Baxter International Inc. (BAX) Q4 2020 Earnings Report, Transcript and Summary

Good morning. And welcome to Hill-Rom’s Fiscal Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded by Hill-Rom and is copyrighted material. It cannot be recorded, rebroadcast or transmitted without Hill-Rom’s written consent. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Mary Kay Ladone, Senior Vice President, Corporate Development, Strategy and Investor Relations. Ms. Ladone, you may begin.

Good morning. And thanks for joining us for our fiscal fourth quarter and full year 2020 earnings conference call. Joining me today are John Groetelaars, President and Chief Executive Officer of Hill-Rom; and Barbara Bodem, Chief Financial Officer. Before we get started, let me begin by reminding you that this presentation includes forward-looking statements that are subject to risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those described, including any impact related to the COVID-19 pandemic. Please refer to today’s press release and our SEC filings for more information concerning risk factors that could cause actual results to differ materially. In addition, on today’s call, non-GAAP financial measures will be used. Reconciliations between GAAP and non-GAAP financial measures are included in our earnings release issued this morning. Finally, I would also like to mention that in addition to the press release issued this morning, we have posted a supplemental presentation, which highlights Hill-Rom’s performance and details regarding our 2021 financial guidance. These materials can be accessed on the Investor Relations page of our website. So with that introduction, let me now turn the call over to John.

