Logo of jester cap with thought bubble.

Image source: The Motley Fool.

NuVasive Inc (NASDAQ:NUVA)
Q1 2020 Earnings Call
May 6, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the NuVasive, Inc. First Quarter 2020 Earnings Conference Call. [Operator Instructions] [Operator Instructions].

I would now like to turn the conference over to your host, Suzanne Hatcher, Vice President of Internal and External Affairs. Thank you. You may begin.

Suzanne Hatcher -- Vice President, Internal And External Affairs

Thank you. Welcome to NuVasive's First Quarter 2020 Earnings Call. The company's earnings press release, which we issued earlier this afternoon, is posted on our website and has been filed on Form 8-K with the Securities and Exchange Commission. We have also posted supplemental financial information on the IR website to accompany our discussion. I hope all of you are staying well during these times. Due to the COVID-19 pandemic, we are using a more virtual approach in conducting this earnings call. We are going to begin with prepared remarks from our CEO, Chris Barry; and CFO, Matt Harbaugh. Then, we'll open it up to Q&A with Matt Link, President, joining us during that portion of the call. With safety in mind, all of us on the phone are dialing in remotely from different locations. I would like to remind you that discussions during today's call will include forward-looking statements, which are based on current expectations and involve risks and uncertainties, assumptions and other factors, which if they do not materialize or to be correct, could cause NuVasive's results to differ materially from those expressed or implied by such forward-looking statements.

In particular, there is significant uncertainty around the duration and impact of the COVID-19 pandemic on the company's business, operations and financials. The COVID-19 pandemic continues to evolve, and it is important to note that our commentary reflects our best estimates as of today's date. Additional risks and uncertainties that may affect future results are described in NuVasive's news releases and periodic filings with the Securities and Exchange Commission. NuVasive assumes no obligation to update any forward-looking statements or information, which speak as their respective dates. This call will also include a discussion of several financial measures that are not calculated in accordance with generally accepted accounting principles, or GAAP. We generally refer to these as non-GAAP financial measures. These measures include our cost of goods sold, gross margin, sales, marketing and administrative expenses, research and development expenses, operating margin, non-GAAP earnings per share, free cash flow and EBITDA. Reconciliations to the most directly comparable GAAP financial measures may be found in today's news release and the supplementary financial information, which are accessible from the Investor Relations section of NuVasive's website.

With that, I'd like to turn the call over to Chris.

Chris Barry -- Chief Executive Officer

Thank you, Suzanne. Good afternoon, everyone, and thank you for joining us. Hope all of you, your family and friends are staying healthy and safe during this COVID-19 pandemic. These uncertain times are difficult, to say the least. Across NuVasive, and around the globe, we are facing adversity that is challenging us in unique ways. As such, we have structured our formal remarks to share the actions we are taking to maintain business, financial and operational continuity, while supporting our employees, surgeon partners, patients and communities. As with nearly all medtech companies, we are hopefully experiencing a temporary but substantial impact on our business due to the COVID-19 pandemic as a large portion of surgery cases we support with our technology and services are considered elective. First quarter 2020 net sales were tracking to expectations until mid-March, when we experienced a sharp decline in our business due to deferrals of elective surgeries. That decline in case volume persisted throughout April, but we are now seeing case volumes increasing at a steady state during the first week of May. That's a positive sign that perhaps April may be the worst of it.

Over the last two months, NuVasive has responded to the COVID-19 situation by adopting new operating procedures that ensure the safety and wellbeing of our employees. We've also taken steps to maintain core capabilities in our sales channel and our supply chain, and continue our focus on our innovation pipeline. Additionally, we have adopted new ways to engage our surgeon partners to provide the service they expect from NuVasive. In its early days, we are now seeing elective surgeries resume in the U.S. and other geographies around the globe in a limited capacity, as shelter in place mandates begin to ease. We are engaging with our surgeon partners in charting data on a daily basis that gives us a better understanding of what our business may look like in the short to medium term. Based on the insights we have gathered, as more spine and orthopedic surgeries have resumed over the last two weeks, there are trends starting to take shape, but still a lot of unknowns at this point. Here is what we know as of now. In the U.S., many hospitals are restarting elective procedures, but in a measured way.

In other global markets, the restart is also happening, but in a highly variable situation by geography. In some situations, hospitals, resuming spine surgeries, may have capacity constraints as they manage the ongoing effort against COVID-19. Here's what we don't know and we'll need to learn. Although capacity is coming back online for elective surgeries, the extent is unclear at this time. We continue to monitor on a daily basis which hospitals are coming back online and to what extent. Hospitals will likely adopt new protocols and procedures within their facilities. We do not know what impact this will have on the overall efficiency, and what constraint that may have on our surgical volumes. Finally, the overall sentiment and willingness of patients to return to both clinic and hospital setting is hard to predict. Ultimately, it will be a patient-by-patient decision. It's also uncertain how unemployment or a patient's change in coverage may impact surgical postponement or scheduling trends. Overall, there are some positive signs as we enter May, but many questions remain that we'll be working to answer as we move forward.

