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…

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%.…

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…

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.