Thanks, Mary Kay. Good morning, everyone. Today, we are pleased to announce our fiscal 2020 financial results and provide guidance for 2021. It goes without saying that fiscal 2020 has been an extraordinary and historic year for Hill-Rom and the world at large. I’m impressed by the progress we have made toward our vision of advancing connected care. I’m inspired by the commitment and execution of our global team and energized by the steps we have taken to accelerate Hill-Rom’s business transformation. Despite challenging circumstances posed by the pandemic, Hill-Rom’s overall financial performance has been strong relative to many of our peers in the med tech industry. For fiscal 2020, core revenue increased 3%. We exceeded our expectations and delivered more than $570 million in new product revenue. We achieved a new record level for both gross and operating margins with solid execution. We advanced our growth platforms with organic investments and 3 acquisitions, and finished the year with adjusted earnings of $5.53, an increase of 14% after adjusting for the 2019 divestiture of our surgical consumables business. This was in line with our guidance range provided a year ago, and we are proud we have delivered this level of performance during these unprecedented times. For the year, onetime COVID-related purchases for bed systems and noninvasive ventilators accounted for $180 million in revenue and earnings of approximately $0.75 per diluted share. As we cycle through some difficult comparisons over the next few quarters, we remain confident in the underlying fundamentals of our business, the compelling value propositions we offer across our connected care solutions and our proven ability to deliver enhanced value to patients, caregivers and our shareholders. While Barb will walk through the P&L in more detail, let me provide some perspective on our fourth quarter results and recovery dynamics. As expected, our fiscal fourth quarter reflects the impact from hospital capacity expansion that occurred in the earlier phases of the pandemic. Customers turn to Hill-Rom, and we quickly responded to their urgent needs. As you know, this resulted in Q3 financial performance that far exceeded our internal expectations and affected visibility on normalization and recovery dynamics across our portfolio. Forecasting trends in that environment was more complex and less predictable due to patients shifting profiles, improving treatment options and the ability of providers to rapidly adapt and triage COVID and non-COVID patients. With that backdrop, Q4 performance came in above our projections, with revenue of $705 million and adjusted EPS of $1.17 per diluted share. This reflects normalization of demand for beds, following record Q3 performance, and sequential recovery across most of the remaining portfolio. We are now observing early signs of improved trends as recovery progresses and year-over-year declines are decelerating. We will keep a keen eye on areas that have recently seen rising COVID cases and are experiencing setbacks in the process of reopening, but we have not seen any material impact to date. Therefore, we expect that Q4 represents the trough from a growth perspective as we move into fiscal 2021. Geographically, U.S. core revenue declined 15%, driven by lower capital revenue, like beds and surgical equipment. International revenue, on the other hand, advanced 5%. We are very pleased with the recovery in the emerging markets, where growth exceeded 10%, led by double-digit growth in China and the Middle East. Developed markets like Europe and Canada saw solid gains across the portfolio outside of the Surgical business, where large construction projects continue to be delayed. Now let me briefly review the performance by business at constant currency rates. First, Patient Support Systems revenue declined 13% in Q4. This reflects a challenging comparison to prior year growth of 14% and follows the third quarter peak COVID demand for Med-Surg and ICU beds. As expected, our bed revenue declined by more than 20% overall despite a COVID tailwind of approximately $25 million, driven primarily by elevated demand across Europe. For the year, our portfolio of smart beds grew double digits, including mid-teens growth in the second half. We continue to enhance our leadership and share position with our differentiated ecosystem of smart beds and connected care solutions. The good news is that throughout Q4, our bed orders and backlog in the U.S. accelerated and the remaining PSS portfolio experienced encouraging sequential improvement. This includes the Care Communications business with a sequential increase of nearly 30% versus Q3. As hospital access restrictions have eased, quoting activities accelerated and revenues rebounded to near pre-COVID levels. Q4 Front Line Care revenue increased 1%. Performance was driven by double-digit growth in vital signs monitoring, blood pressure and thermometry as well as the completion of the U.S. stockpile order for noninvasive ventilators. The remaining FLC portfolio was down double digits, but showed sequential improvement of 15%, as U.S. physician office visits resumed. This is a trend that has continued into the start of our new fiscal year. Lastly, Q4 revenue in Surgical Solutions declined 29%, reflecting a difficult comparison, the remaining impact from the surgical consumables divestiture and the impact from capital project timing. With strong sequential growth and improving order funnel and easier comparisons for 2021, we expect gradual recovery in surgical from here. Last November, we unveiled a compelling multiyear plan reflecting durable mid-single-digit revenue growth, double-digit earnings growth and strong cash flow. This was a plan that included benefits from new product momentum, emerging market penetration and value creation from M&A. I am pleased to reiterate with confidence that these key growth platforms remain intact. Obviously, the long-range outlook we provided did not reflect an impact from a global pandemic in the first year of our plan. However, I am confident that as we cycle through difficult comparisons from 2020 and with fiscal 2021 as a new baseline, we are well positioned to deliver on both our long-term aspirations and growth objectives in a post-COVID world. This pandemic has demonstrated that the work we have done to build a strong portfolio provides us with unique solutions and capabilities to tackle accelerated transformation of the global health care environment. We believe Hill-Rom is very well positioned to benefit from these new trends in 2021 and into the future. For fiscal 2021, many uncertainties remain around COVID, including how the pandemic will evolve, how governments worldwide will respond to new policies and when a vaccine will be available. While the pandemic continues to be fluid, we believe the guidance range provided today is both balanced and achievable. For fiscal 2021, we expect revenue to decline 3% to 5% and adjusted earnings of $5.25 to $5.45 per diluted share. After adjusting for the 2020 onetime COVID impact of revenue and earnings of $180 million and $0.75 per diluted share, our guidance range reflects underlying base business revenue growth of mid-single-digits and adjusted EPS growth of at least 10% for the full year. This implied underlying growth is aligned with our longer-term growth aspirations. In closing, as I reflect on the progress of our ongoing business transformation, I am extremely proud of what we have accomplished. Our global Hill-Rom team has displayed a winning spirit, rose to the challenge during these uncertain times. And I would like to humbly thank them for their commitment, resilience and dedication. As I have mentioned, our mission has never been more vital. Our passion is focused on enhancing outcomes for patients and caregivers with connected care solutions that add significant value to the delivery of health care across all care settings, from the hospital to the surgical suite to the physician’s office and at home. We look forward to the future with conviction as we build on a solid foundation in pursuit of our vision of advancing connected care. Thank you, and let me turn the call over to Barb.

