Welcome to the First Quarter 2020 Stryker Earnings Call. My name is Christine, and I'll be your operator for today's call. This conference is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during this conference will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Stryker's current report on Form 8-K filed today with the SEC. I would now like to turn the call over to Mr. Kevin Lobo, Chairman and Chief Executive Officer. You may proceed, sir.

Welcome to Stryker's first quarter earnings call. Joining me today are Glenn Boehnlein, Stryker's CFO; and Katherine Owen, VP of Strategy and Investor Relations. On today's call, I will provide opening comments, followed by Katherine with some perspectives on our mix of deferrable and capital businesses. Glenn will then provide additional details regarding our quarter results and liquidity position before we open the call to Q&A. As you know, Katherine will be shifting out of her role on June 1, so this will be her last Stryker earnings call. While this is not quite the finish she had in mind at the end of February, I did want to take a moment to express my gratitude for her outstanding work over the past 13 years. She has been a great help to me and the management team of Stryker. Also, if you include her time covering Stryker as a sell-side analyst, this will be her 97th Stryker earnings call. She has seen a lot, but nothing quite like what we are going through right now. On today's call, we will review our first quarter results and provide additional details regarding the impact of COVID-19 on our businesses in March and into the second quarter. I would also highlight many initiatives underway to ensure we maintain a strong cash position through stringent controls to manage through this unprecedented environment. For Q1, we achieved organic sales growth of 2.4%, reflecting strong momentum through the first two months of the quarter and into March, followed by a marked slowdown tied principally to a deferral in elective procedures. We took a number of steps in March to aggressively limit travel to ensure the safety of our employees and customers, while ensuring our essential personnel were available to support health care workers around the world. These efforts, along with other cost controls, helped to mitigate some of the impact on earnings, from the slowdown in sales resulting in adjusted per share earnings of $1.84, a decline of 2% versus the prior year. The sales drop became more pronounced towards the end of March, and in the last week of the month, our company sales declined 30% versus the prior year. The biggest declines were in hips, knees, spine, and endoscopy, offset by our other businesses. By geography, Japan, Canada, and smaller countries in Europe and emerging markets performed well, while China was clearly the weakest. In Q2, we expect a recovery in China, but most other geographies will get worse, given the spread of the virus. For the month of April, our company sales will decline by 35% to 40% versus 2019. Looking at the remainder of the quarter, we are encouraged by the planned gradual resumption of elective surgeries in the U.S. and abroad. Portfolio products are being impacted by COVID-19 in numerous ways. Clearly, we are seeing a deferral in elective procedures, particularly within our orthopedics and spine businesses. We fully expect, given the chronic and progressive nature of the conditions impacting these patients, that the vast majority of them will be treated in the coming months, recognizing that the exact timing of a broad resumption of elective procedures is too fluid to predict. And as hospital needs to treat COVID-19 patients escalated sharply in March and into April, we saw a significant increase in the demand for products across our roughly $2 billion medical portfolio, which Katherine will discuss in more detail. In response, our manufacturing teams have been aggressively ramping capacity of much-needed products while also ensuring we scale back other plants where demand has been negatively impacted. Overall, given our mix of businesses and the cost control initiatives underway, coupled with our strong balance sheet, we believe we are well positioned to manage through this slowdown. Given the fluid nature of the current situation, we are not providing Q2 or full-year guidance. However, we expect to maintain the cost control efforts for most of 2020. We are also setting ourselves up to respond quickly as customer demands return. We are providing financial assistance to hold our sales forces in place and continue to invest in our pipeline of new products. We are proceeding with integration efforts regarding Wright Medical. And given the impact of the virus on competitive hiring, we are expecting a minimal level of sales force attrition. As was publicly announced, Wright held its shareholder meeting on Friday, April 24, and the deal was approved. This reduced the tender threshold from 95% to 80%. The tender offer was extended until June 30, which is customary as we continue to work through the closing conditions. We expect to close around the end of Q3 2020. Please note, beyond this update, we have no new information to share with you regarding Wright Medical and we will not be taking any questions on this pending acquisition during today's call. Before I turn the call over to Katherine, I would like to take a moment to thank all of our employees around the globe for their commitment to ensuring the safety of their colleagues, their families, and our customers. Our sales forces across our businesses who are essential to supporting doctors and caregivers have demonstrated unwavering commitment during this pandemic. Our manufacturing teams have worked tirelessly to optimize the plant network and to ramp capacity where needed. And we have created rapid innovations in response to the pandemic. We will continue to support our employees and our customers as they work to meet the needs of the many patients that will need treatment. While our many year growth momentum has been temporarily derailed, the Stryker spirit is alive and well and we remain poised to capitalize as the situation improves. And now over to Katherine.