Matt Harbaugh will provide additional insights on how we would view the current market environment, review the company's cash position and overall liquidity, followed by first quarter 2020 results in detail. I'd like to transition to discussing the actions we are taking internally to support the vitality of our business. As announced, in our press release and Form 8-K, issued on April 14, the NuVasive management team continues to evaluate the COVID-19 situation on an ongoing basis. In consideration of differences across geographies, and to ensure we are effectively operating the business under new constraints, we laid out priority centered on people, which then drove financial business and operational continuity. First, let me discuss the actions put in place to promote the safety and wellbeing of our employees. Early on, a task force was formed to manage the company's response to COVID-19, including work from home protocols for those able to do so, while supporting the safety of our employees whose daily jobs require them to be on-site or in hospital settings. At NuVasive facilities, we instituted processes to follow health agency and local government guidelines, including social distancing, temperature checks, face coverings, enhanced cleaning measures and more. In addition, we assessed our various geographic regions and the impact due to the temporary decline in elective surgeries.

We have implemented thoughtful measures across our global commercial teams, with the goal to mitigate and preserve compensation for our commission-based employees. To that end, I've been extremely impressed with the level of productivity and adaptability of our employees. Second, from a financial standpoint, we have taken steps to control operating expenses, including implementing compensation reductions for the Board of Directors and executive officers, measures to constrain discretionary spending and adjusted overall production efforts to align with the drop in volume. We also evaluated immediate supply chain efficiencies such as variable distribution costs and scaled back capital expenditures. Related to business continuity, we continue to engage with our surgeons and valued partners to serve them during this time. Our priority has been to understand from our surgeon partners how they are preparing the ramp-up of elective surgeries and identifying how we can best support them during this transition. In addition, despite COVID-19, we are committed to maintaining the level of R&D investment we budgeted for at the beginning of the year to continue to make solid progress on our technology road map. At this time, our major filings and approvals planned for 2020 are on track with our internal time lines.

We remain highly focused on differentiated spinal hardware solutions and are enabling technologies to continue our position as the innovation leader in spine. In particular, the internal development and testing of Pulse remains on track. Our engineering teams are applying the learnings from beta evaluations and refining the integrated platform accordingly. In parallel, our robotics application development continues, and we are making good traction on the software and hardware arm component of the system. Our integrated platform strategy remains on track and continues to be validated by the market, and we will continue to forge ahead. We're also on track with an end-of-year launch of several new cervical portfolio offerings. Currently, in the alpha launch stage, the anterior cervical plate system will help treat degenerative, trauma and deformity pathologies. In addition, we plan to launch a new posterior cervical fixation system in the same time frame. This system will be compatible and incorporate many of the same design principles of our current flagship lumbar fixation system to create a complete posterior fixation solution. We are encouraged by the product demand from surgeons already during our alpha evaluation.

We have and will continue to foster engagement opportunities for surgeons to learn from us and from each other. NuVasive's clinical professional development and global marketing teams have adapted quickly to digital and virtual learning opportunities. In teaming up with our surgeon faculty, we have moved from in-person offerings to leveraging videos, webinars and remote trainings to educate on our procedural solutions for XLIF, XALIF, MAS TLIF and MAS Midline. We plan to continue hosting and building out our virtual spine conference series we started up to provide continued online learning opportunities for our surgeon partners, acknowledging the way surgeons will be able to train and travel in the near to midterm will likely be challenging. And finally, we continue to focus on operational capabilities during this slowdown in elective procedures. This includes driving sustainable improvements related to global logistics, fulfillment, manufacturing, and the European MDR initiative. A few weeks ago, governing body officially postponed European MDR's date of application for one year. Regardless of this extension, this does not change our approach or time line to ensure this initiative is acted upon with urgency as it's a critical step to help enable our long-term international growth plan strategy.

We continue to make the necessary investments to foster operational efficiencies, including sterile packaging, which enables us to fully continue participating in key global markets. These actions are a reflection of continuing to balance profitability while strategically investing in key areas for growth as we prepare for the future. With that, I want to be very clear. I believe our company's fundamentals and long-term strategies are sound. While certain spine surgeries are considered elective, the need and the demand for these life-changing procedures remains high. We expect deferred or delayed spine surgeries will, ultimately, be scheduled and performed when it is safe and appropriate to do so. And therefore, we anticipate that volumes will likely bottom out over the second quarter and then gradually increase over the next several quarters. We'll be tracking data across the globe to get a better sense of the trends that provide better insights as we move through this year. In addition, we are focused on business, financial and operational continuity, while keeping the safety of our employees and customers at the forefront. What I can say with absolute certainty is that as a leadership team and as a company, we're doing everything we can to manage through this time and best position NuVasive for long-term growth.

With that, I'd like to turn the call over to Matt.

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Thanks, Chris, and good afternoon, everyone. Before jumping into the financials, I'd like to acknowledge the tremendous job healthcare workers around the world are doing to serve patients. These past months have required all of us to overcome challenges associated with COVID-19, and I'm proud of the resilience demonstrated by our employees as well. While I will discuss first quarter 2020 results in a minute, I'd like to start off by addressing what is top of mind for investors right now, the company's liquidity position and how we generally view the return of elective procedures and related net sales cadence for the remainder of the year. NuVasive had a strong cash position, with more than $500 million of cash on hand as of March 31, 2020, with additional untapped access to date of up to $550 million on our revolver. In late February, before we started to see material impact from COVID-19, we took steps to improve our capital structure, providing additional liquidity. We amended our revolving credit facility to increase borrowing capacity from $500 million to $550 million and extended the term to 2025. Then, in early March, the company completed an offering of $450 million of convertible notes due 2025.

