Q3 2020 Hill-Rom Holdings Inc Earnings Call
Good morning, and welcome to Hill Rom's fiscal third quarter 2020 earnings conference call. During the presentation, all participants will be in listen only mode. At the end of management's prepared remarks, we'll conduct a question answer session at that time. If you have a question press star one on your Touchtone phone.
If anyone should require assistance during the conference call. Please press Star then do euro in order to make the call more efficient. Please limit your inquiries to one question and one follow up if you have additional questions. You may return to the Q. As a reminder, this call is being recorded by Hill ROM is copyrighted material it cannot be recorded or rebroadcast retransmitted without hill rom's written.
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I'd now like to turn the call over to Mr. Americana don't senior Vice President corporate development strategy in Investor Relations misled, though and you may begin.
[music] good morning, and thanks for joining us for our fiscal third quarter 2020 earnings Conference call.
Joining me today are John Girl, our President and Chief Executive Officer, Acceleron, and Barbara modem 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 cobot 19 pandemic. Please refer to today's press real.
Ladies and her FCC filing for more information concerning risk factors that could cause actual results could differ materially.
In addition on today's call non-GAAP financial measures will be you reconciliations between GAAP and non-GAAP financial measures are included in our earnings release issued this morning.
I would also like convention that in addition to the press release issued this morning, we have posted a supplemental presentation, which highlights Hill rom's performance.
These materials can be accessed on the Investor relations page of our website.
With that introduction, let me now turn the call over to John.
Thanks, Mary Kay Good morning, everyone Hope, we're doing well and thank you for joining the call.
I'd like to start default say by recognizing a dedicated committed passionate and mission driven team that we have here noble.
It's truly extraordinary and.
And I do need extra ordinary.
We were called to fulfill our mission to enhance outcomes for patients and caregivers.
And as a team we unequivocally executed to achieve.
Ramping up and shipping two times, the normal volume of smart beds.
Wrapping up and delivering seven times than normal volume of Noninvasive then leaders.
Securing our global supply chain.
Ensuring a worker safety.
Involving.
Five of our largest manufacturing sites in ramping up manufacturing to meet customer needs.
Continuing to engage our over 1200 field service employees and rental employees and those involved in logistics and shipping you name it our overall operational team.
Delivered excellent.
And this group of people, which is approximately 7000 employees out of our 10000 employees really deserve special recognition.
No.
We pivoted and accelerated R&D pipeline during the pandemic launching five new products and pivoting our programs towards innovations to help patients feeling we called it.
It doesn't stop there would close with two acquisitions, that's supported our vision of advancing connected care, both patient monitoring and all our data integration.
And if all that wasn't enough for you.
He actually did this while all of our office workers moved to remote work from home.
And we launched a new website for the company.
As I said extra ordinary.
Incredible execution by the L. Baum team.
The combination of our exceptional execution financial strength and diverse portfolio underscores our commitment to enhancing value for customers caregivers and our shareholders today and over the long term.
Moving to financial highlights from the third quarter. We're pleased to report record results that exceeded our expectation on both the top and bottom line.
Core revenue growth was 12%.
Reflecting the durability and strong value proposition of our critical care products and other category leadership in the markets we serve.
Core revenue include the contribution of approximately 400 basis points from the Breeze acquisition.
Benefit up more than $100 million laid to other kobin related purchases.
We continue to be pleased with our ability to significantly expand margins achieving a record adjusted gross margin of 53.8%.
Well disciplined cost management and expense leverage we posted an operating margin of 23.7%.
This resulted in adjusted EPS of $1.95 per diluted share.
An increase of 59%.
Before turning to performance by business.
I'd like to highlight the growth from new products accelerated again this quarter.
Resulting in more than $440 million and new product revenue year to date.
An increase of 40% versus the prior year.
Importantly, this sets of solid foundation for achievement of $550 million and new product revenue.
A key objective, we said at the beginning of the fiscal year.
I'm very proud of how we pivoted R&D efforts and recently introduced five new products in the areas of remote monitoring.
First Detroit care and surgical workloads.
Were highlighted in the press release issued this morning, so given our limited time together I won't walk through them individually.
I was going to note that they are all representative of how we are advancing our category leadership and plan to accelerate future growth through innovation.
Geographically.
International performance was strong with core revenue growth of nearly 40%.
The surging demand for Kobin related products like I see you and Medsurg spreads.
Obama tree and vital signs monitoring equipment.
As expected.
With the exception of Asia Pacific all regions generally positive growth.
Including significant double digit growth from Yeah Me, a Canada and Latin America.
In the U.S.
Growth of 2% reflects the puts and takes across our diverse portfolio.
Support system led the way with core growth and 12%.
Which was offset by lower revenues in front line care and surgical solutions.
Now, let me touch in our third quarter performance by business at constant currency rates.