Thanks, Kevin. My update today will focus on providing greater granularity around our mix of businesses that are particularly impacted by the COVID-19 virus. Overall, we estimate that 40% to 50% of our total global revenue includes procedures that are considered elective, or more accurately, can be, in many cases, deferred for a period of time. This includes primarily our orthopedic businesses, including hips and knees, extremities as well as spine and neurotechnology's ENT. There are also procedures within our endoscopy portfolio that can be deferred, including some of the scoping procedures and sports medicine. Additionally, with many states and countries having implemented or recently come out of stay-at-home orders, we have seen a slowdown in trauma. This can be attributed to fewer people out driving, a slowdown in construction, and a general decline in overall activity that traditionally drives trauma procedures. Unlike truly elective procedures, the patients deferring surgeries addressed by our products will not improve with time; rather, their underlying conditions generally continue to deteriorate. So while the exact timing of the resumption of elective procedures to more normalized levels is difficult to predict at this point in time, we do anticipate the vast majority of patients treated by our products will return. We also assume the resumption of procedures will continue to vary by country, state, and municipality as they increasingly move past the peak impact of the virus. In contrast to the impact we are seeing from deferred surgeries, other parts of our portfolio are experiencing significantly heightened demand, as Kevin noted. This is most noteworthy for our medical business, which had sales of roughly $2.3 billion in 2019, or approximately 15% of total Stryker revenue, and is comprised primarily of capital equipment. It's important to recognize that our capital equipment portfolio, which represented about 25% of our total sales in 2019, includes both large capital and small capital at about 9% and 16%, respectively. Our large capital equipment offering includes Mako, beds, and structures within medical, endoscopy's communication portfolio, and spine's enabling technology, which includes Mobius and navigation. Turning to smaller capital equipment, this bucket includes medical emergency costs and defibrillators, endoscopy's cameras, instrument's power tools, waste management, and neuro-powered instruments that are reported within neurotechnology. Of note, small capital is typically used in the OR and, as such, tracks more closely to growth in procedures. Against that backdrop, we are seeing strong demand across essentially the entirety of the medical offering, including beds and stretchers, physio, emergency costs, and safety. We are also seeing a meaningful increase in demand for instrument flight personal protection offerings, which is included in their base product portfolio within surgical technologies. Across the board, we have ramped capacity to meet the current demand and what we anticipate will be ongoing demand as hospitals look to better position their capacity and stockpiles going forward. In late March, we developed the Stryker emergency release bed, which helps emergency responders manage patients efficiently during this critical time. We started manufacturing this low-cost bed at the end of March, which broadens our medical offering beyond ICU and MedSurg beds to better meet customer needs. Other efforts to assist with responding to COVID-19 include the production of face shields for healthcare professionals and a new patient protective covering product, which attaches to our ambulatory structures. Overall, while the slowdown in elective procedures has and will continue to impact our top line, we are able to leverage our unique product portfolio and offset part of that impact through the demand for our medical and instrument offerings. We expect this trend will continue into Q2 with an ongoing gradual increase in elective procedures. With that, I will now turn the call over to Glenn.

