Intuitive Surgical, Inc. (ISRG) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Intuitive Surgical, Inc. Annual Meeting of Stockholders. I'd now like to turn the conference over to Lonnie Smith, Chairman of the Board of Directors of Intuitive. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen. I'm Lonnie Smith, Chairman of the Board of Directors of Intuitive. I welcome you to the 2020 Annual Meeting of Stockholders. We are hosting our annual meeting virtually due to the public health impact of the COVID-19 pandemic. As previously announced, I will retire from the Board after this annual meeting. I have had the privilege and it truly has been a privilege of working with an extraordinary team over the last 23 years. I firmly believe they will continue to uphold the company's values and mission as we weather through these unprecedented times. Our long-term fundamentals remain strong. Our first priority now and always is the health and safety of our patients, our employees, customers, providers and the communities in which we operate. Before I call the meeting to order, I'd like to introduce you to other members and nominees of the Board of Directors as well as the management team who are online with us today: Dr. Craig H. Barratt, who has been an Intuitive Director since 2011; Joseph C. Beery, who is a nominee to become an Intuitive Director; Dr. Gary S. Guthart, President and Chief Executive Officer of Intuitive and an Intuitive Director since 2009; Amal M. Johnson, who has been an Intuitive Director since 2010; Dr. Don R. Kania, who has been an Intuitive Director since 2018; Dr. Amy L. Ladd, who's been an Intuitive Director since 2019; Keith R. Leonard, Jr. who's been an Intuitive Director since 2016; Dr. Alan J. Levy, who's been an Intuitive Director since 2000; Jami Dover Nachtsheim, who has been an Intuitive Director since 2017; and Mark J. Rubash, who has been an Intuitive Director since 2007. Other officers and members of the management team of the company online with us today are: Marshall Mohr, Executive Vice President and Chief Financial Officer; Kara Andersen Reiter, Senior Vice President, General Counsel and Chief Compliance Officer; and Siang Chin, Vice President and Assistant General Counsel; and Philip Kim, Investor Relations. I would like to also introduce Alan Mendelson of Latham & Watkins LLP, secretary of the company and the company's outside counsel; [ Chris Vico ], representing Broadridge, inspector of election; and Deepak Bhandarkar, global engagement partner of PricewaterhouseCoopers LLP, the company's independent registered public accounting firm. Mr. Mendelson will act as secretary of the meeting. Let me start with a brief review of agenda for today's meeting. We'll start by taking care of some housekeeping items, and then we'll move on to the formal business of today's meeting, consideration of the proposals described in our proxy statement. After the conclusion of the formal business, we will provide an overview of recent company highlights and then provide time for appropriate questions. Only stockholders may ask questions, which must be submitted in the designated field on the web portal. Out of consideration for others, please limit yourself to 2 questions. If you encounter any difficulties to any questions during the meeting, please refer to the proxy statement for information on how to reach our support team. The meeting will now come to order. I will hand it over to Gary Guthart to proceed with the formal business of the meeting as set forth in the Notice of the Annual Meeting and Proxy Statement. Gary?

Thank you. First, on behalf of the entire Intuitive team, I'd like to thank Lonnie for his unwavering leadership, guidance and support over the last 23 years. Lonnie's contributions to Intuitive are extensive, and his philosophy lives in the company's mission and culture. I am delighted and honored that Lonnie will continue to work with us in the form of assisting the Intuitive Foundation. I have confirmed with Computershare that we have a complete list of the stockholders of record of the company's capital stock on February 28, 2020, the record date for this meeting. That list of stockholders and the number of shares held by each such stockholder as of that record date is available on the web portal for any stockholder wishing to inspect it. The stockholder list shows that as of the record date, there were 116,749,934 shares of common stock outstanding and entitled to vote at this meeting. I also have an affidavit certifying that on March 13, 2020, either a notice of Internet availability of the proxy materials or the proxy materials themselves were sent either by United States mail or e-mail to all stockholders of record at the close of business on February 28, 2020. Broadridge has been appointed to act as inspector of election at this meeting. [ Chris Vico ] of Broadridge has taken and subscribed the customary oath of office to execute her duties with strict impartiality, which will be filed with the records of the meeting. Her function is to decide the qualification of voters, accept their votes and, when voting on all matters is completed, to tally the votes cast as to each matter. I am informed by the inspector of election that based on the number of proxies received today, a quorum is present and the meeting will proceed. Accordingly, I hereby declare this meeting to be duly constituted for the transaction of all business. We will now proceed to the formal business of this meeting. There are 6 proposals to be considered by the stockholders at this meeting, which are listed in our proxy statement. The polls are open for voting on all matters to be presented. The polls will be closed to voting after we go through the matters to be voted upon. The first item of business is the election of the 10 directors nominated by