Baxter International Inc (BAX) — Q4 2020 Earnings Call Transcript

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 three 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, one-time 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 turned 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, such as 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 multi-year 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 one-time 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, rising 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 two other points I would like to highlight. First, Q4 non-core 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 one-time 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 multi-year track record of driving annual operating margin expansion. Interest and other non-operating 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 surges 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. 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 non-core 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 one-time COVID impact of $180 million in fiscal 2020, which presents a challenging comparison to fiscal 2021. Excluding both the one-time 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 one-time 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 one-time 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 levels 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 one-time 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 toward 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.

It’s encouraging to see a strong finish to the year. I appreciate the clarity regarding all the various factors; it really helps. John, could you elaborate a bit more on your guidance for the upcoming year? While that's clear, I'm also interested in your vision for how the year will progress. The first quarter looks solid, but could you share how you anticipate each quarter's flow and what areas you see improving as the year goes on?

Thank you for the question, Rick. Please refer to Slide 25 in the presentation material for the breakdown of the COVID benefit for fiscal 2020, which is important to understand. For 2021, Q4 was our lowest point, and we are optimistic about the broad momentum across all businesses and regions as we concluded the year and began fiscal 2021. This encourages our confidence in our Q1 guidance. As we enter Q2 and especially Q3, we will face challenging COVID-related comparisons from last year. The recovery curve is building momentum in the underlying business, and our growth in emerging markets is consistently in double digits. We plan to launch over ten new products this year. The drivers of new product growth, growth in emerging markets, and the recovery of previously impacted businesses are all on track to deliver results throughout the year. We expect to see sequential improvement excluding last year's COVID impact. In the second half of the year, we anticipate growth without the COVID benefit and expect to see solid organic growth in Q4. We need to navigate challenging comparisons related to COVID and our business recovery, but we foresee a strong sequential recovery from Q4 to Q1 without COVID influence. Additionally, our growth drivers remain strong in product categories that excite us, particularly in ICU expansion and care communications, with multiple new launches planned. We are focused on noninvasive ventilation, remote monitoring, and diagnostics, with an emphasis on telehealth. We also have promising new products in connected exam tools and screening tools for vision and physical exams, alongside our Surgical Solutions business, highlighted by the acquisition of Videomed and advancements in connected video and OR integration. Overall, the fundamentals are solid, the recovery curve is underway, and the new product launches and emerging market growth will position us well as we approach the end of the year and navigate through this year's COVID benefit comparisons.

That’s great and there's a lot of clear direction there, John. On the other side, considering the investor concerns and the types of questions I typically receive, much of the investor anxiety is focused on the outlook for capital and capital spending at the hospital level. Specifically, there is always interest in the bed business, particularly the PSS side. Could you share your thoughts on the capital spending environment and your expectations? Additionally, when considering the PSS's low single digits excluding COVID, do you think there will be concerns about the competitive landscape and its impact on Centrella and other areas? Can you provide some perspective on this for us?

There’s a lot to discuss, Rick. Let me address your important questions. First, regarding the environment, it has improved significantly in terms of capital expenditures and the recovery of physician office visits. We are seeing recovery across our businesses globally, not just in the U.S. This increased certainty allows us to confidently issue new guidance, marking a key difference compared to previous waves. While I won’t go into specifics about the different phases of the pandemic, what we see now is that both our providers and customers have much greater confidence in managing COVID surges and treating both COVID and non-COVID patients effectively. Overall, we have good certainty and a solid recovery of procedures, leading to a notable improvement in the financial health of our customers, particularly in the U.S. Internationally, the impact was less severe. Although capital expenditures are down compared to projections from a year ago, it aligns well with our offerings in ICU, bed expansions, care communications, and ventilation. We believe the capital expenditure environment has improved significantly over the past three to six months, which supports our decision to provide new guidance. Regarding the bed business, if you look at last year in full, our bed business had double-digit growth. Moving forward, we are seeing a strong recovery in orders and our backlog for Med-Surg and ICU beds has improved by about 20% from the last quarter to this period. The level of activity in quoting and orders is almost back to pre-COVID standards for our bed business, which is encouraging. From a competitive standpoint, we feel confident. We anticipated this launch and expected it to happen much sooner. The comparison between our bed solutions and Stryker’s offering is not quite comparable, as ours focuses more on patient monitoring and connected care. We feel well-prepared for this competitive landscape.

I have a couple of macro-level questions I would appreciate your comments on. First, could you discuss the potential pipeline for deals throughout this fiscal year? What are you observing, and what should we anticipate as a result? Additionally, with so many moving pieces in the business this year, I understand that things will become clearer as we move further into the year. What should we be monitoring on a quarterly basis to provide a better understanding of the underlying business? I'll leave it at that.

I will address the second part of your question first. It's essential to recognize the impact of COVID on our business, which is why we're being transparent about it. We are seeing a steadily improving recovery in the businesses that were adversely affected. For example, we had reported a 10% decline in Q4, but our guidance for the first quarter indicates a significant recovery, and we expect this trend to continue. Specifically, our Care Comm and surgical divisions are making a comeback, approaching pre-pandemic levels, though they haven't fully reached them yet. Once they do, we anticipate showing year-over-year growth. Additionally, we are excited about our product launches as we get closer to them. Concerning our emerging markets, we expect that the investments we've made will lead to double-digit growth throughout the year, with particularly strong growth in China. We are optimistic about this aspect of our business. Regarding mergers and acquisitions, we have been actively pursuing this area, completing three smaller deals last fiscal year. We remain optimistic about identifying meaningful opportunities as we enter fiscal 2021, particularly with privately held companies that align well with our portfolio and our vision of advancing connected care.