Thanks, John, and good morning, everyone. I will briefly walk through our financial results before turning to our guidance for fiscal 2021. As mentioned, worldwide revenue in the fourth quarter of $705 million declined 10% compared to a record finish last year with revenue of $783 million. John discussed recent business trends, but there are 2 other points I would like to highlight. First, Q4 noncore revenue of $13 million reflects the international surgical OEM business. As previously disclosed, we expect to complete the exit of this business by the end of this calendar year, and we are now retiring the core definition. In addition, during the fourth quarter, we lapped the anniversary of the surgical consumable divestiture as well as the Breathe acquisition, both of which were completed in 2019. So revenue projections going forward reflect organic growth. Moving on. Adjusted gross margin in the fourth quarter of 51% expanded by 110 basis points. This was the result of favorable product mix and operational improvement. For the full year, we achieved a new record gross margin of 51.5%, reflecting an improvement of 200 basis points versus the prior year. This includes the positive impact from onetime COVID revenue of approximately 70 basis points. Moving on to operating expenses. R&D in the quarter increased 2% to $36 million. SG&A increased 8% to $207 million, as we continue to fund investments in our strategic growth platforms and IT transformation while managing our discretionary spending. Our adjusted operating margin in the fourth quarter was 16.5%. For the full year, operating margin improved by 100 basis points to 18.8%. This performance is consistent with our strong multiyear track record of driving annual operating margin expansion. Interest and other nonoperating expenses for the quarter totaled $18 million, and the adjusted tax rate was 20.3%. So this translates to adjusted earnings per share of $1.17 per diluted share for the fourth quarter, which declined 31% versus the prior year. For the full year, adjusted earnings per share increased 9% to $5.53 per diluted share. Excluding the impact of the surgical consumable divestiture, adjusted earnings per share increased 14%. Now turning to cash flow. Cash flow from operations for the year was $482 million, reflecting an improvement of $81 million versus the prior year, which was a 20% increase. Capital expenditures totaled $106 million and as a result, we generated free cash flow of $376 million, which is 15% higher than last year. In terms of the balance sheet and financial leverage, our debt-to-EBITDA ratio at the end of September was 2.9x, and we have returned $129 million to shareholders through dividends and share repurchases during the 2020 fiscal year. Let me conclude my prepared remarks with our guidance for fiscal 2021. Today, we are issuing guidance range that we believe is both balanced and achievable, incorporating various scenarios and uncertainties. This outlook assumes a return towards normalized demand trends in those areas that significantly benefited from the COVID-related activity in 2020, and our guidance also incorporates a gradual recovery from product categories negatively impacted. As mentioned earlier, the ongoing scope and evolution of the pandemic remains uncertain and could present incremental risks as well as opportunities for the company’s business. We are not including any potential benefit for substantial surge in COVID-related purchases, nor are we including significant financial or operational impacts to Hill-Rom or our hospital customers from government policies associated with the pandemic. Our guidance also does not reflect an impact from potential health care, government or tax reform, or from future M&A. So for fiscal 2021 full year, we expect revenue to decline 3% to 5%, both on a reported and constant currency basis. As we have previously mentioned, we are retiring the noncore definition as we expect to complete the exit of the international surgical OEM business by the end of the calendar year. Our guidance includes a headwind of approximately $30 million or 110 basis points related to the year-over-year impact of this exit. In addition, our revenue guidance reflects the headwind from the onetime COVID impact of $180 million in fiscal 2020, which presents a challenging comparison to fiscal 2021. Excluding both the onetime COVID impact and the surgical OEM exit, revenue growth is expected to be in the mid-single digits, in line with our longer term objectives. By business segments, at constant currency rates, we expect Patient Support Systems to decline 6% to 10% due to the COVID headwind. Excluding the onetime COVID impact from surge demand, growth is expected to be in the low single digits. We expect Front Line Care revenue to be comparable to the prior year. As the impact from the onetime U.S. stockpile order of noninvasive ventilators in 2020 is offset by continued recovery related to physician office visits. And finally, we expect Surgical Solutions revenue growth of 3% to 5%, driven by gradual recovery towards pre-COVID level and inclusive of the surgical OEM exit. From a profitability standpoint, we expect some modest pressure to adjusted gross margin and operating margin with both set to be within 50 basis points of the record level set in fiscal 2020. We expect gross margin to exceed 51% and operating margin in the range of 18.3% to 18.8%. We expect R&D to approach approximately 5% of sales, and we expect adjusted SG&A to decline in low single digits and represent approximately 28% of sales. Our SG&A guidance includes investments in key growth initiatives, and approximately $50 million in accelerated business optimization savings from actions we announced in September. We expect other expense, which includes interest of approximately $70 million. And lastly, we expect a tax rate of approximately 19% and share count of approximately 67 million shares. We look to offset stock option dilution with share repurchases just like we have done historically. This translates to an adjusted earnings guidance range of $5.25 to $5.45 per diluted share. On a reported basis, adjusted earnings per share are expected to be down 1% to 5%. However, when excluding the prior year onetime COVID impact of approximately $0.75, adjusted earnings per share growth is expected to be at least 10%. From a cash flow perspective, we expect operating cash flow of $370 million to $400 million, which reflects our earnings guidance as well as outflows related to our business optimization efforts and the timing of receivable collection. Capital expenditures in 2021 are expected to be approximately $100 million, and free cash flow is expected to be $270 million to $300 million. For the fiscal first quarter, we expect revenue to decline 3% to 5% on both a reported and constant currency basis. We expect adjusted earnings of $1.05 to $1.10 per diluted share. There is no prior year impact of COVID. Before I turn the call back over to John, I want to mention that we have provided additional quarterly information on the 2020 revenue and earnings per share impact of COVID in our supplemental presentation posted to our website. This information will help you understand the expected quarterly trajectory of reported revenue and earnings per share guidance and the performance of the underlying business during the recovery. Thanks. And now I’ll turn the call back over to John.

