Q1 2020 Earnings Call

[music].

Great and walk into the no basis, and first quarter 2000, a 20 or any conference call. At this time all purchases Arnie listen only mode. It brief question and answer session will follow the formal presentation. If anyone should require operator system. During the conference. Please press start zero on your cell phone keypad.

How's your mind. Your this conference is being recorded.

I would knowledge on the conference over here Hope <unk>, Vice President of internal and external affairs. Thank you you may be good. Thank you welcome to the basics first quarter 2020 earnings call. The company's earnings press release, which we issued earlier. This afternoon. It's posted on our website and has been filed on four eight k. with the security.

Strange Commission.

We have also posted supplemental financial information on the I.R. website to accompany our discussion.

I hope.

During these times due to the Kobe liking pandemic.

Using a more virtual approach and conducting this ernie call, we're going to begin with prepared remarks from R.C.E.O. Christenbury NCSL not hard though.

Open it up the Q. when he was mentioning president joining us during that portion of the call. We safety in mind all of us on the phone or dialing and remotely from different locations.

I would like to remind you of the discussions during J.'s call. One quick forward looking statements, which are based on current expectation and a ball grid and uncertainties assumptions in other factors, which if they do not materialize Barbie to be correct could cause he says results due to affirmative early from those expressed or implied by such forward looking statements.

In particular, there's significant uncertainty around the duration impact of the code.

<unk> on the company's business operations and financial.

Coping 19 condemning continues to evolve.

Is important to notice that are commentary reflect our best estimates as up to date they.

Additional respond uncertainties that may affect future results are described interfaces news releases and periodic filings with the Securities and Exchange Commission did they.

Obligation to update any forward looking statements or information, which speak as their respective date.

This call walk to include a discussion of several financial measures that are not calculated in accordance with generally accepted accounting principles or.

Which I only for T.V.'s as Nongaap financial measure.

Include our costs are good so.

Sales marketing administrative expenses.

Research and development expensive operating margin knocked out earnings per share free cash flow and either.

Reconciliation for the most directly comparable yeah financial measures maybe.

He was really and the supplement mentoring financial information, which are accessible from the Investor Relations section of new they said website, but that I'd like to turn it over to correct.

Thank you Suzanne good afternoon, everyone and thank you for joining us.

Hope all of you your family friends are staying healthy and safe during this cope with 19 pandemic.

These uncertain times are difficult.

Say the least.

Across new basis and around the globe, we're facing adversity that is challenging us in unique ways you have such.

Restructured our former remarks to share the actions were taken to maintain business.

<unk>, an operational continuity, while supporting our employees surgeon partners patients communities.

That was nearly all med tech companies were hopefully experiencing a temporary quite substantial impact on our business due to the coping 19 pandemic has a large portion.

Surgery cases, we support with our technology and services are considered.

First quarter 2020, net sales were tracking to expectations until mid March we experience a sharp decline in our business due to differences elective surgeries.

That decline encased volume persisted throughout April we're now seeing case volumes, increasing steady state during the first week of night.

That's a positive sign that perhaps April may be the worst habit.

Over the last two months new base. It has responded to cope with 19 situation by adopting new operating procedures that ensure the safety in wellbeing of our employees.

We've also taking steps to maintain core capabilities in our sales channel and our supply chain continue our focus on renovation pipeline.

Additionally, we adopted new ways to engage or surgeon partners to provide the service they expect from new basis.

It's early days, we're now seeing elective surgeries resuming U.S. and other geography around the globe in a limited capacity a shelter in place mandates begin to east.

There are engaging with our surgeon partners in charting data on a daily basis that gives us a better understanding of what our business may look like in the short to medium term.

Based on the inside so we have gathered as more spine and orthopedic surgeries have resumed over the last two weeks.

There are trends starting to take shape, but still a lot of unknowns at this point.

Here's what we know as of now.

In the U.S. Many hospitals are we starting elective procedures, but in a measured way.

In other global markets. Three start is also is also happening but in a highly variable situation by geography.

In some situations hospitals resuming spine surgery may have capacity constraints. They they manage the ongoing effort against coping Nike.

Here's what we don't know and we'll need to learn.

Although capacity is coming back on line for elective surgeries. The extent is unclear at this time.

We continue to monitor on a daily basis, which hospitals are coming back on line and to what extent.

Hospitals will likely adopt new protocols and procedures procedures within their facilities.

What do you not know what impact is will have on the overall efficiency and what constraint that may have on our surgical volumes.

Finally, the overall sentiments in willingness of patients to return to both clinic and hospital setting it's hard to predict.

Ultimately it will be patient bike patient decision.

It's also uncertain how unemployment for patients.

Change in coverage may impact surgical postponement or scheduling trends.

Overall, there's some positive signs as we enter Mag, but many questions remain that will be working to answer as we move forward.

Horrible will provide additional insight on how we use of the current market environment, where do the company's cast position in overall liquidity followed by first quarter 2020 results in detail.

I'd like your transition discussing the actions we are taking internally to support the vitality of our business.

Has announced in our press release in form eight K. shoot on April 14th.

They said management team continues to evaluate the coping 19 situation on an ongoing basis.