This helped bolster our cash position by more than $330 million after deducting offering costs, the net cost of the related bond hedge and warrants and the use of proceeds for share repurchases made in connection with the issuance of the notes. As it relates to debt covenants, our newly issued convertible notes, due 2025, as well as the convertible notes due in March 2021, have minimal financial covenants. In addition, our credit facility provides a bit more flexibility than the old facility and requires we maintain certain interest coverage and leverage ratios, which are measured on a quarterly basis. Subject to compliance with the covenants and other requirements, we can draw on the facility so long as we don't exceed a total net debt leverage ratio of 4.5:1. As a comparator, our net debt leverage ratio as of the end of the first quarter, as defined in our facility, was 2.7:1. Based on the cash position I shared above, and access to additional cash should we need it, I feel comfortable with the company's overall liquidity and ability to meet our financial commitments during these uncertain times. We have also taken a number of steps to control costs and reduce discretionary spend, and we'll continue to manage the company's cash position in a disciplined manner.

Back on April 14, the company withdrew annual financial guidance for 2020. As a result of COVID-19, due to market uncertainty and with a limited view on when elective procedure volumes will normalize globally, we have decided to not provide further full year 2020 financial guidance at this time. It is too difficult to accurately predict with so many variables, as Chris described earlier. At this time, we expect the impact of COVID-19 on volumes and net sales will be most severe in the second quarter, followed by a gradual recovery in the third quarter, with further incremental improvement in the fourth quarter. Spine surgeries may be deferred, but they are not typically canceled altogether, so we anticipate volume recovery to continue into 2021. We believe this view is realistic as of now based on the assessment of overall market conditions, government agency information and feedback from surgeons and hospital administrators. Now let's turn to our first quarter 2020 performance. As a reminder, many of the financial measures covered in today's call are on a non-GAAP basis, unless noted otherwise. Please refer to today's earnings news release as well as the supplemental financial information on www.nuvasive.com for further information regarding non-GAAP reconciliations.

For the first quarter 2020, net sales were $259.9 million, down 5.4% year-over-year on a reported basis and down 5.1% on a constant currency basis. This includes international growing in mid-single digits year-over-year, offset by declines in U.S. spinal hardware and U.S. surgical support as a result of the significant deferrals in elective surgical procedures starting in mid-March due to COVID-19. We experienced better-than-anticipated pricing pressure compared to our expectations in the first quarter of negative 1.7%. Now let me give you some additional color at the business line level. U.S. spinal hardware revenue declined 6.3% year-over-year to $138.5 million. In the first two months of the quarter, NuVasive's X360 system was tracking to deliver solid year-over-year growth as surgeon training and adoption rates continued at the pace we have seen previously. Cervical performed relatively well, as momentum from strong gains in the fourth quarter 2019 continued into the first quarter 2020, driven primarily by new and alpha product introductions as well as a more focused selling strategy for this underpenetrated part of our portfolio. The cervical technology is used in trauma and emergency spine surgery cases more often than thoracolumbar. This portfolio has experienced more stable use and has been less impacted from COVID-19 when compared to other parts of the business.

Net sales from U.S. surgical support came in at $64.3 million, a 10.9% decline over prior year. The benefit that we saw last year from the improved billing and collections at NuVasive Clinical Services has now annualized and returned to more normalized levels as we anticipated. Case volumes tracked up year-over-year in January and February, and then experienced a slowdown in volumes in mid-March due to the pandemic. Turning to International. Net sales were $57.1 million for the first quarter, growing 4.1% year-over-year as reported and 5.6% year-over-year on a constant currency basis. This was driven by Asia Pacific growing in mid-double digits year-over-year on a constant currency basis, led by Japan, where we saw more stability against the backdrop of COVID-19 through the first quarter. Europe delivered low single-digit net sales growth for the pandemic impact was felt earlier and more significantly in certain regions like Northern Italy. Other regions continued to experience decent volumes through March. Latin America net sales declined, primarily due to a sharp decrease in Puerto Rico, driven by case cancellations.

Overall, while the international regions drove year-over-year growth in the first quarter, performance was definitely impacted by the decline in elective procedures due to COVID-19. We continue to work with our commercial teams around the world to monitor the situation and prepare for recovery. Turning to the rest of the P&L. Non-GAAP gross margin for the first quarter was 72.3% or a 60 basis point decline over prior year of 72.9%. This was primarily driven by COVID-19, price erosion and inventory-related charges, partially offset by improved operational efficiencies in manufacturing. The West Carrollton, Ohio facility continues to perform well into 2020, and is positioned to meet customer demand when it returns to more normalized levels. Non-GAAP SM&A expenses decreased by 300 basis points compared to prior year to 48.7% of net sales in the first quarter or $126.6 million. This decline was driven by reduced compensation expenses, inclusive of commissions and fair value adjustments for certain equity awards. Non-GAAP research and development, or R&D expenses, totaled approximately $17.5 million or 6.7% of total net sales in the first quarter.