Thanks, Katherine. Your comments are as insightful as always. Today, I will focus my comments on our first quarter financial results, related drivers, and certain liquidity matters. Our detailed financial results have been provided in today's press release. Our organic sales growth was 2.4% in the quarter. These results included U.S. growth of 2% and international growth of 3.3%, recognizing that approximately 75% of total sales, our business is significantly weighted in the U.S. As a reminder, this quarter included one additional selling day as compared to Q1 2019. Pricing in the quarter was unfavorable 0.4% from the prior year quarter, while foreign currency had an unfavorable 0.9% impact on sales. During the quarter, our growth was significantly negatively impacted by reductions in elective surgeries that occurred in the last two weeks of March. This impact was most pronounced on our joint replacement procedures. In light of the current environment, we wanted to provide additional detail with respect to our businesses and geographies. For the month of April, our U.S. orthopedics and spine sales were down roughly 65%, while MedSurg and neurotechnology posted declines of roughly 25%. Asia Pacific declined roughly 20%, while Europe was down nearly 55%. Our Latin American business was solid, delivering 20% growth for the month of April. Our adjusted quarterly EPS of $1.84 represents a decline of 2.1% from Q1 2019. Our first quarter EPS was negatively impacted by $0.02 from foreign currency, which was slightly higher than our previous expectations given currency fluctuations. Certain other factors resulted in disproportionately negative impacts on EPS, including the loss of higher-margin sales and a loss of leverage related to manufacturing and operational fixed costs. In addition, the lack of share buybacks in Q1 2020 resulted in a higher-than-average share count outstanding. I will now provide some brief comments on segment sales. Orthopedics had a constant currency and organic decline of 1.2%. This included U.S. growth of 0.3%. This growth included positive impacts from knees, trauma, and extremities and Mako. Internationally, Orthopedics had an organic decline of 4.3%, which primarily reflects an earlier downturn in certain geographies. MedSurg had constant currency growth of 7% and organic growth of 6.3%, which included a 5.6% increase in the U.S. Instruments had U.S. organic sales growth of 10.8%, driven by gains in their surgical cutting blades, waste management, Steri-Shield, Surg account, and smoke evacuation product lines. This performance was particularly impressive given the tough comps from Q1 2019 and further validates our decision to split the sales force into orthopedic instruments and surgical technologies. Endoscopy had a U.S. organic sales decline of 2.9%. This reflects positive growth in its core video and general surgery products, offset by a slowdown in its communications and sports medicine businesses. The medical division had U.S. organic growth of 9.1%, reflecting strong demand across its bed and emergency care businesses, which accelerated meaningfully in the latter part of March, owing to demand tied to COVID-19. Internationally, MedSurg had organic sales growth of 9.1%, reflecting a slower impact on capital businesses in key geographies. Neurotechnology and spine had constant currency growth of 1.5% and organic growth of 0.3%. Our U.S. Neurotech business posted constant currency growth of 0.2% and a 0.6% organic decline for the quarter. This reflects a slowdown in procedures in the latter half of March and some temporary supply disruptions during the quarter. Internationally, neurotechnology and spine had organic growth of 9%, reflecting balanced growth across most geographies and businesses. Now I will discuss operating metrics for the quarter. Our adjusted gross margin of 65.3% was unfavorable 50 basis points from the prior year quarter. Compared to the prior year, gross margin was unfavorably impacted by price, acquisitions, business mix, and fixed cost absorption, the latter two of which were more pronounced during the second half of March. Adjusted R&D spending was 6.4% of sales. Our adjusted SG&A was 34.8% of sales, which was 40 basis points unfavorable to the prior year quarter. Compared to the prior year, SG&A was unfavorably impacted by business mix, deleveraging of selling and marketing costs, and foreign exchange, and this was partially offset by operating expense savings actions taken during March. In summary, for the quarter, our adjusted operating margin was 24% of sales. Given the current environment, we enacted measures in March covering most of our discretionary spending. These included curtailments in hiring, travel, meetings, consultants, as well as the idling of certain manufacturing lines and facilities, including furloughing the related workers. Subsequent to March, we also enacted salary reductions impacting most of our leadership positions. Related to other income and expense, we saw a benefit in investment income, which was partially offset by increased interest expense related to the Eurobond offering that was completed late last year. Moving forward, though, given an unexpected decline in investment income earned on deposits and the impact of other rate changes, OI&E will increase by approximately $5 million to $8 million per quarter. This does not include the impact of any additional debt issuance for Wright Medical. Our first quarter had an adjusted effective tax rate of 14.3%. This included the benefit related to stock compensation expense and other discrete items. Turning to cash flow and liquidity. We ended the first quarter with cash and marketable securities of $4 billion and generated approximately $591 million of cash from operations in the quarter. This is ahead of our internal targets and significantly more than in Q1 2019. This reflects increased earnings and a reduction in working capital, primarily driven by accounts receivable during the quarter. As I noted in January, we did not repurchase any shares in Q1, nor do we plan to do so during the remainder of the year. In addition to the discretionary spending controls I previously outlined, we have also taken steps to conserve cash, including reductions in planned capital expenditures and project spending, focusing on opportunities and accounts payable and slowing M&A activities. Considering our cash holdings and available credit lines, from a liquidity standpoint, we are well positioned. We currently have available credit lines, none of which are drawn on at this time, of approximately $3 billion. In addition, our investment-grade credit rating supports good access to the capital markets, and we would anticipate taking advantage of historically low rates to complete the funding for Wright Medical. In terms of future capital requirements, our quarterly dividend is approximately $215 million, and we have $300 million bond maturity due in Q4. As it relates to guidance for Q2 and the full year, we reaffirm our previously announced decision to withdraw guidance, given the significance of uncertainties at this time. We will continue to evaluate operating circumstances in the market environment for stability prior to reinstating guidance. And now, I will open up the call for Q&A.

Your first call comes from the line of Bob Hopkins from Bank of America.

Congrats to Katherine on achieving such an impressive number. I have a couple of quick questions. First, Kevin, I would appreciate your insights on your capital businesses. Do you think the increase in demand you're experiencing will last beyond a few quarters? Additionally, what do you anticipate for growth once this surge in demand settles?

