Smith & Nephew - Earnings Call - Q1 2020 TU

Transcript

Operator (participant)

Ten statements in this presentation are forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those included in these statements due to a variety of factors. More information about these factors is contained in the company's filing with the Securities and Exchange Commission, and right now, I would like to turn the conference over to your first speaker today, Mr. Roland Diggelmann. Please go ahead, sir.

Roland Diggelmann (CEO)

Thank you. Thank you and good morning. Welcome to Smith & Nephew's quarter one results. I hope this finds you all well and safe and healthy in these truly unprecedented times, and thank you for dialing in. I'm here on the call with Ian Melling, who is serving as our Interim CFO. As we announced last month, Anne-Françoise Nesmes will join as our new CFO by August 3rd, once her current commitments at Merlin Entertainments have concluded. I'd like to give you a brief summary. We've had a really good start to the quarter in January and February, and then, as March went on, the COVID-19 outbreak increasingly impacted our business globally. That pressure continued into the second quarter. We're now seeing encouraging early steps towards resuming elective procedures.

As well as quarter one trading, we'll cover in this call the trends we're seeing in key markets through April, some detail on our cost base flexibility, our balance sheet and liquidity, and the steps we're taking to prepare for recovering demand. Despite the current unprecedented challenges, I believe Smith & Nephew is very well prepared to meet them. Looking to the medium term, we have a proven strategy to enhance our growth with commercial execution, innovation, and business development. Our ambitions for the future are unchanged. We actually came into this crisis with really good momentum, also stemming from last year. Moving to the next, to the first page, and starting with first quarter revenue of $1.1 billion. That is a 7.6% underlying revenue decline, in line with what we indicated in our announcement on March 30th.

This includes the effect of one less trading day compared to prior years as well. The impact of COVID-19 was the main factor, of course, first in China, and then at the end of March in the rest of Asia Pacific, and then in Europe and the U.S. The Orthopedics and Sports Med ENT franchises are, as you know, predominantly driven by elective surgery. So, as you would expect, their sales have been most affected at -8.3% and -9.5%, respectively. Advanced Wound Management declined at -4%. I'm looking at the next page, looking at the geographies. We saw the greatest negative impact in emerging markets at 17.9% in the quarter. This was, as you'd expect, almost entirely driven by China, with sales down close to 50%. By the end of the quarter, we had seen restrictions on elective surgery spreading to most developed markets.

This resulted in a 4.7% decline in the U.S., 6.3% decline in other established markets. I'll now go into the details of the franchises, starting with Orthopedics on the next slide. Orthopedics declined by 8.3% in the first quarter. Both knees and hips were significantly impacted, with declines of 10.6% and 8.6%, as non-urgent procedures were deferred across all major markets by the end of the quarter. There were some bright spots, however. Revision hips still grew in the quarter. And we're also very encouraged by the early response to the launch of our OR3O Dual Mobility Cup and System. Other Recon grew 19.4% for the quarter as a whole, reflecting a very strong first two months of robotic sales before also beginning to decline in March. Trauma sales fell by 7.1%.

This business is less exposed to elective surgery, of course, but lower levels of activity in the society at large, and for example, fewer road traffic accidents have also meant that Trauma has been impacted by shelter in place and lockdown restrictions. Moving to the next slide, Sports Medicine and ENT, which declined overall by 9.5% in the quarter. All segments are primarily driven by elective surgery and are seeing a high level of treatment deferral. In Sports Medicine, Joint Repair declined by 7.1%, and Arthroscopic Enabling Technologies by 11.2%. Some products, such as REGENETEN, NOVASTITCH, and FLOW 90, continue to grow strongly, but were more than outweighed by broad-based pressure across procedures and regions. ENT also declined, and by 15.2%. Case volumes in ENT remain low, with more clinically urgent cases, such as cancer treatments, for instance, being prioritized by specialists.

Moving to the next slide into Advanced Wound Management, with a decline of 4% overall in the quarter. This is a category that is less exposed to COVID-19 restrictions, but it is not immune as well. Some use in elective surgery and reduced access of sales rep to hospitals has provided a further indirect headwind to this sector. Of the subsegments, Advanced Wound Care was down 6.7%, with COVID-19-related lockdown restrictions in the Asia Pacific region, the largest drag on performance as for the other franchises. Bioactives also declined by 8.6%. Both SANTYL and skin substitutes were impacted as hospitals prioritized COVID-related activities. Advanced Wound Devices was up 13%. And while it's pleasing that the business continues to grow in a difficult environment, low exposure to China helped in this case.

Negative Pressure Wound Therapy is exposed to elective surgery as well, and we're seeing delays to the rollout of some recent contract wins. Pressure on this business is likely to increase in the second quarter. I'd like to move on to the next slide and to more recent developments, and in particular, how we at Smith & Nephew are responding. So, on the next slide, what you can see is the second quarter and April results, with an underlying -7% revenue decline in the very month of April. We'd like to give you some additional insights. into what has been happening. So, the graphs that you see here show the year-on-year changes in our weekly sales across China, the U.S., and the U.K. for the months February, March, and April.

