Icu Medical Inc/De Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for joining us. Welcome to the Q2 2020 earnings conference call for ICU Medical Inc. All participants are currently in a listen-only mode. Following the presentations, there will be a question-and-answer session. Please note that today’s conference is being recorded. I will now hand the call over to our first speaker, Mr. John Mills from ICR. Please proceed, 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 operational results and financial position. Please note that during today's call, we will also discuss non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency in ICU Medical's ongoing results of operations, particularly when comparing underlying results from period to period. We've also included a reconciliation of these non-GAAP measures in today's release and provided as much detail as possible on any addendums that are added back. And with that, it is my pleasure to turn the call over to Vivek.

Thanks, John. Good afternoon, everybody. And we hope you and your families are well. For the 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 for 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. Describe the high-level knock-on effects of the pandemic to ICU Medical and how we're adapting. Reiterate our short-term financial goals that were stated on the last call. Provide an update on some housekeeping items. And lastly, articulate how we feel about our own positioning in this environment, any strategic implications and reflect on the criteria by which we are judging ourselves. The short story on Q2 is as follows. As 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 most differentiated lines, yielding a small amount of growth for the company in aggregate. There were substantial differences between the U.S. and international markets, 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 sensor, with not much customer switching, which is both a positive and negative. The company is operationally running well in the new normal, and we were pleased with our level of profitability given the reduction in volumes and our higher-margin products overlaid with the geographic mix. We were able to add a good amount of cash to our balance sheet even after making the final payments to Pfizer, as restructuring costs came down. And while in Q2, we did not encounter any of the negative currency effects we felt in Q1, currency does remain a fluid situation for a company our size. We finished the quarter with $289 million in adjusted revenue, adjusted EBITDA came in at $58 million, and adjusted EPS was $1.65 due to better profitability than expected and a favorable tax rate. Basically, we had various declines in utilization in the U.S. market of dedicated pumps, IV consumables, and IV solutions, which were offset by higher IV pump hardware sales and continued oncology growth, albeit more driven by the international market 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. Brian will provide an update on the latest thinking on the revolver. Restructuring and integration charges were half the level of Q1. So let's go to the businesses quickly and then come back to discuss COVID-19 and the knock-on effects. Starting as usual, on infusion consumables, which are our largest business, infusion consumables had revenues of $111 million in Q2, 2020, which was a 5% decrease year-over-year adjusted for currency and a 6% decrease on a reported basis. We did not necessarily have predictable consistency in all places and product lines. Traditional IV therapy was down near 10% globally, with the U.S. accounting for the vast majority of the decline. Our oncology products grew nearly 15%, again, with negligible gains in the U.S. We do not think we had any pandemic stocking in the quarter, as reduced admission volumes and demand allowed for consumption of the small volume of pandemic ordering we saw towards the end of Q1. The story for Q2 was really about U.S. volumes. There was no real customer churn, and we've started to finally implement some pieces of new business in the last few weeks. An open question in our minds is the rate of oncology diagnosis and treatment in the U.S. market. We would not have considered this to be as elective as it was. Pursuit Vascular's ClearGuard products delivered results as expected, and we continue to be pleased with the acquisition. Moving to infusion systems, which primarily include our LVP, pumps, and associated dedicated sets. This segment generated $92 million in adjusted revenue, which is growth of 15% on a constant currency basis or 12% on a reported basis. As a reminder, this segment captures not only infusion pump hardware but also the locking key dedicated pump sets. Those pump sets were also down approximately 10% with utilization, but both for the reasons we've been talking about on the last few calls, and the pandemic, we were able to sell a substantial amount of hardware, which dramatically improved results for the segment. As we noted on the last call, we did have some pandemic-specific stocking purchases as expected, and the balance for the most part was expansion at existing customers. We believe that customer expansion hardware will be utilized during the