In consideration of differences across geography and to ensure we are effectively operating business under new constraints, we laid out for already centered on people, which didn't drop a natural business and operational continuity.

Burst like we discussed the actions put in place.

The safety and wellbeing of our employees.

Early on a task force was formed to manage the company's response to cope at 19.

Including work from home protocols for those able to do so.

While supporting the safety of our employees, whose daily jobs require them to be on site or in hospitals settings.

At new basic facilities, we instituted processes to follow the health agency in local government guidelines, including social distancing temperature checks based coverings enhance cleaning measures and more.

In addition.

Assessed our various geographic regions and the impact due to the temporary declining elective surgeries.

We had implemented thoughtful measures across our global commercial teams with the goal to mitigate and preserve compensation permission based employees.

Did that in I've been extremely impressed with the level of productivity and adaptability about employees.

<unk>.

From a financial standpoint.

We've taken steps to control operating expenses, including implementing compensation reductions for the board of directors and executive officers.

Measures to constrain discretionary spending.

And adjusted overall production efforts to align with the drop in volume.

We also evaluated immediate supply chain efficiencies, such as valuable distribution costs and scaled back capital expenditures.

Related to business continuity, we continue to engage with their surgeons invalidate partners to serve them. During this time.

<unk> has been to understand from our surgeon partners. How they are preparing the ramp up of elective surgeries and identify how we can best support then during this transition.

In addition, despite cobin 19, we are committed to maintaining the level of already investment we budgeted for at the beginning of the year.

To continue to make slaughtered progress on our technology roadmap.

This time.

Major filings in approvals plan for 2020 are on track with our internal time lines.

We remain highly focused on differentiated spinal hardware solutions and our enabling technologies to continue our position as the innovation leader inspiring.

In particular, the internal development and testing Appalls remains on track.

Our engineering teams replying to learn things from bait evaluations and refining the integrated platform accordingly.

In parallel robotics application development continues and we were making good traction on the software and hardware arm component of the system.

Are integrated platform strategy remains on track and continues to be validated by the market and we will continue to forge ahead.

We're also on track with an into your launch of several new cervical portfolio offerings currently.

And the Apple launch staged the interior cervical plate system will help treat degenerative trauma and deformity pathologies.

In addition, we plan to launch a new posteriors cervical fixation system in the same time frame.

This system will be compatible incorporate many of the same design principles about current flagship lumbar fixation system to create a complete posterior fixation solution.

We are encouraged by the product demand from surgeons already during her alpha evaluation.

We have and will continue to foster engagement opportunities for surgeons to learn from US you know from each other.

New basis clinical professional development in global marketing teams have adapted quickly to digital in virtual learning opportunities.

Teaming up with our surgeon faculty, we have moved from incursion offerings to leveraging videos webinars remote trainings educate on our procedural solutions for excellent <unk>, a lip mask p. left en masse midline.

We plan to continue posting in building out our virtual spine Conference series, we started up to revive continued online learning opportunities for surgeon partners.

Knowledge in the way surgeons, we'll be able to train and travel in the near to mid term would likely be challenging.

And finally, we continue to focus on operational capabilities. During this slowdown intellect procedures.

Kluge driving substantial improvements related to global logistics fulfillment manufacturing in the European Indy our initiative.

A few weeks ago governing bodies officially postpone European indie ours date about vacation for one year.

Regardless of this extension this does not change our approach or timeline to ensure this initiative is <unk> acted upon with their agencies.

As it is a critical step to help enable our long term international growth planned strategy.

We continue to make the necessary investments to foster operational efficiencies, including sterile packaging.

Which enables us to fully continue participating in key global markets.

These actions are reflection of continuing to balance profitability wall strategically investing in key areas for growth as we prepare for the future.

Was that I want to be very clear I believe our company's fundamentals and long term strategies are sounds well certain spine surgeries are considered elected the need and the demand for these life changing procedures remains high.

We expect deferred or delayed spine surgery will ultimately be schedule and perform when it is safe inappropriate to do so.

And therefore, we anticipate that volume's will likely bottom out over the second quarter and then gradually increase over the next step recorders.

We'll be tracking data across the globe to get a better sense of the trends that provide better insight as we moved through this year.

In addition, we're focused on business financial and operational continuity, while keeping the safety of our employees and customers at the forefront.

I can say with absolute certainty is that as a leadership team and as a company.

Doing everything we can manage through this time and best position today, so for long term growth.

With that I'd like to turn the call over to Matt.

Thanks, Chris and good afternoon, everyone before jumping into the financial I'd like to acknowledge the tremendous job health care workers around the world are doing this or patients.

These past month require all of us to overcome challenges associated with Kobe at 19.

I'm proud of the resilience demonstrated by our employees as well.

Well I will discuss first quarter 2020 results in a minute I'd like to start off by addressing what is the top of mind for investors.

Accompanies liquidity position and how we generally view the return of elective procedures and related net sales cadence for the remainder of the year.

Had a strong cash position with more than $500 million cash on hand as of March 31 21.

With additional funds have access to date.

Up to $550 million.

In late February before we started to see material impacts on <unk>.