Thanks, Barb. For those of you who have followed Hill-Rom over the years, you know that we have significantly diversified our business. We strengthened our business model with enhanced value propositions and improved our durable growth profile with internal R&D and deployment of capital into M&A. Our continued balanced approach towards growth and investment is leading to an exciting and compelling transformation at Hill-Rom. I will reiterate that our strategy, long-term fundamentals, growth prospects and investment thesis remain intact. Prior to and during the pandemic, our company has established a strong track record of performance. We have consistently delivered on our objectives and met expectations. While the macro environment has proven challenging for most, including Hill-Rom, with shocks to traditional demand and evolving dynamics never seen before, we are entering 2021 with improved visibility and cautious optimism as our business begins to recover. Our commentary today is intended to provide a transparent depiction of current business trends and our future outlook, which we believe will aid investors in their evaluation of Hill-Rom as a long-term investment. With a solid foundation, clear strategy and seasoned leadership team, we will continue to go above and beyond to deliver enhanced value to our customers and shareholders and position our company for sustained success. With that, let’s open up the call for Q&A.

[Operator Instructions] I would like to remind participants that this call is being recorded, and a digital replay will be available on the Hill-Rom website for seven days at www.hillrom.com. Our first question comes from Rick Wise from Stifel.

It’s good to see the solid finish to the year. Thank you for the clarity around all the moving pieces, it really helps. Maybe, John, just talk a little bit more about your -- the -- not just the guidance for the year ahead, I think that’s clear, but just how you’re envisioning the year unfolding. Solid first quarter, clearly. But maybe help us think about how you’re thinking about the flow of the quarters for the year and what you think could get better as the year unfolds?

