Earnings Call Transcript - ICUI Q1 2020

Operator, Operator

Good afternoon, ladies and gentlemen and welcome to the ICU Medical Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host today Mr. John Mills of ICR. Please go ahead, sir.

John Mills, Host

Great, thank you. Good afternoon, everyone. Thank you for joining us today to discuss the ICU Medical financial results for the first quarter of 2020. On the call today representing ICU Medical are 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 First 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.

Vivek Jain, CEO

Thanks, John. Good afternoon, everyone. We hope you and your families are doing well. Over the past three years, we've consistently expressed our gratitude for the support from our customers and our employees' ability to adapt during our journey. Although it wasn't intended for the current circumstances, that belief has been essential in this situation. Like others in our industry, we want to start by thanking our hospital customers for trusting us during these times. We may not know the exact nature of the new normal, but we will continue to adapt and provide our best support and execution. Our experiences in swiftly adjusting production levels and implementing new IT systems and fulfillment models have prepared us for volatility. We aim to keep this call brief, given the extensive late-quarter reporting in the market. Today, we want to discuss our Q1 results, including the effects of COVID-19, the impact of the pandemic on ICU Medical, how we are adapting, our positioning, and any strategic implications. We’ll also touch on timing and provide insights into our short-term financial goals and current assumptions. Additionally, we'll update on housekeeping items related to quality audits, product approvals, the transition at our Austin factory, and our criteria for measuring our progress as we focus on growing our differentiated product lines. In the first quarter of fiscal 2020, we saw sequential revenue growth and stability in our most valuable product lines, benefiting from pandemic-driven increased purchases in specific areas. The company is operating well, and while the competitive environment has somewhat stabilized, we do not face significant production constraints, with all plants performing efficiently. Despite the benefits from COVID-related orders, we experienced a strengthening US dollar that adversely affected our income statement in a largely non-cash manner. We reported $316 million in adjusted revenue, with adjusted EBITDA at $63 million, accounting for an $8 million currency impact. Even after adjusting for COVID-related purchases and associated profits, we feel satisfactory about our profitability levels. When excluding currency issues, the main factor contributing to decreased year-over-year profitability is related to the pricing and volume mix in IV Solutions, as anticipated. Our adjusted EPS was $1.81, and our cash reserves stood at $440 million after drawing down on our revolving credit in mid-March to prepare for uncertainty. Brian and I will provide more details on that, as it represents a costly insurance measure. Most restructuring and integration expenses were tied to the IT cutover at the Austin factory, as previously mentioned. Let’s briefly cover the different business segments before returning to discuss COVID-19 and its consequences. Starting with Infusion Consumables, our largest segment, it generated $124 million in Q1 2020, reflecting a 4% year-over-year increase when adjusted for currency and a 2% increase on a reported basis. We maintained consistency across most areas and product lines. In Oncology, we had a record quarter for growth in international markets, but growth was slower in the US due to implementation delays in March and some letdowns from Q4 implementations. In traditional IV therapy, we observed a minor increase in excess purchases internationally due to the pandemic. For most of the US market, volumes met our expectations, without any significant customer losses. Pursuit Vascular's ClearGuard products performed as anticipated. Moving to Infusion Systems, primarily encompassing our LVP pumps and dedicated sets, this segment generated $89 million in adjusted revenue, marking a 7% growth in constant currency. Our significant market presences in Spain and Italy saw minor sales increases due to the pandemic in Q1, and we anticipate a COVID-related demand boost in Q2, mainly in the US market. Before the pandemic, we were already well-positioned with competitive signings. The challenge remains to implement these transitions in hospitals. We believe we have stabilized the decline in our installed base over the past ten years, recognizing that safety is crucial when selecting an infusion pump. Our Plum LVP technology remains well-positioned, evidenced by recent clinical guidelines supporting it. In the non-LVP sector, including PCA and ambulatory pumps, PCA vial supply has remained steady, and we don't foresee any backward movement in that line. While we expect a decline in ambulatory product sales, given our recent LVP successes and projected installation timelines, we still believe we can achieve growth in our Infusion Systems segment, net of currency impact. Concluding the segment overview, Infusion Solutions reported $91 million in adjusted revenue, a 1% decrease year-over-year but up $10 million sequentially. As with last quarter, we are experiencing more stability in our base business. We noted excess COVID ordering in the last two weeks of March, estimated at $5 million to $6 million, or approximately 50% over-ordering. Our business includes both direct and distributor fulfillment, with roughly half the overage going to committed customers and half to open market purchases. The status of distributed business remains uncertain. We take pride in the quality of our customer portfolio, which has improved since our acquisition of the business. We maintain healthy safety stock levels, and our new distribution center in Texas has been operational to enhance our long-term supply chain costs. That covers the segments briefly. I’ll revisit some of these points when discussing our current model. COVID-19 has profoundly impacted our company in various ways. Commercially, we responded swiftly to European pump hardware tenders and dedicated sets demand. In the US market, we participated in some national stockpile sales and engaged with state RFPs for pumps. We aim to balance between ongoing care sales and stockpile needs. We believe most pumps sold in Europe during Q1 were intended for actual patient care. Operationally, early signals from China prompted us to expedite raw material purchases, enabling preparedness. The pandemic necessitated enhanced planning for our operational footprint, shift schedules, local transport, and