So Bob, I'll take that, the first part, and then I'll pass it to Katherine. As it relates to large capital, I think Katherine provided you the breakdown of our large capital in her prepared remarks. The beds and stretchers are the ones experiencing kind of a spike in demand. And at this point, it's really too difficult to ascertain whether that's pull forward or whether that's just extra demand because there is this need to build stockpiles. There is this need to have a certain number of beds and expansion of beds, primarily related to coronavirus, but it may not be something that's just pull forward; it may be additional demand. As it relates to the other large capital communications, Mako and those other components, that's going to start to slow down, as you probably would imagine. We're not seeing orders being canceled, but there is a bit of deferral going on. And that I would expect would continue to pick up in the future. And maybe I'll turn it to Katherine to talk about small capital.

Yes, Bob, thank you. If you look at small capital, it's about 16% of the total, and it tends to follow surgeries. This segment has not benefited as much as the medical side, especially in areas like beds and stretchers. I believe small capital will align more closely with the resurgence of elective procedures, which will also depend on hospital liquidity. Through Flex Financial, we can assist hospitals in financing these purchases in various ways. This situation is quite different from the Great Recession regarding the impact on the medical business, but there will still be ongoing uncertainty about how stockpiling will adapt to the new normal.

I have a quick follow-up, which is another big picture question. Kevin, some other medical device CEOs believe that growth could return by the fourth quarter. I'm curious if you, based on what you're observing in the world and from your customers, share that optimism or if you're feeling a bit more cautious.

Well, thanks, Bob. As you can imagine, we've run a lot of scenarios, and I don't have a crystal ball, but certainly, that is a scenario that we think could very well happen. The pent-up demand is there. I think the recovery will probably come in waves. So you have a number of employees that are furloughed that would love to get their procedures done now while they have healthcare coverage, worried about what could happen in the future. That could be a first wave of resumption of procedures. And then you also have people who have taken time off and that may not be able to take time off later, so that could cause a slight dip and then a resumption again. But it really is going to relate to how the overall economy recovers and how the virus evolves in the future. But that certainly is a scenario that we believe could happen. But again, this is uncharted water. So we'll see.

Your next call comes from the line of David Lewis from Morgan Stanley.

I'm going to reiterate Bob's comments, Katherine. Congratulations. I have just a couple of quick questions. I wanted to explore Bob's question from a different angle. There seems to be a perception among some of your peers that economic exposure to recon is somewhat unique. First, there are other device procedures that are less deferrable, while orthopedics are considered more deferrable. What are your thoughts on the economic sensitivity of hips and knees? There seems to be a general belief that they are very economically sensitive, but the data isn't entirely clear regarding the expectation that orthopedics would recover after other types of medical device implantable procedures. What is your perspective on that economic exposure and your recovery in comparison to other med tech?

Well, David, I mean, obviously, this is uncharted waters, as I mentioned at the end of my answer to Bob's question. But what I would say is the hospitals are very motivated to do our procedures. If you think about orthopedics and spine procedures, they are moneymakers for hospitals. And the hospitals who are treating coronavirus patients now are bleeding in their P&Ls. So there's a financial motivation. Also, patients certainly that are suffering would like to get those procedures done. So I'm not in some of the other spaces of other elective procedures, so it's hard for me to do a compare and contrast. But the hospital CEOs and the surgeons that I've spoken to are all absolutely gearing up to start bringing back their patients. And the surveys they've done with patients have suggested that patients are very comfortable coming back. As soon as the hospitals say it's going to be safe for them, I think those patients will be coming back. So I don't believe that there's something unique about orthopedic surgery that would cause that to be pushed to the back of the line. On the contrary, given its economic impact to the hospitals, I think it could be moved earlier in the chain.

Okay. Very helpful. And then just a related question. Just Glenn gave us some numbers on the percent decline in April procedures. So a couple of questions there were just have you seen in recent days or a rolling 7-day average, a recovery or any kind of bounce off the trough for your orthopedic procedures? And there's been a lot of discussion around inpatient versus outpatient. Have you seen a difference in terms of how procedures are recovering if they are in inpatient versus outpatient? Is there an opportunity to use this particular pandemic as a way of pushing more procedures to the outpatient market?

Yes, David, there's a couple of questions in that. I think the first one, the percentages that I gave you are absolutely up to date. And so I don't have any sort of further data or information that would support a bifurcation of that. In terms of looking at what's going to outpatient or what's inpatient, I think it's still too early and it's still dynamic, and it's evolving in the moment. So it's something that we obviously are watching very closely. And as soon as we have data or monitoring on it, we would provide that. But I'll let Katherine comment on that as well.