Took steps to improve our capital structure, providing additional liquidity.

We amended or revolving credit facility to increase borrowing capacity from 500 million so $550 million an extended the term to 2025.

Then in early March accompany completed in offering $450 million up convertible notes.

2025.

This help bolster our cash position by more than $330 million after deducting offering costs. The net cost of the related Bon hedging warrants and the use of proceeds for Sherry purchases made in connection with the issuance of the notes.

As it relates to debt covenants, our newly issued convertible notes do 2025 as well as the convertible notes do in March 2021 have minimal financial problems. In addition, or credit facility provides a bit more flexibility than the old facility and requires we maintain certain interest coverage and leverage.

Shows, which are measured on a quarterly basis.

Subject to compliance with the covenants another requirements, we can draw on the facility. So long as we don't exceed eight total met that leverage ratio of four and a half the one.

As a comparative or not that leverage ratio as of the end of the first quarter as defined in our facility was 2.7 to one.

Based on the cash position I shared above and access to additional cash should we need it I feel comfortable with the company's overall liquidity inability to meet her financial commitments. During these uncertain times.

We have also taken a number of steps to control costs and reduced discretionary spending and will continue to manage the company's cash position in a discipline manner.

Back on April 14th the company with drew annual financial guidance for 2020.

As a result of code that 19 due to market uncertainty and with a limited view on went elective procedure volumes will normalize globally, we have decided to not provide further full year 2020 financial guidance at this time.

It is too difficult to accurately predict with so many variables as Chris described earlier.

At this time, we expect the impact of code that 19 on volumes and that's sales will be most severe in the second quarter, followed by a gradual recovery third quarter with further incremental improvement in the fourth quarter.

Spine surgery is maybe differ but they're not typically cancelled altogether. So we anticipate volume recovery.

New into 2021.

We believe this view is realistic as of now.

Based on the assessment of overall market conditions government agency information and feedback from surgeons in hospital administrators.

Now, let's turn or first quarter 2020 performs as a reminder, many of the financial measures covered in today's call or on a non gap basis unless noted otherwise.

<unk> refer to today's earnings news release, as well as a supplemental financial information on W.W.W. Dot <unk> Dot com for further information regarding non gap reconciliations.

For the first quarter 2020, no sales were $259.9 billion down 5.4% euro per year on a recorded basis.

Down 5.1% on a constant currency basis.

This includes international growing in it single digits year over year offset by declines U.S. spinal hardware and U.S. surgical support as a result of the significant to pearls and elected surgical procedures starting in mid March due to cope at 19.

We experienced better than anticipated pricing pressure compared to our expectations in the first quarter of negative 1.7%.

Now let me give you some additional color it's a business line level.

U.S. spinal hardware revenue declined 6.3% year over year to 138, and a half million dollars.

In the first two months to the quarter Nuvasives X. three six X. 360 system was tracking to deliver solid year over year grow as surgeon training and adoption rates continued at the pace we've seen previously.

Cervical perform relatively well as momentum from strong gains in the fourth quarter 2019 continued into the first quarter 2020, driven primarily by new and alpha product introductions as well as a more focused selling strategy for this underpenetrated part of our portfolio.

Cervical technology is used in drama and emergency spine surgery caissons more often than Thoracolumbar. This portfolio has experience more stable use and has been less impacted from code at 19, when compared to other parts of the business.

Yeah Tales from U.S. surgical support payments $64.3 million, 10.9% decline over prior year.

Benefit that we saw last year from you prove billing and collections at the base of clinical services has now annualized in return some more normalize levels as we anticipated.

Case volumes Trek up year over year in January February and then experience to slow down and volume in mid March due to the pandemic.

Turning to international.

Sales were $57.1 million for the first quarter growing 4.1% year over year as recorded in 5.6% you're over here on a constant currency basis.

This was driven by Asia Pacific growing in mid double digits euro per year on a constant currency basis.

Led by Japan, where we saw more stability against the backdrop of posted 19 through the first quarter.

Europe delivered low single digit net sales growth.

Pandemics <unk> earlier and more significantly in certain regions like northern Italy.

Other regions continue to experience decent volumes through March.

Latin American AD sales decline, primarily due to a sharp decrease in Puerto Rico, driven by case cancellations.

Overall, while the international regions Road, you're over your growth first quarter.

<unk> was definitely impacted by the decline in elective procedures due to code that 19.

We continue to work with our commercial teams around the world to monitor the situation and prepare for recovery.

Read the rest of the P. you know non gap gross margin for the first quarter was 72.3% or 60 basis point decline over prior year of 72.9 per cent.

This was primarily driven by <unk> pricey Rosen, an inventory related charges, partially offset by improved operational efficiencies in manufacturing.

The West Carrollton, Ohio facility continues to perform well into 2020 and his position to meet customer demand when it returns to more normalize levels.

Non gap S.M. and the expenses decreased by 300 basis points compared with prior year to 48.7 per cent of net sales in the first quarter or $126.6 million.

This decline was driven by reduced compensation expenses inclusive, both commissions and fair value adjustments for certain equity awards.

Non gap research and develop already expenses totaled approximately 17, and a half million dollars or 6.7% total net sales in the first quarter.