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 three to five-year time frame.

So I just wanted to clarify two things. One is, when you look at the one-time 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 beds and beds? Or was the composition any different as you move through the pandemic?

Yes. I would say that the COVID benefit of $180 million is detailed in the quarterly breakdown I mentioned earlier. Eighty percent of it relates to beds, and half of the total was from international markets, while the other half came from the U.S. So, to summarize, eighty percent was for beds and twenty percent for ventilators, with a fifty-fifty split overall between U.S. and international. I hope that clarifies your question. Do you have a follow-up?

Yes. No, that’s great. 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 to 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.

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 in 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. I believe that the certainty of the environment and the significance of the capital expenditures we are introducing in the marketplace, particularly with our beds, sensors, and communication technology, indicate a sustained strong pipeline of activity. Additionally, we are witnessing a broad-based recovery in businesses that were previously affected. We are confident in our ability to see this recovery materialize and to benefit from the investments we have made over the years, positioning the company for long-term growth. This growth could stem from emerging markets and, specifically, from our new incremental investments in our Care Comm team and our digital business. Our Enterprise Accounts team, which is focused on expansion in the U.S., is also part of this strategy. We anticipate that our customers will become larger and more pivotal regarding enterprise-wide purchasing decisions. Therefore, we are scaling our efforts in these two areas to ensure we are well-prepared for continued growth as the recovery unfolds. Now I will turn it over to Barb for the second question.

Your question about the level of overall investment in 2021 compared to 2020 and whether we can sustain that. The answer is yes. We are reinvesting at a level in 2021 that is very similar to what we achieved in 2020. We are able to do this by pulling forward business optimization.

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.

It’s a strong deck. I appreciate that the fiscal ‘21 outlook does not factor in any surge buying due to COVID. This seems to be a conservative and prudent approach. However, in the last week or two, even the World Health Organization has made predictions about ICU capacity in certain parts of Europe being severely tested. I would like to get a real-time assessment on what you’re hearing in areas where flare-ups are gaining traction. Are your customers experiencing strain on their capacity? Any insights you can share would be appreciated.

Yes, Mark, thank you for the question. As I mentioned, this is the third wave. We expect it to resemble the second wave from the summer, but it will be much more geographically widespread. This should increase hospital capacity. From our discussions with customers, they feel confident in their ability to handle the expected hospitalizations, treatment protocols, and patient segregation. The patient profile this time is significantly different from the first wave and is more dispersed geographically. In the U.S., while there may be some tension, the prevailing sentiment is that it is manageable. In Europe, however, with rising case numbers and surges, we are beginning to see pressure on ICU capacity and treatment in specific regions. This has led to increased interest and demand for some of our product offerings, including our ICU solutions, vital signs products, and thermometry. We’re noticing this uptick in Europe, but it appears to be more well-managed and not panic-driven, although we are observing some additional demand in these areas.

It seems that this hasn’t been fully incorporated into the Q1 framework. Yes, and perhaps, John, you could provide more insight into the differences between your bed platform and the upcoming release from the competition. Your competitor is making some significant claims, and I would appreciate more details on how your offerings stand out compared to what you anticipate ProCuity will provide to customers.

I'm glad to address that question. We have been developing a uniquely advanced platform for our bed business for quite some time. I would say we are at a pivotal point where it has evolved into a patient monitoring and connected care system. With all the technology, sensors, and real-time communication features we have integrated into the bed as a digital hub, along with our Care Comm and mobile communication offerings, we have created an impressive solution. To put it in perspective, think of the comparison between basic cellphones and smartphones. Basic wireless connectivity is like owning a flip phone from the 1990s, while what we have developed is akin to today’s smartphones. What I mean is that we can visualize waveforms, access real-time data, and include video in communication between patients and caregivers, creating a closed loop. The sensors from the bed communicate with the phone, which then allows interaction with other caregivers and patients directly. The difference here is the sophistication of our ecosystem built with Centrella, our Care Comm solution, the Voalte acquisition, and the sensors integrated into the bed compared to just basic wireless connectivity.

Can you provide additional insights on how we project Q1 in 2021 regarding the impact of COVID? You shared quite a bit already, but in relation to bed demand and backlog, considering the order book's growth in Europe and similar regions, how do you interpret the $180 million or approximately $140 million in bed revenue? Specifically, how do you view the potential pull forward of demand to address that increase, which may affect order trends in 2021, as opposed to one-time factors that are not likely to influence future expansions in the upcoming year?

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

Sure, I'm glad to. The main point to consider is that 2021 is focused on the normalization of bed demand. We believe much of the demand surge was experienced in the fourth quarter of 2020. For 2021, we're concentrating on the normalization of that demand. As John mentioned, we've observed positive sequential growth in our order book and are approaching pre-COVID levels in our order and quoting activity within the bed sector. Another aspect to consider for 2021 is the gradual recovery of product lines that were adversely affected by COVID, and this recovery is expected to be slow, continuing through the first three quarters of the year. When we look at the timeline for the year, we expect a low point in the fourth quarter, followed by gradual improvement as demand normalizes and recovery takes place during the first and second quarters. However, in the second and third quarters, we anticipate facing significant challenges due to COVID, particularly in the third quarter. By the fourth quarter, we expect to return to a growth trajectory. Additionally, throughout the year, we foresee progressively improving operating and gross margins, which will contribute positively to our bottom line, mirroring the anticipated improvements at the top line.

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