Zimmer Biomet Holdings, Inc. (ZBH) Earnings Call Transcript & Summary

Good afternoon. Thanks for joining us for a session in our MedTech track here at the UBS Virtual Global Healthcare Conference. I'm Matt Taylor, UBS' U.S. medical supplies and devices analyst. And I'm really pleased to be joined by management from Zimmer Biomet Holdings. And today, on the line, we have joining us Suky Upadhyay, who's the EVP and CFO of Zimmer, having taken that role in the last 2 years. And also joining Suky is Keri Mattox, who's the SVP of IR and Chief Communications Officer; and Barb Goslee, Director of Investor Relations for the company. First, I just want to thank everybody for joining us and say welcome to the call. Just a couple of points for this call. I think most investors will know having listened to me for a while here, but there'll be a 40-minute fireside chat with Q&A. If you have questions that you want to ask, just send me an e-mail or you can ask them through the webcast.

So Suky, just to get started, I wanted to kick it off with a little bit of a higher-level question. Looking at some of the trends that you've had over the last year or so, we've begun to see some momentum in the business. Talked about resolving supply issues, going back on offense, and it looked like that was actually continuing through the first couple of months of the year before COVID hit. So maybe we could start by talking about what you've done to revitalize the business at Zimmer Biomet, and then we'll dive into some of the questions that everybody wants to hear related to COVID.

Yes. Sure. So first of all, thank you, Matt, for having Zimmer Biomet on this call. I hope everyone out there listening is also well and continues to remain safe. You hit it on the head, Matt. We came in the end of 2019 into 2020 on a really strong trajectory after a number of years of challenges for the company post the Zimmer Biomet merger, where the company was plagued with supply challenges, quality challenges, compliance, ultimately translating into commercial challenges. And then Bryan, coming in a little bit over 2 years ago, really led the transformation of the company and started with mission, talent and culture, setting the organization to the North Star of patient centricity; second, overhauling the leadership team and then starting to work through the broader organization from a talent perspective; and then on culture, really setting the tone for the notion of accountability, setting commitments, living to those commitments, operational excellence and making sure we have the right structure and operating mechanisms and everything we do and just being extremely disciplined about how we go about things. And so over the last 2 years, those have taken root. We've moved beyond supply constraints to now supply efficiency. Our quality continues to improve every day. Our most recent FDA audit in our North Campus was a good proof point of that. From a commercialization perspective, we started to grow the business in the back half of last year, low single digits. We're not happy with that or I should say we're not satisfied. We're happy with the progress we've made, but we're not satisfied where there's more room to grow but we were able to bend the trend. And the backdrop of that, also started to expand margins and liberate some additional free cash flow. All of those strong trends were beginning to manifest themselves into what we saw as a very strong quarter in 1Q of this year, pre-COVID. And interesting enough, Bryan and I were extremely excited, Keri was extremely excited about getting on the call for the first quarter and talking about what we saw as one of the best quarters the company has had since the merger. Now 2 months or 2 weeks left in March, we all know where things went. And so we're in a different situation. But I think your overture is absolutely right on that the underlying business, the market fundamentals are still incredibly strong and well intact.

Great. And then just maybe I have a follow-up on that. It did seem like a lot of the medtech companies were talking about strong demand. So I was hoping you could just speak to the underlying utilization that we were seeing in the market, but also maybe just touch on a few of the key product launches that have really allowed you to regain that momentum, and I'm sure we'll dive a little bit more into those as the conversation goes on.