Now, we want to provide you some color, but I'd also like to caution against over-interpreting the week-to-week shifts in growth. We see inventory shifts, of course, timing of holidays. General volatility can produce pretty big swings on small absolute weekly values, so also, I want to be clear, we won't be providing this level of detail on an ongoing basis. As you know, China was the first market to be affected, and it rebounded at the beginning of April, as it was being down around 80% in the most affected periods. Please remember that in China, we have distributors in the channel, and they're restocking at the start of April, hence the spike that you see in the beginning of April. We believe that elective surgery had reached around 50%-70% of the normal procedural load by the end of the month of April, so good signs of recovery.

Developed markets started to be affected in March, as mentioned, and particularly in the last two weeks of the quarter. The U.S., our largest market, then saw around 60% decline in April. Europe, as a whole, saw less of a decline, at around 50%, with a wide range of impacts across individual countries. We're showing the U.K. here, what you see. It was down by around 40% for the month, with volatility driven by a large wound order coming in a single week. That's where you see the spike in the graph. Moving to the next slide and some movements towards restarting elective surgery. In particular, in China, which I've already covered. In the U.S., CMS has issued a framework for regions to restart non-COVID, non-urgent procedures, and that depending largely on hospital capacity.

Some states started to announce elective case approvals from April 22nd, and more than 40 states had made announcements by May 1st. While it remains to be seen exactly when this translates into a meaningful recovery in procedure volumes, it does suggest, however, we may start to see some early recovery in our largest market. We're seeing similar developments in certain other developed markets. Joint replacements gradually restarted in Australia from late April. In Germany, the Federal Health Ministry recommended for elective surgeries to restart at the beginning of May. We're also seeing similar trends in Switzerland and in Austria. Other countries, such as the U.K. and France, look likely to be more delayed, and we're closely monitoring developments for each segment in each market for early signs of a change. In Japan, we're still seeing slowing procedure volumes.

It's conceivable that there will be some policy response yet to come. Beyond that, though, we're not currently seeing meaningful new restrictions in our major markets. So now, for what we're doing on cost in the current environment, I'll pass over to Ian Melling, please.

Ian Melling (Interim CFO)

Thank you, Roland, and good morning, everyone. We've initiated plans and actions to save up to $200 million of costs in 2020 as a response to the unprecedented slowdown. The majority of this will come from SG&A, for example, from reduced variable pay, travel, promotional activity, events, and use of consultants. In addition, there will be some more modest savings from restricting hiring, managing overtime, and reducing the use of temporary staff. We also have scenarios for more beyond that in the event that the current slowdown persists for longer and further savings become necessary. I would reiterate, though, that while we expect to realize significant discretionary savings, cost control will be balanced with maintaining our ability to serve customer needs.

Commission would normally be a variable cost, but we recognize the need to support our commission-based reps in the current circumstances and to maintain our ability to capitalize on the recovery in demand when it comes. R&D expense will be largely protected, with only scope for modest cost reductions as we continue to invest in the innovation that's central to our strategy. There are also substantial fixed elements to our cost base. We're managing our supply in line with demand, and during the period of production slowdowns, you will see lower gross margins reflecting the inefficiency of the factories. While there are cost savings from SG&A, we are not reducing headcount at this stage in response to COVID-19. The around 40% of SG&A that is other costs, which includes many of the target areas for savings, has only a small naturally variable component.

More broadly, we will also have our usual cost inflation across the business that we will not be able to absorb through volume growth this year, and there is always potential for further short-term margin volatility driven by provisions, for example, inventory excess and obsolescence charges or bad debts. Your expectation should be for material negative margin leverage in 2020 and for that to be more pronounced in the first half. Turning to the next slide, our approach is supported by our strong balance sheet and our access to significant liquidity. As of the end of Q1, net debt, excluding lease liabilities, was $1.8 billion, with no committed debts maturing in 2020. That compares to committed credit facilities of $3.4 billion, including $550 million of senior notes to be drawn down in June 2020.

We have no financial covenants in our bank debt, with covenants applying only to our private placement debt, and our present low leverage means we could withstand a substantial trading downturn without breaching them. We're also continuing to allocate capital in line with our policy. Organic investment is ongoing through R&D, and our 2019 final dividend payment of $202 million has been approved and is being paid today. We're continuing to evaluate external M&A opportunities, although you should expect a lower rate of deal activity while the current uncertainty remains. And finally, on cash flow, at this point, we're seeing only modest disruption in cash collections, and we're continuing to pay our suppliers. We're also conscious of conserving cash where possible by slowing CapEx programs, although the long lead time on instrument sets limits how quickly we can react on that component and by managing costs related to restructuring.

Still, given the top-line impacts, cash flow, like profits, will be substantially below normal, particularly in H1. With that, I'll hand back to Roland.

Roland Diggelmann (CEO)

Thank you, Ian. I'll finish with some comments on what we're doing around the key priority of ensuring commercial readiness, so firstly, on people, obviously a big focus on people. Many sales reps, as Ian mentioned, are dependent on commission, so we're protecting a high proportion of their on-target compensation through the crisis. I think that is important to them. It's also important to the customers who understand the strain this could place on our reps, and they are pleased that we're focusing on retaining and supporting them, in particular, of course, for the recovery and the rebound. Our staff are also using their time for product and other training, which should lead to enhanced effectiveness on their return to the field. On customer support, we're also focused on supporting customers through this crisis, of course. Very, very important to us. We've stepped up digital delivery of professional education.

