Zimmer Biomet Holdings, Inc. Q1 FY2020 Earnings Call

Good morning, everyone, and welcome to the Zimmer Biomet First Quarter 2020 Earnings Conference Call. I will now hand over the call to Keri Mattox, Senior Vice President of Investor Relations and Chief Communications Officer. Please proceed.

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. I want to start by acknowledging that we are in different locations right now, so I apologize for any awkward transitions during this earnings call and for any connectivity issues or background noise you might hear. I hope you and your families are healthy and safe as we navigate this unusual environment. Personally, I’ve spent more consecutive days at home with my family than I have in the last 20 years, and they are eager for things to get back to normal. I’m sure you are doing your best to manage through this as well, which has also provided opportunities for learning about ourselves and our families. Given the unprecedented situation with COVID-19, we do not have a historical comparison to guide us, as there has never been a global pandemic that has brought the world to a standstill. The significance of this situation means we’ll be spending considerable time discussing it on today’s call. I will provide an overview of how it’s impacting ZB and what we anticipate moving forward. You can expect a lot of information during the Q&A, and I want to ensure you leave with at least five key takeaways, which I believe are the most significant points of our call. First, Zimmer Biomet prioritizes the safety of our team members above all else. I'm pleased with the momentum we've gained early on to ensure their safety and the energy we've committed to this effort. Second, we have confidence in our liquidity and financial flexibility to navigate this challenging period. I'm proud of the proactive actions Suky and his team took to strengthen our organization from the outset. Third, we are confident in the eventual recovery, with a majority of patients likely to return to the healthcare system. The timing remains uncertain, but our outlook is positive. Fourth, we will continue to invest in key strategic areas, including research and development and commercial projects, while also managing expenses. Finally, the work we’ve done over the past two years has prepared us to face this challenge more effectively than we would have been able to two years ago. We believe we will emerge from this crisis in a stronger position. Now, let’s dive deeper into our focus on safety. Interestingly, as part of our crisis management planning, we developed a comprehensive global pandemic plan shortly before COVID-19 became widespread. This preparation allowed us to mobilize quickly, implementing work-from-home policies, travel restrictions, and maintaining strict protocols at our facilities to protect our essential workers. I want to thank our team members, especially those in manufacturing, distribution, and commercial roles, who have gone above and beyond during this time to ensure that the healthcare professionals we serve have what they need. Now, moving to the second point about our liquidity and financial flexibility. As COVID-19 challenges emerged, we acted decisively to reduce costs and secure the company’s liquidity. We refinanced a significant portion of our debt and secured additional credit facilities to strengthen our financial position. We have also continued our restructuring efforts to streamline our organization and drive efficiency, which enabled us to pivot quickly to address COVID-19 impacts. Regarding our confidence in recovery, we had strong momentum going into the pandemic, but our business has been significantly impacted due to our reliance on elective procedures, which account for over 80% of our global revenue. However, we believe these patients will return, as the critical nature of procedures like knee and hip surgeries drives their need for timely interventions. Historical trends suggest that patients typically do come back after deferrals following disruptions, although the timing may vary due to factors such as operating room capacity and patients’ comfort levels. Looking ahead, we plan to continue investing in high-priority areas, including R&D and commercial projects. We introduced mymobility LE, a lower-cost version of our mymobility platform, designed for rapid deployment to support patients during COVID-19. Additionally, we transitioned to virtual experiences for our healthcare partners when the AAOS conference was canceled, which has been well-received. Finally, we believe our efforts over the last two years to transform our company put us in a better position to handle this challenge. Our culture, business strategy, and operational improvements have enhanced our readiness. We view this time as an opportunity to drive innovation and strengthen our market position, and now I'll turn the call over to Suky for more financial details.

