Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet First Quarter 2020 Earnings Conference Call. [Operator Instructions]. 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 Biomet's First Quarter 2020 Earnings Conference Call. Joining me virtually today are Bryan 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 are used in our first quarter results. Reconciliations are available on our website. Additionally, our comments during this call will include forward-looking statements. Actual results may vary materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties. Please note, we assume no obligation to update these forward-looking statements even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties in addition to the inherent limitations of such forward-looking statements. Additionally, the discussions on this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is included within the earnings release found on our website at zimmerbiomet.com. With that, I will now turn the call over to Bryan. Bryan?

Thanks, Keri. And I think everybody knows that we're 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 and any bad cellphone connection and/or dogs barking in the background. I'm sure everybody's 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 in and living in right now. I can tell you that I've been home more consecutive days with my family than I have I'm pretty sure in the last 20 years, and I know for sure that they cannot wait for this to be over because they want me to get out of 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 and our families. Given the fact that it is so unprecedented when we think about COVID-19 and really just thinking through it, there really is no proxy that you can look back on that would give you the pathway forward as a result of looking at that historic view. There's nothing that compares to this, I mean, when have we ever seen a global pandemic shut basically the world down. And as a result of the significance of it, obviously, we want to make sure that we spend a lot of time talking about it today on the earnings call. I'll spend time walking through it. Suky will spend time giving his view of it. We'll let you know how it's impacting ZB, what we can give you relative…

Thank you, Bryan, and good morning, everyone. I hope that you and those close to you are healthy and remain safe. I'd like to start by saying that our underlying fundamentals remain strong. Recall that in February, we announced a strong close to 2019 with top line results ahead of expectations, leveraged earnings, robust cash generation and continued deleveraging of our balance sheet. While COVID-19 has had and will continue to have a significant unfavorable impact in the near term, we remain confident in our ability to navigate these challenges and to return to a positive trend over time. Let me turn to first quarter revenues. Net sales were just under $1.8 billion, a reported decrease of 9.7% from the prior year and an operational decrease of 8.9%, excluding the impact of foreign currency changes. Moving forward, unless otherwise noted, my commentary will be on a constant currency basis. Prior to COVID-19 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 COVID-19 had a meaningful negative impact on our first quarter performance. Across ZB, this impact became most pronounced in mid- to late March. Again, revenues for the first quarter were down 8.9% versus the prior year and down approximately 60% in the last 2 weeks of March. That trend extended into the first part of Q2, with April revenues down about 70% versus the prior year as we observe the impact of the pandemic intensify in submarkets. 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, the region decreased 9.5% in the quarter. We began to see procedure…

Thanks, Suky. And in closing, it's clear that the impact of COVID-19 is real and obviously material for ZB. But we do think it's also clear that ZB is positioned to address the challenge. And again, if I can leave you with those same 5 things, I just want to make sure that we get these points across as I think you've been able to hear. We absolutely feel confident in our ability to keep our team members safe, and that will remain our 1 priority as an organization. We have a very high level of confidence in our liquidity and financial flexibility to manage through this challenge. We have confidence in the recovery. It's just a question of the timing of that recovery, but a high level of confidence in the patient funnel being there. And we will continue to invest in key R&D and commercial projects. The fifth piece is that we truly do believe that given some of the changes we've put into place as an organization over the past 2 years, we will come through COVID-19 stronger than when we entered it. What we know is we have the absolute right team at ZB, and I want to thank each and every one of them for the amazing job they're doing right now. But we are highly confident that we're positioned to deliver value to our customers, our patients and importantly, to our shareholders. And with that, I'm going to turn the call back over to Keri to move into the Q&A portion of the call.

Thanks, Bryan. [Operator Instructions]. With that, operator, may we have the first question, please?

[Operator Instructions]. We'll take our first question from Chris Pasquale with Guggenheim.

Bryan, I want to start off with -- obviously, not a surprise that the business was weak given everything that happened late in the quarter, but it does look like you lost a little bit of ground in hips and knees this quarter, which really reverses a recent trend of narrowing that gap versus peers. Can you talk a little bit about how you thought the quarter turned out from a competitive standpoint?