The 40 basis point increase over prior year is in line with the company's ongoing commitment to its innovation pipeline development. First quarter non-GAAP operating margin came in at 16.9%, a 200 basis point improvement over prior year, primarily due to expense reductions previously noted and overall expense control across the company, partially offset by R&D investment and the COVID-19 net sales impact. Non-GAAP tax expense in the quarter was $7.4 million, resulting in a non-GAAP effective tax rate of 22.5% versus the prior year tax rate of 23%. First quarter non-GAAP net income was $25.4 million or non-GAAP diluted earnings per share of $0.48 compared to non-GAAP net income of $27.6 million or non-GAAP diluted earnings per share of $0.53 for the same period last year. Turning to GAAP results. GAAP net earnings for the first quarter of 2020 were $5.3 million, or GAAP diluted earnings per share of $0.10 compared to $9.4 million or GAAP diluted earnings per share of $0.18 in the same period last year. Finally, free cash flow for the quarter was negative $22.9 million versus negative $9.5 million in the prior year. Free cash flow, compared to the prior year, was down primarily due to the impact of lower operating profit from COVID-19 and higher annual cash compensation payouts, partially offset by reduced capex spend.

In conclusion, while COVID-19 impacts will be felt through the remainder of the year, our teams are diligently working to make progress against NuVasive's long-term strategy and using this time to best position NuVasive for 2021 and beyond. We continue to see progress on our innovation road map for both Pulse and Pulse Robotics, while still investing in core implant technologies. We are also using this time to accelerate operational efficiencies within manufacturing and distribution, with the goal of continuing to develop a world-class supply chain that is a true competitive advantage. I'm extremely proud of the dedication of our employees that they have demonstrated during this difficult time. Our commercial teams are looking forward to ramping back up as soon as they can to help surgeons and patients as more and more elective surgeries resume throughout the next several months.

Thank you. And with that, I'd like to turn the call back to the operator to start the Q&A session.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Josh Jennings with Cowen and Company. Please proceed with your question.

Josh Jennings -- Cowen and Company -- Analyst

Thank you. Good afternoon. I appreciate all the details and the update here. And I was just hoping you may be able to just help us think about, like most of your medtech peers, it seems like you started to feel the brunt of the elective procedure slowdown in March, hit the bottom in April and are kind of on a recovery swing. But any help you can give us in terms of how deep that the depth of the hit in April was so we can kind of have a starting point to think about modeling out through the rest of this year? And then just a follow-up in that same vein is, just in terms of Japan, it sounds like you had strong growth in Q1. There is a state of emergency in place there now. It's one of your bigger international markets. And have you seen a dramatic shift thus far in Q2 with that state of emergency in place?

Chris Barry -- Chief Executive Officer

Thank you, Josh. Let me hit with the second part, and then I'll turn it back over to Matt Harbaugh to hit the first part. Japan was relatively stable, up to what we've seen more recently. Again, we haven't seen necessarily a significant drop from Japan as of yet. Having said that, we've seen the emergency situation there. And from the feedback we've gotten from our teams there, suspect some slowdown. It's too early to tell what the magnitude will look like, but we're hearing something very similar. We had positive results comparatively in context of the Rest of the World and Japan over the course of the first quarter. But it seems like situation there may be worsening. But it's too early to really put our finger on exactly what that will represent. As far as the bottoming out, let me turn it over to Matt Harbaugh to address.

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Yes. Thank you for the question, Josh. April definitely was a tough month for us. The way you characterize it very similar to other medtech companies, really the mid-March to end-of-April time frame was tough. As you heard in the prepared remarks, we're more focused on the quarters as opposed to months. And I think it's, frankly, a bit dangerous to take what we saw in April and extrapolate it to May and June because we have seen some positive signs in the last week or so where procedures are starting to pick up. And so I would encourage you to think about it on a quarterly basis as you're modeling it out, with the second quarter having the highest impact with continued but lessened impact in the third quarter, and then a more moderate impact in the fourth quarter. Obviously, very hard to predict very early on, but that's how our internal modeling is manifesting itself at.

Josh Jennings -- Cowen and Company -- Analyst

Understood. Thank you.

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Thanks. A question.

Operator

Thank you. Our next question comes from the line of Richard Newitter with SVB Leerink. Please proceed with your question.

Richard Newitter -- SVB Leerink -- Analyst

Hi, thanks for taking the question. I wanted to go to the kind of the capacity issue that you referenced earlier. And ASC, I know that we've heard from other companies who have procedure performed more often in the ASC setting or outside the hospital, the fact it alleviates potential bottlenecks for surgery to accommodate any capacity constraints, so I'm just wondering what percentage of your sales or surgeries are performed in an ASC? And then do you think that, that percentage could meaningfully begin to shift in the near term? And then just I'll ask this on top of that because if you could answer how MIS, or minimally invasive procedures, of what your portfolio definitely has a higher percentage of exposure, how might minimally evasive procedures lend themselves in the spine sector to getting performed in that setting?

Chris Barry -- Chief Executive Officer

Thanks, Rich. I think the gentleman most prepared to talk about this, and we talked a lot about our ability and the opportunity in the ASC, but I'll ask Matt Link to comment on that.