redundancy strategies. Early investments in PPE prioritized employee safety, and we provided additional compensation to team members in Production and Service Operations required to fulfill their roles under shelter-in-place orders. Our primary manufacturing locations include Texas, Utah, Costa Rica, and Ensenada, Mexico, which is located about 90 minutes south of Tijuana. In terms of expenses, the additional direct costs related to COVID-19, alongside our savings, likely balance out. Increased expenses have arisen, but we've also saved through lower discretionary costs, reduced travel and entertainment, and a higher job vacancy rate. Prior to the outbreak, we faced challenges with extremely low unemployment rates in Utah and Austin. Freight costs have risen due to reduced capacity in the system. Strategically, our considerations regarding COVID-19 and the healthcare system's challenges align with our previous comments since becoming a full-line supplier. We produce essential items that require significant clinical training, high capital investments, and typically, customers prefer not to switch unless necessary. As a US manufacturer that is vertically integrated and possesses core product redundancy in non-domestic production areas, we believe the healthcare supply chain weaknesses revealed during the pandemic will be reevaluated going forward. We don't make assumptions about minimum supply chain holds, expecting those will be established soon. However, we believe the market, in a broad sense, does not desire a winner-take-all approach in these essential categories. Regarding each category, innovation and clinical outcomes will require assessment as well. In these moments, we are focused on what we can control: maintaining strong relationships with supportive customers, ensuring adequate liquidity for our company, which, while not large, plays a necessary role in the healthcare system, and preparing for realignments or opportunities. In the medium term, we are concerned about the economic conditions within the broader healthcare system. Our products are directly linked to hospital admissions. Like others, we are witnessing a rapid decline in elective procedures and emergency room visits, impacting admissions. These factors lead to lost selling time and postponements in product implementations requiring on-site training, heightening inertia when clients are occupied with other priorities. Consequently, we are cautiously optimistic about the remainder of the year, except for potential gains in our Infusion Systems segment in Q2. In mid-March, we faced uncertainty regarding potential impacts on liquidity. Therefore, we opted to tap into our revolving credit, unusual for a company of our financial position within our product categories, but we did not want to be left asking for assistance. We understand there is an adverse short-term impact if we keep it drawn, and combined with currency fluctuations leading to revisions in our guidance range, we manage our company production plans and compensation in line with the latest forecast. Our current model relative to our initial year assumptions reflects increased sales in Infusion Systems beyond our original projections, possible savings from discretionary expenditures, some operational enhancements, all of which are counterbalanced by declines in solutions and consumables linked to reduced hospital admissions, currency impacts, a significant part of which is non-cash, and other incremental COVID-related costs. Elective procedures account for roughly one-third of admissions, and we see our customers segmenting these cases into time-critical and time-sensitive categories, suggesting not all will return to normal in our perspective. It is too early to determine the full year’s implications with certainty. Our current model has factored in significant reductions for Q2 and Q3 in relation to utilization, incorporated into our view, with further clarity expected in 90 days. I believe a wide range of outcomes remains possible, but we wish to manage the company according to a baseline model due to our size, and we recognize that the new normal will involve more volatility. Now, moving on to housekeeping items, in Q1, we achieved exceptional global fulfillment rates for our customers, the Austin systems cutover went smoothly and will continue to be supported in Q2. We are fully established away from Pfizer, and we now have modern, connected systems across all business lines. In terms of quality, we've undergone various notified body audits in San Clemente, San Diego, Costa Rica, and Salt Lake City over the last four months, all conducted remotely. These pertained to the Medical Device Single Audit Program and CE Mark annual certifications, all of which went well without major findings, with a few remaining sites still pending. There will be a small announcement regarding the recall of one lot of IV Solutions produced in mid-2019 by our contract manufacturing partner in Rocky Mount, which poses no economic impact. On product approvals, we received 510(K) nods for our SwabTip male cap, complementing our SwabCap business, and a new Two-Way Transfer Device to enhance our IV solutions offering. We need to swiftly introduce both items into production. To summarize our comments regarding the business segments, COVID-19, and how we’re evaluating ourselves. On the last call, we indicated our capacity to enhance our position in our most differentiated segments of IV Consumables and IV Systems, while needing to demonstrate stability in the less differentiated IV Solutions area. We've talked about the attractiveness of the industry structure for two years, explaining how our products fit from technological, quality, and manufacturing perspectives. While this may induce short-term volatility, we believe the weaknesses unveiled in the healthcare supply chain further highlight the necessity for all participants to be healthy and stable regarding IV Solutions. We feel we possess a strong competitive position for IV pumps, more than we have since acquiring the business. The competitive stance of our consumables business and the value of our oncology category remain unchanged due to COVID-19; however, it is challenging to forecast what the coming quarters will hold. In the COVID-19 landscape, where supply chain resilience and diversity are critical, we are confident that our essential items will benefit and that our most differentiated products remain distinct. We expressed in the last call that 2019 was a very challenging year for our team. The company emerged operationally stronger from that experience, providing valuable lessons in adaptability. Thank you to all our employees, customers, suppliers, and healthcare workers on the front lines. We appreciate everyone's contributions. With that, I'll turn it over to Brian.

