of like.
Not only t. any savings, but healthcare spend and other things that.
We also.
Just like everybody else out there right there are things we're benefiting from.
Absolutely.
I appreciate it thanks guys.
And again, if you would like to ask any questions Press star one of your telephone keypad.
Your next question comes from Matthew Mission, Tim Keybanc. Your line is open.
Brian I guess.
Hi, good afternoon.
Hey, so just on the guidance.
Pretty clear Twoq and Threeq, you seem like you're much more comfortable around around where those quarters have come in.
Youre thinking about your model, what does that say about what you're thinking about.
We ended the third quarter into the fourth quarter.
Like is there going to be school in the fall, it's hard to it's hard to know right now I mean, I think our customer sincerely want to be busy they're really trying and in terms of patient recruitment and getting full and getting people to Yahoo.
Our 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 they're being driven out there. So I think we we have a baseline for our consumables view spoken to that and the variance is going to be at how much installs. We can do on the hardware piece and I think we could see clear to the next 23456 weeks of hardware schedule.
Going beyond that it gets a little bit more hazy.
I think that I think Thats fair.
And then you could really gone from from one at normal event to just an even bigger abnormal event.
Year over here.
The last what implications that that became headwinds for several quarters afterwards.
Around manufacturing absorption supply chain cost and that where or how do you now fully annualized those those headwinds and as we get into Threeq Q and for Q here, Yes, I think you talked about the gross margin headwind you experience. There are there any other implications or headwinds we should be thinking about.
As you get past, three Q and and maybe even that that could affect 2021.
Yes.
Yeah I think.
In the short term.
And I know you asked about 23, when they're in the short term it's.
About some of the extra costs, we put into the factories is the 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 an 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 of that we did last year and.
Theres 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 that's really is.
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And on Pfizer I mean.
It does.
Could that dispute impact.
Some of your other manufacturing agreements with them.
We don't think so.
We think it's very separate very separate discussion.
Okay. Thank you.
Thanks for doing well.
Yeah.
And again, if you would like to ask any questions you need to press star one forget telephone keybanc.
And is there are no further questions at this time I would turn the call back to Mr. does that change.
Okay. Thanks, everybody I hope folks are enjoying as much as a kid in the summer of.
2020, and it's been it's 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.
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