Matt Link -- President

Yes. Thanks, Chris. So look, we've long seen an opportunity around the shift inside of care from an inpatient to outpatient or ambulatory surgery setting. And I think, in your question, you hit on a key point, minimally invasive procedures reducing the morbidity, creating a more predictable intervention to manage a patient outcome in that setting, it's critically, critically important. We have enjoyed some success in that space. I'd characterize our current sort of representation of the space in the single digits as it relates to total revenue, but growing year-over-year. I don't think there's any question that there'll be an ongoing shift to ambulatory and outpatient surgery setting as a result of this crisis. I think the question remains, what that impact will be in spine. There are certain components as it relates to reimbursement that are still a consideration. There's also a consideration as it relates to patient safety and ultimately outcome. And that's not something that necessarily get meaningfully addressed in the near term.

So currently, what you have is a backlog of elective and scheduled procedures across all settings, including ASCs. Remember, in the midst of the crisis, or at its peak, the shortage in PPE led to closure of ASCs as well. And so think about existing procedures that have more regularly and routinely been done in an ASC setting, there's a catch-up there. So it's not as if there's a necessarily a huge capacity for new procedures to shift to that setting. I do think that the surgeries that are routinely done in that setting will see some uptake. Certainly, to the extent you can eliminate a burden for other procedures creeping into the inpatient setting that then opens up capacity for the spine procedures, who we anticipate will still predominantly be performed in that setting, at least as we think of them as the instrumented infusion procedures because currently the largest volume procedures we see in the ASC setting are actually uninstrumented procedures like laminectomies and microdiscectomy followed closely by ACDFs, which are the cervical fusions.

Richard Newitter -- SVB Leerink -- Analyst

Thank you.

Matt Link -- President

Thank you.

Operator

Our next question comes from the line of David Lewis with Morgan Stanley. Please proceed with your question.

David Lewis -- Morgan Stanley -- Analyst

Thanks for taking the question. Chris, I appreciate the comments on the R&D pipeline. I just wonder, as I think about Pulse and Robotics now, is the first half next year still a good way to think about Pulse's commercialization? And can we still see Robotics first-in-man in the second half of this year? And then I guess, related to these questions, Chris, is just any strategic changes in terms of how you're thinking about selling or pricing these systems in terms of user base or leasing in light of what we're seeing out there from a capex perspective?

Chris Barry -- Chief Executive Officer

Thanks, David. As far as the time lines, no material change of any of the time lines that we've previously communicated with the carrier. We don't necessarily know the availability of doing evaluations. We don't necessarily know the availability of resources in relation to some of the regulatory pathways. We're still banking our time lines with previously with previous paradigms, right? So if regulatory approvals become challenging because of resourcing within some of those agencies, that's not baked in, in any of our thinking. But generally speaking, we're still holding to the previously aforementioned time lines.

As far as pricing or anything relating to, I guess, strategic direction of those programs, the only thing I'll say is we've always said, and we'll continue to really stand by the fact that we want to be as flexible as possible. Historically, back in 2008, when housing crunch impacted really the entire economy as well, you saw hospitals stop spending capital. And that you saw a lot of medtech companies evolve some of their approach. And I don't necessarily think that you'll see anything that different in this situation where capital might be constrained and people will deploy other means in order to place their capital for either volume commitments or other unique placement programs. We've all along said that we want to be as flexible as possible. We want to be easy to do business with. So largely, not really rethinking it, just watching closely how this may impact the broader market. And does that give us any insight to how do we how we're more successful coming out of the gate.

David Lewis -- Morgan Stanley -- Analyst

Thanks.

Chris Barry -- Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from the line of Matt Miksic with Credit Suisse. Please proceed with your question.

Matt Miksic -- Credit Suisse -- Analyst

Hey, good evening. Thanks for taking the questions. One follow-up, Chris, if I could, on the comments that you made. I think Matt may have also referred to this sort of like early positive signs in early May. If you could talk maybe a little bit about the context of those coming back, procedures starting to come back. What the logistics or protocols look like, if folks are starting in first year and you anticipate them sort of picking up the pace at centers that have decided to begin doing? Any sort of color like that would be helpful. And I have one follow-up.

Chris Barry -- Chief Executive Officer

Thanks, Matt. Thanks for the question. I think as you again, I'll turn it over to Matt Link who really is closest to this. We've been tracking this on a daily basis. Before turning over to Matt, I'll just say that the kind of the way we're looking at this is capacity is coming back on. We know that. Anecdotally, we know that. We don't know the magnitude of that, so we're looking at data there. We don't know the protocols that you mentioned, which Matt could get into. What level of or constraint of efficiency will that create? And ultimately, at the end of the day, we don't know the patient sentiment. These are considered elective by the industry, but they're not necessarily elective by the patient. Patients, I think, are in high demand of these procedures to really get back on their feet. But we don't know what the receptivity of patients to enter into the market is today. So Matt, why don't you add some color to protocols and things that you're hearing?

Matt Link -- President

Yes. So as stated previously, and Chris has touched on, early positive signs of the recovery. Look, I think the one of the key elements when we think about recoveries is we're talking about it in broad terms. But the reality is that the geographic variation is considerable, right? And understandably so based on what has been the impact of COVID in the market to date? Where are they with respect to their curve and/or recovery? And then what impact has it had on the capacity of the health system? And there's also a question of health system economics. So I think that's one thing. We are extraordinarily mindful of and have a regular cadence of engagement with surgeons and providers as well as hospital administrators and health systems to try to understand what the impact is and what's the variation geographically. So there is an unquestioned financial driver for both the providers and the health systems to get back to a more regular cadence of scheduled and elective surgeries. So that's a positive.

