Q1 2020 Earnings Call

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Good morning, ladies good morning, ladies and gentlemen, and welcome to the Zimmer Biomet first quarter 2020, <unk> earnings Conference call.

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As a reminder, this conference is being recorded today May 11 2020.

Oh in today's presentation, there will be a question and answer session.

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I would now like to turn the conference over to Keri Mattox, Senior Vice President Investor Relations and Chief Communications Officer. Please go ahead.

Thank you operator, and good morning, everyone. I Hope you are all well and safe welcome to Zimmer Biomets first quarter 2020 earnings conference call. Joining me virtually today are buying Hanson, our president and CEO and CFO Suky Upadhyay.

Before we get started I'd like to remind you that we recently made slight changes to our revenue reporting format as discussed on our fourth quarter call. These changes are designed to further align with the company's recent reorganization and argues in our first told them don't.

Reconciliations are available on our website.

Additionally, our comments during this call will include forward looking statements actual results may vary materially condos indicated about forward looking statements do a variety of risks and uncertainties.

Please note we assume no obligation to update forward looking statement, even if actual results or future expectations change materially.

We refer to our FCC filings for a detailed discussion with you.

Uncertainties. In addition to the inherent limitations of such forward looking statements.

Actually the discussions on this call will include certain non-GAAP financial measures reconciliation of these measures for the most directly comparable GAAP financial measures is included within the earnings release sound on our website as gonna Biomet Dot com.

I'll now turn the call over to Brian Brian.

Thanks, Kerry and I think everybody knows that were in different locations right now so I'll just apologize upfront for any of the awkward handoffs that we have between each other for this earnings call in India batch cellphone connection indoor dogs barking in the background I'm sure everybody. She used to that by now I. Just also want to say before I get.

Started that I, certainly hope that you and your families are healthy and safe and trying to get used to this unusual environment that we're working hand in living in right. Now I can tell you that I've been home work consecutive days with my family then I have I'm pretty sure last 20 years and I know for sure.

That they cannot wait for this to be over because they want me to get out in the house. So again, hopefully you're managing through this as best as possible certainly gives us an opportunity to learn things about ourselves that we did not know before I indoor families. Given the fact that it is so unprecedented when we think about cobot, Nike and really just thinking through it there really is no.

Proxy that you can look back on that would give you know the pathway forward as a result of a you know looking at that distort you. There's nothing like that compares to this I mean, when if we ever seen to global pandemic shut they should be the world down and as a result at the significance of it obviously, we want to make sure that we spend a lot of time talk.

Think about it today on the earnings call I'll spend time walk you through it so people spend time, giving his view of it well, let you know how it's impacting GB what we can give you relative to what we think will happen in the future from here, but the fact is there's going to be a lot of information moving enforce particularly in the queue in a I'm sure I just want to make sure you walk away from the call with at least.

These five key points because at the end of the day I truly due to leave these will be the most significant in meaningful points that we have throughout the call.

The first one is really that Zimmer biomet myself included have been very focused on ensuring that our number one priority through all of this has been the safety of our team members and I'll talk more about this in a minute, but I'm very happy with the momentum that we've picked up here very early to make sure that our team members are safe.

And the amount of energy that we've put behind this the second thing is that we have a high level of confidence that we have adequate liquidity and financial flexibility to manage through this storm I would tell you that im very proud of the worked it took he and his team did you make sure that we backstop the organization aggressively right out of the gate and Oh, we do have a high level of kind.

Confidence in our liquidity and financial flexibility as a result and number three we also have a very high level of confidence in the recovery I'm very sure that a majority of these patients will come back into the funnel. The biggest variable right. Now is just a timing of that but just know that we have a high level of confidence the recovery will happen and.

Many many of the patients that are being deferred now we'll come back into funnel. The fourth thing is that we will continue as an organization to invest in our key strategic areas in research and development and commercial projects. This will not deter us from continuing to double down in those key areas and I'll talk more about that in a minute doesn't mean that we won't save money.

Because we have aggressively but we will be committed to spending money in these key strategic areas. In the first thing is that we are just given the work we've done over the last two years to reshaped. The company. We are better prepared right now to deal with this challenge than we would have if it was two years ago as a matter of fact, we feel confident that given that reshaping of the company.

In the position we're in we can not only come through covert 19 will come through any better position as a result of the work that we have done so really those are the five things safety is our number one priority, we feel confident in liquidity and financial flexibility as a company we have confidence in the recovery, we will continue to invest in key strategic areas.

And we're very confident we will come out the other end to covert 19 in a better positioned than when we started okay. So let's start with safety and I'm just give you an overview of why I feel so confident here interestingly enough last year as a part of a broader risk mitigation kind of a planning process that we're going through.

Crisis management planning process, we actually did put together a a comprehensive global pandemic plan I know it sounds inconceivable that we did this literally months before the pandemic occurred, but we did have it in place and as a result to that to the extent possible. We were is ready for covert 19, as you can be and we mobilized that plan and the most.

Well work streams right away very early on in January actually and that's been from my perspective, a significant game changer for US you know I also think it's our ongoing transformation of CB that it's really been key in this whole process. We already had a means to tackle this because we have stronger team we've been able to put us.

Hunger team together over the reshaping over the last two years, we had a very active and engage no business right now and we had a very supportive culture. All those things are paramount to being able to get through a challenge like this and we move to put new policies in place even before the covert 19 reached pandemic status very early on in the process.