Yes. Happy to do it. So if you look at the back half of '19 -- or sorry, third and fourth quarter and sort of average the growth rates, as we moved into the first quarter of this year, just about every one of our businesses and markets was accelerating over that back half trend. In fact, we were having one of the best quarters through the early, mid part of March in our America knees business, which is one of our largest, of course, businesses and one of our most important from an overall leading indicator of revenue health and margin health within the business. And we were posting America knees somewhere in the mid-single digits, leading up to the COVID pandemic and that was excluding ROSA, right? And so if you added ROSA in there with sales that generally occur towards the end of the quarter, just given the way the capital cycles work with our customers, we were sitting on an even stronger profile vis-à-vis that mid-single digit that I talked about. Some of the things that drove it, yes, operational execution. The supply is no longer a headwind. Operating mechanisms around field force incentives and around customer segmentation targeting all have improved. But I think the shining star for us is really around the product introductions, as you alluded to. Our ROSA application continues to be a differentiator for us. It continues to be a strong growth platform for us. Even if there aren't sales, particularly in Q1 because of the capital cycles that I talked about being disrupted, it still is a differentiator for us and pulling through our overall Persona family of knees. And the other very important launch that we had was Persona Revision. We went out there with an early launch with limited sets. And what we're seeing is that the demand and uptake has just been beyond our expectation in the first part of this year. And quite frankly, the recovery continues to be a part of the leading part of our business through this recovery. So we're very happy where Persona Revision is going. Beyond that, in our hips business, we had the Avenir launch, which is the anterior approach to hip replacement, which has really helped us maintain our market leadership across our hips franchise. And then within our S.E.T. business, we had a number of new product launches in our extremities business that were also meaningful in that subsegment. And then you probably heard us talk about within spine as we continue our recovery in that business that was part of the channel disruption that we underwent over a year ago, some bright spots in there have been the launch of Tether, which got special designation by the FDA in pediatric use, so we're very excited about that product. So there's been a number of new product introductions over the last 6 months that have really led that and fueled that acceleration that I talked about.

Okay. Great. All right. Well, let's move into talking about some things with regards to the recovery and the outlook. The first one I'll ask is you chose to hold the guidance for this year. A lot of companies did that. I think it's understandable. But maybe you could talk about what decisions went into that. What inputs went into that decision? And what you're seeing now? And when you might be able to give guidance again? Any thoughts on the outlook would be great.

Sure. So it's a great question because, first of all, we did not take the decision to pull guidance lightly. Bryan, Keri, Barb and I often talk about -- from an IR strategy perspective, we have a few guiding principles, which are to be insightful, transparent, incredible, right? And as we pulled into the first quarter and the pandemic hit us, just the level -- the scale and the time that, that scale hit us and just the outlook being so uncertain and our high correlation to elective procedures just led us to the decision point where we don't believe we could be credible if we gave guidance because the outlook is so uncertain. So we felt compelled to pull our guidance at that time, and I believe that was the right decision. And of course, as you said, we saw many of our peers do it. Now with that, we try to provide as much color as we could because we know how difficult this is for our analysts, our investors as they make their trade-off decisions. And so with that, we provided more granularity on Q1 by a deeper level by segment or market. We gave how the trend was coming out of Q1, and we went so far as to be explicit as to what we were seeing in April, which is a course breaker for us because we generally don't provide that level, what we thought was important in this environment. On top of that, we said, look, here's where we expect things to go. We expect May to be at similar to April or better. And what we were trying to do with that comment was kind of say that April is the floor. We don't expect it to get worse than April, right? So the deepest part of the trough we believe is behind us. And from there, we should see some improvement into May, trend into June and then, of course, into Q3 and Q4, provide some broad shaping. But at that point and at this point, that was the best that we could do because there's still a lot of uncertainty. Now where we are through May, early part of May is the leading indicators we're seeing continue to give us confidence that, that overall trajectory we provide is still very much intact, and we're seeing a lot of really good positive proof points. We don't want to overreact to 1 or 2 weeks because there still remains a lot of uncertainty, which I can go through. But we are seeing some pockets or some signals that we were -- as leading indicators that we were hoping for. So let me go through those. In China, we're seeing a really rapid V here from a recovery standpoint. Within 2 months of the deepest trough to where we sort of exited May and kind of began -- or sorry, exited April and began May, we went from doing about 25% of normal run rate to almost 75% or 80% of run rate. So pretty massive recovery in just the 2-month period. We're continuing to see that positive trend through the early part of May. In Japan, our largest market within Asia Pacific, we didn't really see any meaningful impact in Q1. We saw some modest impact in April, and we're seeing that hold relatively stable into the early parts of May. Some positive leading indicators are we just got word that just under 40 prefectures within Japan have now lifted their state of emergency, so that's a very good sign. So they held up kind of through the trough of all this, and they're starting to open up more prefectures, which is, we think, a positive leading indicator. And also Australia and New Zealand, in that particular market, was at its deepest parts 10% to 20% of normal run rate. We're seeing that accelerate exponentially here in the near term. So we're seeing good signs out of Asia Pacific. As we move to Europe -- and I'm happy to go through others, if that's helpful.