pandemic, though government purchases are likely more one-time in nature. Even before the pandemic, we were holding the best amount of rollover and competitive signings we've had in many years. The challenge continues to be getting into hospitals and implementing these conversions. We continue to believe we've stabilized the 10 plus year decline of our installed base. We still know that safety is a critical factor when choosing an infusion pump. We believe our Plum LVP technology is well positioned, as evidenced by the recent clinical guidelines around IV pumps. We have gotten back to our core marketing messages around our Plum LVP pump, as these independent clinical reviews have validated our differentiation. Regarding the non-LVP products, which include our PCA and ambulatory pumps, nothing has changed since the last call. Our goal, and we're getting close, is to have enough demand and expansion to finally overcome the annual declines we've had in ambulatory pumps. The infusion system segment 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. To give a bit more color by volumes on some of the subcategories to form an opinion on where the volume shortfall was, the year-over-year is a bit inconclusive, given all the other dynamics we've lived through in IV solutions, and Q1 is a bit biased by the pandemic quarters we mentioned, but we think it does illustrate what happened. Our SVPs or Small Volume Presentations were up 30% year-over-year and close to flat sequentially. These are the products used in admixture to deliver routine medications. Our irrigation products, which are our largest volume presentations, were down nearly 30% year-over-year and sequentially. These products are much more tied to both surgeries and emergency room visits, which are obviously down dramatically. The remainder was normal LVP products, which were really only down sequentially in units related to the overall ordering in Q1. I think that's a lot of words to basically say the products tied to admissions, electives, and OR visits really suffered, and the rest was generally stable. We continue to believe the quality of our book has improved with us holding the best list of sustainable relationships since the day we bought the business. We're healthy on safety stock, and since the last call, our new national distribution center has come online in Texas to help improve supply chain costs longer term and to provide enhanced supply chain services to our customers. We hope the recent events have illustrated the value of having a healthy and diverse supply chain in this country. One item of note you'll see is a rare press release from us today. We have entered into a distribution agreement with Grifols, the multinational Spanish company, whereby Grifols will supply us a variety of PVC-free IV solution products. Today these products represent a small minority of the U.S. IV solutions consumption, but they do matter over time and are part of an integrated oncology preparation offering to the pharmacy. We felt this alignment was a logical move, as it allows us to move away from Pfizer for these items, ensuring immediate supply to customers with a broader portfolio. It was more sensible than new capital expenditures, as we do not believe the category merits additional capacity investments, particularly with the conservation efforts by customers over the last few years, combined with lower end-user emissions. To give a little more color on what we experienced throughout the quarter, international markets had generally less volatility even from the start of April. The U.S. market, however, was a bit of a seesaw across the quarter. The first two weeks of April were very strong, followed by a weak five or six-week period nearing the end of May with ordering running at around 25% below normal for our census-driven items. June improved dramatically, cutting the May declines in half. Like other medical device companies have said on their calls, we don't want to get in the habit of real-time sales explanations, as it's about the long term for us. But July showed sequential improvement compared to June. August, based on our previous experiences, has always been a bit of a low summer month. It's hard to assess right now how much of the activities are catch-up versus what should be done while we can in the current market. We're much happier with what we felt over the last few weeks compared to the end of April and the first few weeks of May. Moving on to some of the COVID-19 knock-on effects for the company and what we're doing to adapt. Commercially, we've organized well to respond to various government tenders and are adapting to the new normal in sales. Hospitals have started to show an unwillingness for on-site implementation or discussions in the last few weeks. We believe the concept of sales will not revert to the established model quickly, and thus, we're using our time for training in a business and selling environment that will be fundamentally different going forward. That means adapting our tools, training, and mentality just as everyone has to do. Operationally, as we've mentioned on the last two calls, the early signs from China prompted us to accelerate preparation from a production