Yes, we began to shift immediately to work from home policies no travel policies, we did not allow visitors in our distribution sites or manufacturing facilities. We didn't want visitors entering the sites where are essential workers were not just doesn't make any sense right want to keep them is isolated as possible. We did that right out of the gate.

Had no large meetings and we had broader social distancing practices in those sites that we were continuing to work in so again I really do think that that we moved aggressively and took a very proactive stance because we had the road map already laid out to that planning process. I also want to just thank all of our team members in especially.

Our manufacturing distribution in commercial teams, who have gone just truly above and beyond during this challenging time, we still have team members who have been out into hospitals every day, there's still there making sure that health care professionals that we have that are out there doing procedures still have what they need to be successful in those surgeries.

And it's just impressive really truly on the front line to make sure that we move patient care forward. Our team has also adhere to new safety protocols, and it's made changes to our sites and production lines and where possible obviously, making sure that we're doing the work that we do in a safe and effective manner given the guidelines that we have right now for covert 19, they've also man.

It's temporary facility shutdowns.

Basically proactively modulate production, where we need and all the while they've done all of this without disrupting our overall supply chain. So needless to say I'm really proud of how the Zeevi team is taken safety so seriously out of the gate and his work to achieve goals to keep not just our team member safe, but also our customers our partners.

And our patient safe as well.

Okay, moving on to number two and our confidence around to be adequate liquidity for the business and financial flexibility I would tell you just right out of the gate as we saw the challenges associated disruption associated with covert 19, we took very aggressive measures to contain costs and also obviously to support the liquidity or the company.

One of the first things that we focused on was making sure that we refinanced our 1.5 billion.

That's it came due on April 1st at this year and then soaking team went to renegotiating, our 1.5 billion revolver and then shortly after that secured an additional 1 billion credit facility as an additional backstop and so again, just kudos to suky and his team to make sure. They got right out ahead of this and make sure that we had that financial flexibility.

And the liquidity strength in the organization.

Additionally, we've continued to execute on our previously announced restructuring program as you may remember.

This program was focused on streamlining our structure and just driving efficiency throughout the organization with the ultimate intent to allow for margin expansion overtime, which we committed to while also allowing for investment for growth really the only way that we could have both those things happened in tandem was to be able to put this restructuring plan in place.

Actually having the restructuring plan in the working group in place to moving forward.

Actually helped us to quickly pivot and aggressively cut costs as a result of the cobot 19 challenges using the very work streams and really the mindset that we had in place for this program.

We've also modulators to schedules in the output across our manufacturing facilities no keeping an eye on cash consumption with inventory, while also positioning the business for business continuity and need to make sure that we have the inventory that is needed today and also we have the inventory for the recovery when it comps and finally, we implemented temporary base pay.

Reductions for all of our salary team members of about 20% and we did 25% cuts for executive teams and then up to 100% reductions to the annual retainer of our board of directors and as you probably have heard up tick in personally 100% reduction in my pay during this during this period, okay moving onto.

And number three our confidence in the recovery what I'd tell you just first and foremost the momentum that we had coming at a 2019 absolutely carried into the early part of the first quarter, obviously pre covert 19, but we were performing at or above our expectations pretty much across all businesses in regions now.

Theres no doubt that the pandemic is absolutely change the landscape for everyone, but for CB, specifically it has significantly impacted our business.

Probably more than most just given our dependence on elective procedures. We have 80 plus percent of our global revenue that comes from elective procedures. That's the bad news. The good news is as I said, our business was strong before the pandemic and the good news is we do believe that these patients will in fact come back into the funnel.

The fact is you can certainly delay. These procedures is no question about that but the critical and really often life changing nature of a knee procedure hit procedure.

Back surgery, or other bone and joint procedures make us confident that these patients will ultimately return to the health care system.

And the fact is we've seen that you know we signed an exact proxy, but we have seen when natural disasters occur or other market disruptions occur in patients get deferred they do in fact to come back.

The majority of those do come back into the the funnel and this is obviously a significantly different than what we've seen in the past just given the volume of deferred procedures. There are other variables that make it harder to determine when they're going to come back. The fact is are you don't even know our capacity will have to be something that we consider in the short term with bringing these patients back just given the number.

Patients, we're going to how to think about the access to PB indoor testing kits and we're also going have to think about this psychological.

Viewpoint of a patient on when they're ready to come back, but I can tell you right now as we've done our own analysis and we've done extensive outreach to our customers. The one consistency is that everyone does believed the majority of these patients will come back. The question just becomes over when that's going to happen.

Based on our modeling right now and really our Q1 performance in our April form it's what we would say if we're trying to put some color to this is that you know clearly Q2 is going to be the most challenging quarter in April as a month will be the most difficult month, we truly do believe after April were going to see sequential improvement on a month.

A month month to month basis, and on a quarterly basis until we get back to normal, but we definitely see April as the most challenging month and then sequential improvement from there okay moving on to number four as I said, we're going to continue to invest in a dedicated and disciplined way in key R&D and commercial projects were.

Highly focused on the high priority high growth areas of our business and we're making investments to continue to drive innovation in those areas. The fact is when we look at rose and or any other robotics related initiatives that we have these are key priorities and our investment if anything will accelerate right now and certainly the focus on these projects.