That being said is that even under the best case circumstances, we're not returning to operations or to a higher volume of operations in an environment that's COVID-free. And so when you start to think about protocols across the service line, so operationally, how they're going to continue to protect healthcare providers? How are they're going to protect patients? And how are they going to continue to limit the potential impact of some type of secondary rebound is critically important. And that's going to impact, without question, volumes and throughputs at a service line level. They'll be inherently less efficient. The good news is, I see positive signs in terms of our team's ability to have access to support those cases. Obviously, with considerations that vary geography by geography, system by system, as it relates to testing, PPE, those are all things that we're staying very close to. We're investing heavily into the safety and wellbeing of our own field organizations, which includes our field-based sales force as well as our clinical services organization and all of our global teams. We're investing in environmental health and safety training as well as ensuring that they have all of the required protocols, not just from the facilities that they're going to be entering, but also what we think is necessary to help protect them.

So those are all the things. And if you go back to Chris' prepared remarks, the variables we know and the variables we don't know, these variables that we don't know exactly what the impact will be on service line throughput and volume, until they really start to ramp back up, which is going to play out, I think, materially over the next, let's say, four weeks in May through to June. And we could start to have a little bit of a better idea. And the last piece is the one Chris touched on as well, which is the patient sentiment. And again, I think what you're going to see from a patient sentiment perspective is going to vary geographically and regionally. In these regions or geographies, where there's been a high census of COVID patients, or even within a given market, if you have certain facilities that have had a high census of COVID patients, understandably, I think you're going to see a reluctance from patients to want to go to those facilities and potentially push out rescheduling of these cases. The good news is in practices and individual providers we've talked to where they've actually begun the active engagement of patients for rescheduling, even in the instances where they may choose not to schedule a case today, they're simply deferring it out slightly further into the future, but still, in many instances, if not all instances, this calendar year, just wanted to let things play out a little bit further.So I think that's a very good sign as well. But again, we'll have to see how it plays out.

Matt Miksic -- Credit Suisse -- Analyst

Sure. And if I could just get in related, as you sort of figure out ways to put proctors and your people in front of surgeons and in terms of training and introducing them to X360 or other new products, I know it's early, but I guess, what kinds of capacity impact do you see or your capabilities do you see in terms of using remote capability, virtual capabilities, to kind of keep those training and interactions going?

Chris Barry -- Chief Executive Officer

Yes. Go ahead, Matt. I think you got this one as well.

Matt Link -- President

Yes. So it was referenced also in the prepared remarks. And look, I just want to give a ton of credit to our global marketing team, our global product management team and our clinical professional development team. In a very rapid manner under pretty dynamic and uncertain circumstances, the teams pivoted quickly and developed a very robust digital platform to be able to continue to push out training and education to providers, and candidly to our teams, around the globe. And so we are actively engaging surgeons in the most beneficial ways in which to use these platforms for training education, whether it be webinar series, case debates, structured lecture series. We've also had ongoing conversation with many of the professional societies that we normally partner with, who are also having to pivot to digital platforms because of the inability to do in-person meetings and trainings.

And so I'd say, thus far, in what has been a relatively rapid turnaround, the team has done a tremendous job to leverage internal resources and is going to continue to develop them. And then I think one of the key pieces for us is to continue to gather feedback from providers as to what's being most effective. And look, as things start to open up over the coming weeks and months, we'll also pivot back to in-person learning, where appropriate and where safe, both here and San Diego as well as potentially doing a more regional approach. And I think in all essence, what you'll see is a more tailored small group or limited numbers in the environment, maybe as opposed to some of the larger courses that we and others, including the societies have done in the past.

Matt Miksic -- Credit Suisse -- Analyst

Great, thank you so much.

Matt Link -- President

Thank you.

Operator

Our next question comes from the line of Kyle Rose of Canaccord. Please proceed with your question.

Kyle Rose -- Canaccord -- Analyst

Great. Thank you very much for taking the questions here. I understand the hesitance to provide some commentary with respect to your case volumes on a month basis. But maybe just kind of help us understand I think some of the previous commentary from other management teams of just some of the survey work that we've done is we'd seen case declines in the U.S. in the ballpark of the 70% range for the month of April. So I guess question one is, does that seem fair? And then number two is when you've seen the improvements through the first week of May, maybe kind of help us understand what are the types of cases you're seeing? Is it more the cervical? Some of the less complicated cases? Are you able to get some of the big meaty cases where NuVa really excels in the X360 side? Just trying to understand what the pace of recovery looks like, specifically where your strengths are?

Chris Barry -- Chief Executive Officer

Yes. I mean, I think what we saw in April was probably aligned with what you're hearing from others. I don't think we're an outlier at all. I think so ballpark, that's in the general ballpark. As far as the types of procedures, Matt, why don't you comment on what we're hearing?

Matt Link -- President

Yes. So as we work into recovery from the types of procedures, I think the biggest deciding factor in the type of procedure is the patient profile and risk, specifically as it relates to age and other comorbidities. So again, you can imagine and appreciate in this environment those would be the primary concerns. And so we are seeing some impact with respect to older patients or other high-risk patients. But the good news is we are starting to see a resumption of a more regular mix in the types of cases, and that includes, in some instances, some of the larger constructor deformity cases, particularly in the adolescent and pediatric fields. Because again, you have the patient population who, in many instances, otherwise healthy, and less of a risk potentially in this environment.