Yes. Sure. Thanks for the question, Rick. I’ll point you, Rick, to Slide number 25 in the presentation material. In that slide, you’ll see the breakdown of the COVID benefit for fiscal ‘20. I think that’s a really important foundational set of numbers to understand. So with that in mind, here’s how I’d characterize ‘21. Obviously, Q4 was our trough. We feel really good about broad-based momentum we’re seeing across all businesses and all geographies as we exited the year and entered fiscal ‘21. So that’s a very encouraging sign and something that gives us a tremendous amount of confidence around our Q1 guidance. As we start to come into Q2 and Q3, we’re going to start, especially in Q3, hitting it up against some really difficult COVID-related comps from last year. And so the shape of that recovery curve continues to build momentum in the underlying business. And our emerging market growth continues to be at double digits throughout the year. We will be launching a significant number of new products, north of 10 new products planned for launch this year. So the fundamental drivers of new product growth, emerging market growth and the recovery of our businesses that were negatively impacted are all well in play and going to deliver for us during the year. And we will see that sequential improvement, excluding that COVID impact from last year. So as you look at the second half of the year, we would expect to see growth excluding that COVID benefit and certainly see nice organic growth in the fourth quarter. We got to cycle through some challenging comps on the COVID side of things and on the recovery of our business, which you’re starting to see, as you noted. Compare Q4 to Q1, we’re expecting to see a nice sequential recovery in our business just in that period where there’s no COVID impact. So I think the final point I would make is our growth drivers. As we’ve mentioned in the past, those -- in terms of product categories, those continue to be in the same areas that we’ve seen them. Very excited about the growth driver opportunities in ICU expansion, in care communications. We have several new product launches in that category coming this year. Noninvasive ventilation, remote monitoring and diagnostics, especially with the importance of telehealth and remote diagnostics. We have several exciting new products in our connected exam tools and screening tools, both for vision screening as well as for physical exam. And then in our Surgical Solutions business with the recent acquisition of Videomed and connected video and OR integration. So really, I think the fundamentals are there. The recovery curve is well in place and new product launches, emerging market growth are going to really position us very nicely as we get towards the end of the year and get past these COVID benefit comps that we have to overcome this year.

That’s great and lots of clear direction there, John. On the other side, thinking about it, the investor concerns or the kinds of questions I get. A lot of that, obviously, a lot of investor anxiety revolves around the outlook for capital, capital spending at the hospital level. And of course, very specifically, always on the bed business, the PSS side. You’re talking -- maybe talk to us, if you would, about the -- your sense of the capital spending environment and what you’re dialing into your expectations? And when you contemplate the PSS low single digits ex COVID, maybe talk about are people going to be concerned about the competitive environment and impact on Centrella, among other issues? Can you put some of that in perspective for us as well?

Yes. Sure. There’s a lot to unpack there, Rick. So let me take it -- important questions, let me take them to start up with. The environment first, right? The environment is so much better from a CapEx point of view and procedure recovery, physician office visit recovery. And we’re seeing that as we outlined in recovery of our businesses, not just here in the U.S., but globally. So that increased level of certainty allows us to reissue guidance quite candidly. And that’s the fundamental difference between the first wave versus now where we are today. Obviously, I won’t get into the details between the first wave and second wave and what we’re now experiencing with a third wave. But the summary of all that is not just us, but our providers and our customers have a lot more confidence of how to deal with COVID surges, how to treat COVID patients and non-COVID patients and how to triage those patients and effectively keep health care treating patients on both sides of the equation. So overall, very good certainty, very good recovery of procedures. And as a result, the financial profile of our customers and the financial certainty of our customers is significantly improved, particularly in the U.S. Internationally, it was never impacted the same way. And while some CapEx -- in aggregate, CapEx is down from where it was going to be a year ago, it plays to our portfolio very nicely, in ICU, in bed expansion in care communications and in ventilation. So relatively speaking, we feel that the CapEx environment is quite improved from where it was even 3 months ago and certainly significantly improved from where it was 6 months ago. So -- and that’s why we feel confident enough to reissue guidance the way we have. So that’s that part of the question. The second part of the question relates to the bed business. If you look at -- if you take a step back and avoid looking at quarter-to-quarter, I’ll get to that in a second. But if you look at the full year last year, our bed business grew at double digits, right? And now if we look forward, we’re seeing a really nice recovery of orders and our backlog for our Med-Surg and ICU bed offering, and we’re seeing that number sequentially is about 20% improvement from Q4 into this current period. So not only that, but the activity level around quoting and orders is actually near pre-COVID levels for our bed business. So we feel really good about that. And from a competitive point of view, we can maybe get into details at a follow-on question, but we’re feeling really good competitively. This is not a surprise to us. We knew this launch was coming, and we candidly expected to come a lot earlier than it is. And quite frankly, the comparison between our bed offering, which really is more of a patient monitoring and connected care solution versus the Stryker bed offering, is like apples and oranges. And I’m happy to get into the comparison of that, if you want. But we feel really good competitively and are prepared for that introduction.

Bob Hopkins on Bank of America.