And we're going to continue to build out our dedicated specialty sales teams and other high value commercial programs. These things will not stop during this time.

In terms of supporting innovative commercial initiatives, we've launched recently the my mobility Ellie.

Which is a change to my mobility to make it more limited edition and lower cost version of my mobility, but really built for rapid deployment to help customers and patients respond to the needs of the cobot environment right now my mobility, we and our exclusive exclusive partnership with Apple can be used by surgeons and care teams.

To actively but importantly, virtually support and guide patients preparing for for the procedure and recovering from the procedure at home.

This is an innovative in really alternative solution to continue delivering pre and post op care and reduce unnecessary in office in hospital visits and was perfect for this particular time and providing all the while through this mechanism my mobility, Ellie providing real time data on patients progress.

Yes, so that surgeons know how that patient is doing it offers education. It offers video guided exercises for rehab programs to be able to do that at home to not have to have that personal contact with with rehabilitation and provides direct video picture and text based messaging right to the patient again, allowing that patient and surgeon canal.

I wouldn't be there, but also allowing us to happen with the new social distancing policies that are in place.

Another great commercial initiative that that was put into place was to make sure that when double iOS conference was cancelled in March that we immediately got to putting together a virtual and a virtual reality double double iOS experience, where healthcare partners can actually come in to the booth again virtually.

Through that virtual experience. They can learn about the products that we would have shown a double iOS. They can talk directly with our commercial teams through that virtual experience and they can even sign up for the trainings that would have been there other trainings that we're doing online as well and I can tell you that added the gate. This has been very well received by our surgeon partners.

We've had over 7500 site visits in the first two weeks alone. So again, we're going to continue to stay focused on investing in those areas that are important and strategic to the organization and we're going to make sure that we continue to bring innovations that matter right now during the pandemic and finally moving onto the fifth takeaway.

We truly do believe that the work we've done over the past two years to reposition the company for success, absolutely better positions us to be able to not just to get through covered 90, but to be able to emerge on the other side in a better positioned than when we started this is clearly a challenging time that will test I think.

Obvious even the best teams in the most innovative companies and I know for sure is that over the past two years, we have made real progress in transforming our culture, we valving our business strategy, improving our financial performance and we have vastly improved our manufacturing supply in inventory management.

Based business is strong and we have a talented and dedicated global team that positions us very well for this challenge we believe that this progress interestingly, our proactive stance in our financial stability also give us key competitive advantages right now during this challenging time that could open up new opportunities not just to.

Jason but also grow our business and our share position in the near term.

And with that I'm going to turn the call over to city to get into more financial details.

Thank you, Brian and good morning, everyone I hope that you and those both you are healthy I remain.

I'd like to start by saying that our underlying fundamentals remain strong.

Call that February we announced a strong close to 2019. The topline results ahead of expectation leveraged earnings robust cash generation.

Continued de leveraging of our balance sheet.

Welcome to 19 has had and we'll continue to had.

Nick and unfavorable impact in the near term, we remain confident in our ability to navigate these challenges and a return to our positive trend over time.

Let me turn first quarter revenues.

Net sales were just under $1.8 billion reported decreased 9.7% from the prior year and operational decrease of 8.9%.

Moving the impact of foreign currency changes.

Moving forward and less otherwise noted my commentary will be on a constant currency pace.

Prior to cope with Nike and reaching global scale late in the first quarter most of our businesses and markets were trending at or ahead of expectations.

However, the deferral of elective procedures as a result of hospitals redeploying resources to covert 19 had a meaningful negative impact on our first quarter performance.

Coffee this impact became most pronounced in mid to late March again revenues for the first quarter were down 8.9% versus the prior and down approximately 60% in the last two weeks of March.

That's right extended into the first part of Q2 with April revenues down about 70% versus the prior year as we observe the impact of pandemic intensified spot market.

I'll break down the overall revenue trends I, just mentioned starting with regional performance and then move to our businesses.

Beginning with Asia Pacific region decreased 9.5% in the quarter.

We began to see procedure deferrals in early February at varying levels across the region at various times during the quarter.

That's it was one of our first markets to be impacted I'll provide more color, China, which represents about 20% to 25% of the regions revenue.

Here, we observe the largest earliest decline.

Procedures down 75% to 85% from early February mid March.

The six to eight week period represented the peak of deferrals and sets that theaters in China has steadily increased.

Sitting last week, the first quarter at about 40%, though.

So we saw some positive trends in China in the later part of the quarter.

In April try to continue to improve and its averaging procedures being down about 25% steady weekly improvement.

While China experienced some decline.

Pat our largest market needs that they did not see immaterial impact from covert 19 in the first quarter.

However, there has been a modest decline of procedures the country announced the state of emergency last month.

In April procedure and revenue in Japan are down about 15% and have been stable at that level.

We remain cautiously optimistic that deferrals will not approach to levels, China at the Japanese government, that's not a now.

Nor have we observed or seen a widespread deferral surgery and the four or so weeks state of emergency was put in place.

Cross all of Asia Pacific in April that deferral of procedure led to revenue being down about 25% versus the prior year.

Moving to unveil.

The region decreased 11.7% in the core.

Cross EMEA, we saw some variability in the offset and timing of coking 19.

Two profiles emerging.

One countries impacted more severely which represents more than half of the region.

Including countries, like Italy, Spain, France, UK and others.