I think it is, yes. Why don't you continue? This is all good stuff.

Yes. So within EMEA, what we're seeing in sort of Central and Northern Europe, so Germany, Australia, Switzerland, the Nordics, we're really starting to see a pretty positive trend there and a ramp-up as expected. Southern Europe continues to be challenged, and while it's recovering, it's at a much slower pace, and the U.K. continues to really be challenging. We're not really seeing much recovery there as additional color in the beginning part of May. And then finally, in the U.S., our largest market, we expect 100% of the states to be opened in elective procedures by next week, and so that's a really positive proof point for us. So all of these kind of blended together. Again, we don't want to overreact to 1 or 2 data points or 1 or 2 weeks, but all of those data points lead us to come back and validate sort of that trajectory we provided on our call about a week ago.

Understood. Great.

So -- go ahead.

No, I didn't mean to cut you off. Why don't you finish?

Yes. So you had asked about what we might need to see as we move forward to sort of reinstate guidance, I think, was your question. And I think there's a number of variables. So one, as we're seeing this uptake, I look at it from 2 vectors. One is sort of a demand side and the other is the supply side. On the demand side, it's really about the market and the patient, right? And we need to understand, as part of this recovery, are they deferred pent-up patients or are we seeing a mix of deferred and pent-up patients with new incidents coming through? Because at the end of the day, it's the new incidents that market growth that ultimately leads to sustained recovery, right? And so it's still too early to tell what that mix is and what that's going to look like over the next few months, but that's going to be an important proof point for us. Has patient behavior changed? Has the market structurally changed in any way? So we have to keep our eyes and ears close to that. And we're doing a lot of channel checks to get that data and that insight globally. The other side is what I call the supply side. That's the capacity piece, right? So how quickly will hospitals turn on? Will they increase their capacity beyond their normal run rate? What will their throughput look like in the backdrop of different logistics to deal with COVID? So those are some of the variables that are still at this point uncertain. Again, we're getting more insight around those, but those elements, those variables will give us greater confidence in what we think the range of outcome could be. And so as we get confidence around that, that will put us in a better position to provide guidance over time.

Got you. Okay. Great. So now maybe I'll ask a follow-up on that point. So I think investors would be interested to hear a little bit more about the demand and the supply side. So on the demand side, we've heard you say on the call and other forums that you think that most of these deferred procedures, these patients that are -- were likely to seek care will come back not too far down the road. And maybe you could talk about some prior experiences that have informed that. And what are you seeing so far as you do these channel checks as far as the behavior of the patients?

Yes. So we have seen where there's been market disruption because of natural disaster or if we get some anecdotal evidence going back to sort of the '08, '09 economic challenges and recession that we all went through that patients do come back. It depends on the severity of what that dislocation is as to what the timing is for them to come back. Of course, nothing has been to the size and scale of what we're observing and witnessing now. So we do believe that it's going to come back, and that's what our customers, the hospital systems, the markets we deal with are telling us, but it's just unclear as to what's the timing of that. So that's one of those variables that we're going to continue to get more data and more insight around. I will say, though, the early days, we're seeing in the U.S., for instance, just the recent data point I got from our U.S. business was that the mix of patients we are seeing, does -- more than half of that is on the deferred side. But we are seeing sort of new patients or new incidents come through the system and actually get care. So that, as I said, is a really positive leading indicator because over time, that's how you durably get yourself back to a recovery and back to sort of the normal market growth that we're all aspiring to get to hopefully here in the near term.