So I'd say still very much early days, and we'll go back to some of the qualifying comments I made earlier that I think there'll be a judicious and cautious approach to the return to surgery, and there'll be sort of a very close watch and measure to any potential increase in spike in COVID and the ability to maintain more than adequate capacity within the health systems to manage any potential secondary spike in COVID. So that, in turn, I think, translates to a relatively cautious approach. But we are seeing a more normalized mix of cases starting to flow back through, with the exception of some of those high risk patients.

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Yes, Kyle, this is Matt Harbaugh. The other thing I would add is that, as we reflect on what happened in the first quarter, if we take the COVID impact on our revenue, our general business in the first quarter, 80% of it was U.S., approximately about 20% internationally. But as we think about COVID impact during that time frame, we estimate about 90% of the impact was in the U.S., and only 10% was ex U.S. So as you're thinking about your modeling, it's important to distinguish kind of that 80% U.S. business and what's going on there, which is not necessarily correlating with the 20% international revenue. I just want to make sure as you're modeling it, you're also considering that in your thinking.

Kyle Rose -- Canaccord -- Analyst

Thank you. That's very helpful.

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Matthew O'Brien with Piper Jaffray. Please proceed with your question.

Matthew O'Brien -- Piper Jaffray -- Analyst

Good afternoon and thanks for taking the question. A big part of the NuVasive story has been conversion adoption. So given that all the docs are shut down at the moment, have you been able to talk to more doctors, convert more doctors virtually than you were able to do even in person? How does that look as we kind of progress through the rest of this year as they're going to be pretty busy doing as many surgeries as possible? And then you're sitting with over $1 billion of capital, you've got a ton of really small providers out there that are not nearly as well capitalized as you are. What kind of opportunities are you already seeing? Are you seeing more resumes, more business development opportunities? So what opportunities are you seeing to take meaningful market share coming out of this from your smaller, less well-capitalized companies?

Chris Barry -- Chief Executive Officer

Yes. Thanks for the questions. Let me take a shot. As far as the CPD and converting surgeons, probably it's too early to tell. The only thing I would say is that I've heard from the CPD team that the level of engagement has been very high. To the extent that there's learnings that we're taking from this situation. And basically, we'll likely implement even when this crisis passes. The vetting of the surgeons that the quality of the surgeon engagement that we're getting upfront has been very good, which hopefully gives us good signs that we will be more efficient in the conversion rate of the surgeons that we're actually engaged with. There's still a hands-on component that Matt spoke of that we need to make sure we follow-up with. But I could say the surgeons that have engaged with us over this period are likely farther along than previously when we would likely have them come on and do hands on and some didactic sessions on location. So I think time will tell.

But from the CPD team, I would say that they are already commenting on the level of engagement has been surprising. So maybe this helps us become actually more targeted on the right profile of surgeon and have a better vetting mechanism, but it's early to tell. As far as your second question, we've the capital that Matthew Harbaugh spoke of earlier, we wanted to be as flexible as possible or have as much flexibility as possible coming into this year. We, obviously, continue to really look at our ability to drive MIS to look to continue to build out our portfolio in cervical and other subsegments like adult and pediatric deformity. We continue to look for opportunities to further our enabling technologies, including other potential technologies to support Pulse or those technologies that may enhance our robotic capability. So I'm not going to speak to any specific M&A targets as of yet. But I would just say, as this does blow over, we will be we'll be as aggressive as we can. As far as how this allows us to take share, I don't know that it necessarily changes anything. I do think that the dynamics that Matt spoke of earlier are somewhat connected. The protocols put in the hospital, some of the things that we are hearing, is reduced foot traffic.

Will that be a consolidation catalyst? We hope it will be. We're preparing ourselves to a lot of the commentary that Matt Link talked about earlier and ensuring that our reps are trained with PPE, that we've got a testing protocol in place, that we're partnering with administrators to ensure that we're as aligned and supportive of their efforts as we possibly can be. And when the broader portfolio question comes into consideration, that may give us an opportunity. So we're poised to take advantage of it. We don't know what the future holds yet, but we want to be as aggressive as we can on supporting our customers, first and foremost. And then if this yields opportunity for us to broaden our portfolio or take full advantage of opportunities as we see aligned to our strategy, we'll be ready to do so.

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Yes. And Matt, the only other thing I would just add on to Chris' comments is you'll notice that we continue to spend at a healthy clip in R&D, a bit higher than where we were this time last year. And the beauty is that we do have capital available to invest there. And so if others are slowing, while we're keeping our foot on the gas pedal, longer term, that should play into our strategy.

Matthew O'Brien -- Piper Jaffray -- Analyst

Very helpful, thank you.

Chris Barry -- Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Kaila Krum with SunTrust. Please proceed with your question.

Kaila Krum -- SunTrust -- Analyst

Hi guys, thanks for taking our question. So before COVID, I think you had said that you would spend more heavily in the first part of 2020 in areas that would help to support the ability to drive longer-term profitability. So you've said you're reducing expenses today, and that makes sense to me, but I am wondering sort of how or if those prior plans may have been impacted? And how that then impacts your longer-term view on margin expansion?