We saw a significant reduction appreciate your starting in mid March.

Exiting the final weak quarter down about 80% versus prior year.

Two contracts with a more moderate.

This represents the remaining portion of the region and includes countries like Germany, Austria, Switzerland among others.

There we saw reductions of about 50% the final weeks of Q1.

The level of impact in these markets continued into April with both groups observing further decline.

Overall in April we saw EMEA procedures or revenue down about 75% versus the prior here.

While we've seen some recent occurrence and policy actions in many parts or EMEA, it's still too early to tell what level of impact. This will have on revenue uptick in these markets.

Lastly, the Americas decreased 7.7%.

Here, the cobot Nineteena pack ramped up materially in mid March with the U.S. shutdown and with federal and state governments guidance for elective procedures.

The final per week up the first quarter the region saw procedures or revenue decline about 70% of prior year.

Within the U.S. gate for broadly impact that it about same level.

Through the month of April we continue to see a decline in procedures with deferral rates of about 75% to 85% and revenue being down about 80% versus the prior year.

Most recently many states are taking positive steps to reopen elective procedures with the vast majority expected to do so by that Matt.

It's too early to determine the wrath of procedures and space, but this is an encouraging sign.

Let's turn to our businesses for Q1.

Our global knee business declined 8.3%.

Prior to the impact of covert 19, we saw strong performance and category driven by improved operational execution and the continued positive lots of persona revision.

Rosa contributed to sales early in the first quarter Cobot 19 negatively impacted overall capital sales.

Our hits business declined 9.7% in the first quarter.

Underlying performance and hits prior to cover 19 was solid due largely to continue to watch traction for Apple near complete.

Sports extremity and trauma sales declined 5.8% Q1.

The first quarter decline was not as pronounced as a knee and hip primarily due to the trauma patients, which is less selected by nature.

However, we did experience soccer travel market due to a generally mild winter and lower activity as a result of the global quantity.

Looking beyond Q1 for revenue.

As you know we withdrew our 2020 full year guidance on April.

Impact of coking 19 continues to be fluid and there are multiple market dynamics and variables were unable to quantify.

Given the current environment, we will not be providing financial 2020 guidance, we do want to share information insights into our business that might provide shaping our revenue expectations for the remainder of the here.

We expect to see a sequential painting, a procedural deferral rates in the second quarter relative to the first quarter.

As I mentioned earlier, we observe a consolidated revenue decline of about 70% in April when compared to prior year.

To recap in April by region, we saw declines of about 25% for Asia Pacific about 75% for EMEA at about 80% for the Americas.

Within April we observe fluctuations by market throughout the month with many remaining stable in some slightly improving their revenue ramp.

As a result, we project, maybe similar or slightly better than April with an improving trend in June as countries and states reopened and ticket to wrap up elective procedures.

We currently anticipate that the sequential improvement will continue into Q3, and then again into Q4 thats procedures retire.

But the rate level of improvement remains fluid.

Also we do not assume a significant recurrent related to covert 19 later this year.

While we are encouraged by the recent leading indicators our revenue trend could vary materially from the profile I just provided.

Turning to our PNM and liquidity.

We're taking a disciplined and proactive approach to mitigate the earnings that packed with a pandemic intend half for liquidity profile.

However, coven 19 will continue to put pressure on our earnings and free cash profile for the year driving significant deleveraging versus our prior expectations.

In terms of our first quarter results, we reported GAAP diluted loss per share for the quarter of $2 40 success.

And just alluded to earnings per share of $1.20 cents in the prior year period.

Adjusted diluted earnings per share were $1.70 stuff.

Fair to $1.87 cents in the prior year.

In addition to the operational drivers that I'll speak to as part of our adjusted results.

GAAP earnings per share in the first quarter were negative and lower than the prior year due primarily to goodwill impairment charges related to operating segment changes.

At the lower future cash flows pandemic.

In addition, GAAP results were impacted due to higher litigation expenses and restructuring charges related to the restructuring program, we announced earlier this year.

For additional commentary on GAAP results. Please refer to our first quarter had Q to be filed later today.

Turning to our adjusted results for the quarter earnings per share were lower than the prior year driven by decreased revenue.

Adjusted gross margin was 72.7% or 60 basis points higher than the prior year.

While gross margin was higher in the first quarter.

As previously guided we expect pressure on overall gross margins in 2020.

Gross margins were not significantly impacted in the first quarter by Coker 19, as the most pronounced impact it's not sell until late in the quarter.

However, cobot 19 will put additional pressure on gross margins for the remainder of the year due to less favorable mix and lower fixed cost absorption at the result of decreased revenue.

Adjusted operating expenses were 831 billion or a decline of 7.6% versus the prior year.

Key drivers with a lower spending were reduced variable selling expenses related to lower revenues.

Early impact of our restructuring program announced earlier this year add additional cost reductions as a proactive measure to deal with the pad debt.

We were able to flex quickly on Coke 19 related cost reductions in the first quarter by leveraging the restructuring program already in place.

Incremental cost reductions we took in March to deal with a pandemic will have an even larger impact.

You too.

Overall, adjusted operating margin for the quarter with 26.1% 50 basis points lower than the prior year again, driven by lower revenues.

Moving beyond the operating margin and that's a 51 million with down.

Prior year through debt pay down through 2019, and our adjusted tax rate was 15.7% in the quarter lower than expected due to the APAC certain favorable discrete items that we do not expect to repeat through the rest of the year.