We're ensuring supply where procedures can still happen, and we're helping with the widespread need for PPE by increasing our capacity and facilities to supply face shields, for instance. On innovation, we, of course, continue to advance our innovative portfolio. This is absolutely critical to us. Our next generation robotics platform received FDA clearance in February, for instance. This is for use in unicondylar knee replacement surgery, and it is ready to launch as surgery begins to ramp up in the U.S. In April, we also received the CE certificate for REGENETEN, allowing EU marketing of this important product in our sports medicine portfolio. And in the R&D, M&A, finally, I think there's an opportunity to leverage some of our current M&A as activity returns. Consistent market feedback is that procedures outside of hospitals will be an important part of reopening healthcare systems.

Our Positive Connections offering can help ASCs, ambulatory surgical centers, with patient selection and reimbursement. The environment also should suit the rollout of Tula, which enables ear tubes to be placed in physicians' offices instead of in the OR. In summary, and moving to the last slide, obviously, we expect second quarter revenue and first-half trading margins to be substantially down on the prior year. Clearly, it's a difficult period for countries and healthcare systems around the world, and there is a significant short-term impact on Smith & Nephew. The speed of normalization in key markets and the timing of catch-up of deferred procedures remains largely uncertain, and that's why we will see a material impact on the margin and headwind in the first half. It's important to remember, however, that this is only a temporary situation.

Our focus is on being ready to meet patient and customer needs when markets recover, while, of course, controlling discretionary costs where we can. In the short term, we have key strengths in our portfolio. We have less exposed businesses, like wound management, for instance, and the financial condition to withstand this period of uncertainty. We're also seeing major markets starting to return to elective surgery, and I believe we're well positioned to take advantage. We have a broad range of leading technologies that we continue to add to, and we have an offering suited to the shift of procedures into decentralized, into ASCs, and into the physicians' offices. So, looking ahead, my team and I, we remain very focused on our long-term strategy and on our ambitions, which remain unchanged. So, I'd like to thank you for your attention, and we can now move to your questions.

Operator (participant)

Okay, ladies and gentlemen, we will now begin the question and answer session. And as a reminder, if you wish to ask a question, please press the star and one on your telephone, and wait for your name to be announced. Okay, our first question comes from the line of Veronika from Goldman Sachs. Your line is now open.

Veronika Dubajova (Managing Director)

Good morning, gentlemen, and thank you for taking my questions. I will keep it to two, please. The first one is just, Roland, would love to get your thoughts on some of the comments you've made around the U.S., the recovery that you're seeing. I think it echoes something that some of your peers have discussed, but I'm just curious, one, two weeks in, what's the situation like on the ground for the people who have reopened ORs? Are patients coming back? What's patient behavior been like? Because that's one of the things, I guess, where there is an element of uncertainty. So, it would be great to get your thoughts, whether anecdotally or if you can point to some figures here. That would be really helpful. And then my second question is actually maybe slightly off-piste, but just surprised by your wound care performance.

In particular, we've had a couple of your peers report numbers that were much more resilient than yours. Maybe if you can give us some color here, what the impact of China was, and as you look at the performance outside of China, what those numbers look like? Otherwise, I guess the conclusion might be that competitively you are seeing maybe a bit more pressures than some of your peers. It'd be helpful to understand that. Thank you.

Roland Diggelmann (CEO)

Yes, thank you, Veronika. Thanks for your questions. On the U.S. recovery, I think this is, of course, very different by state, sometimes by county, and of course, also very much by hospital. So, we're working very closely with our customers to understand their new protocols, as you pointed out. Infection control is obviously at the forefront of thinking here, and it's about making sure that patients have safe access to elective surgery again, but also, of course, protecting the staff and everybody, including, of course, also our employees. So, what we're seeing is gradual recovery here, very different in pace. We're seeing, of course, pent-up demand in patients needing and demanding surgery, but as you pointed out, it's about patients' confidence in returning. This is a process as well in terms of the hospitals rescheduling surgeries. It's not as easy as just turning on a new hospital.

Everything needs to work together, and we're playing an important part here as well. We have a lot of requests for guarantees on supplies, for reaching out to customers and supporting them for being on their side as they restart. So, overall, I can't give you numbers. This is a lot of anecdotal information, but we're seeing a lot of activity around how to get back to work, and remember, a lot of these institutions are for-profit institutions, so they have an inherent interest in getting back to work as quickly as possible, especially also as these elective surgeries, joint replacements, and sports med are moneymakers for the hospitals. We'll obviously monitor very closely, and we'll give you more information as we have. At this stage, it's pretty anecdotal, so I don't have any hard numbers to support that.