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 deferrals in early February at varying levels across the region and at varying times during the quarter. Since it was one of our first markets to be impacted, I'll provide more color on China, which represents about 20% to 25% of the region's revenue. Here, we observed the largest and earliest declines, with procedures down 75% to 85% from early February to mid-March. This 6- to 8-week period represented the peak of deferrals. Since then, procedures in China have steadily increased, exiting the last week of the first quarter at about 40% down. So we saw some positive trend in China in the later part of the quarter. In April, China continued to improve and is averaging procedures being down about 25% with steady weekly improvement. While China experienced some deep declines, Japan, our largest market in Asia Pacific, did not see a material impact from COVID-19 in the first quarter. However, there has been a modest decline in procedures since the country announced the state of emergency last month. In April, procedures and revenue in Japan are down about 15% and have been stable at that level. We remain cautiously optimistic that deferrals will not approach the levels of China as the Japanese government has not announced nor have we observed or seen a widespread deferral of surgery in the 4 or so weeks since the state of emergency was put in place. Across all of Asia Pacific, in April, the deferral of procedures led to revenue being down about 25% versus the prior year. Moving to EMEA. The region decreased 11.7% in the quarter. Across EMEA, we saw some variability in the onset and timing of COVID-19, with 2 profiles emerging. One, countries impacted more severely, which represents more than half of the region, including countries like Italy, Spain, France, the U.K. and others, where we saw a significant reduction in procedures starting in mid-March and exiting the final weeks of the quarter down about 80% versus the prior year. Two, countries with a more moderate impact. This represents the remaining portion of the region and includes countries like Germany, Austria, Switzerland, among others. There, we saw reductions of about 60% in the final weeks of Q1. The level of impact in these markets continued into April, with both groups observing further declines. Overall, in April, we saw EMEA procedures or revenue down about 75% versus the prior year. While we've seen some recent encouraging policy actions in many parts of EMEA, it's still too early to tell what level of impact this will have on revenue uptake in these markets. Lastly, the Americas decreased 7.7%. Here, the COVID-19 impact ramped up materially in mid-March with the U.S. shutdown and with federal and state government's guidance to defer elective procedures. The final 2 weeks of the first quarter, the region saw procedures or revenue decline about 70% versus the prior year. Within the U.S., states were broadly impacted at about the 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 policy steps to reopen elective procedures with the vast majority expected to do so by mid-May. It's too early to determine the ramp of procedures in those states, but this is an encouraging sign. So let's turn to our businesses for Q1. Our global knee business declined 8.3%. Prior to the impact of COVID-19, we saw strong performance in the category driven by improved operational execution and the continued positive launch of Persona Revision. ROSA contributed to the sales early in the first quarter, with COVID-19 negatively impacted overall capital sales. Our hips business declined 9.7% in the first quarter. Underlying performance in hips prior to COVID-19 was solid due largely to continued launch traction for Avenir Complete. Sports, extremity and trauma sales declined 5.8% in Q1. The first quarter decline was not as pronounced as in knee and hip, primarily due to the trauma/fissure, which is less selective by nature. However, we did experience a softer trauma market due to a generally mild winter and lower activity as a result of the global quarantine. Looking beyond Q1 for revenue. As you know, we withdrew our 2020 full year guidance on April 6. The impact of COVID-19 continues to be fluid, and there are multiple market dynamics and variables that we're unable to quantify at this time. Given the current environment, we will not be providing updated financial 2020 guidance. But we do want to share information and insights into our business that might provide shaping of our revenue expectations for the remainder of the year. We expect to see a sequential deepening of procedural deferral rates in the second quarter relative to the first quarter. As I mentioned earlier, we observed a consolidated revenue decline of about 70% in April when compared to the prior year. And to recap, in April, by region, we saw declines of about 25% for Asia Pacific, about 75% for EMEA and about 80% for the Americas. Within April, we observed fluctuations by market throughout the month, with many remaining stable and some slightly improving their revenue ramp. As a result, we project May to be similar or slightly better than April, with an improving trend in June as countries and states reopen and begin to ramp up elective procedures. We currently anticipate that the sequential improvement will continue into Q3 and then again into Q4 as procedures return. But the rising level of improvement remains fluid. Also, we do not assume a significant recurrence related to COVID-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 P&L and liquidity. We're taking a disciplined and proactive approach to mitigate the earnings impact of the pandemic and to enhance our liquidity profile. However, COVID-19 will continue to put pressure on our earnings and free cash flow profile through 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 $2.46 compared to diluted earnings per share of $1.20 in the prior year period. Adjusted diluted earnings per share were $1.70 compared to $1.87 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 and to lower future cash flows due to the 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 10-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 COVID-19 as the most pronounced impact was not felt until late in the quarter. However, COVID-19 will put additional pressure on gross margins for the remainder of the year due to less favorable mix and lower fixed cost absorption as a result of decreased revenue. Adjusted operating expenses were $831 million or a decline of 7.6% versus the prior year. Key drivers of the lower spending were reduced variable selling expenses related to lower revenues, the early impact of our restructuring program announced earlier this year and additional cost reductions as a proactive measure to deal with the pandemic. We were able to flex quickly on COVID-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 the pandemic will have an even larger impact into Q2. Overall, adjusted operating margin for the quarter was 26.1%, 50 basis points lower than the prior year, again, driven by lower revenues. Moving beyond operating margin. Interest expense of $51 million was down versus the prior year due to debt paydown through 2019. And our adjusted tax rate was 15.7% in the quarter, lower than expected due to the impact of 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 have taken a number of steps to enhance our liquidity profile, including securing an additional credit facility backstop, amending covenants for greater operating flexibility and moderating cash expenditures 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 of free cash flow in the quarter. Our ending cash position was higher than normal due to the execution of a $1.5 billion of new senior notes in early March. Those funds were used to term out a $1.5 billion senior note maturity early in the second quarter. To neutralize for this timing difference, underlying ending cash and marketable securities was about $900 million at the end of the first quarter. In April, we secured an additional $1 billion credit facility that will be in place through this calendar year, and we have our existing $1.5 billion credit facility that was in place prior to COVID-19. Combining cash and our available credit facilities, 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 5.75x through 2020 instead of the 4.5x covenant in place prior to COVID-19. Also, both facilities remain untapped. For more details about the new credit facility and the amendment through the existing credit facility, please refer to our Form 8-K filed on April 29. The steps we have 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 consistent with what we outlined earlier this year. But in the near term, we will focus our energy on navigating the challenges of the pandemic while strategically prepared to meet demand as end markets recover. In terms of our P&L for the remainder of 2020, we do want to provide some broad insights to help you think about the rest of the year. Moving forward, the majority of our remaining cost base is fixed in the near term. And as a result of deeper revenue erosion, we expect margins will be significantly impacted in the next few quarters, down from Q1 and negative in the second quarter. If the revenue trajectory improves in Q3 and Q4 as we project, we anticipate that margins and earnings will also improve. But earnings improvement may lag revenue improvement as we plan to increase our investments to prepare for market recovery. Free cash flow should have a similar profile to earnings. We do want to remind you that the situation remains fluid, and these comments represent our best estimates at this time. To summarize, our underlying financial fundamentals remain strong, and we have taken prudent steps to enhance our financial flexibility and liquidity profile. I'm proud of how the ZB team has responded to the crisis. We believe we're well-positioned to address this challenge, lead in the recovery phase and accelerate our growth profile over the long term. With that, I'll turn the call back over to Bryan.