Chris Barry -- Chief Executive Officer

Yes. Matt Harbaugh, why don't you take that one?

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

You bet. So what I would say is we really focused on pulling back on things that we don't think will impact the longer-term prospects of our longer-term strategic plan. Travel and entertainment, for instance, obviously, dropped as a result of COVID-19, and we're going to have to be flexible there as the market kind of comes back. We aren't working with a lot of consultants right now because, obviously, you can defer that without impacting the business. So a lot of the measures that we implemented, we don't think are going to impact the business long term. It's the reason on the last question, I came back to reiterate that we are investing in R&D incrementally a bit more this year than we did last year. We're pulling back on things that we don't think are going to materially impact our margin profile for the long haul.

Kaila Krum -- SunTrust -- Analyst

Great, thanks. Thanks for the working.

Operator

Our next question comes from the line of Robbie Marcus with JPMorgan. Please proceed with your question.

Robbie Marcus -- JPMorgan -- Analyst

Great, thanks for taking the question. Maybe to follow up on Kaila's question a bit and dive a bit deeper. I was really impressed with the gross margin and level of expense cuts you were able to put up in first quarter. As we think about the model here, you said 70% revenue decline in April isn't terribly that far out of the ballpark. Maybe help us understand what's going on with your sales force? Are you changing incentive programs here? Are you setting minimum floors? Are they getting paid down with procedures? Are you furloughing people in the manufacturing plant? Just give us any detail you can or even just a high level framework to think about some of the P&L effects. One, just a bit more behind first quarter because it did come in really nicely. And then, two, how we think about going forward here with sales down in that territory?

Chris Barry -- Chief Executive Officer

Thanks, Robbie. Listen, we've taken we took a very aggressive stance early on. And rightfully so. We implemented compensation reductions for our Board, for our executive officers. We put a very strict control on our discretionary expense across the organization. We did make some adjustments in manufacturing capacity to ensure not only health of our employees, but also making sure the inventory levels were appropriate to the volumes that we saw. We've also taken some measures throughout our workforce, I think, in a thoughtful manner, and in most cases, directly related to decline in elective surgeries. We have done some furloughs, but in a thoughtful manner. And again, it's directly related to the elective surgeries. As far as our sales channel, we've said all along, we want to maintain the health and safety of our employees, where we can we want to maintain as much as we as possible their livelihood. And certain population of employees are specifically impacted, straight commission employees, hourly employees. So we have taken measures to support those employees during this time to the best of our ability. Your question that sort of is the question of the day is, OK, so what's next? And I think what's next is directly related to what happens next.

We want to see elective surgeries come back online and get a sense of how that slope of that line looks over the next four to six weeks, and what that projects to us into the third and fourth quarter, and ultimately into 2021. But to be very clear, we the business continuity requires us to ensure we continue to have a viable channel. It requires for us to continue to make sure that we have a viable operational capability. We think, strategically, maintaining our R&D pipeline is an absolute in this crisis. And we'll do everything we can over the course of the next several weeks and months as long as it takes to maintain our focus in those areas. To Matthew Harbaugh's earlier point, we've tried to do everything we could, in the short term, again, first and foremost, to protect our employees with our employees with our, you don't have a company. But the future of what we'll have to do will really be dependent upon what unfolds over the next two quarters. And so we're poised to attack and support, but we'll have to see how things unfold over those weeks and months.

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Robbie, the only other thing I would add to your question is you asked kind of about gross margin and therein how it relates to operating margin. For gross margin, we're going to have pressure for sure in the second quarter, just with some of the things we're seeing with NCS and the fixed cost base that we have there. So margins will be under pressure in the coming months and quarters, but we do think that will lessen. Buried in our results in the first quarter, we still started we still continued to see savings in Ohio that were meaningful to us. Dale Wolf and the team, who lead our supply chain, they are taking full advantage of this period here to get us really set up for meeting demand as we move forward into the future.

So from a gross margin perspective, I would just encourage you to dial that into your thinking. Also, I would say, as you're thinking below the gross margin line, the one thing I would highlight is that we saw about $10 million in our SM&A that are kind of onetimers that and it's related to stock comp and a few other items, that are not going to repeat as we go into future quarters. So as you're thinking about the bottom line operating margin, just take that $10 million into consideration as well. Sorry to have interrupted you, Matt.

Robbie Marcus -- JPMorgan -- Analyst

Thanks a lot.

Operator

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Barry for any closing remarks.

Chris Barry -- Chief Executive Officer

Thanks, Michelle. And I'd just say thanks, everyone, for participating in our earnings call today. I hope you and your loved ones stay safe and healthy during this time, and we very much look forward to speaking with you next time. Thank you.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Suzanne Hatcher -- Vice President, Internal And External Affairs

Chris Barry -- Chief Executive Officer

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Matt Link -- President

Josh Jennings -- Cowen and Company -- Analyst

Richard Newitter -- SVB Leerink -- Analyst

David Lewis -- Morgan Stanley -- Analyst

Matt Miksic -- Credit Suisse -- Analyst

Kyle Rose -- Canaccord -- Analyst

Matthew O'Brien -- Piper Jaffray -- Analyst

Kaila Krum -- SunTrust -- Analyst

Robbie Marcus -- JPMorgan -- Analyst

More NUVA analysis

All earnings call transcripts

AlphaStreet Logo