On wound care, indeed, we have seen a reduction in sales, 4% on the quarter. It is very much dependent, I would say, on the portfolio that we're having. Some part of the portfolio, of course, is closely related to elective surgeries. If the number of surgeries come down, of course, the wound care business is affected as well, and then on SANTYL and on skin substitutes, we have also seen a slowdown here indirectly because some long-term care patient institutions do not accept new patients anymore, so there's been a slowdown there, and there has also been SANTYL usually being a prescription by physicians, in which case when physicians are not visiting anymore, where there maybe is a nurse, there is not that prescription that is happening, so we believe we're going to get back to that when the situation starts to normalize.

But as pointed out, we have different segments which are affected in different ways.

Veronika Dubajova (Managing Director)

That's very helpful, Roland. And can I just follow up? For the hospitals that have reopened, do you have a sense for where their OR capacity is versus prior? I know we've had some conversation with folks who are saying maybe they're reopening 80% of their ORs. And then your thoughts on infection protocols, is that likely to impact the number of surgeries you can do per day?

Roland Diggelmann (CEO)

Very good question. So, I think every hospital is in a different recovery status, of course. They will develop individual protocols, always under the auspice of the broader guidelines. Infection control is a very, very important point, and it will affect the entire delivery of care, of course, from accessing the hospitals to the treatment and also to the rehab. We are currently understanding what that means. There is, of course, various protocols being implemented. You can imagine OR capacity and the turnover in ORs all the way to sterilization and the processes. So, everything is being reviewed. Everything is being looked at. I think at short term, it probably will impact the capacity, but I think it's also going to become a new normal, and we're going to see efficiencies there as well.

And I also believe that the system has the capabilities to, of course, extend OR times, extend OR days, and that's also discussions that we hear are happening because for weeks now, patients have not been treated, and so there is a pent-up demand that needs to be going through the system. So, I think while on one hand you will see inefficiencies build up, on the other hand, you will see more capacity being made available, and over time, I think that we will then also see a lot of efficiency improvements happening again.

Veronika Dubajova (Managing Director)

That's very clear. Thank you very much, and hope you're staying safe out there. Thanks.

Roland Diggelmann (CEO)

Thank you, Veronika. You too.

Operator (participant)

Okay, our next question comes from the line of Kyle Rose from Canaccord Genuity. You'll answer some of them.

Kyle Rose (Managing Director of Equity Research)

Great. Taking the question. So, I have one that I wanted to start on from a high-level perspective. Historically, you talked about the ASC in the outpatient setting as being an opportunity for the organization. Some of our diligence suggests that in an effort to increase capacity, you may see an increase in shift of procedures to the outpatient setting, at least over the near term. One, I just wanted to get your thoughts on that theme broadly. How do you view that with respect to Smith & Nephew's exposure? And then two, maybe help us understand and frame how much of that, what percentage of your revenues are in the ASC outpatient setting now, and how do you think about that over the medium and long term? And then I have one follow-up.

Roland Diggelmann (CEO)

Thank you. Thanks for the question, indeed. ASCs have obviously been a trend before the COVID-19 crisis. We've started to see more and more ASCs opening, a shift towards ASCs. Of course, it's from a small base, and it's certainly not going to rival the capacities that we have in the large hospitals. But overall, we see this trend in the U.S. towards more outpatients, towards decentralized care. And we're also seeing some markets in Europe and in Asia investing in such capabilities and capacity. So, it's a small amount of our sales. I don't think we've disclosed the number. I'd have to look it up, and we may be able to follow up with you. I think it is a trend. It is a trend that is helping us also with regards to our current presence in ASCs in sports medicine.

We're in most cases already calling on these customers. We have one of the leading sports medicine portfolios, and I think that we'll continue to see some convergence between sports medicine and joint replacement, be that technology-wise, be that customer-wise, always depending on different geographies, of course. I think we're very well positioned there, and this is an opportunity for us.

Kyle Rose (Managing Director of Equity Research)

Great. I appreciate that color. And then one of the touch on pricing pressures and then also how the appetite from health systems and hospitals might be impacted, at least for the capital goods part of the business when we think about both robotics, but then also some of the new technologies rolling out through the enabling technologies business. Maybe help us understand where hospital systems' appetite for capital is at this time and how that might adversely affect the enabling technologies. And then also any expectations for increased pricing pressure just given the profitability of these orthopedic procedures, but also the distressed nature that some of these health systems find themselves in currently. Do you expect pricing to accelerate over the near term?

Roland Diggelmann (CEO)

Yes, very good question, indeed. I'd say on the overall price pressure, we do expect that to increase. There's no doubt, and a lot of these systems will come out of this with challenges. On the other hand, we all know that we're fundamentally very strong and healthy businesses with the demographic shifts, with access to healthcare and emerging markets, so this has, of course, been there before and will be the driving factors for the future as well. What I can tell you is mostly anecdotal because we're just a few weeks into this situation, of course, so it is clear some hospitals have put capital expenditures on the back burner. I think this is temporary. I think they'll come back. I think they'll come back for two reasons. I think this is a trend, and this is also in search of more efficiency.

So, I don't think the trend will change, and I think the hospitals will continue to want to drive efficiency in their systems, so specifically to Smith & Nephew, I think we here too, we have an opportunity with our NAVIO, with our CORI platform on robotics because it is a modular system, because it is a small footprint, and because it is also less expensive than others on the market, so I think in every situation, there is also an opportunity, and that is one for us, absolutely.