<unk> basis point increase over prior year is in line with the company's ongoing commitment to the innovation pipeline development.

First quarter non gap operating margin eight minutes 16.9 per cent.

200 basis point improvement over prior year, primarily due to expense reductions previously noted and overall expense control across the company, partially offset by R. and B. investment and the cobin 19 that sales impact.

<unk> tax expense and the quarter with $7.4 million, resulting in a non gap effective tax rate of 22.5% versus the prior your tax rate of 23%.

First quarter non gap net income was $25.4 million or non gap delude earnings per share of 48 cents.

Haired that non gap net income $27.6 million or non gap deluded earnings per share 53 cents for the same period last year.

Turning the gap results gap net earnings for the first quarter of 2024 $5.3 million.

For gap diluted earnings per share of 10 cents compared to $9.4 million for gap. The looting earnings per share of 18 cents in the same period last year.

Finally free cash flow for the quarter was negative $22.9 million versus negative $9.5 million and the prior year.

Free cash flow compared to the prior year was down primarily due to the impact of lower operating profit from code that 19 and hierarchy annual cash compensation payouts, partially offset by reduce cap accent.

In conclusion, while coven 19 impacts will be fell through through the remainder of a year or teams are diligently working to make progress against me bases long term strategy and using this time to best position, They said for 2021 and beyond.

We continue to see progress on her innovation road map for both Poles and pulse robotics, while still investing court implant technologies.

You're also using this time to accelerate operational efficiencies within manufacturing and distribution.

With the goal of continuing to develop a world class supply chain that as a true competitive advantage.

<unk> <unk> streaming proud of the dedication of our employees that they have demonstrated during this difficult time or commercial teams are looking forward to ramping backup as soon as they can to help surgeons in patients as more and more elective surgeries reason throughout the next several months.

Thank you and with that I'd like to turn the called back to the operator to start Q. and a session.

Thank you will now be conducting a question and answer session.

You would like to ask a question. Please press start one on your telephone keypad. It confirmation tone wanting to Kate Airlines and the question Q. you May Prestart too if you let your another question from the queue for purchases getting speaker equipment may be necessary to pick up your handset before passing the Starkey. Please also note that <unk> participant one at the <unk>.

Two one question during today's Q. and a fresh at one moment people we pull for your question.

[noise]. Our first question comes from the line of Josh Chatting with counting company. Please proceed with your question.

Thank you good afternoon.

You know the the details in the update here and.

There's just hoping he may be able to just help us think about like like must so you're meant to <unk> seems like you started to feel the brunt of the elective procedures slow down in March.

A bottom in April and <unk>, <unk> <unk> recovery swing with any.

Any help you can give us in terms of how deep that that.

The depth of the at the hit in April was so we can.

I have a starting point to think about modeling out to the rest of this year.

And then just to follow up in that same vein is just in terms of Japan sounds good strong Christian Q1, there was just to have emergency in place there now.

When you're big International markets, and you've seen a dramatic shift as far in Q2 with the tit emergency in place thanks for taking the questions.

Thank you Josh let me, let me here, but the second part that'll put back over to map for both you get the first part Japan was relatively stable up to what we've seen more recently again I, we haven't seen as necessarily a significant drop.

From Japan as of yet having said that we've seen the the emergency situation there and from the the feedback gotten from our teams there suspects some slowdown I too early to tell what the magnitude will look like but.

Yeah, we're hearing something very similar the the that we had positive results comparatively in context of the rest of the world in Japan over the curse of the first quarter.

But but it seemed like situation there may be worse me, but it's too early to really put her finger on exactly what that a represented as far as the the bottoming out let me turn over to map our boat to to address.

Yeah. Thank you for the question Josh <unk>.

April definitely was a tough month forcefully you characterize it very similar to other med Tech companies really the mid March to end of April time frame is tough.

As you heard in the prepared remarks were more focused on the corridors as opposed to months I think it's frankly a bit dangerous to take what we saw in April and extrapolated to May and June because we have seen some positive signs in the last week or so where procedures are starting to pick up and so.

I would encourage you to think about it on a quarterly basis as your modeling it out with the second quarter, having the highest impact with continued but lessen the impact in the third quarter and then more moderate impact in fourth quarter, obviously very hard to predict very early on but that's how our internal model.

Thing is is manifesting itself at this point in time.

Understood. Thank you.

It's a question thinking.

The next question comes from the line of Richard Newitter with F.B.B. Leary. Please proceed with your question.

Hi, Thanks for taking the question [noise].

I wanted to go to the kinds of capacity issue that you you referenced earlier and and.

Yeah see I I know that we've we've heard from other companies were but you didn't <unk> performed or often did in the A.S.D. standing outside the hospital. The fact that alleviate potential problem acts for surgery to accommodate any any capacity constraints, so and I'm just wondering what percentage of your.

Sales or or or or surgeries are performed in in a nasty and then do you do you think that that percentage.

Could meaningfully began to shift in the near term and then just all assets on top of activity if you get answer.

How M.I.S. or minimally invasive procedures.