perspective. We've adapted our operational footprint, shifted hours, set up local transportation, and redundancy plans. We have invested in employee safety and provided incremental compensation. We focused on securing our supply of raw materials and components and have invested in incremental inventory as a buffer for unforeseen disruptions. As a reminder, our primary manufacturing locations are in Texas, Utah, Costa Rica, and Ensenada, Mexico, which is 90 miles south of Tijuana. From an expense perspective, our incremental direct costs related to COVID-19 have been a wash on a cash basis. We have had increased expenses, as described, but we've also had savings with discretionary expenses, reduced T&E, lower insurance costs, and a higher overall job vacancy rate. Freight costs have increased as capacity has been reduced. Regarding our near-term financial results, we believe we largely spoke our piece on the last call and have no change to our previously stated guidance, with currency being the largest variances to our original 2020 earnings expectations. We felt we sounded the alarm bell on admissions during the last call and believe the model we laid out then carries through for the year, assuming that the pandemic's impact on hospitals does not worsen from the current level. We continue to be cautious on admission numbers and expect to offset that slightly with gains in our most differentiated lines. We also are cautious regarding implementation timing for system installs. We believe Q2 was the low point for our consumables and solution segments. It's probably the opposite for Infusion Systems, as we're unlikely to have a quarter with as much additional hardware in it. Our profitability will be most impacted by hardware sales as a percentage of the overall mix, and the extra production costs we added will now impact the gross margin of the products. Brian will discuss both tax rate favorability and our view on repaying the revolver. Moving on to some housekeeping items. Again in Q2, we had excellent global fulfillment rates to our customers. The cutover of Austin IT systems has exited hypercare and is running well. We're fully stood up not only away from Pfizer but now have modern connected systems across all business lines. From a quality perspective, we have again had a number of successful notified body audits. The FDA has announced the intention to resume on-site audits, and we would potentially expect inspections over the next few months. The product approvals we mentioned on the last call are moving their way into production. A new item to note in our 10-Q will reference a dispute notice received in Q2 from Pfizer regarding the calculation of performance targets related to our earnout payment. Pfizer has been a solid partner and we're working with them to provide additional details pursuant to our agreement. Pfizer is obviously an equity participant here and our board of directors, and we have tried to treat them well at every step as we address the issues that came with Hospira. We feel comfortable with our position and will address the inquiry with our usual thoroughness. To synthesize all these comments about the business segments, the pandemic, and how we're trying to judge ourselves, we've stated for a while that we have the ability to improve our position in our most differentiated businesses of IV consumables and IV systems. We need to prove stability in our less differentiated business of IV solutions. We've talked about the industry's structural attractiveness for years, about 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 volatility, strategically, we think the weaknesses exposed in the healthcare supply chain add to the argument for all participants to be healthy and stable, which has been our commentary since we became a full-line supplier. We make essential items that require significant clinical training, capital expenditures, and items that customers do not want to switch unless they have to. We are a U.S. manufacturer that is deeply vertically integrated and has core redundancy in products that we do not produce domestically between Ensenada and Costa Rica. We believe that the market broadly defined does not want a winner-take-all setup in these essential item categories, particularly before each category is assessed for its own innovation, clinical outcomes, etc. In the new normal or COVID-19 world, where supply chain resiliency and diversity matters, we believe our essential items logically benefit, and our most differentiated items remain differentiated. Therefore, we focus on what we can control during these moments: maintaining the best list of supportive, healthy customers; keeping our employees safe while delivering operational stability; driving differentiation in our most valuable categories; ensuring we have the best liquidity we can have for a company our size; using all of the above to be prepared for any realignments or opportunities that arise; and ensuring our own commercial execution. Our company has emerged stronger from all the events of the last few years. Thank you to all the employees, customers, suppliers, and frontline healthcare workers. Our company appreciates each of your roles. With that, I'll turn it over to Brian.