Kyle Rose (Managing Director of Equity Research)

Great. Thank you for taking the questions.

Roland Diggelmann (CEO)

Thank you.

Operator (participant)

Okay, our next question comes from the line of Tom Jones from Berenberg. Your line is now open.

Tom Jones (Co-Head of European Research)

Oh, good morning. Thanks for taking my questions. I wanted to firstly follow up on the ASC discussion and then have a question perhaps for Ian. On ASC, it's been clear this shift from hospitals to ASC settings has been going on for a while. And I think the general belief is that the COVID-19 situation is going to accelerate that. Clearly, that's plain for all to see, and your competitors have also noticed that trend. So, aside from your ability to perhaps leverage your Sports Medicine business, which to be honest, over the years has been quite a hard thing to do, but maybe it's easier in ASCs. But aside from that, is there anything you think that gives you a competitive advantage in the ASC setting? Maybe you can give us a bit more color on your Positive Connections offering. So, that'll be my first question.

And then the second one for Ian, the $200 million cost savings, how should we think about the phasing of those over the year? Are they likely to be much more H1-weighted, or is that just kind of a pro forma number that we can divide by month and it will be tailored as and when the COVID-19 situation develops? Just some idea of how to think about that would be helpful.

Roland Diggelmann (CEO)

Sure. Let me take the first one on ASCs. And indeed, as you pointed out, this has been a trend. I think this trend will be further accentuated because of the current situation, because of the need to separate patients, because of the commercial interests, also because obviously we've had favorable CMS decisions that support further treatment in ASCs. So, I think this is an ongoing trend supported by the system at large, by customers, and of course also by suppliers. I do think that we have a really good Sports Med offering and that we can combine some of these offerings that we call on the same ASCs. I also think that there are digital solutions here. You mentioned Positive Connections programs that we offer to ASC customers, which are educational, which are advisory, which are also helping with financial processes.

So, I think there's a lot of adjacencies and digital solutions here that can support that. And that's a thing that we continue to roll out. We're very excited about some of these opportunities because I think they also look at compressing the revenue cycle timeframe, improve cash flow, and compliance for orthopedic procedures. So, very much things that ASCs and other institutions will want to do coming out of this crisis. Also, develop creative solutions for contracting issues, all the way to create payer-specific invoices, aggregate data, clinical, financial data into one repository, conduct education events through such platforms, etc., etc. So, I think there is a lot to be done there in helping our customers becoming better, more efficient, and in turn being the best partner we can be to these ASCs.

Tom Jones (Co-Head of European Research)

Yeah. And do you have any differing sales approach to an ASC versus a hospital? Because I mentioned with a hospital, it's easier to have one rep for the Sports Med business and another for the recon business. But within a smaller ASC, does it make sense to have one person selling both products? Or just some color on how you market to ASCs versus hospitals would be helpful, I think.

Roland Diggelmann (CEO)

Yes, yes, absolutely. I think we have created an entire team. We have specifically a Vice President of Ambulatory Surgical Centers at Smith & Nephew who looks specifically at the delivery and how we deliver our products and solutions. There is no one size fits all because, as you would know, ASCs are also very different. There are very large ones with multiple institutions to smaller ones. But I think that's absolutely what we want to do is be as close as possible to them and tailor our solutions to their needs, whether it's one rep approach, whether it's individual, whether it's then supported by other solutions. That is being determined on the ground and individually. But absolutely, there are different behaviors, different buying patterns, different needs in ASCs from large hospital centers.

Tom Jones (Co-Head of European Research)

Very helpful. And the costs?

Roland Diggelmann (CEO)

Yeah. Morning.

Ian Melling (Interim CFO)

Thanks, Roland. Morning, Tom. Thanks for the question. Yeah, in terms of the $200 million, and that's a number that we are planning for at this stage based on the scenarios we've got. Clearly, other outcomes are possible, and that number could be adjusted up or down as we go depending on the recovery we see. In terms of phasing, you can imagine we put this in place towards the end of the first quarter as we saw the impact. So, other than in China, limited savings in Q1. And I would expect the majority of the savings to come across probably the middle two quarters of the year as we plan for a recovery later in the year. So, that's the initial thinking. But obviously, that will be dependent on what we see on the top line over the next couple of months.

Tom Jones (Co-Head of European Research)

Okay. Makes perfect sense.

Operator (participant)

Okay. Our next question comes from the line of Patrick Wood from Bank of America. Your line is now open.

Patrick Wood (Analyst)

Perfect. Thank you for taking my questions. I have two, please, and apologies if you answered them already, but the first one's really around the sales rep model and the access over time. You mentioned about infection control on the surgical side, but do you think it's going to be harder over time for reps to get into hospitals consistently, and does that change in some ways the business model in relation to how market share moves between the ortho providers? I mean, just curious of your thoughts on that was the first question, and then on the second question, just to get a sense, you gave some detail very helpfully to Veronika on the wound care side. I'm just curious, do you have a sense for wound care broadly, what proportion of the business is kind of chronic wounds versus surgical versus kind of trauma?