So a couple of things. I’m going to keep my questions kind of on the macro level. So just two things I’d love to hear you guys comment on a little bit. One is if you just wouldn’t mind talking about the potential pipeline for deals over the course of this fiscal year. What you’re seeing out there, and what we should expect as a result? And then also, there’s so many moving pieces to the business this year. And I understand things will get a little cleaner as we progress later in the year. But if you are -- so what are the things that we should be tracking on a quarterly basis that will give us a better sense for what’s really going on with the underlying business? I’ll leave it at that.

Yes, great. I’ll take that second part of the question first, Bob. I think it’s really, fundamentally -- and this is why we’re being so clear about the COVID impact. But fundamentally, looking at the recovery curve of our businesses that were negatively impacted and seeing how that recovery is improving sequentially, right? We had reported a negative 10% in Q4. Our guidance for the first quarter is a significant improvement of that, and we would expect that to continue over time. So that’s one thing. The other part is, in particular, the businesses that are recovering that are significant to us are Care Comm and our surgical business, which will -- which are coming back to pre-COVID levels, but they’re not quite there yet. And once they cross over the chasm, I think we’ll be in a really good place to start showing year-over-year growth. So I would be looking at that, Bob. Certainly, we’ll be talking about new product launches as we get closer to them. The other part I would look at is our emerging markets. We do expect, with the investments we’ve made, to continue to see double-digit growth in emerging markets throughout the year and high double-digit growth in China, where we’ve made some significant investments. So we feel particularly good about that part of it as well. Related to your question on M&A, we, as you know, have remained quite busy. We’ve completed 3 deals, smaller tuck-in deals during the last fiscal year. We continue to remain busy, and we’re optimistic that we’ll find some meaningful tuck-in opportunities as we come into fiscal ‘21. We’re very busy on that front, we see a lot of nice opportunities in private -- privately held companies. Then we fit very nicely with our portfolio and our vision of advancing connected care and our ability to do -- to advance in those areas that we talked about in the past.

Great. That’s it for me.

I think just to conclude that, I think investors should expect us to stick to our financial discipline of our criteria of being growth accretive, being margin accretive and providing an ROIC within a 3 to 5-year time frame.

Matt Taylor of UBS.

So I just wanted to clarify two things. One is, when you look at the onetime positive COVID impact here in the fiscal fourth quarter, what was that comprised of? Do you continue to see some of these same trends around the orders of noninvasive dents in beds? Or was the composition any different as you move through the pandemic?

Yes. I would say, Matt, the COVID benefit of $180 million, you see this quarterly breakdown in that one schedule that I pointed to earlier. 80% of it is beds and half of it, half of the total, was international, the other half was in the U.S. So those are probably 2 good kind of ways to think about that $180 million. 80% beds, 20% ventilators and then 50-50 in total in aggregate between U.S. and international. So that’s -- I hope that answers your question. Did you have a follow-on to that?

Yes. No, that’s great. And then...

Hey, Matt, that’s okay. Yes. Let me just add. In the fourth quarter, we had $35 million of COVID benefit, and $10 million of that was related to the ventilators, $25 million is related to that. Just to clarify Q4.

Okay. And then I just wanted to get some thoughts on the year ahead in terms of what you’re anticipating in different geographies. You called out the trends here in the quarter and the year in terms of how they’re recovering differentially. Can you speak to the outlook for the major regions that you’re exposed to?

Yes, sure. So as I mentioned earlier, emerging markets, we expect double-digit growth. China, we expect very high double-digit growth. Our investments are really starting to come through there. And because of the breakdown I just gave you earlier, that $180 million being roughly half of that being internationally, that was mostly in Canada and Europe. So we will have in that timeframe of Q3 and Q4 some very challenging comps overcome in those regions. So barring some unforeseen demand, which has not into our guidance, we would expect to have some challenges in that Q3 period internationally.

David Lewis of Morgan Stanley.

Can you hear me okay?

Yes, we can hear you.