Yes. I just would follow-up, David. Just keep in mind, the shift to recon procedures in the ASC setting is already underway. This probably continues us down that path, but there's only so much capacity. There are about 300 ASCs in the U.S. that are doing hip and knee procedures. They are essentially running at full capacity. Now they may be able to do more by staying later on working weekends. But that is really dwarfed by the number of hospitals in the U.S., which is about 5,000. So I think you're going to see the shift continue, but I wouldn't expect some massive climate change in the trend because the capacity just isn't there to absorb it.

Your next call comes from the line of Vijay Kumar from Evercore ISI.

Maybe one on the robotics side. I know it falls into the large capital bucket. Is there a view that either hospitals see this as a differentiated investment as a way of differentiating themselves from peers? So when we think about in the post-COVID world, that demand should normalize for something like Mako? Or just maybe give us some color on how we should be thinking of what Mako, because there is a view of that as systems are capacity constrained, maybe utilization of robotics might lag a little bit here.

Yes. Thanks for the question. I would say that those surgeons that are believers in Mako or believers in robotics will resume their normal amount of work. We had terrific momentum. You can even see if you look at the line of other orthopedics, it performed very well in the quarter. We did see a bit of a slowdown in some of the Mako orders being delayed a little bit. So liquidity of the hospitals is important when you're outlaying large amounts of money. But we see tremendous signs of continued interest. No orders are being canceled, just being delayed a little bit until elective surgeries resumes. And yes, hospitals do see it as a differentiator, and we continue to be very bullish about the prospects of Mako. Underscoring what Katherine said earlier about Flex Financial, I think that's something that we're going to use even more probably as ASCs want to acquire Makos, and they don't typically have the same size of capital budgets, but we have a number of different vehicles to help them finance their capital. And so we do expect to Mako to absolutely resume the kind of trajectory we're on once the elective surgery comes back in force.

That's helpful, Kevin. And maybe one for Glenn. On the cost structure, fixed versus variable, how should we think about decremental margins here as you think about the next, call it, 3 to 12 months?

Yes. At this point, just given sort of the fluidity of the situation and looking forward, I'm not sure that I can guide you to an exact sort of margin number. I will say that to the extent expenses are discretionary, what I've mentioned, travel meetings, consulting, and many other things, we have curtailed those or discontinued those. We discontinued most of our hiring, and we furloughed manufacturing employees that are at facilities where we've slowed down or stopped certain lines. It's really difficult to sort of predict our exact operating state. I do think some of those expenses, obviously, will come back as we ramp back up. But at this point in time, as I think about our future cost structure, I do anticipate that many of these things will be impacted and we'll feel the impact from them throughout the remainder of this year and, frankly, on into 2021.

Your next call comes from the line of Matt Miksic from Crédit Suisse.

Just one follow-up, if I could, on ASC for Katherine, your comments on the number of orthopaedic-oriented sort of ASCs out there. Could you talk a little bit about the potential impact on spine? And then I had one follow-up.

Yes. Sure. I can take the first part of that. Okay. Sorry, Katherine. I'll start that. So spine procedures are done in the ASCs, but they tend to be the more basic procedures like ACDS. So it's not an enormous part of the overall spine market, and we think we're well positioned there to be able to deliver the products needed for those procedures. Sorry, Katherine, go ahead.

No, nothing additional. Just to say, it's probably low single digits, the percent of spine procedures that are done in the ASC setting at this time.

Got it. Okay. Regarding your observation about the majority of the increase in elective orthopedic procedures, it seems that this needs to take place in acute care centers. What are the next steps you foresee in that area? What constraints do you anticipate? States are beginning to open up, is that accurate for mid-May? Is it a certain percentage of utilization that triggers this? What indicators do you expect to see in the coming weeks to help us understand if this is occurring and to what extent?

I think it's going to be very gradual. We're seeing states, and not just in the U.S., overseas, they're moving slowly, and it really just depends where they are in meeting guidelines, where they are in peak cases. So we don't have a perfect formula to tell you what it's going to look like. It just seems to be pointing in the direction, and this is uncharted territory, but pointing in the direction that we're going to continue to see more and more states resume elective procedures. Those patients need to be treated. As Kevin indicated, it's a profitable procedure for hospitals. And so I think it's just going to be gradual. So we're probably in a better position a month from now than we are today, but it's also very much a wait and see as hospitals get increasingly comfortable and start to recognize the new normal of how they deal with COVID patients while also recognizing they have to treat the broader spectrum of patients.