Yes. Yes, Chris. I'll tell you, 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 mix 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 COVID-19 issue. I think it's really challenging to look at this quarter in particular, truthfully any quarter, but this quarter in particular, and try 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 COVID-19, again, pretty much in every region. I was actually looking forward to this earnings call before COVID-19 because I was pretty confident. Based on the trend that we were 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 their earnings call did reference the fact that they were feeling confident about their business. Now again, it's 1 quarter, but that would indicate that everybody felt that the momentum in Q1 was good. That ultimately bodes well for all of us. So I'd like to see us do well, and I'd like to see our competitors do well. That's actually a good thing, all those rise in those situations. So again, very difficult to be able to draw parallel to what our numbers look like versus somebody else for all the reasons that I mentioned. But the general momentum and the feedback and the messaging that I'm hearing bodes well for the market at least pre COVID-19.

That's helpful. And then could you just give us a little bit more color on when you think recon volumes return to year-over-year growth? And should people be thinking about pre COVID expectations is still being a reasonable proxy for where recovery ends up? Or are you baking in some lingering impact from the economic fallout or from your patients perhaps not wanting to engage with the health care system?

Absolutely, Chris. It's tough because, as I said in my prepared remarks, I have a high level of confidence, not just me, by the way. This 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 it as well. And there's 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. As I referenced before, there's a lot more complexity to this particular situation just given the volume of patients that are being deferred. As I mentioned, OR capacity will absolutely be something that we're going to have to consider, particularly in certain parts of the world. This access to PPE and test kits will be a factor. There's no question. And really just when the patient's going to be ready to come back in. So to be able to put a specific time frame in place is challenging. So what I would tell you is that my confidence is how they're going to come back. And we'll not only get to pre COVID revenue numbers, I believe we'll surpass that. We'll see a positive tailwind come when these patients come back in the funnel, and we'll see extraordinary growth at some point. I just can't give you the specific time. Generally speaking, as we think about it, as we provided in the script, we would say April is the most difficult, for sure, month that we're going to see. And we're going to see sequential improvement from there until we get back to normal. And then at some point, I would expect, again, extraordinary revenue numbers coming in as that patient funnel comes back into the mix.

Our next question comes from Kyle Rose with Canaccord.

Great. I just wanted to see if we could get some thoughts on the potential to move cases to the ASC in an effort to increase capacity over the near term from a recovery standpoint. I guess -- and then what types of cases you see moving there? And then when you're talking to your physicians, when they're thinking about putting or where it's appropriate, when they're thinking about scheduling cases again, what types of cases are being scheduled? Or are there any different dynamics that you're seeing that things being prioritized, complex versus relatively simple procedures? And just the overall timing of that return to volume 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, may feel, I want to make sure that I say that, may feel more comfortable coming into an ASC setting versus an acute setting like a hospital. And 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 to the ASC versus the hospital. But one could assume that there would be some desire to not go into an acute facility and feel more comfortable in an ASC setting. And again, we'll know that when it happens. What I would tell you is that pretty much across the board, our procedures -- most of the procedures can be done in ASC setting, where our 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 knee cases or hip cases. So clearly, those patients that have a desire to get in given kind of "a more acute issue" seem to be coming in first. But again, it's very difficult to say. It's pretty fluid, as I've suggested, but I would expect, generally speaking, that momentum towards ASC to continue. We don't see whether it accelerates or not. And I would expect those patients that are more acute and have a higher level of desire to get back in to come into the funnel first.

The next question comes from Kaila Krum with SunTrust.

Can you just speak to any updates on the strategy with your large joint robotic system? You mentioned that you're still investing there, but I'm just curious how or if your commercial approach may have changed for 2020, just given the current backdrop.