Or some kind of color of what proportion is chronic in terms of end demand? If you have any idea around that, that'd be very helpful. Thanks, guys.

Roland Diggelmann (CEO)

Thank you, Patrick. On the reps and the future, I think absolutely there will be changes. I think we will find out over time how hospitals develop their own protocols for access to hospitals. And of course, this will not be limited to patients only. This will impact the entire industry and how we, as an industry, have access to hospitals. I would expect a very heterogeneous picture developing over time, probably with some overarching principles around infection control and limited access. But just like healthcare systems are very different between the different geographies, I would expect that to develop also differently. Clearly, I do expect that it will be more difficult for reps to have access to hospitals, less spontaneous, probably less frequent. And that will probably also have an impact on how we deliver our solutions, how we engage with customers.

I think we're learning as we go here. It's also exciting. We have had great opportunities, for instance, to stage some medical education events where we had been completely overwhelmed by the response. In one event, we scheduled for 200-300, and we had 1,100 healthcare professionals in the line. So, there is a need there, and there's going to be a new normal. But there's a lot of opportunities here too to develop those models. And again, I think it's all around the use of digital solutions and different ways of engaging. I don't want to speculate over how that impacts market share. I think it's very, very early to say that. If anything, I would say there'll be opportunities. And of course, they will have to be tailored country by country.

We're already seeing our China team, for instance, how they approach customers because they've been earlier in this crisis, so they've had more time to develop solutions. And it's quite exciting to see the opportunities that arise here as well. But clearly, there will be changes, and we can call it the new normal or whatever we decide to call it. But we won't go back to exactly the same model that we had in the past. On wound and on the differences between the different subsegments in wound, I would have to go back to you. I don't want to give you any wrong numbers.

I don't have those on top of my head here with the very specific difference or the very specific percentages between our wound care, wound devices, biologics, and then how they in turn are in the different hospital segments, meaning surgery, chronic, and then also into the home-based or into nursing homes. So, this is too many segments and too many dimensions to give you the number right here. But we can follow up with you if that's okay, Patrick.

Patrick Wood (Analyst)

Totally understand. No problem, and by the way, thank you for putting the extra detail on the slides today. That's really helpful. Thanks, guys.

Roland Diggelmann (CEO)

Thank you.

Operator (participant)

Okay. Our next question comes from the line of Sebastian Walker from UBS. Your line is now open.

Sebastian Walker (Head of EU Medical Devices and Services)

Hi there. Thanks for taking my call. So, my question. So, just one from me, please. So, thinking about 2021 volumes, I know it feels quite far out, but could you maybe comment on how you see those comparing with 2019, given on one hand, potentially having pent-up demand, but on the other hand, some economic headwinds and lower insurance coverage and lower volumes, therefore as a result? Thanks.

Roland Diggelmann (CEO)

Thank you, Sebastian. It's a very good question. I'm not sure I have the answer here, but I'll try to share some thoughts on the overall development of patients and procedures. So I would say if we look at this from a long-term perspective, we obviously continue to see the demographic shifts, which leads to more patients in the developed markets, and we're seeing better access to healthcare, which leads to more procedures in emerging markets. So overall, you should expect a trend that continues to be positive, probably in the low teens of procedures per year that are increasing, and that's for Orthopedics and Sports Med.

How that refers then to 2021 relative to 2019, I can't give you a precise number, but I would say the indication to me would be that we would continue to see a growing number of procedures, that there will be some impact, of course, through the phase and the stage and the speed of the recovery. So, on one end, pent-up demand, and on the other end, of course, systems that are coping with higher debts and probably more restrictions around procedures. What I do expect, though, is, of course, that in any case, these procedures don't go away. This is not lifestyle surgery. This is, yes, elective surgery, but it is determined by patients' conditions, by their pain, by their decision to seek surgery and medical support. So, I'd say the long-term trend, I don't see affected. Short-term, we're seeing a huge, of course, trough in 2020.

We'll see how the recovery develops over the next couple of weeks and months. That will indicate how we think about 2021. And that's kind of how I think about it at this stage. I hope this is helpful. Sorry for not being more precise, but we're really in unprecedented times here.

Sebastian Walker (Head of EU Medical Devices and Services)

No, of course, no. And that's very helpful already. So, thank you for that. And maybe just to follow up then, thinking a bit more near-term, when you have discussions with the U.S. and European surgeons, in their mind, is it a feasible scenario that sometime over the course of this year, they are going to be doing the same volumes they did last year? Do they think that they can actually get there, even in an upside scenario?

Roland Diggelmann (CEO)

I think generally, yes. I would say that probably the U.S. is probably a bit more bullish around the faster recovery, and I think that's also part of the system that is being operated there, a more private and private-pay system, physicians, institutions, for-profit, which are interested in going back to pre-COVID levels because, again, these elective surgeries are moneymakers for them. In Europe, probably a bit of a slower recovery in that this is largely public systems, and I know I'm generalizing here because, of course, this is not just black and white, but in the past, when I look at adoption of trends, when I look at recoveries from crises, I think the U.S., in general, as an economy, has always been a bit faster than Europe, and in Asia, I think it's too early to speculate. We've seen in China very encouraging signals.