Yes. The only thing I'd add to that comment is a lot of hospitals are actually gearing up to be able to work extra hours, even on weekends. They won't do that day one. Obviously, they're going to gradually start to bring patients back, but that's something that they're planning for in the back half of the year. And so I do expect, as I mentioned before, seeing this recovery come back in waves is pretty likely.

Your next call comes from the line of Larry Biegelsen from Wells Fargo.

One product question and one kind of big picture question. Just on the April trend of negative 25%, I think, for neurotechnology and spine, did that apply to your neurovascular business as well? Or has that been more resilient? And I had one follow-up.

Yes, Larry. Yes, that did include our neurovascular business as well in that statistic.

Got it. And Kevin, just taking a step back, what do you think the long-term implications are of this coronavirus for med tech? And how are you positioning Stryker for success in a post-coronavirus world?

No, thanks. That's a big question. I think we're very well positioned given the diversity of our portfolio. Obviously, elective surgeries are important to us, but we're not only an elective surgery company. The fact that MedSurg is the largest of our three segments certainly helps protect us and insulate us from the full effect. I believe that our diversification will serve us well, and we still have confidence in our strategy. This situation will not change our focus on category leadership and maintaining strong positions in all the segments we operate in. We remain committed to our approach to mergers and acquisitions. We will emerge from this situation, and I believe that our conservative balance sheet has really benefited us. Even with the upcoming Wright Medical acquisition, we maintain a strong financial position. Things will change, particularly in terms of travel. I’ve observed that we've learned a lot about technology. Our engagement with customers has been impressive, including surgeon and hospital engagement. Even within our company, despite our high-touch culture, we are discovering that technology can facilitate remarkable educational opportunities. I believe this will become a more permanent aspect of our operations. Our R&D teams are adapting to work very effectively, including virtual collaborations with surgeons. These developments are likely to be more lasting. The trend towards ambulatory surgical centers will likely accelerate, although, as Katherine noted, there's still a long way to go. Nonetheless, that pace will increase. Those are probably the two points I'd highlight. Aside from that, I think we'll return to the regular momentum we had before.

Your next call comes from the line of Pito Chickering from Deutsche Bank.

I want to echo thanks to Katherine for lots of your help over the years. First question is, as several states are moving to allow surgeries to start happening again, what is your sales force in those states telling you about what the doctors are planning? And how does OR block schedules look in those states?

Thank you, Pito. I don't have definitive data because it really varies. There are hospitals, even in New York, gearing up to resume elective procedures, particularly hip and knee surgeries, starting in May. The situation will depend on the type of hospital, teaching institution, or their geographic location. Some may conduct more procedures over the weekends or in the evenings. They are all highly motivated, and we know that their patient waitlists are quite high. Although there are some concerns about patients returning to hospitals, our discussions with customers indicate that their waitlist remains strong and patients are heeding their doctors' advice. They listened when told to postpone surgery and will return when informed that it's safe. They recognize that they won't have procedures like hip and knee surgeries in the emergency room, where concerns are greater, which makes them feel more comfortable. However, there isn't a perfect model for how they will manage this situation. Flexibility and various strategies will be necessary to address the backlog of patients needing treatment.

Yes. Sure. Thanks, Pito. I can tell you we're seeing the surveys. And many of the hospitals have pretty good feedback from their patients who are waiting for surgeries. And it is encouraging to see, as you said earlier, that everybody is raring to go. They are high incentive to get back to work and bring back those patients. So we have good indications that hospital OR scheduling will start ramping up in May.

Yes, I would just add to that, Kevin, that we do know that some states are preparing to call in even more. And there is a lot of planning underway right now to address the backlog.

So it is hopeful.

Your next call comes from the line of Richard Newitter from SVB Silicon Valley.

I wanted to ask on any protocol changes that are happening or that you're hearing about from your customers with respect to reps and the way you deliver your implant businesses to the physicians being allowed in the ORs and the hospital. How is that going to change, if at all? And then I have a follow-up.

Yes. So far, we haven't really seen any change. As you know, many of our representatives are present in the hospitals, including our trauma and neurovascular representatives. Today, as well as in the context of revision surgery or oncology surgery within joint replacement, our representatives are in the operating room alongside the medical staff performing those procedures. We've received some information that there may be testing required for our sales representatives in certain locations. However, it's still very early, and the focus is on ensuring they have the appropriate personal protective equipment and are properly equipped to avoid transmitting the coronavirus. Aside from that, we haven't heard any discussions about restricting access or limiting entry. Again, it's quite early, and hospitals are developing their plans. What we've primarily heard so far pertains to PPE and whether the representatives are trained and aware of how to properly use it, along with the possibility of some testing aligned with the expectations for their own staff attending those surgeries.