First patient support systems revenue increased 21%.
Core revenue growth of 23% was driven by a global surge demand for ice to you and medsurg existence as hospitals expanded capacity in the early phase of the Cogan outbreak.
The vast majority company cobot benefit I referenced earlier was from Medsurg and I see you beds, which comprise approximately 3% total company revenue in Q3.
That's a full 10 percentage points higher than typical.
During the quarter.
We work through the significant backlog in order that accumulated during the month of March and April.
Looking at least in the U.S., Canada MDM yet.
This resulted in revenue that was nearly two times the level of prior year.
In the U.S., we estimate that approximately 50% of the peak demand for bed.
Was due to market expansion.
Well the other 50% was pull forward from our fourth quarter funnel.
Global demand for bed now begins to normalize.
Due to the pull forward effect and surge demand previously mentioned.
We anticipate near term trended toward headwinds for a big portfolio that being said, we remain optimistic about recent customer commentary and prioritization around I see you bad as a top capex investment priority would be ballots capacity needs to treat bolt tobin and non covered patients.
We remain encouraged.
The long term growth prospects of I see you market expansion.
Which may help overcome some otherwise difficult growth comparisons in coming quarters.
Well bed revenue was strong it was partially offset by anticipated headwinds in other parts of the business.
Including Kids Communications.
Which was impacted by hospital access restrictions to complete installations.
The good news that access restrictions are starting to ease of installation didn't quoting activity is accelerating towards pre cobot levels.
We're currently building a robust funnel, we expect the benefit from in fiscal 21.
Turning to frontline care.
Third quarter revenue increased 4%, reflecting strength in international and onetime noninvasive ventilation orders of approximately $25 million to support U.S. stockpiles.
While we experienced strong demand for vital signs monitoring equipment and thermometry. It was not enough to offset the impact of lower physician office visits in the U.S.
On the other patient screening and diagnostic tools, including cardiology and vision screening.
Generally physician offices are now resuming and recovery towards pre coven levels is occurring across multiple areas of our front line care portfolio.
Lastly, surgical solutions revenue declined 37%.
Shifting to surgical consumables divestiture last year.
Core revenue declined 21% as a result of project timing and capital delays due to cope with 19.
We expect recovery in surgical them in the surgical business to be more gradual.
As always our capital projects as you can imagine are currently being deferred by our customers.
With that as a backdrop.
I'd like to provide some additional perspectives on our results and visibility to the trends were now seeing across the portfolio.
As you May recall, we have portions of our business have been favorably impacted and those that have been negatively impacted by the evolving market trends.
The net impact to hill ROM in various regions and product categories will largely depend on the scope.
Density and duration of the pandemic as well as the shape of the recovery in the demand for health care and access into acute care facilities.
Given all these variables last quarter, we elected to suspend our previously issued guidance.
And while we're not reinstating guidance today.
Hi, this situation remains very fluid, we're now through three quarters of our fiscal year.
And we have some visibility into our final fourth quarter.
Given the strength of our financial results to date.
Core revenue growth of 8%, an adjusted EPS growth of 28%.
And evaluation of various scenarios for Q4, we're confident projecting adjusted earnings of at least $5 in 40 cents per diluted share for fiscal 2000.
Our comments is based on various outcomes of the puts and takes across our portfolio. This includes the assumption of normalized demand for med surge and I see you beds. Following the Q3 surge.
Continued growth across multiple product categories in Q4 and reflects no benefit from a second wave.
In addition, we anticipate recovery across other areas of our portfolio that were negatively impacted by project delays customer access and reduce physician office visits.
We're pleased with the speed of this recovery and expect double digit sequential growth for these products as we exit our fiscal year.
So.
In summary, amid a challenging environment our performance to date demonstrates the advantage of our company's transformation into a diverse and more resilient portfolio of connected care solutions.
And that is more important than ever.
Looking ahead, we will continue to focus on our strategic priorities.
Advancing our mission and category leadership strategy executing on our growth oriented M&A strategy.
And driving operational execution and strong financial performance in the years to come.
Thanks, and I'll turn the call over to Barb.
Thanks, John and good morning, everyone.
Let me briefly walk through the piano before commenting on trends, we are seen as we close out fiscal 2020.
For the third quarter global revenue of $768 million increased 6% over prior year revenue of $727 million.
On a constant currency basis revenue increased 7%.
Core revenue advance 12%.
Taking a benefit from covert related purchases of more than $100 million.
New product contribution as well as approximately 400 basis points from the brief technologies acquisition, which will anniversary in August.
Adjusted gross margin expanded 350 basis points versus the prior year and picked up 53.8% a new record record level.
This reflects favorable product mix, particularly from higher margin onetime covered purchases.
As well as the impact of new products and portfolio optimization initiative.
And the benefit of lower manufacturing and service costs.