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 number one 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, may we have the first question, please?

We'll take our first question from Chris Pasquale with Guggenheim.

Bryan, I want to start off by saying that it’s not surprising the business was weak given everything that occurred late in the quarter. However, it appears you lost some ground in hips and knees this quarter, which reverses a recent trend of narrowing that gap with peers. Can you discuss how you feel the quarter went from a competitive perspective?

Yes, Chris. To be honest, I don't fully agree with that statement. This quarter was particularly confusing due to day rate differences and variations in business across different regions, which may have been impacted by COVID-19 to varying degrees. It's really tough to draw definitive conclusions about market share dynamics from this quarter, or any quarter for that matter. However, I felt quite positive about our performance in hips and knees prior to COVID-19, and I was confident that everyone would be pleased with our results based on the trends we were observing. Although I can't say for certain what's happening with my competitors, I believe that their performance has exceeded my expectations overall. In their earnings calls, many also expressed confidence about their business. While it’s just one quarter, this suggests that many felt positive momentum in Q1, which is encouraging for all of us. I want to see our company succeed, as well as our competitors, since growth benefits everyone. So, it's challenging to compare our numbers directly with others for the reasons I've mentioned, but the general momentum and feedback I’m receiving looks promising for the market, at least prior to 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 as 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.

I wanted to get your insights on the possibility of transferring cases to the ASC to boost capacity in the short term from a recovery perspective. What types of cases do you anticipate moving there? Additionally, when you consult with your physicians about scheduling procedures, what kinds of cases are being planned? Are you noticing any shifts in priorities, such as a focus on more complex versus straightforward procedures? Also, I'd like to know about the overall timeline for returning to normal volume, particularly in Q2.