What's your portfolio definitely has a higher percentage of a exposure how how might minimally invasive procedures that lend themselves in the spine sector to to getting performed in in that setting. Thanks.

[noise]. Thanks, <unk> the that got them in most prepared to talk about this and we've talked a lot about our ability and the opportunity in the F.C., but I'll <unk>, Matt linked to comment on that.

Yeah. Thanks, Chris <unk>. So we we've long scene an opportunity around the ship inside of care from an indication to outpatient <unk> surgery, setting and I think you in your question you hit on a key point minimally invasive procedures, reducing the morbidity, creating more predictable intervention.

<unk> demanded a day a patient outcome in that in that setting. It's critically critically important we have enjoyed some success in that space characterize our our current sort of representation the spaces in the single digits as it relates to total revenue, but growing year over year.

I don't think there's any question that there'll be a ongoing shift two ambulatory an outpatient surgery settings. As a result of this crisis I think the question remains what that impact will be in spine. There are.

<unk> certain components as it relates to reimbursement that are still a consideration is also a consideration as it relates to you know patient safety and ultimately outcome and that's not something that necessarily.

Get meaningfully address in the near term. So I'm currently what you have it they backlog elective in schedule procedures across all settings, including it sees remember and and the <unk> in the midst of the crisis or at its peak the shortage in P.P.E. led to closure of at these as well and so think about.

Existing procedures that have more regularly and routinely been done any nasty setting there's a catch up there said not as if there's a necessarily a huge capacity for new procedures to shift to that setting I do think that that the surgery that are routinely done in that setting we'll see some uptake certainly to the extent you can.

Eliminate a burden for other procedures creeping into the impatient setting that then opens up capacity for the spine procedures, who we we we anticipate will will still predominantly being performed in that setting at least as we think of a mad the intermittent infusion procedures Ah because currently the largest buying the procedures we seen.

ASCII setting or actually on instrumented procedures like Laminectomy, then and Mike or distracting me followed closely by H.D.S., which are the cervical fusion.

Thank you.

Thank you are next question comes from the line of David Lewis with Morgan Stanley. Please proceed what's your question.

That's taken the question Chris I I appreciate the comments on that they already pipeline I just wonder is as it thinking about polls in robotics now is the eyes first half next year still a good way to think about polls commercialization and can we still see you know robotics first in man in the second half of this year and then I guess related these.

<unk>.

Changes in terms of how you're thinking about selling or price. She needs systems in terms of it uses based or leasing in light of yeah. What we're seeing out there from a cat backs perspective, thanks, so much.

And it takes David as far as the the time lines no material <unk>, but they need to timeline, we previously communicated with <unk> that.

We don't necessarily know the availability of doing evaluations, we don't necessarily know the availability of resources in realistic in relation to somebody regulatory pathways.

We're still banking our time lines with previously with previous paradigms right. So if if if regulatory approvals.

Become challenging because of Resourcing with that you know some of those agencies, that's not <unk>, but but generally speaking we're still holding to the previously for mentioned timeline as far as that pricing or anything.

Relating to I guess strategic direction of those of this programs.

<unk> is is always said and will continue to really stand by the fact that we want to be as flexible as possible.

Historically back in 2008 with housing Cry Crunch.

Impacted really the entire economy as well you saw a hospital stop spending capital and that you saw a lot of med tech companies evolve some of their.

Some of their approach and I I don't necessarily think the you'll see anything that different in this situation where capital might be constrained and people will deploy other means in order to place the capital for your volume commitments or other other unique placement programs, we've all along.

Said that we want to be as flexible possible that it'd be easy to do business with that so so large the not really rethinking. It just watching closely how this may impact the broader market and does I didn't give us any inside the how do we where most accessible coming out with gate.

Thanks.

Thanks, Dave.

Thank you are next question comes from the line of matter Nextseq with credit plus.

Question.

Hey, good evening. Thanks for a particular question one one follow up Chris if I could on the comments that you've made I think Matt may have also referred to this like the early positive signs in early early really may if you could talk maybe a little bit about you know the context of those coming back.

Because he just starting to come back you know what the logistics of protocols look like you know if folks are starting in first gear and you anticipate them to picking up the pace. It centres that have decided to begin doing you know any any sort of color like that'd be helpful. In at one follow up.

Mm.

I think there's the question I think I think as a as you.

Rubber mat linked to relates closest to this ribbon tracking this on a daily basis sports are met I'll, just say that you know the kind of the way. We're looking at this is capacities coming back on we know that anecdotally, we know that we don't know the magnitude of that so we're looking at data. There. We don't know the protocols that you mentioned, which Mac could get into what led.

Will have a a constraint of efficiency will that grade and ultimately at the end of the day and we don't know.

<unk> <unk>.

Sentiment. These are considered elective by by the industry or but they're not necessarily elective by the patient patients I think are in high demand up these procedures to really get back on the beach, but we don't know what <unk> what would what the what the receptivity of patients to enter into the market is to it. So why don't you had some color to protocol.

<unk>.

Yeah. So as stated previous thing Christmas tests on early positive signs the recovery like I I think the what are the key elements. When we think about recoveries is we're we're we're talking about it in broad terms, but but the reality is that they did that geographic variation is is.