All right, John. Sorry about that. Just two quick questions for me, I’ll ask them both upfront. I guess the first thing, John, what’s interesting about the guidance. If I think about your guide for the year and I back out the surgical OEM headwind as well as the COVID-19 dynamics that you’re very nice in providing, it kind of gets you kind of a 4% underlying number for 2021, John, which frankly isn’t that far off of where you were pre-COVID at 4% to 5%. So the couple of questions is your confidence in that sort of underlying performance because it doesn’t seem to imply a lot of sluggishness in the U.S. capital market. I just sort of wonder sort of some of your assumptions and your confidence about that number because it’s, frankly, a lot more robust than we were expecting and how you were thinking about sort of Stryker’s ProCuity, which should get going here in the first quarter of next year in the U.S.? And then for Barb, just thinking about the rate of investment in ‘21 versus ‘19, I noticed that the implied SG&A number is lower. And I just want to kind of understand how you can deliver that level of SG&A improvement in ‘21 over ‘19 on the recovery? And does it factor it enough, frankly, relative investment back in the business to kind of maintain the growth momentum you had pre-COVID? Sorry for the long questions, but those are my two.

Thank you, David. Yes. I think the -- as I’ve mentioned before, on the certainty of the environment and the relative importance of the CapEx that we’re bringing to the marketplace with our beds and our sensors and our communication technology, we see continued strong pipeline of activity. And really, quite frankly, broad-based recovery of the businesses that were negatively impacted. So we’re quite confident about our ability to see that recovery come through and then also take advantage of the investments we’ve made over the years to position the company for sustained durable growth, whether that’s coming from emerging markets or in this case, we are deploying new incremental investments for our Care Comm team, our digital business, to expand, and our Enterprise Accounts team, which is focused in the U.S. to also expand. We do expect our customers to become larger and more significant in terms of large, enterprise-wide purchasing decision. So we’re scaling up in those 2 areas specifically to make sure we’re positioned for ongoing growth as the recovery continues. And I’ll turn it over to Barb for the second question.

Your question about the level of overall investment in ‘21 versus ‘20 and are we able to sustain that. The answer is yes. So we’re reinvesting incremental investment in ‘21 at a very similar level to what we had in ‘20. And the way that we’re able to do that [Technical Difficulty] and pulled forward the business optimization and just...

Barb, you’re breaking up there. I think you’re breaking up, Barb.

Oh, I’m sorry. Was it not clear? Let me try again. Can you hear me now?

Yes.

Okay. So David, I’m sorry to repeat, if you heard it the first time through. But our level of incremental investment in ‘21 is very consistent with ‘20. And we’re able to do that because of the pull forward of approximately $50 million worth of business optimization into ‘21. Is that clear?

Yes.

Okay, great.

Sorry for the technical question, David. Did you have a ProCuity question as well, David?

This is, Marissa, on for David. Yes, we were just hoping you could comment on any trends that you’ve seen or any commentary in the channel if you have seen anything from Stryker’s ProCuity.

Yes. We have not seen any deliveries yet. Obviously, there’s some commentary out there of a pending launch, but we have not seen any deliveries occur at this point in time. So we expect that will happen in the next couple of months, but we’ve not seen anything material in the marketplace today.

Michael Polark from Baird.

It’s quite the deck. Maybe a few -- appreciate that no COVID surge buying is built into the fiscal ‘21 outlook. Seems like the conservative and prudent thing to do. We have seen, though, in the last week or 2, even the World Health Organization out with predictions about ICU capacity in places in Europe getting really strained. And so would be interested in just kind of a real-time assessment. What are you hearing in some of these pockets where the flare ups are starting to really pick up steam? Are you seeing your customers really strain, gets strained with capacity? Any color would be helpful.

Yes. Sure, Mark, and thanks for the question. The -- if I refer, as I mentioned, is this being the third wave. We expect this third wave to be a lot like the second wave in the summer. However, it’s going to be much more widespread geographically. And that opens up more hospital capacity as a result. We do believe that the -- from what we’re hearing from our customers that they feel confident, that they can manage what is anticipated in terms of hospitalizations, their treatment protocols, their ability to segregate patients, their ability to -- the patient profile themselves is a very different patient than the first wave, and it’s much more geographically dispersed. So I think in the U.S., yes, it’s going to provide some tension, but manageable is the current feeling. In Europe, with the spikes that are going on and the surge going on in Europe, the level of ICU capacity in particular and treatment capacity in certain regions of Europe, we are starting to see pressure building. And as a result, some higher level of interest and demand in some of our product offerings as a result. That goes across from ICU offering to our vital signs business to thermometry. So we’re starting to see some of that in Europe today. But it does seem -- it’s -- again, it does seem much more well-managed and not panic-oriented, but we are starting to see some incremental demand in those areas.