Yes. What I would tell you is, first of all, thanks for the question. We're -- we remain very excited about ROSA and just overall robotics and the desire to bring robotics into orthopedics. And there's nothing that we've seen in the short term that at all, in any way, shape or form, changes that viewpoint. We truly do believe robotics is going to be the future of orthopedics. What I would tell you is just honestly, as Suky mentioned, it had a very little impact for us anyway in Q1. And that's not surprising. It's not even concerning. The fact is most of the sales of a robotics program or capital program in general comes towards the end of the quarter. And I think as everybody knows, a lot of our robotics sales have been in the U.S. And 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. The good news is that we're not seeing cancellation of any of 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 trying to get queued up for training, which is a very good leading indicator of where robotics is going to go. And 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 from the very beginning, of placing robotic systems. The real goal for us is to get them placed. And we'll work with our customers if they need flexibility in the way they acquire those systems and place those systems to make sure that we're…

Our next question comes from Joanne Wuensch with Citibank.

Could you please spend a minute on what it takes to roll out mymobility, and how you plan on -- or how you expect on seeing this in action as we get back to sort of a new normal? And I'm going to sneak a second question in, which is, when you think about that new normal, when do you think procedures will be back to sort of a stable or relatively normal run rate? This year or next year? Or if you get more granular than that, that would be great.

Yes. I don't have -- I'll just hit the second question first. I don't have specifics on the normal time line as we referenced. I would say it's more likely next year, though, if I was just going to give you a very broad view of when I think it's going to come. It could be earlier than that, but it's very difficult to say. There's just a lot of moving pieces and parts right now. When I talk about mymobility, I think there's -- in any crisis situation, there's this opportunity to move away from crisis management to crisis optimization. mymobility is a platform that we've had out for a while that has a good traction. But I can tell you the interest in an application like mymobility that allows for virtual interaction with the patient has gone up fivefold since this whole thing has started, with the social distancing requirements. And people really have a significant interest to get it out. That was the reason why we came out with the LE, how do we do this in a way that allows for absolute rapid deployment while still giving most of the characteristics of mymobility to the patient and to the surgeons so they can enjoy it while they're in this unnatural kind of COVID environment. So 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 launch of mymobility 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 already had it.

We'll take our next question from Amit Hazan with Goldman Sachs.

I want to come back to China. They're obviously a couple of months ahead of us in this whole thing, and they've got a patient backlog there too, 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 view 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 in the rest of the world.

Yes. I'll take a shot at this just maybe topically. And then, Suky, if you have anything to add, feel free to do that, obviously. What I would tell you is that Suky was referencing what we have seen so far through April in China. And I would say, I'm actually very pleased with the recovery. I would be happy to see every other market that's being impacted by COVID-19 respond in the same way, with the same level of exuberance in the recovery. If we look past April, just to give some more specifics, and I think it's warranted here just because it is our longest-standing proxy of what could happen. And 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 COVID-19. And then post that, there's folks there on the ground that would expect us to be above 100%. So again, we start to see some of that extraordinary growth come from patients coming back in the funnel. I have not heard from the China team a lot of concern around the specific concern of a patient coming back into the funnel. Whether that applies to other markets or not, who knows, but I'm not hearing that as a specific issue at least 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 that are occurring out the marketplaces. But I'm pretty pleased actually with the recovery that we're seeing in China and the timing of it. I don't know, Suky, if you had anything additional to add?

I think that's a good summary, Bryan. Only color I'd add on top of that in the midst of those numbers, at the deepest part, China was doing about 25% of their normal run rate. Within 2 months, they're up to 75% in April. So we're seeing a pretty steep V there. And again, as Bryan added, we expect that trend to continue over the near term. It's too early to tell if that same shape and pace of recovery will extend into other markets, but we're encouraged by what we saw in China.

Our next question comes from Larry Biegelsen with Wells Fargo.

Bryan, one on pricing. One of your competitors called out the potential for increased pricing pressure given the situation that hospitals are in. Can you comment on that? What is your expectation going forward?

Yes. What I'd say, Larry, is that I don't -- to 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 I could certainly see where people might be looking for more. But the fact is there are competitive forces in place that would -- the pricing doesn't go down unless somebody gets the pricing. And I 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. It's still not an attractive pricing environment. 2% 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, either in concert with ROSA placements or robotic placements or just cross-business contracting using multiple categories, with the idea that we would be able to help our customers in the time of need, have longer-term contracts. And as a result of that longer-term contract, actually have more pricing stability. That will be our focus. I don't want to predict better pricing, but I also don't want to predict worse pricing in the short term here.