Right. Okay. And that's a good data point. And then on the supply side, there's a few things to consider, I think. One of the issues that we know is a lot of hospitals still have COVID patients. There's new protocols that will be put in place to allow patients to come in, and so there may be some constraints there. But conversely, there are ASCs and other types of facilities that are saying, "Hey, we're going to add surgical slots or days to run through more backlog." I guess what are you seeing on balance? Which of those forces do you think dominates? And maybe you could just talk about what you're hearing on that front from your customers.

Yes. We are seeing the -- just speaking about the U.S. market, the ASCs tend to be coming back a little bit faster than the overall hospital setting or specialty orthopedics setting. So that's something that we're watching. We don't know how long that maintain or if that balance shifts over time. Again, we're weeks into the recovery. So there's still more to play out. And right now, what we're hearing on the hospital side for those that are doing elective procedures, there are additional protocols that they're having to move through. But it's too early to tell to understand whether that's going to have a structural shift in sort of throughput through the hospital or care system. But we are seeing where reps have to be able to identify that they're COVID-free either through the testing through their hospital system or through some other third-party testing. There are some protocols around PPE, as you would expect, in ensuring that when the rep does come into the hospital that, in some cases, they can use their own PPE, in some cases, they can't use their own PPE. So it's extremely varied out there, which makes it even more challenging to kind of predict how that demand side -- or sorry, how the capacity side will, in fact, play out. But the fact that it is turned on, we'll have 100% of the states by next week. What we're finding is that the overall market is finding a way to move through this. That's a positive leading indicator, but we've got a lot more runway to go.

Great. Great. Yes. And then maybe you could just offer folks a view and some insight as to how much of your procedures today go through those kind of ASC and outpatient settings, and how much could go through them over time as maybe there's more motivation to do procedures that way now.

Yes. So right now, we're somewhere in the 10% to 20% of our business is done outside of -- out of a hospital system and in more of an ambulatory-type setting or -- sorry, an urgent setting or a specialty setting. So again, it's about 10% to 20%. There was already a market shift towards that trend that was emerging. Could this potentially accelerate it? I could -- one could intuitively say, yes, over time, this could just given that patient behavior may be more apt to go to a -- instead of a general hospital that might have COVID patients there to an ASC that maybe isn't caring on a day-to-day basis for COVID patients. Perhaps that changes patient behavior or attitudes over time more structurally, but we think we're well positioned for that. We have a broad portfolio offering that we believe suits well for the ASC. We have a broader ASC strategy and road map that we're implementing. And so if that shift were to happen, we think we're well positioned from a product portfolio perspective and from an overall execution perspective.

Great. Yes. And maybe I'll transition now and talk about a few of your key products in more depth. I think ROSA gets a lot of focus, so we should probably talk a little bit about that. You mentioned some of the prior trends. What's it like now for ROSA? Is there still activity in the market? Do you think that this is still an environment where you could be placing some systems? And maybe just speak to anything you can with regards to current trends and outlook there.

Yes. So the first good thing is ROSA continues to be used as -- while we were in the trough and as part of the recovery. The demand is -- and excitement for robotics is still absolutely there, and it continues to be a pretty well underpenetrated application and platform, I think, for the sector overall. And so we're really happy about being in the early days of that cycle and being there with a product that we think has got a lot of features and benefits and differentiation that can drive growth over time. So the demand is there. And as we think about ROSA in the first quarter, we did see some headwinds on capital sales, just given the cash constraints that the hospital systems were going through in the U.S. and more broadly across the world. But what we did not see is cancellation of orders. We simply saw deferment or folks just kind of say on the sidelines that say, "Hey, we've got to sort this out, and we got to think about where we're going from here. We're not going to cancel but we just have to think a little bit more acutely about our cash position relative to this robotics placement." So what we're doing is, given how important this is, we think, to the overall health care system, to our overall growth platform, is to look at other alternatives, which we had in place, by the way, prior to the pandemic, of how do we get these systems into the hospitals, either as a capital sale or as a placement strategy with some volume commitment or a hybrid of the 2 or some kind of alternative financing option. So we do have a number of options to help customers with their financial considerations while they think about robotics as well. And to us, we're -- getting the robot in the hospital system is actually the more important thing for us. Because when you think about the annuity stream, the pull through that, that placement brings for the company, not only in the knee, not only with the cementless opportunity -- greater cementless opportunity that robotics brings but also on the disposables and the service and other ancillary products that come around that, it's a really nice pull-through opportunity for us. So for us, the focus is on making sure that we can meet customer demand and sort of help solve their financial considerations as they think about robotics.