Fair to say that hasn’t been fully built into the Q1 framework? Or -- yes. Okay. And maybe, John, you offered to get into a little more detail on the apples and oranges of your bed platform versus the upcoming competitive release. They do make -- your competitor makes some fairly big claims. And I just love a few extra details about how you see what you have and how that differentiates versus what you expect ProCuity to offer to customers.

Yes, I’m happy to take that question. We’ve been building for quite some time, a very differentiated platform on our bed business. In fact, I would actually say we’re turning the corner and it’s really more of a patient monitoring and connected care system today. Given all the technology and sensors and real-time communication capability that we’ve built into the system of the bed as a digital hub, the sensors and then the communication tools that surround it with our Care Comm and mobile communication business. So when you think of what we’ve been able to do and the offering that we’re continuing to enhance, what we effectively have put in place is -- from a -- I guess my best analogy would be cellphones and smartphones. Having connectivity is one thing. Having wireless connectivity is effectively like a flip phone from the ‘90s. Having what we have put together is effectively a smartphone in the current day and age. And what I mean by that is we can visualize waveforms, we can access real-time data, we can incorporate video into a patient and caregiver communication, and it’s a closed loop. So sensors from the bed communicate to the phone and then the phone, you can then communicate with other caregivers and patients directly. So it’s really -- the comparison of apples and oranges is really the basics of connectivity of having a cellphone versus having a smartphone today. Incorporating that camera, so you can do video chats and communication, you can access stock market information, you can access all kinds of other information. And that’s the difference of the robustness of the ecosystem that we have built with Centrella and our Care Comm offering and the Voalte acquisition and the sensors that we’ve incorporated the bed versus the basics of wireless connectivity.

Our final question comes from Andrew Cooper from Raymond James.

It’s been asked already, but maybe just one more on kind of the guide and how we think about 1Q in ‘21 in terms of the COVID impact. You gave a lot of color. But when we think about your comments on bed demand and backlog, as where the order book is building relative to some of the upticks in Europe and things like that, when we think about that $180 million or 90 or so -- I’m sorry, 140 or so that’s bed. How much -- how do you think about what pull forward of demand to meet that surge that might slow orders in ‘21 relative to kind of onetime, but not necessarily impacting the expansions or roughly consider coming in the coming year?

Yes. Maybe I’ll have Barb. Can you take that one?

Yes, I’d be happy to. No, I’m happy to talk to that. So the key thing that you need to think about is we’re looking at all 2021 is really about the normalization of the bed demand. And we’ve talked about how most of that pull forward we felt was really affected in Q4 of ‘20. And really for ‘21, it’s about normalization of that demand. And as John talked about, we saw nice sequential growth in our order book and are now reaching points where we’re getting close to pre-COVID levels in terms of order and quoting activity in the bed area. The second thing to think about as you look across ‘21 is the gradual recovery of those product lines that were negatively impacted by COVID. And that gradual -- that recovery can be more gradual and will continue across the first 3 quarters of ‘21. So as you think about the calendarization, as you think about the cadence as we go across ‘21, we’ll see that trough in Q4, we’ll see gradual improvement as we get normalization of demand and the recovery across the rest in Q1 and Q2. As you get into Q2 and Q3, we’ll have much stronger COVID headwinds that we need to manage through, especially in Q3. That’s a big headwind in Q3. And by the time we get to Q4, we’ll be bouncing back to growth. The other thing to think about as you think about the course of the year is we will see progressively improving operating margin and gross margin throughout the year, which will also contribute then to a bottom line that will look very similar to the top line improvement.

Is that the final question? Well, thank you everybody for joining our call today. And we’ll see you next quarter.

Ladies and gentlemen, this does conclude today’s conference with Hill-Rom Holdings Incorporated. Thank you for participating. You may now disconnect.