R&D spending of $34 million was comparable to the prior here.
Adjusted EPS DNA of $197 million decreased 3%, primarily as a lower discretionary spending like travel meetings in certain marketing expenses.
More than offset strategic investments to drive teacher broke.
Given strong adjusted gross margin expansion and expense leverage adjusted operating margin of 23.7% improved 590 basis points compared to the prior year setting a high watermark for the fiscal year.
Interest and other non operating expenses for the quarter totaled $17 million and the adjusted tax rate was 21%.
This translates into adjusted earnings for the fiscal third quarter of $1.95 cents per diluted share, which is an increase of 59% from $1.23 cents per diluted share in the prior year.
Excluding the dilutive impact of the surgical consumable divestiture, which contributed seven cents per diluted share last year.
Adjusted earnings per share increased 68%.
Now turning to cash flow.
Cash flow from operations for the first nine months of 2020 was $315 million, a 5% increase to prior year.
Capital expenditures on a year to date basis totaled $72 million.
$21 million higher than the prior year, driven by I T transformation, Clos and capitalized software cost related to R&D investments.
As a result year to date free cash flow totaled $243 million.
Our balance sheet and overall financial position remains very strong.
Today, we returned $114 million to shareholders through dividends and share repurchases during fiscal 2020.
We ended the quarter with $332 million in cash and our debt to EBITDA ratio at the end of June was 2.9 times. The first time, it's been below three times since the Welch Allyn acquisition.
We continue to operate well within our debt debt covenant and we have no material debt maturities until 2024.
Lastly, given our refinancing efforts last year, we have access to a revolving credit facility of up to $1.2 billion to address any capital needs as necessary.
No.
Before turning the call back over to John Let me expand on the current business trends as we continue to actively monitor the evolving landscape and truck potential implications geographically within each of on three businesses.
As John mentioned Q3 reflected peak demand overall for 60% of the portfolio.
Which translated into actual growth of more than 40% for this category of products.
As demand for certain products like I see you in med surge beds begins to normalize.
We do expect double digit growth for other category or other products in this category.
Like thermometry vital signs monitoring and respiratory products as we exit the here.
Electively for the 60% revenue category, we expect Q4 revenues to be comparable to the strong fourth quarter last year.
Resulting in growth of nearly 20% for the second half of 2020.
This reflects our current backlog and <unk> and visibility to orders and no benefit from a second wave.
The other 40% up or revenue is now showing signs of recovery and is expected to show sequential double digit revenue growth as we exit our fiscal year as customer access and physician office visits improved.
We continue to expect second half revenue for this portion of the portfolio to decline by about 25%.
This is inline with the expectations, we shared with you last quarter.
Given the unbilled ongoing uncertainty scope and evolving nature of the pandemic.
We're not reinstating poor formal guidance.
We would also not recommend extrapolating our recent results into projections for the remainder of the fiscal year.
However, given our results to date and disciplined management of the business.
We can say that we expect full year adjusted earnings of at least $5 in 40 cents per diluted share.
We look forward to providing you with additional upticks in the future.
Thank you and with that I'll turn the call back over to John.
Thanks, Bob.
In closing we remain confident in the durability of our diverse portfolio of differentiated health care solutions.
As we move beyond heighten koby demand and and the transitory benefit we believe our value propositions or even stronger and remain attractive in the post cobot environment and the multiyear growth platforms. We previously discussed can contribute meaningfully to future performance.
Our company is better positioned today than during the last period of economic instability, our core investment thesis remains intact.
Our financial strength consistent cash flow generation and the execution of our strategic priorities is positioning Hill ROM for sustained success.
As I mentioned earlier.
The strong foundation, we have built due to the amazing work and dedication of our held on team.
Their commitment both to our company and the patients and caregivers we serve.
It is truly an inspiration.
Our employees around the world bring our mission to life every day.
I feel fortunate to work for such a great team.
It together, we will continue to build on our own on our momentum we aspire to deliver on our long term objectives and create value for our shareholders.
With that let's open up the call for acuity.
Thank you we will now begin the question and answer session. If you have a question. Please press star one on your Touchtone phone, if you wish to remove yourself from the Q press the pound key if you're using a speaker phone. Please lift they headset to ask your question, we will pause a moment, while the list is being compiled I'd like to remind participants but this.
<unk> digital replay will be available on the Hill ROM website for seven days that Www Dot Hill ROM Dot com.
And first question comes from Rick Wise with Stifel. Please go ahead.
Good morning, John Barb.
Thanks for all by excellent detail and the the.
Performance quarter.
So many questions, maybe I'll start with Oh patient support.
All right John you you.
I can give us won't be too about the corner, but I'm sort of treat with your views around market expansion here I can imagine why you might argue for market expansion, but.
As part of that discretion.
How does that market expansion you know characterized in your mind, what's the due to growth.