Brian Bonnell, CFO

Thanks Vivek, and good afternoon everyone. To begin, I'll first walk down the P&L and then talk a little about cash flow and the balance sheet. So starting with the revenue line, our first quarter 2020 GAAP revenue was $329 million compared to $331 million last year, which is down 1% or flat on a constant currency basis. For your reference, the 2019 and 2020 adjusted revenue numbers, which exclude contract manufacturing sales to Pfizer can be found on Slide Number 3 of the presentation. Our adjusted revenue numbers for the quarter were $316 million compared to $311 million last year, up 2% or 3% on a constant currency basis. Infusion Consumables were up 2% or 4% on a constant currency basis. IV Solutions, which we sell primarily in the US, was down 1% on both a reported and constant currency basis. Infusion Systems was up 4% or 7% on a constant currency basis and Critical Care down 4% or 3% on a constant currency basis. As you can see from Slide Number 4 of the presentation. For the first quarter, our adjusted gross margin was 40% compared to 44% for the first quarter last year. The Q1 gross margin was in line with our expectations. The largest driver for the year-over-year decrease is similar to last quarter and reflects the impact from lower sales of higher-priced non-committed business in IV Solutions along with lost manufacturing overhead absorption from lower production levels compared to a year ago. SG&A expense was 22% of revenues during the first quarter, which is flat compared to last year. This was slightly less than expected due to a combination of spending controls and currency. R&D expenses were $11 million for the quarter, down $2 million year-over-year. And we expect R&D to be around 4% of revenue for the full year. Restructuring, integration, and strategic transaction expenses were $12 million in the first quarter versus $24 million last year. The first quarter 2020 spending related primarily to the system cutover for our Austin manufacturing facility and also included cost to restructure certain foreign commercial operations. The Austin system cutover took place during the quarter and was the final step in the system integration plan related to the Hospira acquisition. We now expect total restructuring, integration, and strategic transaction expenses to be a bit lower for the full year at $30 million to $35 million with the majority of the spend coming in the first half of the year. Adjusted diluted earnings per share for the first quarter of 2020 were $1.81 compared to $2.58 for the first quarter last year. Please note that the prior year results were favorably impacted by excess tax benefits related to equity compensation. We continue to estimate our tax rate for the full year to be in the range of 21% to 23% with the non-GAAP rate at the higher end of this range. Diluted shares outstanding for the first quarter were $21.5 million and for modeling purposes this same number can be assumed for the full year. And finally, adjusted EBITDA decreased 19% to $63 million for the first quarter of this year compared to $78 million last year. During the first quarter, the strengthening of the US dollar, which was brought on by market reactions to the COVID-19 global pandemic, had a negative impact on our P&L in a couple of different ways. These impacts are further described in Slide Number 5 of the presentation. We estimate that the combined effect in Q1 was a reduction in adjusted EBITDA of $8 million and a reduction in adjusted EPS of approximately $0.30. First, as compared to our original 2020 guidance, the impact of foreign exchange from the translation of our foreign entity financial statements into US dollars for purposes of financial reporting reduced adjusted revenue by $3 million, adjusted EBITDA by $2 million, and adjusted EPS by $0.07. Second, in addition to the translation impact, we also incurred foreign currency transaction losses of $6 million during the quarter, which are reflected in the other expense and income line of the P&L and reduced adjusted EBITDA by $6 million and adjusted EPS by $0.23. These transaction losses relate primarily to balance sheet exposures from inter-company receivables and payables among our various legal entities and were