Moving to cash and liquidity.

Given the unprecedented challenges facing us we've taken a number of steps to enhance our liquidity profile, including securing an additional credit facility backstop.

Many covenants for greater operating flexibility.

And moderating cash expenditure in the near term.

We ended the first quarter with cash and marketable securities of about $2.4 billion.

And we generated approximately $325 million free cash flow in the quarter.

Our ending cash position with higher than normal gets the execution of a $1.5 billion of new senior notes in early March.

So far for years to term out a $1.5 billion senior note maturity early in the second quarter.

You neutralized for the timing difference.

Underlying ending cash and marketable securities was about $900 million at the at the first quarter.

In April we secured additional $1 billion credit facility that will be in place for this calendar year.

And we have our existing $1.5 billion credit facility that was in place prior to cope with 19.

Providing cash and our available credit facility, we have over $3 billion of immediate liquidity available to us in the near term.

The credit facilities will have a gross leverage covenant of 5.75 times for 2020, instead of the 4.5 times covenant in place prior to 19.

Also both facilities remain on track.

For more details about the new credit facility at the amendments to the existing credit facility. Please refer to our form 8-K filed on April 29.

The steps, we've taken should position us well to deal with the near term challenges and set us up for strength through the recovery.

Related to liquidity, our capital allocation priorities remain distant with what we outlined earlier this year.

But in the near term, we will focus our energy on navigating the challenges of the pandemic.

Strategically prepared can meet demand at the end markets recover.

In terms of RPL for the remainder of 2020, we do want to provide some broad but help me think about progress here.

Moving forward the majority of our remaining cost base effects in the near term.

As a result of deeper revenue erosion, we expect margins will be significantly impacted the next few quarters down from Q1 and negative in the second quarter.

If the revenue trajectory improved in Q3 Q4 actually project.

We anticipate that margins and earnings will also approved.

But earnings improvement May lab revenue improvement as we plan to increase our investments.

Prepare for market recovery.

Free cash flow should have a similar profile, earning.

We do want to remind you that the situation remains fluid and these comments represents our best estimate at this time.

Summarize our underlying financial fundamentals remain strong.

Taken prudent steps to enhance our financial flexibility and liquidity profile.

I'm proud of how that VB team has responded the crisis.

We believe we're well positioned to attract talent late in the recovery phase and accelerate our growth profile over the long term.

With that I'll turn the call back over to Brian.

Thanks for any closing it's clear that the impacted cobot Nike is real.

And obviously material for CP, but we do think it's also clear at GBS position to address the challenge and again, if I can leave you with those same buy things I just want to make sure that we get these points across as I think you've been able to here, we absolutely feel confident in our ability to keep our team member states and that will remain our number one.

Priority as an organization.

We have very high level of confidence in our liquidity and financial flexibility to manage through this challenge.

We have confidence in the recovery because just a question of the timing of that recovery, but high level of confidence in the patient being there.

And we will continue to invest in key R&D and commercial projects. The fifth cases that we truly do believe that given some of the changes we put into place as an organization over the past two years, we will come through cobot 19 stronger than when we entered.

What we know is we have the absolute right teen CB and I want to thank each and every one of them through the amazing job, they're doing right now we're highly confident that we're positioned to deliver value to our customers are patients in importantly to our shareholders and with that we're going to turn the call back over to carry can move into acumen a portion of the call.

Thanks, Brian before attack acuity Thats in a reminder to please limit yourself to a single question. So that we can get through as many questions as possible during the call with that operator may we had the first question. Please.

Thank you ladies and gentlemen at this time, we will now begin the question and answer session. Once again, please limit yourself to one question if possible to allow everyone an opportunity to ask your question before we end at 931 moment. Please for the first question.

Yes.

We'll take our first question from Chris pass the call with Guggenheim.

Thanks appreciate taking the questions.

Brian I want to start off with obviously not it not a surprise that the business, we given everything that happened late in the quarter, but it does look like you've lost a little bit of ground in hips and knees this quarter.

Which really reverses a recent trend of narrowing that gap versus peers talk little bit about how you thought the quarter turned out from competitive standpoint.

Yes, yes, Chris I'd say it's.

I don't know that I would agree with the statement to be honest I think that you've got such a confusing quarter given day rate differences given.

Six of business in certain parts of the world that may or may not have been hit as hard as other parts of the world from the Cobot 90 issue I think is really challenging to look at this quarter in particular.

Usually any quarter, but this quarter in particular.

Now to draw too much conclusion about either share gain share loss that type of thing what I would say, though is that we were feeling actually very good about our performance in both hips and knees.

Before cobot 19, again pretty much in every region I was actually looking forward to this earnings call before cobot 19, because I was pretty confident.

Based on the trend that we're seeing everyone was going to be very happy with the performance that we had so it's very difficult for me to know exactly what's going on with my competitors, but I would say is almost across the board I'd say the performance is a little better than I expected and pretty much everybody in the earnings call did reference the fact that they were feeling confident about their business now.

And it's one quarter, but that would indicate that everybody felt that the momentum in Q1 was was good.

That ultimately bodes well for all of us so I'd like to see us do own I'd like to see our competitors do well that's actually a good thing all boats rise in those situations. So again very difficult to be able to draw a parallel to what our numbers look like versus somebody else for all the reasons that I mentioned, but the general momentum in the feedback and the the messaging that I'm hearing.