Great. And then just on the big ticket capital items, I was just curious, you said no one's really canceling as right now is more a postponement. I'm curious, what are they saying that they're going to need to see as you have the conversations? What do they need to see to potentially resume their decision-making process? And are you getting the sense these are 6- to 12-month delays or truly just indefinite?

Yes. I think they're temporary delays. I don't think they're indefinite. Look, there's a lot of uncertainty right now. They don't know if they're going to get a bolus of new patients for coronavirus. And the hospitals that are, let's say, New Jersey, New York, those that are at the epicenter or even Detroit, they lose a lot of money while their hospitals are not having elective surgery and while they're treating coronavirus patients. So obviously, the first $30 billion has been doled out to the hospitals. The next $30 billion is coming. The general allocation method didn't provide extra money to those patients, those hospitals that were treating coronavirus patients. $10 billion of the next $30 billion is going to be disproportionately pushed to those hospitals. So waiting to receive the money and seeing how much each hospital gets is very important to their overall liquidity profile. And then as they resume elective surgeries, as I mentioned earlier, that is really going to help shore up their financial situation. And so that's what they're waiting for. If the governors declare delays in the elective surgery ramp, their financial situation deteriorates, just like ours does. And so that's the unknown that we're waiting to resolve. And even if they're not back to 100%, if they're back doing elective procedures and they have some line of sight to financial stability, then they'll be inclined to start to make those purchases because they do want to differentiate themselves. They do want to deliver great service to their customers. And so it's just the uncertainty around their financial stability and their liquidity that is what they're waiting to resolve.

Your next call comes from the line of Joanne Wuensch from Citibank.

Katherine, congratulations. I have two questions that are related. How do you think about the recovery in the procedures that have been postponed? Another management team thought that maybe 0% to 15% would come back in the back half of this year. Can you comment on that? And then big picture in your portfolio, which ones of your procedures come back first?

I believe that most of the procedures we perform will eventually return. Osteoarthritis is a degenerative condition, meaning patients will require these procedures again, particularly for hips, knees, and spine. However, we've noticed an unfortunate trend in the stroke area where many patients are hesitant to visit the ER. We initially thought this demographic would be relatively secure, similar to trauma cases, but that has proven to be inaccurate. As a result, people are enduring strokes at home, and part of this situation is related to elective care, which I wouldn't have anticipated. As patients gain confidence and as the incident and death rates continue to decline in many areas, they will likely feel more comfortable returning to the ER, leading to a resumption of that patient volume. In my view, the projection of 0% to 15% returning appears unusually low, and we anticipate a significantly higher number. What remains uncertain is the speed of their return.

No, I agree, Kevin. I think we just have to wait and see how it plays out whether this is a V or a U-shaped recovery. It has different implications, but I don't think we could provide any more detail or specificity.

I can't really answer that because it depends on the locations and the hospitals. Are they equipped? Can they have separate facilities for their coronavirus patients? If they can, they'll conduct whatever procedures they have the equipment for in those operating rooms. I'm hearing a lot of pent-up demand, especially in orthopedics. Many of those physicians are not employed by hospitals; they might be affiliated but not employed, and they are very eager to get back to work. These procedures are also quite profitable for hospitals, so I believe they will return fairly quickly.

Your next call comes from the line of Ryan Zimmerman from BTIG.

I just want to follow-up on Raj's earlier question, and it's really around pricing. MedSurg came in positive for the first time, and I think it's 8 quarters on pricing. And it just seems that pricing is a little less pronounced right now. And is that a function of hospitals maybe taking their foot off the gas there? And kind of what are your expectations for pricing in the back half of the year, maybe when they have a little more time to focus on it? Could we see that increase a little bit? And then the second one is a follow-up to that. And you didn't call out pricing in spine in the press release. I'm just curious if you could comment on some of the pricing dynamics there in that segment of the market.

Sure. So first off, in terms of pricing and you think about our portfolio of businesses, generally, on the orthopedic side, we have more pricing pressure than on the MedSurg side. And actually, even within MedSurg, if you look at some of our businesses that largely sometimes have positive pricing, medical would be one of those businesses. So I would say that as you look at Q1 or you think about Q2, business mix is going to really influence where pricing is going to land. And if there's sort of less ortho and more MedSurg, I would say pricing would be a little muted. I do think, though, moving forward, the same controls and pricing, sort of procedures and functions that exist in the hospitals will always continue to exist. We have always felt pricing pressure, and I don't expect that, that will let off at all. So I do think that it's not really a function of hospitals getting back to it for us. It's really going to be a function of sort of business mix within our sales line. And then on the spine front, I don't have any real specific guidance on spine pricing. I mean, spine is probably within orthopedics, one of the most sort of price-sensitive product lines that we sell. There's loads of spine companies. I would say, if anything, maybe the current environment will drive out some of the spine competitors. And so with fewer competitors, maybe spine pricing will level out a little bit. But it's really uncertain at this point.