That's a good point. And then maybe you could also just speak to -- we talked about this transitional period of recovery. I think just as a reference point on the call, I think Bryan talked about, maybe it's going to take more until '21 for normal volumes to come back and that could happen. That's one scenario. But if we do get to normalization through the second half of the year, could you offer some early views on what 2021 and years forward could look like? Could we get back towards normal volumes? Do you think there's some patients who'll get lost in the cracks? Any insights that you can offer there?

We do know -- well, we don't know, but we project, based on what we're hearing through our channel checks and what we've actually seen, is that we're -- we do expect to continue to sequentially improve, and we talked about that. Bryan talked about when normalization could happen. I don't think we were so front foot to say it happens in '21 versus '20. I think our comments were more around it's still uncertain, right? And could it be in the fourth quarter? Could it be early part of 2021? I think it comes back to those variables I talked about, the supply and demand, which -- it's still a very complicated set of variables we want to get complete insight into in one market, let alone several markets around the globe. So we continue to work through that. We're hopeful that, over time, in the near future, we'll have a better view of what that looks and feels like. But at this time, we just can't commit to when that recovery will happen. But we do know, as we talked about earlier in this call, that those patients, largely, they get delayed, they don't go away. That's what we've been hearing, that's what our past events have told us. And the incidents, new patients that actually need procedures, doesn't stop. So that patient demand, that funnel continues to be filled. It's just a matter of how quickly and at what pace does it get serviced by that supply side that I talked about. So more to come on that, Matt. We can't speak -- we can't go beyond that at this time.

Sure. And on the product side and in terms of your offerings, one of the things that could stand out for you here is mymobility. And you made some efforts to really scale that at a time where, for obvious reasons, we want to have less touch points where we can physically. So can you talk about how mymobility could play a greater role? And maybe just educate folks. I don't think everybody knows all the capabilities that it has. But maybe spend a second on what it does, and how that could be important for ZB going forward.

Sure. Actually, it's funny to say that Keri, who's on the call, gave our leadership team today an update on mymobility with our U.S. and Americas leader and our global business leader, Ivan Tornos. I'll actually have her talk a little bit more about those features. But I will say this is a bright spot for us as we think about what could some of those structural changes be going forward. I think we're seeing now that, given this notion of less patient touch or less interaction face-to-face outside of the surgery, both pre and post mymobility, I think, sets us up well in that new world, in that new environment. Maybe, Keri, you can talk a little bit about why and what we're seeing and what that program is all about.

Sure. Happy to. And I think, Matt, to your point and to Suky's comment, one of the reasons we talked about this earlier when I was presenting more detail is just the interest. There's obviously been a lot of interest since Bryan mentioned it on our earnings call last week. And I think people are wanting to understand more about what it is. So we do have an exclusive partnership with Apple and mymobility, the original program and app actually runs through the Apple Watch or the iPhone. The mymobility LE, which is that limited edition version that we launched during COVID, was really built for rapid deployment. So in that case, you don't need to have an Apple Watch. You don't need to go buy one. You don't need to go -- have an interaction where you acquire one. You could use an existing smartphone, an iPhone or an Android device. And really it becomes a portal for patients that are home, are outside of the office or outside of the hospital setting with their physician and still want to be able to communicate. So they can send data to the physician, but they can also get updates, get exercises in PT. They can provide details back to the physician's office on what they're doing. Are they actually completing those video-guided exercise programs? We've actually customized to where they can do it before a surgery if they're now a deferred patient and waiting or they could be post-surgery, and they could be doing that as rehab instead of going into a clinic or a PT setting. So mymobility, at the bigger, broader scale, is really an app and then the LE version is a rapid deployment version of that, that we put together pretty quickly, and we made it a little bit more customized. It's a shorter duration. It doesn't cover quite as many of the settings as the full mymobility does. But we were able to roll it out really quickly. And what we've heard so far from the physicians and the patients that are using it is that, that virtual connection for both health information and data but also just for communication back and forth has been really helpful, one, on just the communication front; but two, on that connection on keeping the patients informed, keeping them calm, frankly, if their procedure was deferred. It's become a tool that the physicians have given us really positive feedback on, and we've been getting through those physicians some really nice color on how the patients are responding. And that engagement level has been really high. So again, we think it's innovative. We love that it's partnered with Apple, and we've been able to do that. We think the fact that it can deliver the pre- and the post-op care and reduce those in office and hospital visits while continuing to collect data on the patient's progress has just been a huge win. It's always important, but right now, even more so.