Bodes well for the market at least pre cobot 19.

That's helpful. Thank you and then could you just give us a little more color on when you think return volumes return.

Year over year growth and should people be thinking about pre covert expectations is still being a reasonable proxy for where recovery ends up or are you baking in some lingering impact from the economic fallout from your patience, perhaps not wanting to engage with the healthcare system. Thank you.

Absolutely, Chris it's tough because.

So as I've said in my prepared remarks, I have a high level of confidence not just need by the way. It isn't my assumption. This is us talking to literally thousands of surgeons around the world on a weekly basis to find out how they're feeling about as well and and there is clearly a lot of confidence around the large majority of patients coming back again, there's a lot of.

Question marks on when it's going to happen.

Referenced before that Theres a lot more complexity to this particular situation just given the volume of patients that are being deferred.

As I mentioned know our capacity will absolutely be something that we're going have to consider particularly in certain parts of the world.

Its access to PPD in test kits will be factor. There's no question and really just one the patients going to be ready to come back in.

So so I'd be able to put a specific timeframe in place is challenging but what I would tell you is that my confidence levels, how they're going to come back and will not only get to pre kogut revenue numbers I believe will surpass that we'll see a positive tailwind come when these patients come back in the final we'll see extraordinary growth at some point I just can't give you the spin.

Perfect time generally speaking as we think about as we provided script.

We would say April as the the most difficult for sure month that we're going to see and we're going to see sequential improvements in there until we get back to normal and then at some point I would expect again extraordinary revenue numbers coming in is that patient final comes back into the mix.

Thanks, Brian Loren can we go to the next question. Please.

Our next question comes from Kyle Rose with Canaccord.

Great. Thank you very much for taking the question I just wanted to see that we can get.

Some thoughts.

The potential to move cases to the ASV.

In an effort to increase capacity over the near term from a recovery standpoint, I guess and then you'll what types of cases, you see moving there and then when you're talking to your position when they think about putting where its appropriate when thinking about scheduling cases again what types of cases are being scheduled are there any different dynamics that you're seeing that things being price.

Our ties complex versus relatively simple procedures and just the overall timing of that return the volume is specifically into Q2.

Yes, I think it's again, it's very difficult to say because there's so many moving pieces and parts, but just logical extension argument would suggest that patients may feel Mayfield I want to make sure that I'd say that.

May feel more comfortable coming into an AMC setting versus an acute setting like a hospital.

Again, we won't know that for a fact until we actually see the patients come back and get a true assessment of how much of those patients are coming back today LC versus the hospital, but one one could assume that there would be some some desire to not go into an acute facility and feel more comfortable on an AMC setting.

Again, what will know that when it happens what I would say use that you pretty much across the board our procedures up most of the procedures can be done in AOCI setting.

Big volume comes in and what we're seeing out of the gate to be honest is a higher volume of recovery in revision cases versus your standard need cases are hit caissons. So clearly those patients that have a desire to get in.

Given kind of air quotes a more acute issue seems becoming in first but again, it's very difficult to say, it's pretty fluid is I've suggested but I would expect to generally speaking that momentum towards assay to continue we'll see whether it accelerates or not and I would expect those patients that are more acute and and have a higher.

The level of desire to get back into coming to the final first.

Thanks, Brian.

And can we move on to the next question. Please.

Your next question comes from Kayla Crum with Suntrust.

Hi, guys. Thanks for taking my question. Thank.

Thank you just speak to any update on the strategy within a large suite robotic system, you mentioned that you're still investing there, but I'm curious how or if your commercial approach I may have changed for 2020, just given the current backdrop.

Yeah, well tell you is personal thanks for the question where were we remain very excited about Roseanne, just overall robotics and indeed, the desired bring robotics into orthopedics and there's nothing that we've seen in the short term debt that at all in any way shape or form changes.

Vuepoint II, we do believe robotics is going to be the future of orthopedics, what I would tell you just honestly as Susan mentioned it had a very little impact for us anyway in Q1, and that's not surprising started concerning the fact is most of the sales of a robotics program.

Capital program in general comes towards the end of the quarter and I think as everybody knows a lot of our robotic sales have been in the U.S. So when the U.S. got hit so hard in the back half of the quarter, it's not surprising that a lot of those opportunities that we had got deferred you know the good news is that we're not seeing cancellation of any of the no. The deals that we had in place.

We're seeing deferment of those and we're continuing to see very strong demand for robotics overall still seeing people try to get cued up for training, which is a very good leading indicator of you know were robotics is going to go in so we feel good about it we will absolutely.

Flex with our customers if customers are in challenging situations remember we have different ways. As we've said in the very beginning of placing robotic systems. The real goal for us is to get them place and we'll work with our customers if they need flexibility in the way they acquire those systems in place those systems.

To make sure that were flexing for their needs.

The fact is we've got to remember that the major benefits associated with Lowe's or robotics placement isn't necessarily the capital sale upfront. It's nice to have no question about it but it's really more around the annuity, yes, and also quite frankly, when you do place. These systems with the right type of contracting strategy. You also see kind of a byproduct effective better.

He because you typically get longer term contracts in place, but if I just look at the annuity revenue associated with it you get disposable revenue that was an uptick to the share of wallet you get in every procedure that is dedicated needed for rose a procedure you get to pull through of competitive volumes just kind of naturally occurs when you get a rose system in place and you also gets.