Considerable right and understandably so based on what has been the impact of Kobe. It in the market today, where they with respect to their curve and or recovery and then what what impact it had on the capacity to health system and there's also a question of health system economics. So I I think that's one thing yeah. We we are extraordinarily mindful of and have a regular.

Cadence engagement.

With with surgeons and providers as well as hospital administrators and health systems is to try to understand what the impact is and what's the variation geographically. So there is there and unquestioned financial driver for both the providers and the health systems to get back to a more regular cadence I've scheduled.

An elective surgery. So that's that's a pot.

That being said is that even under the best case circumstances were not returning to operations or to a higher volume of operations and environment. That's coded free and so when you start to think about protocols across the service line. So operationally, how they're going to continue to protect health care providers, how they're going to protect patient.

And how are they going to continue to limit the potential impact of some type of secondary rebound is critically important and that's going to impact without question volumes and throughput at a service line level built there'll be inherently less efficient the good news as I see positive signs.

In terms of our teams ability to have access to support those cases, obviously with considerations that very geography by geography system by system as it relates to testing P.B.E. Those are all things were staying very close to where investing heavily into the safety and wellbeing of our own.

Yield organizations, which includes our our field day sales forces balls or clinical services organization in all of our global teams when best in environmental health or safety training as well as insuring that they have all the required protocols not just from the facility is that they're going to be entertained but also but we think is necessary to help protect them. So.

Those are all the things if you go back to to Chris is prepared remarks that the variables. We know in the variables. We don't know if these variables that we don't know exactly what the impact will be on surface line through put in volume.

Until they really start to ramp back up which is going to play out I think materially over the next day, let's save four weeks you know in made three to June and we could start to have a little bit of a better idea in the last season. When you know Chris types on as well, which is the patient sentiment and again I think what you're gonna see from a patient <unk>.

It's going to vary geographically and regionally and these regions or geography, where there's been a high senses of Kobe patients or at eight even within a given marketed gab certain facility that have had a high senses of computation understandably I think you're gonna see a reluctance from from patients to want to go to those facilities.

Potentially push out <unk> rescheduling of these cases.

Good news as in in practice it as an individual providers, we've talked to where they've actually begun the active engagement of patience for rescheduling, even in the instances, where they may choose not to schedule like Kate today, there there's simply different it out you know slightly further into the future, but still in many instances if not all instances discount or a year.

I just want you to let things play out a little bit further site I think that's that's that's a very good sign as well, but we're getting a lot to see out plays out.

Sure and if I could just a it gets in a related as as you as you to figure out ways. It put proctors and and your people in front of surgeons in in in terms of training and introducing him to X., we fix your other new products.

I know, it's early but I guess, what what kinds of capacity impact you you see or will you know capabilities D.C. in terms of using.

You know remote capability virtual capabilities to to kind of keep those training and interactions going.

Yeah go ahead, you got this one's yet.

Yeah. So it was reference Austin prepared remarks, and like I, just want to give a kind of credit to our global marketing team or or global product management team and our clinical professional development team in in a very rapid manner under you know pretty dynamic it on certain circumstances. The teams pivoted quickly and developed.

Very robust digital platform to be able to continue to push out training and education to providers in candidate to our teams around the globe and so we are actively engaging surgeons and the most beneficial ways in which to use these platforms.

Training education, whether it be Webinars series case debates structured lecture series of also had ongoing conversation with many of the professional societies that we normally partner with who are also having to pivot to to digital platforms because of the inability to do in person meetings and trainings and so I'd say.

Thus far in what has been a relatively rapid turn around the teams than a tremendous job to leverage internal resources is going to continue to develop them and then I think one of the key pieces frosted to continue to.

Gather feedback from providers as to what's the most effective and looking at things start to open up over the coming weeks and months, we'll also <unk> back to encourage and learning where appropriate and where save both here in San Diego and as well as potentially doing a more regional approach and I think and all that stuff.

You'll see a they're more tailored small group are you know you know unlimited numbers in the environment, maybe as opposed to some of the larger courses that we and others, including the societies have done in the past.

Great Thanks to much.

Thank you all next question concerning the line of Karl Rove can't afford please.

Great. Thank you very much for for taking the questions here I I understand the the the hesitant to provide you have some commentary with respect to the k. size in a month basis, but maybe just.

Help us understand.

I think oh, some the previous commentary from other management team was just some of the survey work at this we've done is he had seen case declines in the U.S. in the ballpark you know the 70% range to the <unk>. So I guess because you know what is it it does that seem fair.

And then that the number two is.

When you've seen improvements through the first week of maybe kind of help us understand what are the types of cases, you're seeing as it is a more of the cervical it's in the less complicated cases or are you able to get some of the big Midi cases, where where newer really excels in the X. 365, just try to understand what the pace of recover it looks like it specifically where you're stripes are.

Yeah, I mean to that I I think what we saw in April was probably aligned with what you're getting from others.

An outlier at all I I think so ballpark that's that's in the the general ballpark as far as the types of procedures.

Matt one of you comment about what we're hearing.