caused by a significant weakening of certain currencies mostly in Latin America, Asia, and South Africa. Although these transaction losses are non-economic in nature as a result from inter-company balances, they do impact our reported results. Excluding the impact of currency, we believe that the level of profitability in Q1 relative to revenues is appropriate. Now moving on to cash flow and the balance sheet, for the quarter free cash flow was $14 million working capital reflected continued decreases in both DSOs and days of inventory on hand. These improvements were offset by a reduction in accounts payable due primarily to timing of vendor payments. Note that the one-time payment to Pfizer of $22 million, which we originally expected to make in the first quarter will be made in the second quarter of this year. While we are pleased with our progress to reduce both DSOs and days of inventory on hand, we also recognize that the COVID-19 pandemic could pressure both of these metrics over the remainder of this year. Our hospital customers, many of whom we service directly, are dealing with the financial implications of lower hospital admissions and procedures, which could result in slower payments in the future. Additionally, we may look to maintain higher levels of inventory in the near-term to ensure we can continue to meet any surges in customer demand. In the first quarter, we spent $25 million on CapEx for general maintenance, system integration, and capacity expansion. Consistent with our original guidance, we still expect to spend $85 million to $90 million this year, which includes expenditure related to transferring a portion of the contracted solutions products from Pfizer to our Austin manufacturing facility, as well as the build-out of our new Dallas distribution center. ICU has historically maintained a conservative capital structure and we feel that the uncertainty the market is experiencing today validates that strategy. As the COVID-19 situation caused a deterioration in the financial markets during the month of March, we preemptively drew $150 million on our revolving credit facility. We plan to hold the proceeds from the revolver draw as cash while the COVID-19 situation and market conditions remain uncertain. Including the $150 million of proceeds from the revolver draw as of March 31, our cash and investment balances totaled $440 million and were in line with our expectations after considering the revolver proceeds and the delay in the $22 million Pfizer payments. During the month of March, the Federal Reserve cut interest rates by 150 basis points in order to provide relief and stability during the pandemic. This reduces the yield on our cash and investment balances. As shown on Slide Number 5, the impact of lower interest income on cash balances, combined with the incremental interest expense from the revolver draw is expected to reduce full-year adjusted EPS by $0.15. As Vivek referenced in his remarks, we are updating our 2020 adjusted EBITDA and adjusted earnings per share guidance to reflect what we know now, which is the expected non-operational impacts for currency and interest income and expense. As a result, after adjusting for the $10 million negative impact from foreign currency, we now expect adjusted EBITDA to be in the range of $230 million to $250 million for the year. Additionally, after adjusting for the combined impact from foreign currency and interest income and expense of $0.55, we now expect adjusted diluted earnings per share of $5.95 to $6.65. While our updated guidance does include a set of assumptions related to the commercial and operational impacts of COVID-19, I want to emphasize Vivek's earlier comment that the range of potential outcomes is wide. However, we will do what we always do and provide an update on our view of the full year as part of the second quarter earnings call when we expect to know more. In closing, I'd just like to say that it's an unusual time to be stepping into the CFO role. But I feel fortunate to be at a company whose products are essential to the healthcare system and I take comfort knowing we are well-positioned to handle whatever challenges may come. And with that, I'd like to turn the call over for any questions.