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. 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 $289 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. IV solutions, which we sell primarily in the U.S. was down 7% on both a reported and constant currency basis. Infusion systems were up 12% or 15% on a constant currency basis, and critical care was 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 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 COVID-related manufacturing costs that were incurred during the second quarter but will not be recognized on the P&L until the third quarter, as well as the impact of continued infusion system hardware implementations. SG&A expenses were 22% of revenues during the second quarter, which is flat compared to last year. On a sequential basis compared to Q1, SG&A was down $5 million due to reductions in T&E and delays in other spending as a result of COVID. R&D expenses were $10 million for the quarter, down $1 million year-over-year. We continue to expect R&D to be around 4% of revenue for the full year. Restructuring, integration, and strategic transaction expenses were $6 million in the second quarter versus $37 million last year. The second quarter 2020 spending related primarily to post-go-live support for the system cutover for our Austin manufacturing facility that went live in Q1. This 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, and strategic transaction expenses for the full year to be around $30 million. Adjusted diluted earnings per share for the second quarter of 2020 were $1.65 compared to $1.99 last year. This year's Q2 results were favorably impacted by excess tax benefits related to equity compensation, which contributed approximately $0.15 of benefit to EPS. With a discrete tax benefit in Q2, we now estimate our tax rates for the full year to be in the range of 19% to 21%, with the non-GAAP rate at the higher end of this range. Diluted shares outstanding for the quarter were $21.5 million, and for modeling purposes, $21.6 million can be assumed for the full year. And finally, adjusted EBIT decreased 13% to $58 million for the second quarter of this year compared to $67 million last year. Now, moving on to cash and the balance sheet. For the quarter, free cash flow was $16 million, which included the previously discussed one-time payment to Pfizer of approximately $20 million. It was another strong quarter of cash flow generation. In fact, over the past four quarters, the company has generated over $80 million of free cash flow after investing almost $90 million in CapEx and 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 end of the first quarter, except for a slight increase in inventory of $11 million. As mentioned in last quarter's call, as we continue through the year, we expect to maintain a higher level of inventory in the near term to ensure we can continue to meet any surges in customer demand, as well as provide a buffer in the event of any supply chain interruptions. In the second quarter, we spent $13 million on CapEx for general maintenance and capacity expansion at our facilities, as well as placement of revenue-generating infusion pumps with customers outside the U.S. Although the second quarter spend was a bit less than our historical rates, the decline was due mostly to the timing of payments and is 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 the build-out of our new Dallas distribution center. In March of this year, as the COVID situation was causing a deterioration in the financial markets, we preemptively drew $150 million on a revolving credit facility and expected to hold the proceeds as cash while the COVID situation and market conditions remained uncertain. Since then, the financial institutions have demonstrated adequate liquidity to meet funding needs of the market. We've seen continued improvement in customer demand for our products, and our internal operations have remained stable. As such, if the current conditions do not worsen, we could be in a position to repay the full amount of the 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 to reflect the expected impact of two items. The first was foreign exchange, most of which related to transaction losses on intercompany balances during the first quarter. The second was lower interest income on cash balances and higher interest expense from the $150 million revolver draw. We felt we could mostly absorb the commercial and operational downsides from COVID with a combination of additional demand for infusion pumps and cost savings, and our outlook today remains the same. For the full year, we still expect adjusted EBITDA to be in the range of $230 to $250 million and adjusted diluted earnings per share of $5.95 to $6.65. In closing, it has been a 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 top-line growth for the business as a whole for both the first and second quarters. Moving forward, our primary goal is to have each of our four businesses growing at the same time. And with that, I'd like to turn the call over for any questions.