the Board of Directors. The following individuals have been nominated to the Board of Directors to serve until the 2021 Annual Meeting of Stockholders: Dr. Craig H. Barratt, Joseph C. Beery, myself, Gary Guthart, Ms. Amal Johnson, Dr. Don Kania, Dr. Amy Ladd, Mr. Keith Leonard, Dr. Alan Levy, Ms. Jami Dover Nachtsheim and Mr. Mark Rubash. The Board of Directors recommends that stockholders vote for the election of each of the nominees. No other nominations complying with the nomination procedures in the company's bylaws have been received, and the nominations are closed. The second item of business is the approval on an advisory basis of the compensation of Intuitive's named executive officers, as disclosed in the Compensation Discussion and Analysis, compensation tables and narrative discussion of the proxy statement for this annual meeting. The Board of Directors recommends that stockholders vote on an advisory basis for the approval of the compensation of Intuitive's named executive officers. The third item of business is the ratification of the appointment of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2020. The Board of Directors recommends that the stockholders vote for the ratification of the appointment of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2020. The fourth item of business is the approval of the amendment and restatement of the company's Amended and Restated 2010 Incentive Award Plan. The Board of Directors recommends that stockholders vote for the approval of the amendment and restatement of the Amended and Restated 2010 Incentive Award Plan. The fifth item of business is the approval of the amendment of our Amended and Restated Certificate of Incorporation to adopt simple majority voting provisions. The Board of Directors recommends that the stockholders vote for the approval of the amendment of our Amended and Restated Certificate of Incorporation to adopt simple majority voting provisions. The sixth item of business is the approval of the amendment of our Amended and Restated Certificate of Incorporation to permit stockholders to call a special meeting. The Board of Directors recommends that stockholders vote for the approval of the amendment of our Amended and Restated Certificate of Incorporation to permit stockholders to call a special meeting. Any stockholder who has not yet voted or wishes to change their vote may do so by clicking on the voting button on the web portal and following the instructions there. Stockholders who have sent in proxies or voted via telephone or Internet and who do not want to change their vote do not need to take any further action. Only stockholders of record on February 28, 2020, or their proxy holders are eligible to vote at this meeting. We're going -- we are now going to take a short pause to allow for any stockholders who have not yet voted to do so. [Voting]

The time is now 3:10 p.m. and the polls are now closed for voting. We have been informed by the inspector of election that the preliminary vote report shows that there were sufficient votes for the election of each of the nominees: Craig Barratt, Joseph Beery, Gary Guthart, Amal Johnson, Don Kania, Amy Ladd, Keith Leonard, Alan Levy and Jami Dover Nachtsheim and Mark Rubash, and each is hereby elected to the Board of Directors to serve until the 2021 Annual Meeting of Stockholders. In addition, the inspector of the election's preliminary vote report for each of the other proposals is as follows: The proposal to approve the compensation of named executive officers on an advisory basis has received affirmative, sufficient votes and is approved. The proposal to ratify the appointment of PricewaterhouseCoopers LLP as the independent registered accounting firm for the fiscal year ending December 31, 2020, has received sufficient affirmative votes and is approved. The proposal to approve the amendment and restatement of the company's Amended and Restated 2010 Incentive Award Plan has received sufficient affirmative votes and is approved. The proposal to approve the amendment of our Amended and Restated Certificate of Incorporation to adopt simple majority voting provisions has received sufficient affirmative votes and is approved. The proposal to approve the amendment of our Amended and Restated Certificate of Incorporation to permit stockholders to call a special meeting has received sufficient affirmative votes and is approved. The inspector of election will prepare a final report that will be included as part of the record of this meeting. We'll be reporting the final vote results in a Form 8-K, which will be filed with the Securities and Exchange Commission within the next 4 business days. The results can also be obtained before that date by writing to our corporate secretary. This concludes the formal portion of our meeting. This meeting is adjourned at 3:12 p.m. Okay. Before I begin my overview of the company's business, as with most presentations, the following discussion contains forward-looking statements, and the company's actual results may differ materially from those discussed here. Additional information concerning factors that could cause such a difference can be found in the company's annual report on Form 10-K for the fiscal year ended December 31, 2019, as updated by the company's other filings with the Securities and Exchange Commission. I'll go ahead and present now a few slides to give you an overview of where we are in the business and in the year, and then we'll take questions and answers from there. As we said just a minute ago, we will provide for you some forward-looking statements and some estimates. I highly encourage you to read our filings with the Securities and Exchange Commission and to look at our forward-looking statements. Our Q1 2020 performance really comes down to 2 parts so far: what it looked like before COVID-19 really started to spread widely; and the experience we've had and our perspective after it has spread over that period. Let's start with where we ended the year in 2019, what we were carrying into 2020. 