Operator, Operator

And you have a question from Jayson Bedford from Raymond James.

Jayson Bedford, Analyst

Hi, good afternoon. Can you hear me okay?

Vivek Jain, CEO

Perfectly. Hi, Jason. Go ahead.

Jayson Bedford, Analyst

There’s a lot to discuss here. Let's begin with COVID. The $5 million to $6 million in IV Solutions appears to highlight the advantages, while the benefits from the pump side don't seem to be just a one-time thing. Is that an accurate assessment?

Vivek Jain, CEO

I think that's an accurate description. The revenue from Spain and Italy on the pumps was not significant, and we anticipate that over the long term, they will continue to generate revenue. Regarding the Solutions segment, the portion that was not aligned with our expectations concerning our existing committed customers was indeed excess.

Jayson Bedford, Analyst

Can you discuss the second quarter and its potential impacts? You mentioned participating in selected ordering in US stockpiles. I'm curious about the potential net benefit from COVID in the second quarter; could you provide some quantification on that?

Vivek Jain, CEO

I don't know if we want to quantify it, Jayson. I would say it's really going to show if anywhere in the pump, in the IV Systems line, but that needs to be balanced against the IV Consumables and Solutions businesses where it has been a very volatile ordering pattern for the last four weeks or five weeks.

Jayson Bedford, Analyst

All right. Okay.

Vivek Jain, CEO

Not in a good way.

Jayson Bedford, Analyst

Okay. In terms of just sticking with the pumps, were you able to install any of the pumps tied to the share gains in 2019 that you previously mentioned?

Vivek Jain, CEO

Not a lot.

Jayson Bedford, Analyst

Okay. And I know this may be a difficult question, but at what point do you think hospitals get back to deciding on new pump platforms?

Vivek Jain, CEO

It's challenging to predict, as right now, people are reluctant to engage with issues they don't absolutely need to address. We've lost significant time over the past six to eight weeks due to current circumstances, which is obviously a secondary concern. We simply need the opportunity to communicate, but that doesn't seem imminent since hospitals haven't yet established procedures for allowing access. There isn't a standardized approach to this situation, and we anticipate that it will take another four to six weeks before we can engage in a meaningful way.

Jayson Bedford, Analyst

All right. Okay, maybe a couple of quick ones for Brian. Gross margin should we assume that 1Q here is the trough for the year?

Brian Bonnell, CFO

No, I don't think that's necessarily the right assumption, just given the potential volatility in volumes over the course of the rest of the year.

Vivek Jain, CEO

Please remember, Jayson. If we install more pumps, that's a negative to gross margin. Or if things deteriorate even beyond what we anticipate at the moment and we'll update everybody in the Q2 call, just like we always do, it just comes down to the other two business and what admissions look like.

Jayson Bedford, Analyst

All right.

Vivek Jain, CEO

If admissions decrease and volumes decline, which is likely to occur, it's just a question of the extent, and if the number of pumps increases, your mix would be adversely affected.

Jayson Bedford, Analyst

All right. Okay.

Vivek Jain, CEO

Margins will be negatively impacted. In that period, you would obviously do better on the pumps over time.

Jayson Bedford, Analyst

All right. Okay, and then maybe just one last question. Regarding the FX dynamics, I'm still a bit unclear. I believe that in the countries mentioned in the PowerPoint, you produce more products than you sell there. So I'm puzzled as to why a stronger US dollar wouldn't be beneficial. If you could, please go over some of the factors that contributed to the revision.

Vivek Jain, CEO

Yes, it's a fascinating topic. I'll let Brian take that.

Brian Bonnell, CFO

Yes. So the majority of the impact due to currency on the EBITDA line comes from balance sheet exposures that we have related to inter-company receivables and payables. Specifically, a number of our foreign entities have inter-company payables to our US entity in US dollars. Many of these foreign entities experienced significant impacts to their currency and as a result that liability in US dollars increased, and that results in a loss to the other income and expense line of the P&L. Jayson, did that answer...?