Got it. Got it. That's a great overview. One follow-up question to that for either of you, I guess. I was wondering -- I know you're running a study. So I just want to get a quick update on that and remind us what the outcomes could be there. And what percentage of patients have been using this? And what do you predict that could turn into as we do enter a period where this is really a preferred way of interacting?

It's a small group so far, Matt. I mean I would say that the engagement and the traction where we've been able to roll it out has been really, really positive. But I think we said even on the earnings call, and I know we've said in some of the follow-up conversations, it's still relatively early for mymobility. So when you think about it on the broader scale of kind of that overall contribution to revenue, not yet. But in terms of what we're seeing on that initial adoption and feedback, it's been really positive. So something that we're obviously tracking in terms of -- on a grander scale, what this could look like, but during the COVID-19 kind of period and during and through that recovery, definitely an opportunity for us for some growth there and to accelerate. In terms of the study, it's a small study and we are looking at some patient outcomes there. We haven't given too much more detail in terms of the time line, but it is something that we're interested to see if we could actually build off of. And as we get further penetrated into more patients and more settings, what we could expand there to kind of pull out those kind of data sets and outcomes.

Okay. Okay. Great.

Yes.

Great. Let me do one more product one and then we'll move on to some other kind of key initiatives here. So the first product one I wanted to ask was around spine. Suky mentioned this earlier, some key launches there, including robotic ones, like ROSA and the Walter arm too. I guess I was wondering if you could give us an update there and then maybe just talk about those as it relates to spine recovery more broadly.

Yes. So Walter continues to be a really nice complement to our overall portfolio, potentially over time being used in conjunction with ROSA, but in the near term being a relatively straight-forward, good value opportunity for efficiency in the OR. And again, we try to focus our innovation on 2 vectors. One is improving outcomes, two is improving the efficiency of the OR. If you can win in those -- both of those spaces, I think you're going to be a winner in this marketplace. So that's played out to be a nice addition. On ROSA Spine, we're still in limited launch. Maybe, Keri, you can talk a little bit about the details of where we're going with that from a timing perspective.

Sure. Yes. So I mean on -- absolutely. So on ROSA Spine, we've be able to continue to kind of move that forward in terms of limited launch, where we have some exposure there. We're kind of testing and looking at that. For strategic reasons, we had pushed, and we're really looking at focusing understandably on ROSA Knee. So it's still possible for us to be on that time line that we had previously communicated for ROSA Spine, which would be later this year, but it's also going to depend a little bit on what the trend of that recovery looks like and the investment there. But in terms of the limited launch and in terms of the early engagement and feedback, we've been really encouraged.

Got it. Okay. And related to that question, for your broader pipeline, are there any projects or product launches that you think could be material impact -- materially impacted that are important? Are there any things that were in flight that are still on track? Could you just touch on that more broadly?

Sure. So we've maintained our investment even through a period of austerity here as we watch our liquidity profile. We've continued all of our critical R&D programs. And some of the key ones there are really around the ROSA application for revision and our hip application, which we believe are going to continue to further differentiate us and continue to enhance our market leadership position. So for me, those are the 2 key near-term ones, Matt, that I'm watching. I don't know, Keri, if there's anything on there that I'm missing or -- that's also relevant.

No. I think from an R&D perspective, that would hit the priority. We've also said that, obviously, any other robotics programs in addition there in the pipeline are definitely key priorities that we're maintaining that investment into those programs.