Yeah, So as we work into recovery from a types of procedures I think that the biggest deciding factor in in that type of procedure is the patient profile and risk specifically as it relates to age another co morbidity. So again you can imagine a <unk> you know and appreciate in this environment those would be the primary concerns in so.

Yeah, we are seeing some impact with respect to older patients or other high risk patients, but the good news is we are starting to see resumption of a more regular mix in that types of cases and and that includes in some instances Ah you know some of the larger.

Construct or deformity cases, particularly in the adolescent pediatric fields, because again, you have that patient population, who in many instances otherwise healthy and less of a risk potentially in this environment. So I'd say still still very much early days and we'll go back to some of that <unk>. The qualifying comments I made earlier that I think.

There'll be a judicious and cautious approach to the return to surgery and there'll be sort of that very close watch in measure to any potential increase in spite <unk> encoded in in the ability to maintain you know more than adequate capacity within the health systems to manage any potential secondary.

<unk> so that in turn I think translates to a relatively cautious approach, but we are seen a more normalize mix of case is starting to flow back through with the exception of some of those high risk patients.

Yeah kind of all this is Matt her go the other thing I would add is this you know as we reflect on what happened in the first quarter. If we if we take the coded impact on our revenue you know our general business and the first core 80 per cent of it was U.S. approximately in about 20 per cent internationally.

So it is we think about cobin impact during that time frame, we estimate about 90% of the impact was in the U.S. and only 10 per cent moves X.U.S.. So as you're thinking about your modeling it's important to distinguish kind of that 80 per cent U.S. business and what's going on there, which is not necessarily correlating with the 20 per cent international revenue.

I just want to make sure you're modeling it you're also considering that and you're thinking.

Thank you that's very helpful.

Thank you are next question comes from the line of Matthew O'bryan with Piper Jaffray. Please proceed what's your question.

[noise] afternoon. Thanks for taking the question you know a big part of the new basis story has been conversion adoption. So given that all the docks or shut down at the moment have you been able to talk to more doctors convert more doctors virtually than you were able to do even a in person or how does that look as we kind of.

The rest of this year as they're going to be pretty busy doing as many surgeries as possible and then you're sitting with you know over a billion dollars up capital you've got a ton of really small providers out there that are not nearly as well capitalized as you are what kind of opportunities are you already seeing or you see more you know more rather.

Amazed more business development opportunities Oh, so what opportunities are you see to take a meaningful market share coming out of this from your smaller plus well capitalised companies. Thanks.

Yeah. Thanks to the question, let me take a shot as far as far as the C.B.D. in converting search probably too early to tell the only thing I would say that is that I heard from the C.P.T.C.P.D.P. in that being the level of engagement.

Has been very high to the extent that there's learning is that we're taking from this situation.

And basically will likely implement even when this crisis passes you know the the vetting of the the the surgeons that the the quality of the of the surgeon engagement that we're getting up front has been it's been very good which hopefully goods as good signs that we will be.

You have more efficient and the conversion rate of the search is that we're actually engaged with there's still a hands on component that met spoke of that we need to make sure we follow up with.

But I could say the surgeons that have engaged that's over this period are likely farther along than previously when we would likely have them come on and do hands on and some.

<unk> on on location so.

I think I think time will tell but but from the C.P.D. team I would say that they they are already commenting on the level of engagement has been surprising. So so maybe this helps us become actually more more targeted on the right profile of surgeon and and they have a better betting mechanism, but but it's early to to.

<unk>.

As far as your second question you know, we we we've <unk>.

<unk> well that that Matt are horrible spoke of earlier, yeah, we wonder to be as flexible as possible or how it looks flexibility as possible, but coming into this year. We we obviously continue to really look at at our ability to drive M.I.S. to look to continue to build out a portfolio and cervical and and other other sub segments like adult pediatric deformity.

We continue to look for opportunities to further are enabling technologies, including access other potential technologies to support poles or those technologies that may enhance our robotic capability. So you know not going to speak to any specific given a targets as of yet, but I would just say is this does blow.

<unk>, we will be a will be as a aggressive as we can as far as Oh. This allows us to take share I don't I don't know that it necessarily changes anything I do think that the dynamics that Matt spoke of earlier are somewhat connected to protocols put into hospital. Some of the things that we are hearing.

He has reduced foot traffic.

That be a consolidation catalyst you know we hope it will be we're preparing ourselves to a lot of the commentary that that that lake talked about earlier and and ensuring that are reps are are trained with P.B.E. that we've got to testing protocol in place. There we're partnering with administrators to ensure that were as as as a line.

When supportive of their efforts as we possibly can be.

And and when the broader portfolio question comes into consideration that may give us an opportunity. So we're we're poised to take advantage of it we don't know what the future holds yet, but we want to be as aggressive as you can on on supporting our customer service and foremost and then if this yields opportunity for us to broaden our portfolio will take full advantage of opportunities as.

See a line to our strategy <unk> will be ready to do so.

Yeah I met the only other thing I would just add on to to <unk> comments is you'll notice that you know we continue to spend a healthy clip in r. and d. a bit higher than where we were this time last year.