Jayson Bedford, Analyst

Yes. So, on the profit and loss statement, we will see it reflected in the other income line?

Vivek Jain, CEO

Yes, that's what it is; that's what it is.

Brian Bonnell, CFO

Longer term on to your other point historically, for ICU strength against the peso was a good guy. We've got a bunch of different places now, and we hedge, we thought it was a portion of it might be as good as it could get, we haven't saw that too historically, so...

Jayson Bedford, Analyst

Okay, thank you.

Vivek Jain, CEO

Thanks, Jay.

Operator, Operator

And your next question comes from Matthew Mishan from KeyBanc.

Matthew Mishan, Analyst

Hey guys, thanks for taking the questions. I just want to ensure I understand correctly, you're not reiterating your guidance without considering FX and interest. You're planning to update it in the next quarter, and there are various possible outcomes. I'm trying to clarify if this range includes some positive outcomes as well as some negative ones. I want to fully grasp what that range of outcomes looks like.

Vivek Jain, CEO

Sure. Our main concern was about currency and interest expenses. We could pay off the revolver if we wanted, but we didn't want to assume that withdrawing it would improve our situation. It's an unpredictable and challenging environment. We've accounted for some potential downturns in our outlook for the remainder of the year to maintain confidence. While things could worsen, there may also be some positive developments, but this could be the new normal. We prefer not to make assumptions year after year; instead, we've adjusted our views as necessary based on our knowledge at the time regarding currency, interest expenses, and the potential deterioration from Q2 to Q3. That's the situation we're in.

Matthew Mishan, Analyst

Okay.

Vivek Jain, CEO

It's a fair question. We are working on running a model. We may not be very large, but we want to be transparent about the goals we are aiming for, even if that comes with a higher level of risk.

Matthew Mishan, Analyst

All right. That's right sense in this environment. You were planning towards a $75 million to $80 million run rate on IV Solutions over the course of the last five, six months before this, what are you thinking now and how do you kind of view the manufacturing footprint between Austin and Rocky Mount, has that changed?

Vivek Jain, CEO

Nothing has changed, the team is actively working, and a significant portion of CapEx has been allocated to getting the lines operational in Austin to facilitate moves away from Rocky Mount, which is essential for our long-term model. So that aspect remains the same. Additionally, the base business was likely slightly above 80 in Q1. I wouldn’t read too much into that; it just was what it was. In comparison to Q4, it was a fairly normal flu season prior to the pandemic, and winter typically sees higher volumes. It's just a few million dollars; I wouldn't draw any conclusions from it.

Matthew Mishan, Analyst

And on your commentary around you believe the market doesn't want a winner-take-all, what is. I'm just trying to sense, where does it, where does that, where did they not want a winner-take-all. I mean we'll, are you talking specifically around the solutions there? Or is it more around you think the hospital would want to use like multiple pump manufacturers?

Vivek Jain, CEO

I believe this situation applies to all these categories. Considering the challenges we've faced, there are not many factories producing these products, nor many vendors available. It's detrimental for the system to become overly reliant on any single aspect. Regardless of whether we benefit or face drawbacks, that’s our perspective on these categories. The messaging we are conveying is clear; your products must have their own strengths, such as technology and other factors. However, we recognize that larger systems are currently contemplating this issue. Whether it's related to vents, personal protective equipment, or other categories, we've had experience in all these areas. We anticipate that people will engage in more thoughtful reflection on this matter.

Matthew Mishan, Analyst

As you consider the rumors regarding you and Smiths, and take into account the UK and the importance of having a manufacturer located in the country to supply it, do you now contemplate a potentially significant acquisition like that? I'm not sure if pursuing such a move would even be practical in today's environment.

Vivek Jain, CEO

I think we haven't focused on anything beyond the past 90 days. Our priority is running our own business and ensuring we take care of our customers. Over time, the requirements in different areas will become clear, but I genuinely believe that having diversity in the supply chain is beneficial for the system, even if it means we obtain some things that may not suit us. Many of the categories you've been hearing about didn't move away from local manufacturing by chance; they shifted because they became either overvalued or had too much weight in a certain direction, which isn't good for anyone.

Matthew Mishan, Analyst

Thank you very much. And thanks for everything that you're doing out to help support and the questions as well.