2019 was a strong year for the company. There were more than 2,800 peer-reviewed journal articles on the use of our products, 1.2 -- more than 1.2 million procedures were performed by surgeons using our systems, and we placed in the year 1,100 da Vinci systems. That takes our total since inception to over 21,000 peer-reviewed journal articles. We've been highly studied. Total procedure performance to date is over 7.2 million. In our clinical installed base, number of systems that people are using is greater than 5,500. We had set out the year in 2019 to execute against the following objectives: continued adoption in general surgery; continued development in Europe and Asian markets; the advancement of our new platforms, SP, Ion and our advanced instrumentation; and support for additional clinical and economic validation by region. And we had areas of real strength. U.S. general surgery growth was quite strong. Our advanced instrument portfolio was fantastic. Our innovation pipeline in terms of SP, Ion and imaging, other things was quite good. We had good success in market access in regions outside the United States where we were focused. And we started to see real growth and the return of our investments over a multiyear period in Germany, in China and in Japan. Coming out of 2019, not all countries in Europe were performing at our expectations. We had some strains in the Nordic countries and in some places in the U.K. And our da Vinci SP time lines, for a couple of reasons, some of them around regulatory data and some of them around the need -- regulatory data needs and some of them around some of our supply chain stability, were challenged and we were working through those things. Growth was strong through 2019. In this chart, you see what our procedure growth was on the left side by parts of the body. And you can see the relative contributions in the right side of that chart. And as you look at that chart, urology was the first place, that green line, where we really started to grow as a company. Then gynecology surpassed it on a run rate basis. That's the yellow line. And then the story over the last few years has been the rapid growth of general surgery. That's the blue line. We continue to grow in thoracic procedures. The thoracic procedures will never be a massive volume, but they're very high-value procedures to the people who need them, likewise for transoral surgery, in the throat, and that's the purple line. So the business fundamentals are healthy there and have been. System placements were strong over the last 3 years. You see that on the left side. System placements involve both putting new systems in where -- into operating rooms that haven't had a system prior; and trade-outs, taking older technology and trading out for newer ones. So if you look at the new capacity added year-over-year, in 2019, 12% new capacity. And the difference between that 21% on the left side and 12% is really this trade-in side. And you can see strength in the United States but, in general, growth around the world. So what happened in Q1 of 2020? Well, we started off strong and we have shared with you in supplemental materials around our last earnings call a weekly procedure run rate and what's happened as COVID-19 has spread in the world. And you can see that we had strength at a fairly high level in the first weeks of the quarter. And then around week 11 of the year, you see in March, as COVID pandemic spread particularly in the United States and Europe, a real slowdown. And that is in response to hospitals and surgical societies recommending the deferral of some surgery to devote hospital resources, personal protective equipment, ICU space and bed space to COVID patients or the readiness for COVID patients. And that makes sense to us. And as a result, they're deferring these procedures, and we'll talk about what it means to defer procedures in a minute. If you look across the world, that's the shape of the curve, but you can actually do some breakdowns. One of the nice things about da Vinci is we have pretty good insight into how they're being used. So that's what it looked like for the world. And if you look at the U.S., the U.S. is that golden line and kind of our world experience mirrors the U.S. But you can see that different pandemic readiness and different policies by country change how countries have responded. So this purple line that kind of goes up and down is how Japan handled surgery during that period, and you can see it didn't impact procedures as much in Japan as it has elsewhere. Now that may change if their experience of the pandemic within the country changes and if they start adapting their health care policies. The green line is Germany, and Germany has come down a little but not quite as sharply as the U.S. And here's China in red, and what's interesting here is that you saw a real decline in use of da Vinci early in the quarter and then climbing back out. And I think that's encouraging. It tells you that these patients need procedures and that the demand for our products are durable. I'll caution you not every country will look the same for 2 reasons: One, policies change by country. So their availability of staff, the way their hospitals are laid out, the availability of personal protective equipment can all change how they'll manage their policies. The second reason that they won't all look exactly the same is that the types of procedures they use a da Vinci for differ by country. So the mix of procedures da Vinci is used for in Japan is different than the mix of procedures that might be done in the United States. As a result, I'm