Of course, it's a very different system there, but with an enormous push to get back to a normalized situation. And the rest of the markets would have to look individually, market by market.

Sebastian Walker (Head of EU Medical Devices and Services)

Great. Thanks very much.

Operator (participant)

Thank you, Sebastian.

Okay. Our next question comes from the line of Michael Jungling from Morgan Stanley. Your line is now open.

Michael Jungling (Analyst)

Great. Thank you. Thank you. I have three questions. Firstly, when it comes to age, do you have a sense of what proportion of your patients that receive your hip and knee products and your sports medicine products are above the age of 65? Question number two is, on inventory restocking, do you see a short-term boost in Europe and in the U.S. in the second quarter? Perhaps not quite as great as in China, but nevertheless relevant and material. And then question number three is in relation to product development. How is COVID-19 impacting your ability to bring new products to the market, including running clinical trials for 510(k)s? And your ability, for instance, to bring cementless knee products to the market, some sort of indication of how you're thinking about that product rollout? Thank you.

Roland Diggelmann (CEO)

Thank you, Michael. On the first question on age, I don't have a number to share here with you. Typically, of course, elective surgeries and joint replacements are done on elderly patients. I can't give you a range of age. Sports Med, of course, would be younger patients by definition. I would say the majority of those are probably younger than 65. We've just had a discussion, which is interesting, maybe alluding a little bit to that question here. We think, and I don't have data here, but we think that we have, especially on the knee side, with JOURNEY II, a system that is more for the active patient and typically would be used on younger patients than maybe other competitive systems. But again, this is just our internal discussion because we asked ourselves pretty much that same question here.

Whether that will actually lead to some difference in adoption and implantations, that is totally, I cannot comment about that. On the second question, just to remind me, you asked about short-term increase in capacity or in inventory. Is that correct?

Michael Jungling (Analyst)

Yeah. In inventory. I mean, you pointed towards a meaningful restocking effort in China. I'm just curious whether you see something that is material for Europe and in the U.S. in the second quarter as people return back to hospitals to get the procedures done.

Ian Melling (Interim CFO)

Maybe I can comment briefly on that one, Roland. I think we have in China and some other Asian and emerging markets, we have distributor models where distributors can restock as things come back. In the U.S. and much of Europe, across the surgical business, it's a much more direct model. So, much less scope for restocking impacts in that area, I would say, Michael. The wound management side, we have wholesalers whose stock level does fluctuate, as you know, a little bit, but I don't think any of them have significantly burnt into inventory. And for the wound products that have high demand at the moment, we're being careful to not allow individual customers to stockpile where there's demand around the world and make sure we serve all our customers.

Michael Jungling (Analyst)

And then around product development, please.

Roland Diggelmann (CEO)

Yes. Thank you. Thank you, Ian. Just one more comment on the first question on age. Obviously, just to be clear, we're not allowed to collect age and other information on patients. So, we don't have that data. We would only have the ability to look at what hospitals have as information. On product development, yes, of course, there is a certain impact because if there's a shelter in place, if there are other restrictions, people can't go to the lab and to the development desks in our sites. So, we've had to adjust on that. I don't think this is material because it's only been a few weeks because we have the ability to do a lot of work outside or from home. Clinical trials is an important area, indeed.

Clinical trials recruitment has been, of course, stopped or very slow for most cases because hospitals don't entertain clinical trials for some parts. Some have continued to do it, but some have completely stopped. And I think we're going to start to see a normalization fairly quickly here. With regards to cementless knees, this is a large focus of ours. This is probably one of our most important development projects. So, in this situation, what we've also done, we've reviewed every project against the timelines, against the cost, against also some savings potential. And you would imagine that cementless knees is very high on the priority. And we've actually further prioritized that in the course of this situation that we're faced with. So, it's going to be further accelerated. I can't give you any dates. Just we won't do that for competitive reasons.

Michael Jungling (Analyst)

Okay. Thank you.

Roland Diggelmann (CEO)

Thank you, Michael.

Operator (participant)

Okay. Our next question comes from the line of Kit Lee from Jefferies. Your line is now open.

Kit Lee (Analyst)

Oh, thank you. Just two left for me, please. Just firstly, on your cost savings of around $200 million, is this part of the APEX program or the new plan that you mentioned back in February? And also, just on those programs, are you still executing on these plans or are they being put on hold at the moment? And I'll come back to the second question.

Ian Melling (Interim CFO)

Okay. I'm happy to take that question. As it relates to the $200 million, that's not part of APEX or the new plans. These are more in-year savings this year in response to what we're seeing. They're not structural in nature in the same way as the savings coming from the plans. With regards to those plans, there have been impacts. We are working through and reassessing what it means. They do continue. They're not on hold. We are still seeing benefits from them. But as you can imagine, with some of the disruption we're seeing, we are having to change our plans and delay some parts of those projects slightly. So, there are some impacts, but still seeing savings there. And the $200 million, not part of them. And you shouldn't think of it as necessarily recurring savings, the $200.

Kit Lee (Analyst)

Okay. That's very helpful. And then, Roland, just on M&A, is this still pretty much on your agenda? And also, how do you think about the asset valuation and also the number of available assets out there during this period?