Vivek Jain, CEO

Thank you, Matt.

Operator, Operator

And your next question comes from Larry Solow from CJS Securities.

Larry Solow, Analyst

Good afternoon. It's nice to hear from you all. I hope you and your families are doing well and staying healthy. Vivek, I have a couple of follow-up questions. Most of my inquiries have been addressed, but regarding your assumptions, clearly the main factors are hospital admissions, and you mentioned that things could worsen. Would the situation on the elective surgery front potentially worsen, or are you more concerned that this situation may remain constrained for an extended time?

Vivek Jain, CEO

I don't know, first, I don't know if it's just elective surgeries. Larry, I mean ER visits are important too; ER visits are our key drivers. We read the public hospital transcripts, you know the four or five of them that are available, and they've all been very candid about it. They are obviously all hoping, right, that electives come back, the system depends on it economically. But what guarantees that the ER business is going to be the same, and what guarantees that electives can ever get back more than 75% of what they were for the foreseeable future, and has a big impact on admissions. People are throwing around numbers much better than that in the third quarter. I don't know if any of us have enough to believe that and we have to run plans, company plans and all the stuff based on the numbers; that's why we want everyone to know.

Larry Solow, Analyst

What is your high-level perspective on maintaining our strategy for electives while admissions gradually decrease as COVID hopefully eases? Is that how you see it? I would say that seems reasonable. Would you agree with that view, Vivek?

Vivek Jain, CEO

I think we are probably a little bit more cautious down the middle. I mean I think we think Q2 could be really challenging and Q3 could also be challenging, if there is any hope it's certainly later in the year.

Larry Solow, Analyst

Right. You mentioned that the pandemic highlights the importance of the industry. How do you think it will specifically impact your business in the mid to long term? How do you envision operating your business once COVID is somewhat under control, even if it takes two to three years? At a high level, do you see areas for improvement or have any thoughts on this?

Vivek Jain, CEO

From a high-level perspective, our operations haven't changed significantly. This has always been our business, and while we've had to adjust production and pause installations, our core activities remain the same. We still have product features to deliver according to our development road maps across all segments, and we may refine our focus on those. As we continue to work, we recognize that we remain committed to our system and are always looking for the next opportunity to present itself.

Larry Solow, Analyst

All right. On the pump side?

Vivek Jain, CEO

Make sure we have customers who are in a strong position and believe in what we are doing.

Larry Solow, Analyst

You mentioned that this year presents one of your best opportunities in a long time to gain some market share. While there are some challenges holding you back, has the competitive landscape impacted your potential, or will it simply delay your progress? I know your competitor is also dealing with regulatory issues that are unlikely to be resolved soon.

Vivek Jain, CEO

I think, similar to our last call, we prefer not to comment on the situation. It seems we've lost some time, and we're uncertain if we'll regain it. Our focus now must be on execution, and we still firmly believe that our opportunities remain strong. We're working on our products and figuring things out. We have a complete range of consumables to support our efforts. Therefore, we believe we are well-positioned, and our priority is to execute effectively.

Larry Solow, Analyst

Okay. And just last question on the oncology piece. You mentioned that you gotten some better traction outside the US, it sounds like you don't expect to really get too much traction in the US until things calm down on the...

Vivek Jain, CEO

It's been a little bit of a more complicated story. We were short product for most of last year. We released it first into the US market. We had a big surge of product taken in the US market in Q4. And then we released it to the international markets at the beginning of this year. As a result of all of that related to the US, we didn't have quite the same store reordering in the US, plus and then the pandemic hit and slowed things down from an implementation perspective. That probably flipped, the US starts to look a bit more normal, and international probably cool off a bit now we put some product out there for the next 90 days or so. But it is dependent on the ability to get into hospitals, to service, train, and switch people over and that has been challenging obviously the last six, seven, or eight weeks, we lost time.

Larry Solow, Analyst

Okay, great. I appreciate it. Thank you.

Vivek Jain, CEO

Okay, that's it. We appreciate very much. We know everybody is busy; it's a difficult time out there. We appreciate everything that all participants are doing here. We appreciate people's interest in our company and just like we had in previous years, we'll come back on Q2 to tell exactly where we think the world is. Thanks very much folks. Appreciate it.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.