encouraged by the China model, but it won't be exactly predictive by country as we go. In terms of our response to COVID as a company, we started tracking it in December of 2019. We created an incident response team and really accelerated that in January. And to have set up a set of actions and our priorities to make it quite clear, our first priority is to support our customers and to ensure the safety of our staff, our customers and our suppliers, those who rely on us. We have been agile about implementing employee health and safety measures to ensure continuity of essential operations. Under most shelter-in-place orders, we qualify as an essential business and we seek to make sure we can supply our customers. You can see our devices continue to be used, and they're used for important procedures. We continue to service them, manage our logistics, run our repair operations. And our IT teams have done a fantastic job enabling work from home and maintaining the backbone of our IT systems for the company. We have stepped up quickly. We have worked hard to build an outstanding employee base, and that is important to us. We stabilized income for them. We have not elected to furlough or cut salaries for our teams at this time. We believe that this is a team that will be really important to the recovery. And we'll talk for -- in a minute about these patients who are having their procedures delayed or deferred ultimately will have to get treatment. Intuitive doesn't really do cosmetic procedures. People who need a da Vinci procedure have an underlying disease, and waiting doesn't cure it. And as a result, those folks are waiting, surgery is often the first choice, which means that a pill is typically not going to solve their problem. And so there's a bolus of patients needing procedures and we want our staff ready to help, work down that backlog as it happens. We are committed to our communities, and we have acted quickly to help the communities in which we work and operate. And that's the next one. We have already manufactured or sourced and donated about 100,000 pieces of personal protective gear to hospitals and communities in which we work, led by a fantastic work out of our Intuitive Foundation and the leadership there. And we have partnered closely with Silicon Valley leadership group and a local business center -- business consortium to help regional hospitals respond to the COVID crisis by contributing what we can. I think our framework for thinking through how to manage in a time like this is important to have a common language. We have adopted the American Enterprise Institute's national coronavirus response framework as our thought process and vocabulary for how to act through these phases. I encourage you to read it. It's available on the web. It's articulate and compact, and I'll take you through it. They break out the way to think about the pandemic and its response into 4 phases. Phase 1 is slow the spread. It's really around buying health care systems time to get ready to treat patients as need be, to secure ICU resources, protective equipment, and to organize their staff. Some places in the world are in Phase 1. Some are in Phase 2. Phase 2 is a partial reopening without a vaccine or a cure but with some testing and ability to implement employee health and safety and social distancing. Phase 3 is when testing is ubiquitous and treatment protocols are put in place and hospitals are not overwhelmed. And Phase 4 is ultimately when vaccines and treatment are widely available. Predicting the exact timing of when things are in Phase 1, 2 and 3 is difficult, if impossible, at this phase. We do know that some societies have moved into Phase 2 already. China is clearly into Phase 2 and different parts of the world. Germany is just starting to open up as well. And you're seeing the debate around the world as to how to do that. I want to speak for a minute about procedures. You'll hear the term elective surgery. And elective kind of implies that it's optional, and it's not. As I said, these folks who need procedures need something. They're building backlogs, and we're starting to see surgical societies and other parts of societies opening up access to them. And our job at Intuitive is to help our customers attend to that backlog safely and in the right locations and in the right way. This will be a long-term process. I don't think this all is solved in a couple of months. I think that Phase 2 may last for many months, and we're equipping our company to be ready for that in terms of listening very closely to what customers need from us, understanding how to be productive in the era of social distancing, really getting ready for Phase 3 in terms of designing access to our systems and training programs and financial structures that allow our customers to succeed, and making sure we support our employees effectively with the right kind of guidance and internal policies. We have constructed and reviewed with our Board our financial plan in this period and it has these elements in roughly this order: We are focused on ensuring our customers are well supported through this period with flexible financing and other financial policies that meet their needs during this time of disruption. We think it's very important to be strong partners with them in this period and to be good listeners and attend to their priorities and their language at this time. As I said before, our employee base is valuable to us. We have built them. They are highly sought after, and we want to make sure we provide a great environment for them so that as we move into Phase 2, they're ready for us. And I believe we are doing that and they are. We are securing and stabilizing our supply chain. These are sophisticated products with sophisticated supply chains. I think our teams are doing a fantastic