Roland Diggelmann (CEO)

Yes. Thanks for the question. I think our strategy around M&A does not change. We'd like to continue to be an active acquirer with a focus on small, medium size, with a focus on technology, with a focus on the ability to leverage the asset within our global operation. Of course, this situation now probably leads to a reduced activity in the short term. I think right now, as Ian pointed out, of course, we are coming from a very strong financial position. We have a strong balance sheet, but we're also focusing on cash flow. So, it might be a reduced activity for the short term, but overall, I don't think anything would change. And then I can't comment too much on the valuations. Of course, a lot has come down, but I think the entire market has come down. So, it affects all and everybody of us.

We'll see how the market rebounds. I think it will recover. It will rebound. The question is over which time. There may be some distressed assets out there. That is possible. That's probably along, certainly, around the smaller and the startup companies who are looking for cash. I think, again, it's much too early to draw a conclusion here.

Kit Lee (Analyst)

Okay. That's great. Thank you.

Operator (participant)

Okay. Our next question comes from the line of Chris from Jefferies. Your line is now open.

Christoph Gretler (Managing Director of EMEA Equity Research Switzerland)

Thank you. Good morning, Roland. Ian, I actually have still three questions left. The first on China. Do you think it's actually a good idea to take the development? I think you mentioned a 50%-70% back to normal rate as a blueprint for ortho markets. Or I think you mentioned also that it's a completely different market structure. So, could you maybe comment on that and how you see that as basically as a guide for ortho markets?

Roland Diggelmann (CEO)

Yes, of course. I think the reason why we're all very keenly looking to China is because, of course, it's the first market that is in this recovery. And it's also, for us, a very important market, being the second largest market in our organization. So, I think there's a lot of learnings there, something we observe very quickly, very diligently. But we don't take that just as a like-for-like model and apply the numbers to the other markets, just precisely because of what you said. It is a very different healthcare system. It's predominantly state-driven. We see that there is a keen interest to getting back to, of course, a normalized situation. And that includes a lot of elective surgeries. We are back to 50%-70%, depending a little bit on the regions. So, it's all very encouraging.

And it's good to see, but it's not the blueprint for the other markets. But right now, that's what we have. We're also looking, of course, very closely into the U.S., into every state, into actually every county. We're doing this with a lot of detail. And we're seeing a lot of different patterns there, but of course, a very different overall scenario than in China. And then in Europe, also, it's country-dependent. Germany, Switzerland, and Austria are the first ones to formally, through the health ministries, have reallowed elective surgeries. And we're monitoring how the recovery happens. It's complex to bring back surgeries online. This is hospitals. This is physicians. This is the healthcare system. This is patients. This is the readiness of OR. So, a lot of things need to be brought together. And we're learning here. We're observing.

But overall, I would say it's positive signals that we're picking up.

Christoph Gretler (Managing Director of EMEA Equity Research Switzerland)

Okay. Fair enough, and the second question is with respect to surgeon training. Do you think actually this situation changes the way you have to train surgeons? And how do you cope with that? I guess you can travel less and have less peer-to-peer and training, etc. Is this a problem?

Ian Melling (Interim CFO)

I think we might have lost Roland.

Tom Jones (Co-Head of European Research)

Looks like.

Ian Melling (Interim CFO)

Hopefully, you can still hear me. I'm not sure what's going on. I'm sure he'll want to add something when he comes back, but I'll at least give it a go, so I think we're doing a lot of online training at the moment, and it's going down very well, so I think Roland spoke earlier about the demand for that online training. I think especially as surgeons have been out of the OR for the last few weeks, they've been keen to keep up with their professional development, and we've been offering online courses, which have been very popular. I think if we can't do peer-to-peer training over a longer period of time, it could start to be an issue. But I don't think it's going to be the same for all the players, right?

So, I don't think it's anything of a particular disadvantage for us versus anyone else. And as we see procedures start to resume, we do have reps in hospitals supporting those procedures so that there is the opportunity to be with surgeons, at least on a one-to-one basis.

Christoph Gretler (Managing Director of EMEA Equity Research Switzerland)

Okay. And then maybe the last question, actually, it's one for you with respect to these cost savings. To what extent are actually government subsidies part of this $200 million? Maybe if you could size that. And also, if you could, if that's the case, give an indication about how many people of your employees are in short-time work and actually get such subsidies.

Ian Melling (Interim CFO)

So, we have very limited government subsidies assumed in those numbers, specifically none in the U.K. We don't have any employees in the U.K. at the moment on the furlough scheme that the U.K. government is running. So, we're not thinking about this from a government subsidy point of view. We're trying to keep people working where we can. We're trying to use the time with our sales reps when they've been off the road to train them and get them up to speed. So, no material part of that $200 million coming from government assistance.

Christoph Gretler (Managing Director of EMEA Equity Research Switzerland)

Okay. That's very helpful. Thanks a lot, Ian.

Ian Melling (Interim CFO)

Thank you. Okay. I think given we seem to have lost Roland, I think we'll end it there, and we can try and follow up maybe offline with anybody who didn't make it to the queue on the questions. Okay. Thank you, everyone. Goodbye.