It's challenging to determine the exact situation due to many variables at play, but it seems likely that patients might feel more at ease returning to an Ambulatory Surgery Center (ASC) than to a hospital. However, we won't have concrete evidence of this until we observe the actual patient return rates and can accurately assess how many are choosing the ASC over the hospital. One can speculate that there is a preference for not going to an acute care facility and instead opting for the ASC. We will find out more in due time. What I can say is that most of our procedures are suitable for the ASC, which is where our highest volume occurs. Initially, we're witnessing an uptick in the recovery of Revision cases compared to standard knee or hip procedures. Patients with more urgent needs seem to be the first to return. However, it's hard to predict with certainty as the situation is quite fluid. I generally anticipate a continued trend towards ASCs, but it's uncertain whether this will accelerate. Those patients with more acute conditions and a strong desire to return to care are likely to come in 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.

Thank you for your question. We are very excited about ROSA and the role of robotics in orthopedics. Nothing we've encountered recently has altered our perspective. We genuinely believe that robotics will shape the future of orthopedics. As Suky pointed out, the impact on us in Q1 was minimal, which is expected and not a concern. The bulk of sales for robotics programs typically occurs toward the end of the quarter. With the significant challenges faced in the U.S. during the latter half of the quarter, it is not surprising that many opportunities were deferred. The positive aspect is that we are not seeing any cancellations of our existing deals; they are simply being postponed, and we continue to experience strong demand for robotics. There remains high interest in training, a promising sign for the future of robotics. We are committed to being flexible with our customers. If they face difficulties, we have various options for placing robotic systems. Our primary objective is to ensure these systems are utilized effectively. It is essential to recognize that the major advantages of ROSA or robotic placements extend beyond the initial capital sale. While the upfront sale is valuable, the annuity revenue is more significant. Additionally, using the right contracting strategies often leads to pricing stability through longer-term contracts. The annuity revenue includes disposable income from every procedure related to a ROSA procedure, as well as increased volume from competitive offerings. For us, adjusting to support our customers during challenging times is crucial. However, our strategy remains firm. We need to ensure ROSA placements increase, which not only benefits patients through enhanced accuracy but also contributes to overall market growth.

Our next question comes from Joanne Wuensch with Citibank.

Could you elaborate on what it takes to roll out mymobility and how you expect to see it in action as we adapt to a new normal? Also, when you consider that new normal, when do you anticipate that procedures will return to a stable or relatively normal run rate? Will it be this year or next year? More specific insights would be appreciated.

I don't have specifics on the normal timeline we mentioned earlier, but I believe it's more likely to happen next year. It could be sooner, but that's difficult to predict due to many moving parts. Regarding mymobility, in any crisis, there’s an opportunity to shift from crisis management to optimization. mymobility is a platform we've had for some time, and interest in an application that facilitates virtual interaction with patients has surged fivefold since the onset of social distancing measures. People are eager to implement it. That’s why we introduced the LE, to enable rapid deployment while maintaining most features of mymobility for both patients and surgeons during these challenging COVID times. The good news is that demand for this technology has increased significantly, and our team is quickly adapting to ensure a successful launch of mymobility, targeting those accounts that are interested as fast as possible. While I would prefer the current situation not to exist, it is raising awareness of this technology, which benefits us as we already have 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 in 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. I don't see any significant change in pricing pressure. We've faced austerity measures before and deal with constant pricing pressure daily. I understand why some might expect more change, but the reality is that competitive forces keep pricing stable. I believe pricing will remain similar to what we've experienced in the past. It isn't a favorable pricing environment; we've consistently mentioned a range of 2% to 3%. I would be surprised if we see any major shifts in the short term. Our main focus now is on expanding our contracting, whether through ROSA placements, robotic placements, or leveraging cross-business contracts across various categories. This approach aims to support our customers during challenging times with longer-term contracts, which could enhance pricing stability. While I won’t predict improved pricing, I also don't foresee any deterioration in the short term.

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, I have a broader comment and a related question. There's a consensus view that orthopedics is more sensitive to economic changes compared to other elective procedures within the medical device sector. I haven't heard much discussion about the economy in this call. Do you agree that reconstruction is more sensitive to economic shifts? Also, considering your various businesses like dental, reconstruction, and trauma, which are quite different, how do you assess the recovery across those three areas?

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.