job. Our supply chains are on its firm footing now, but we're leaning in. If the economy remains highly turbulent in the next months or the next several quarters, we want to make sure that we have robust access to the parts we need and good supply chain partners. We want to make sure that we partner with them and help. We will make sure that any spending we do is valuable. We want to examine the spending and look for areas where it's wasted money right now. Simple things are obvious. There's not a lot of travel going on. Large-scale events are not happening or unlikely to be productive. There are other places where if there's a pause in volume spending, we don't need to hire into that space. And so we're scrutinizing that and constraining where we can. And lastly, we're thinking about policies for our shareholders that are healthy as long as they're not in conflict with 1 through 4 above. As I mentioned briefly, we have moved into action. We take great pride in being a health care company at a time when our health care system is challenged, and we can do something about it. I think being idle as a medical company during this time would be a massive waste of resources. And we have a very high spirit of community involvement. Our foundation jumped into action very quickly. We have designed, sourced, assembled and delivered face shields. We have helped design and source reusable facemasks both for our own population and for donation, and we've started donating them already. The team is quite committed. The level of volunteerism coming out of our team is strong. And we have members of our staff who have worked on the front lines of health care, and some of them are interested in going and helping quite directly. You can ask, does anything about this COVID crisis change the long-term opportunity? Or how should we think about that? And I think our long-term opportunity remains very substantial. If you think about what's happening in the need for surgery in a world in which you're worried about infectious disease, high-quality, minimally invasive surgery will be more valuable, in my opinion, over time. Tying up -- intensive care units tying up hospital beds with open surgical candidates in this period does not seem like a good use of resources. And so for us, it's making sure we support our customers where and how they need it. As we think about Phase 2, that's where a lot of our management team is spending our attention. There's 3 things that are really important to us as part of our values: One is making sure that we meet the customers where they are and solve their problems, so building trust with our customers as they operate in a new environment. Agility is important. Some things that used to be done one way in an era where people, for example, don't want to fly much may need to change. And so some of our investments in our digital technologies, in our Intuitive cloud, in our simulation modeling have been really helpful, and I think those are opportunities for us to accelerate. And lastly, I think in times of change, simplifying the priority list and executing with a high degree of discipline and rigor makes a big difference. And these things are the things that we're focused on. You may ask what's happening in the innovation pipeline. You worry about it. And we have come into the year with strength in our innovation pipeline. Ion was adopting very well. Customer response has been great. The team is working. And even though shelter in place makes for some inefficiencies, they're being quite creative. Likewise, da Vinci SP continues to build a following amongst those who own it. I'm really encouraged by their finding of clinical value. Some things may take a little bit longer here in terms of, for example, clinical trials. If hospitals are busy treating other patients or adjusting their hospital operating processes and don't have time to do a clinical trial, that will be on pause. I see an interest in returning to those activities. So it may pause for some time. I don't think it will pause forever. We are well positioned financially and organizationally to weather the outbreak and to learn from it and to build strength where we can, cut off things that are not going to be productive in this period and double down on those things that are helpful and really can be productive in these periods. Our immediate priorities are to support our customers, our organization and our supply chains in Phase 1 and to recover in Phase 2, really demonstrating flexibility and agility as people start to work down their backlog. We have not forgotten about the long-term opportunity, and these things will come back. Growth in U.S. general surgery, I think there's still a great opportunity there. SP and Ion, I'm not deterred by COVID. I think those things are important and will remain so and our commitment and depth to developing new markets and to expanding our evidence base. And I'll end with this slide. I think our mission is intact. That COVID is out in the world does not mean that others are not in need of care. We're seeing actually quite quickly now a ramp of understanding that we're going to need to treat -- or the world is going to need to treat these patients as they go. So with that, I thank you for your support and I look forward to answering any questions that you might have. I realize that it's different to ask questions in this setting. So I'll look to our team and see if anything comes through. Okay. Well, it looks like we don't have questions at this time. I appreciate you all joining us in this virtual session and appreciate your support for the company. With that, that concludes our session and concludes the annual meeting. Thank you for your attendance. We look forward to speaking to you in the future. Thanks so much.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.