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

Bryan, talking to the whole team, thanks for the details on April, very helpful. Would love to just get your thoughts on 2 things as it relates to expenses. Could you just clarify what percentage of your costs you consider to be fixed? And then as we look forward, maybe hypothetically into next year, if revenues get back to something that approaches 2019 levels, would margins also get back to 2019 levels? Or is there a reason why the recovery in margins may take longer than a recovery in revenues?

Suky, why don't you go ahead and tackle that? And then I've got some color commentary afterwards. I'll provide it.

Yes. So as we said in our earlier remarks, or I said in my earlier remarks, Bob, first of all, thanks for the question. We said more than half of our cost base is fixed in the short term. That breaks out a little bit differently across cost of goods and within OpEx. And cost of goods, it's probably 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 the weighted average then takes the overall cost structure as more than half being fixed. So that's how we think about our overall cost base. We did implement a number of cost-preservation 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 ramp here 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 meet the end market recovery. Relative to margins, we do think it could be slightly delayed versus revenue uptake, primarily because of some of those spending reductions we're taking that we're deferring. We may catch up on in the rest of the year. And then in addition, within cost of goods, some of the fixed overheads ultimately that might fall out as unfavorable variances because of lower revenues could get deferred and be recognized over time in the future. So those are 2 factors that could lead to margins ultimately lagging slightly behind 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 to improve as revenue improves.

Just one additional comment on that. I think Suky's right on the money. But also it's very clear, when revenue comes back, that obviously has a direct and almost immediate impact to margins in a positive way. As we have some deferred expenses, hit that, it could delay it a little bit. But the fact is nothing is better than increased revenue growth to enhance margins. And remember, as I mentioned in the prepared remarks, and I believe Suky did as well, we do have our restructuring program in place live and well. And the whole intent behind that restructuring program is to be able to continue to invest for growth, but do so while expanding margins. And we're pretty explicit the last time that we had talked about our goals associated with those margins. And the hope is this gets behind us, and we get right back on track with what we had predicted the last time.

Our next question comes from David Lewis with Morgan Stanley.

Bryan, just maybe some one broad comment, one related question. The -- this dynamic of the economy, this kind of consensus view that orthopedics is sort of more economically sensitive relative to other elective procedures across broader medical devices. I wouldn't hear a lot of talk about economy on this call. So do you accept that view that recon is sort of more economically sensitive? And sort of related to that -- but I think about your unique businesses, dental, recon and trauma, they're all very different. How do you see the recovery across those 3 different businesses?

Yes. I think I'll hit the second one first. I think, trauma, obviously, will be the one to rebound more quickly. It's been down, obviously, and what you know is people just aren't out. And as a result of not being on, not being active, trauma business just gets hurt. But the fact is, as people start to get to street again and start to move again, we would clearly expect trauma to be the thing that recovers the fastest. Recon would be next for us. And even the acuity level of those recon patients would kind of dictate who comes first into the funnel. And then dental would clearly be the cleanup in the way that I would look at it, be the last to recover for obvious reasons associated with the dental marketplace. When I think about the impact that economic downturn has on ortho, I think, in the past, we've seen that it can have an impact. What we're doing when we're modeling this out, David, when you just think about the number of moving pieces and parts, we're assuming that the natural business, the natural growth of the business remains pretty consistent, that you're going to see the typical 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 come 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 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 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 too, 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 sales force program, and we're able to use those insights to be able to give us a view of what we should expect. But that's just my personal overview based on those insights that I have right now.

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, Lauren, and thanks, everybody. I know there were some other questions in the queue. Unfortunately, it is right up at 9:30, so we are going to wrap here. Of course, the IR team is available all day today, and we'll 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. Stay safe, and be well.

Thanks, everyone.

That does conclude today's conference. Thank you for your participation. You may now disconnect.