Your first question comes from Jayson Bedford from Raymond James. You may go ahead.

Hey, Vivek. Good afternoon. I have 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 governments in some of the stockpiles was probably about 35% to 40% of our overage in pumps, 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 pump side, you mentioned earlier in the year some competitive wins from late last year. Have you been able to recognize any revenue from those installations? Also, can you provide some insight 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, are holding a number of them and 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? This is a little surprising, but how strong was international 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 to support U.S. market adoption within oncology, correct? This is just a COVID-related lag?

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 fewer people coming to the system, etc. But we can't pinpoint it. So it still feels a bit uncertain 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?

There have been a few things. We couldn't get in to do installs; we finally had the ability.

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?

I don't think we'd want to comment on somebody else's approval cycle; they have been 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 important in certain clinical areas. It's important to some systems. 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. It's a broader base supplier that is committed to the category.

Okay. Thank you.

Your next question comes from Larry Solow from CJS Securities. Your line is open.

Great. Thanks. Good afternoon. Just a couple of follow-ups to Jason's questions. On the overage, I guess, you mentioned 35% or 40% is sort of government stockpiling. So, we could assume that those products may be utilized initially, but in theory, you may not get the dedicated disposables on those. But the remaining, whatever that may be, 10% to 12%, those should start to flow through, not at the normal 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; 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 not be 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, a portion of the 10% to 12% produced was from existing customers, and a smaller portion was from new implementations, I guess?

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

Okay. I got you. And on the implementations, I realize the challenge you guys are having. How about just getting into hospitals, talking sales pitches as all of these contracts are coming up on the solution side? Is that starting to improve?

I think everybody's adapting, and so the hospital customers are 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 entry, on-site discussions are happening again. I would say it's still 25% of the calls, if that, right? We'd be happy if that ran at a week right now. Slowly, it's slowly starting to come back, but I don't think our assessment is that it will go back to normal anytime soon. For all companies, we have to figure out what sales mean exactly going forward.

Right. Regarding hospital utilization rates, you indicated that April and May were challenging. However, in June, there was a significant recovery, and July has shown even greater improvement. This aligns with general observations about hospital utilization. Could you provide an estimate? Specifically, is the 10% figure an accurate reflection? I believed the decline was more significant during April and May, but can you give a rough estimate of what hospital utilization looks like at the end of the quarter?

I think in relation to our results, we are referring to a recent baseline, focusing on Q4 rather than Q1. We experienced a 10% decline in consumable items for the quarter compared to this baseline. We noted that July showed some improvement, and June performed better than May. July was slightly better than June, falling somewhere between 10% below and the normal level. It’s important to recognize that some of this is a recovery, and we should take advantage while we can. However, there is no guarantee that these levels will remain stable; what matters most right now is the baseline itself.

Yes, no, I totally get that. Just the last question.

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

Regarding the expense run rate, you provided some guidance on the gross margin. For SG&A, we expected it to remain slightly higher and consistent sequentially, but it decreased somewhat. Brian, do you have any insights on whether this is an acceptable figure, considering there may be some growth if sales recover a bit?

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 spending and other things that we're also benefiting from, just like everybody else out there, right?

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

Your next question comes from Matthew Mishan from KeyBanc. Your line is open.

Brian, how are you guys 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?

It's like, is there going to be school in the fall? It's hard to know right now. I think our customers sincerely want to be busy; they're really trying. In terms of patient recruitment and getting full and getting people to the ER and increasing awareness, I think everybody's trying to do the right thing. But I don't think we can sit here and say it's going to snap back. It doesn't feel that way with employment and all the broader economy issues we are aware of. So I think we have a baseline for our consumables view. We've kind of spoken to that. The variance will be how many installs we can do on the hardware piece. I think we can see clear to the next two, three, four, five, six weeks of hardware scheduling, but beyond that, it gets a little bit more hazy right now.

I think that's reasonable. You can transition from one unusual event to an even more significant one from year to year. The previous event had consequences that resulted in challenges for several quarters afterwards, particularly regarding manufacturing absorption and supply chain costs. Have you fully accounted for those challenges now? As we approach the third and fourth quarters, you mentioned the gross margin challenges you faced. Are there any other implications or challenges we should consider as we move past the third quarter, which could potentially impact 2021?

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 the right thing to do. We do it again. Those kind of costs now cut into the product costing. It's about how much hardware we place. That's still NPV positive, but could be detrimental to gross margins. That's really all there is to talk about, for the most part, volumes and solutions. We've taken our medicine on the resetting that we did last year. There are a couple of other issues that we have to secure just to make sure volumes are right in the factories and the cost structure, etc., 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 it is a separate discussion.

Okay. Thank you.

Thanks, Matt. Hope you're doing well.

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 this summer of 2020. It's been an awkward and challenging time for everybody. I appreciate everybody rallying at the company here. We look forward to talking with everybody at the end of Q3. Thanks.