You know the beauty is is that we do have capital available to invest there and so if others are slowing while we're keeping her foot on the gas pedal no longer term that should play indoor strategy.

Thank you.

Thank you aren't next question comes from the line of Kayla <unk>. Please proceed what's your question.

Okay. Thanks for taking our question so that far Covanta you know I think you had said that you would spend more heavily in the first part of 2020.

In areas that would help to support you know the ability to drive longer term profitability. So you said you know you're producing expenses today and that makes sense to me, but I am wondering sort of how it's those higher plans may have been impacted and and how that then impact your longer term do you on March and expansion things.

Yeah, My car, but what are you pick though.

You bet. So what I would say is we really focused on pulling back on things that we don't think will impact the longer term prospects of our <unk> longer term strategic plan.

You know traveling entertainment for instance, obviously dropped as a result of code at 19, and and you know we're gonna have to be flexible. There is the market kind of comes back you know, we <unk> working with a lot of consultants right now because obviously you can you can differ that without.

Impacting the business.

So a lot of the measures that we implemented we don't think are going to impact the business long term. It's the reason I'm. The last question I came back to reiterate that we are investing in r. and d. incrementally a bit more this year than we did last year.

You know, we're pulling back on things that we don't think are gonna material impact or merging profile for the long haul.

I think.

Yeah.

Comes from the line of Robbie markets with J.P. Morgan. He's proceed what's your question.

Great. Thanks for taking the question maybe to follow up on <unk> question, a bit and die that bit deeper.

I was really impressed with the gross margin and level of expense cuts you were able pup and first quarter.

We think about the model here you said you know 70% revenue decline in April isn't terribly that far at at the ballpark you know maybe help us understand what's going on with your sales force are you changing incentive programs here are you setting minimum floors are they getting paid down with.

Procedures, how are you for allowing people in the manufacturing plant just give us any detail you can or even just a high level framework to think about some of the P.N.L. effects. You know one one just a bit more behind first quarter because it did come in you know really nicely and then to how we think about going forward.

Here with sales down in that territory. Thanks.

Thanks, Robby we've listened we've taken I lead to the very aggressive stance early on.

And rightly so we we implemented the compensation reductions for our board for our executive officers, we put a very strict control on our discretionary expense across the organization. We did make some adjustments are <unk> capacity to ensure not only held the bar employees, but also.

Making sure the inventory levels were appropriate to the volumes that we saw we've also taking some measures to write a workforce I think in a thoughtful manner and in most cases directly related to decline elective surgeries.

We have done some burrows, but in a thoughtful manner and again is directly related elective surgery as far as our our sales channel. We've said all along we want to maintain the health and safety of our employees, where we can win a maintain as much as a as possible of their livelihood in certain certain population of employees.

Are specifically impact it straight commission employees hourly employees.

So we have taken measures to support those employees. During this time to the best of our ability.

You know your your question that sort of is is the question of the day is okay. So what what's next and I think what's next is directly related to what happens next we want to see elective surgeries come back on line and get a sense of how that how that slope of that.

Line looks over the next four to six weeks.

What that projects to us into third or fourth quarter, an old way into 2021, but but but that'd be very clear. We we the business continuity requires us to ensure we continue to have a Bible channel.

Requires for us to continue to make sure that we have a viable operational capability.

We think strategically maintaining our r. and D. pipeline is an absolute in this crisis and we'll do everything we can over the course of the next several weeks and months as long as it takes to maintain our focus in those areas to to met horrible as earlier point. We we we've tried to do everything we could.

In the short term again personal former student tech and protect our employees within our budget Auto company.

But but the but future of what we'll have to do will really be dependent upon what unfold over the next two two quarters and so we're we're poised to to attack and support but we have to see how things out how things unfold over the over those weeks and months.

Robbie dealing with thing I would add the only other thing I would add to your question is you ass kind about gross margin in there and how it relates to operating margin for gross margin. We're gonna have pressure for sure in the second quarter, just with you know some of the things we're seeing with N.T.S.

And the the six costs space that we have there so margins will be under pressure in you know the coming.

Munson quarters, but we do think that will last and buried in our results in the first quarter. We still started we still continued to see savings in Ohio that were meaningful to us they'll open the team who knew your supply chain. They are taking full advantage of of this period here to get US you know.

Really set up for a meeting demand as we move forward into the future. So it from a gross margin perspective, I would just encourage you to dial that into your your thinking also I wouldn't say is you're thinking below the gross margin line. The one thing I would highlight is that we saw about 10 million in R.S. I'm in a.

That are kind of one time or is that it's related to start comp in a few other items that are not going to repeat as we go into future quarters. So is your thinking about the bottom line operating margin just take that 10 million into consideration as well.

Already have interrupted you mark.

Thanks, a lot.

Thank you.

We agreed the end of our question and answer session I would like to trying to call back over to Mr. Barry for any closing remark.

Thanks Michelle.

Just say thanks, everyone participating in already school today I Hope you you and your loved ones. They stayed unhealthy during this time and we very much look forward to speak with your next time. Thank you.

Yeah.

Thank you. This [laughter]. This concludes taste teleconference, you need to connect your line, but this time. Thank you for your participation and have a wonderful day.