Got you. Okay. So we just have a few minutes left. I want to touch on 2 other things here. One is just thinking about your balance sheet, your capital allocation. You did refinance some debt. You've got more flexibility with the revolver. Can you talk about your overall balance sheet and liquidity position? And then talk about that as it relates to how you plan to allocate capital over the course of the next year or so.

Yes. So we set ourselves up to navigate the challenges of COVID from 2 vectors. One is the company was able to respond really quickly in taking out nonessential costs and cash spending to enhance our liquidity profile. We leverage the restructuring program already in motion and just simply turbo-boosted that, and so the company and the team responded really well. The second side is, as you said, Matt, we put some mechanisms in place to give us some operating flexibility in between cash on hand and credit facilities that we have available to us through this year. We have over $3 billion of capital at our disposal should we need it. And at the same time, we relaxed some of our operating confidence temporarily to allow for a lower EBITDA base on our leverage ratio. So we put all the right things in place, again, to give us operating flexibility. Our focus right now is continuing to navigate through this challenge. And I see us, from a capital allocation standpoint, starting to -- if we continue to see positive signs on the recovery, is to begin to invest back into the business again and start to turn on some of those things that we closed down in the early part of -- late part of March, early part of April because we want to keep investing for the other side of this. There will be a market recovery, and we want to continue to invest like a market leader against that recovery. So that's at a more operational level. Capital allocation more broadly than that. When we were coming into this year, Matt, we were improving our underlying operating mechanisms and financial performance. We were delevering our balance sheet, and we were really excited because we were going to go on the earlier stages of starting to look at some smaller tuck-in type acquisitions that had adjacency to markets we already -- businesses we already operate in that we have a right to win in, right, which could, over time, accelerate our revenue and our EBITDA, again, up into that mid-single-digit aspiration and margin profile at the 30% level. So we were really excited about beginning to start to deploy some capital really smartly in a smaller way, but against some M&A. Over time, as we get back to recovery, as liquidity turns more from navigating the challenge to now optimizing our investment base and accelerating growth again, we could return to that. But in the near term, we're going to continue to focus on, again, liquidity management and making sure that we're investing for the recovery. And that means commercial initiatives, R&D, but also supply. We want to make sure we have the right products to be able to meet this market recovery and the demand that we see coming here in the back half of the year.

Good. I think that dovetails nicely into last question here about margins. So you talked a little bit about some efforts to preserve costs to offset some of the lost revenue. Maybe you could just speak to that in terms of what you're doing right now, but also talk about how margins will recover in the recovery. You mentioned there's a little bit of a lag because of the way things work with your turns.

Yes. So in the second quarter, we will not be able to offset the revenue decline, right? April, we said 70% down. I mean that's a pretty massive reduction. And when, as we quoted, a bit over half of our cost base is fixed, it's incredibly difficult to be able to respond that quickly to that size of revenue drop. But also deliberately, we don't want to offset all that revenue drop because we do think it's temporal, and we think that the markets will come back, and we want to make sure we're still investing for that, again, the other side of the recovery. Now how do we see margins progressing? We expect margins potentially to be negative in the second quarter. They could be better if the ramp-up is faster than we expected. That's going to be sort of a week-to-week kind of phenomenon that we're going to have to continue to track. But in Q3 and Q4, we would expect margins to improve as revenue does. Will it get back to our aspiration this year, which was around 27% with the guidance range around that, I think that was the midpoint? No, it will not. But as I said, could it -- over time, as revenues begin to get back to previous levels, will margins get back to those levels -- previous levels? Absolutely. We just can't comment yet on the pace of that.

Great. Okay. Well, I think we're right at the time. And we covered most of the topics that I wanted to. So at this point, I think I'll just thank you for spending time with us and giving all these insights to the investors on the line. I know they appreciate it when there's such great demand on your business to be able to get some updates and some insights. So thanks so much, and good luck as you work through the rest of the recovery period here.

Great. Thank you, Matt. Thanks for having us, and I hope everyone stays well.

Thanks, Matt.

Thank you. Thanks, Keri.