Service agreements.

So for US this idea of flexing to help our customers in a time of need is real willing to do that but the strategy holds we've got to make sure that we're getting rosa placements and getting more robotics out so can help to patients with a better accuracy and ultimately certainly helps the overall market growth as well.

Thank you.

Thanks, Brian.

Martin can we go to the next question. Please.

Our next question comes from Joanne Wench with Citibank.

Hi, good morning, and thank you very much for taking my question I could you. Please spend a minute on what it takes to rollout mind my mobility and how you plan on how you expect on seeing that's an action as we get back to sort about new normal and I'm going to sneak a second question, which is.

When you think about that new normal when do you think procedures will be back to sort of.

Stable or relatively normal run rate this year next year or get more granular it and that that would be great. Thank you.

Yeah, I don't have a versatile second question first I don't have specifics on the normal timeline as reference I would say, it's more likely next year, though if I was just going to give you a very broad view of went when I think it's going to come could be related not that but it's very difficult said, it's just a lot of moving pieces and parts right now.

I talked about my mobility, I'd say, there's any crisis situation.

Theres this opportunity to move away from crisis management to graces optimization my mobility as a platform that we've had for a while that has like the traction but I can tell you. The interest in an application like my mobility that allows for virtual interaction with the patient has gone up five fold. Since this whole thing is it started with.

Social distancing requirements and people really have a significant interest to get it out that was the reason why we came out with the Ali.

How do we do this in a way.

As for absolute rapid deployment, while still getting most of the characteristics of mimo ability to the patient into the surgeon. So they can enjoy it while you're in this this on natural kinda cobot environment. So that the positive news is demand for this type of technology has gone up dramatically and our team is pivoting very quickly to make sure that we have the right.

The right the right launch my mobility to be able to take advantage of that and to make sure that we're deploying it in those accounts that are interested as quickly as possible. So again I'd rather not have the situation happening right now, but the fact is it is opening up People's eyes to this type of technology and that benefits us because we are data.

Thank you.

Absolutely we'll take our next question well take our next question from Amit has on with Goldman Sachs.

Oh, Thanks, Hey, good morning, and thanks for other color I want to come back to China. There's obviously a couple of months ahead of us in this whole thing and they've got adaptation backlog there to of course, but utilization seems to kind of still be stuck around down 25% through April and I'm wondering if you can help us if.

This is explained better in your views through the lens of hospital capacity issues or through the patient demand side factors like psychology, and if that at all helps to color, what we should expect and the rest of the world. Thanks.

Yeah, I'll take a shot it at this just maybe topically and then certainly if you have any anything that feel free to do that obviously, what I would tell you is that no suky was referencing what we've seen so far through April.

In China in I would say I'm actually very pleased with the recovery.

I would be happy to see every other market thats being impacted by Koby 19 respond in the same way same level of exuberance in the recovery. If we look past April just to give some more specifics I think is is warranted here just because it is our longest standing proxy of what could happen I'm not saying this will happen, but the fact is.

We're already suggesting that as we get into June China could be at 100% of what they were doing prior to covert 90, and then post that there's folks there on the ground that would expect us to be above 100%.

So again the start to see some of that extra ordinary growth come from patients coming back in the funnel.

I've not heard from the China team a lot of concerned around the the specific concern of a patient coming back into the funnel whether that applies to other markets are not who knows but I'm not hearing that as a specific issue. We so far in the China market. So again I don't want to read too much into what we're seeing in China, because there's a lot of differences.

At occur and other marketplaces, but I'm pretty pleased actually with the recovery that we're seeing in China and timing of it I.

So if you've got anything additional to that.

No I think that's that's a good summary, finally color I'd add on top of that in the midst those numbers at the deepest part China.

It was doing about 25% of their normal run rate within two months, they're up to 75% in April so we're seeing a pretty steep the there.

And again as as Brian added we expect that trend to continue over the near term it's too early to tell it at that same shape and pace of recovery will extend into other markets, but we're encouraged by what we saw in China.

Thanks, and learn we can go to the next question. Please.

Our next question comes from Larry Biegelsen with Wells Fargo.

Good morning, Thanks for taking my question.

Brian one one on pricing one of your competitors called out the potential for increased pricing pressure.

You know given the situation that hospitals are in can you can you comment on that what is your expectation.

Going forward, thanks for taking the question.

Yeah, well I'd say Larry is that.

I don't.

So my view anyway, I don't see any real difference in pricing pressure I mean, the fact is we've had austerity measures in the past we have constant bombardment on pricing pressure every day of our lives and and I could certainly see where people might be looking for more.

The fact is there a competitive forces in place that that would no pricing is good analysts somebody gets the pricing.

Truly do believe in this situation you're going to find that pricing will continue to be similar to what we've seen in the past its still not at attractive pricing environment to 3% is what we've always said, but I'd be surprised in the short term if we see anything deviate dramatically from that as a matter of fact as I said before what we're really focused on right now is leveraging broader contracting.

Neither in concert with rows of placements are robotic placements or just cross business contracting using multiple categories with the idea that we'd be able to help our customers in the time in the have longer term contracts and as a result, there longer term contract to actually have more pricing stability that will be our focused and focus I don't want to I don't want to predict better play.

Jason, but I also don't want to predict worst pricing and shorten here.