Your next question comes from the line of Josh Jennings from Cowen.

Just two quick questions. First is, just wanted to check in on development programs, particularly the Mako new indication development. Spine and extremity, I think you have talked about historically, you haven't provided timelines, but this crisis delays any timelines, even though we don't know what they are at this point for one. And then second, just Kevin, being the Chairman of AdvaMed, any core initiatives the group is pursuing to support the med tech industry?

Certainly. In the first quarter, our R&D spending was consistent with our usual levels, and we remain committed to our R&D efforts, including Mako and future indications. We aren't ready to share specific timelines just yet, but we are fully engaged in all our R&D activities. Regarding AdvaMed, it’s been a busy period as I am currently in my second year as Chairman. We have weekly calls with industry CEOs, with our initial focus being on ventilators. Currently, the emphasis has shifted to testing since diagnostic companies are also part of AdvaMed. We are collaborating with the administration and FEMA to ensure there is a clear supply signal and to help address demand needs. While we don't define the testing protocols, we are actively discussing this shift. The conversation around PPE continues, but testing has become the primary focus as governments are figuring out how to resume normal work activities. Being part of this trade association highlights the incredible work our industry does, especially in challenging times, and I take pride in how the industry is stepping up to support our customers.

Your next call comes from the line of Matt Taylor from UBS.

This is actually young Xuyang Li for Matt. Maybe just one question. I was wondering, when it comes to your hospital customer finances, do you have a view on maybe how many of them are a little bit distressed in this environment? And how can that disrupt the recovery curve?

Yes. I don't have insights into what hospitals may be distressed. I mean, my guess is that, obviously, their cash flow of most hospitals is under stress just because they don't earn as much money treating COVID patients as they might during elective procedures. I do think that between government grants, external financing, once hospitals can demonstrate positive cash flow again. And even our own programs with Flex finance, there's plenty of capital availability for hospitals. And so I think that moving forward, once things settle down and we see sort of a trajectory ahead, that a lot of those programs will kick in and allow hospitals to sort of reinstate capital buying programs.

Your last call comes from the line of Kyle Rose from Canaccord.

I would like to discuss the commercial structure, particularly in light of the cost changes mentioned. Are you noticing any significant trends regarding the level of support and the responsibilities of sales representatives on a case-by-case basis? Additionally, there has been discussion about the potential for models without sales representatives or using virtual models in the operating room. How does this impact the long-term cost structure reflected in the SG&A line?

So look, at this point in time, we're not really seeing any change to the way our reps provide service and support our customers. I think what we're learning about virtual tools is they can be additive to our offense. The idea of completely replacing our sales reps, you know companies have tried this in the past, and it has met with pretty big failure. But I do think there is a role for technology. We are seeing a little bit of this in Japan. And so I think technology can be an additional tool in our arsenal, certainly for training. And even in terms of support that it could provide some benefits, potentially some benefits in SG&A. But I would say those are very modest at this time. It's very early. And I think as things resume, it's going to resume much more in the manner that we saw prior to coronavirus and then potentially you could see acceleration afterwards. I think rehab, for sure, the patients are very comfortable going home and trying to do their rehab at home and using virtual tools. I think you're going to see a lot more of that. There has been some movement. That's increasing. I think the surgeon consultations that used to occur in surgeon offices, that's going to be a lot more virtual, that's happening now. And certainly, the payers are a lot more comfortable paying for that, which they weren't before. But as it relates to the nuts and bolts of our procedures in the operating room, I don't see any dramatic change at this time.

I have a follow-up question regarding pricing. I value the earlier comments about spine. You mentioned that physicians in hospitals are experiencing financial challenges. Are there any expectations for increased price pressure, particularly concerning the recon side of the business?

We haven't observed any significant change that would lead to a price adjustment for implants, and this situation has persisted for quite some time. Our prices do tend to decrease each year, but they have stabilized. There is no new factor affecting a substantial reduction in pricing, so I anticipate that our price outlook will remain fairly consistent going forward.

There are no further questions at this time. I will now turn the conference back over to Mr. Kevin Lobo for any closing remarks.

As I said in my opening remarks, I would like to once again thank the frontline healthcare professionals and first responders for everything that they have done and continue to do. I'm also proud of the efforts of our employees who are showing great resiliency in continuing to serve our customers in this difficult time. Thank you all for joining our call. We look forward to sharing our Q2 results with you in July.

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