Thank you.

Your next question comes from Bob Hopkins with Bank of America.

Oh, thank you.

And Oh.

Brian's looking into the whole team. Thanks for the details on April very helpful.

I would love to just get your thoughts on two things as it relates to expenses could you just clarify what percentage of your costs you consider to be fixed.

And as we look forward, maybe hypothetically into next year, if if revenues get back to something that approach is 2019 levels.

Margins also get back to 2019 levels or is there a reason why the recovery in margins may take longer than a recovery and revenues. Thank you.

Basically what why don't you go ahead and tackle that in that we've got some color commentary afterwards I'll provide.

Yes, so as we said in our earlier remarks, where I said in my earlier remarks offer slow. Thanks for the question we've had more than half of our cost base is effects in the short term.

That breaks out a little bit differently across cost of goods and and within Opex.

And cost of goods, its probably a much less than half is fixed.

And then as you get into Opex, I'd say, a little bit more than half is fixed and then a weighted average then takes the overall cost structure has more than half being fixed ops. So that's how we think about our overall cost base, we did implement a number of cost preserved.

And activities in Q1.

That will extend into Q2 to help with overall liquidity and earnings.

And again, you'll get a full quarter of those into the second quarter. So we do expect that to be a bigger impact having said that if we do see a solid wrap your in may and into June.

We may elect to start to invest even sooner than Q3 against the business to ensure that we're ready from a supply standpoint from a channel standpoint from a commercial standpoint to ER to meet the the end market recovery.

Relative to margins, we do think it could be slightly delayed versus revenue uptake primarily because of some of the spending reductions were taking that that we're deferring.

We may catch up on in the rest of the year.

And that in addition within cost of goods some of the fixed overheads ultimately that might fall out as on favorable variances because of lower revenues could get deferred and be recognized over time into future. So those are two factors that could lead to margins ultimately lagging slightly below.

Hi.

The revenue uptake as we go forward, it's too early to tell as to when margins could get back to 2019 levels, but as we said Q2 is probably the low watermark and then we would expect margins improved as revenue improves.

[laughter].

I just just one additional comment on that I think you know cities right on the money, but well so it's very clear when revenue comes back that obviously as a direct and almost immediate impact to margins in a positive way.

We have some deferred expenses hit that you could delayed a little bit but the fact is nothing is better than increased revenue growth it to enhance margins and remember as I mentioned in the prepared remarks.

So if you did as well we do have our restructuring plan program in place live and well and the whole intent behind that restructuring program has to be able to continue to invest for growth, but do so while expanding margins were pretty explicit the last time that we talked about our goals associated with those margins and the whole business.

Behind us and that we get right back on track with what we have predicted the last time.

Great. Thank you very much.

Thanks, Brian I'm line I think we have time, so maybe one or two more questions.

Thank you. Our next question comes from David Lewis with Morgan Stanley.

Good morning, Brian just maybe some one broad comedy one related question. The the scenario. The economy. This kind of consensus view that orthopedics or sort of more economically sensitive rail to other elective procedures across broader medical devices I didn't hear a lot of talk about economy. In this call. So do you accept that view.

That recon is sort of more economically sensitive in sort of related to that but I think about unique businesses dental recon and trauma draw very different how do you see the recovery across those three different businesses. Thanks, so much.

Yeah, I think the second one first I think trauma, obviously would be the one to two jury to rebound more quickly. It's been down obviously everybody knows we people just aren't out as a result of not being on that being active trauma business just gets hurt.

Factors as people started street again start to move again, we would clearly expect drama to be the thing that recovers the fastest recon to be next for US you know and even the acuity level of those recon patients would kind of dictate to comes first into the funnel and then dental would clearly be the clean up in the way that I would look at it be last to recover.

For obvious reasons associated with dental marketplace, when I think about the impact that economic downturn has on worth though I think in the past we've seen that it can have an impact what we're doing what we're modeling this out David when you just think about the number of moving pieces and parts, we're assuming that the Nash.

Overall business natural growth at the business remains pretty pretty consistent that you're going to see the typical fake patient flow that would have been coming in over the rest of this year over next year when things recover and then you're going to see that incremental patient flow calm because of those deferred patients. So if anything for me when I think about 2021 and potentially.

Even beyond I think we could have an opportunity as a as the market, which would be a false positive, but I think we could have a situation where you're seeing extraordinary growth during that time, rather than depressed growth because of any kind of economic recovery issue.

But that's just again just as my view based on data points that we're getting from folks that are out there in the world and what they're seeing and then also our own teams I would just tell you to right now we have an unprecedented amount of outreach to our customers. This is not just us sitting in a room thinking about what's going on we literally have thousands of touch points every week to surgeons and.

Customers around the world to get insights, we're loading that through our Salesforce program, we're able to use those insights to be able to give us view of what we should expect but that's just my my personal view based on those insights that I have right now.

Thank you and that concludes today's question and answer session. At this time I will turn the conference back to Keri mattox for additional or closing remarks.

Thanks, Laura and thanks, everybody I know there were some other questions in the Q.

Fortunately it is right up at 930, so we are going to wrap here of course, the IR team is available all day today will be speaking to many of you. If you have additional questions. Please don't hesitate to reach out and thanks, so much for joining us today faith and do well.

That does conclude today's conference. Thanks, everyone here participation you may now disconnect.

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