This play out over the next couple of years.
And maybe you can help us understand <unk>.
On a sustainable basis, what might need to more normalized go forward growth for this business.
Yeah. Thanks, Rick.
You know when it comes to our PSS business going in particular, you know the bed portion both medsurg and I see you bed.
I think what we saw in Q3 and as we outlined in our prepared comments was in fact market expansion. A we took a lot of time to detail out that's an incremental $100 million of holding related.
Business.
And saw that roughly we said about half of it was due to market expansion. So.
A big portion of that in Q3 was was not just the U.S. was international.
I can give you examples I'll give you. One example, we talked last time, you know in Canada, we sold a well over $25 million Oh, I see you and Medsurg, primarily I see you.
And they weren't replacing other beds in that instance, and staying with that whole category that we do we said it was market expansion they were adding new incremental capacity.
It added since it was done in a hurry. It was done you know pretty much across the country.
And we were well positioned to support those customer needs in a real hurry.
So the fact that we could.
Adapt in response, so quickly to that urgent need in a moment of a moment a panic quite frankly.
Led to immediate market expansion in Q3.
And that's why I think it other prepared comments it and I'm sure we'll talk about this.
So let me try and address it now.
We've always said and I've always said that we're gonna see nonlinear recovery when it comes to this part of our business.
We're seeing a non linear expansion.
As it relates in this part of our business right now there was an incredibly urgent and a significant health care and eat.
And Hill ROM was able to me to deliver a point that need to provide immediate market expansion.
Now at the same time it pulled forward a lot of sales we had in for Q4.
But I think to your question with the long term outlook.
We feel really good about the long term outlook for for market expansion projects you beds.
And and med surge brands that have the ability to flex up and becoming I see you bad.
For a transitional temporary period.
Both of those run our portfolio in fact, you won't see on our website a new product offerings that were just oh promoting now that's a centrella bed offering that can't be flex up to two becoming I see you bet offerings.
To provide for this transitory capacity.
It may be required.
So we think are really well positioned Rick to to go to to benefit from this trend. It's a global issue. Many countries require more I see you got to do they have.
There's a clear recognition after after the wave that we've just been through that there seems to happen and you're seeing a much more measured and thoughtful approach around how how.
Various health care systems do this.
However, I would say we've got a lot of a tremendous amount of feedback we've had time to do a lotta research on this topic.
And our conference is very hard we're going to see market expansion over the coming years.
You bet market.
Great.
John do you talked about the care com business and I'm not surprised that.
He sees that Im just curious you didnt have the access you wanted to.
To install and but I'm excited to hear that you're building a backlog again.
Were very positive about the impact on fiscal 21.
We talk about.
What kind of it.
If you can give us any numbers about where the backlog is.
But maybe can you help us think about what kind of incremental benefit could we see from this turnaround in care problem as we contemplate physical 21.
Yes, so our outlook for care Con remains really bullish it's more relevant now.
And in the future then is that it has been.
We have because our carry on business is constituted the conventional nurse call and the mobile platform offering.
The access into rooms to wire in the systems installed systems and recognize revenue as a result was well severely and <unk> impaired in Q3.
As we exited the quarter things got better our outlook in Q4 continues to show in nature. You know, we believe I really nice recovery as we saw the trend played out in Q3.
So we're quite optimistic that that that recovery curve is one of the one that quicker steeper ones to come back.
Partly because of the relevance of and the importance of these communication tools to health care providers and the and the expanded feature set that we now provide.
With everything as as we.
Mentioned in some of our presentation materials or new new partnership with a hands free voice activated.
Feature on our on our votes mobile nurse call system as well the earlier acquisition of XL medical which brings medical device integration and likely forms.
Our comprehensive solution sets and are the most we're building around this business.
And used to.
Provide that they believe dynamic growth vehicle for the company going forward. So.
Recoveries coming it feels like it's one of the quicker businesses that will recover because of the importance of it and the long term growth outlook continues to be.
One of our one of our brightest opportunities in future.
Just last from me.
With that now.
Nine times.
Maybe just talk just about you're thinking about M&A do you feel like.
Just because of all the craziness rolled up you are more businesses available or more.
Kind of acquisition that you're interested and available now and maybe talk through.
With the help of your outstanding business development strategic team.
Werent where are your priorities as we think about the portfolio. Thanks much.
Thanks, Rick Yeah. So we continue to be very active in M&A as we're working through the last quarter room, there and the craziness of the pandemic, we were able to remain very focused with our teams on M&A.
We continue making good progress as you heard in this announcement, we closed two small.
Tuck in acquisitions.
Wander around video integration and the or video and all our data integration in the operating room and then another one around.
Emerging markets connectivity solution for our vital signs business, which we're really happy with both of those are strategically fit into our strategy very nicely. They.
Well support international as well as a U.S. opportunities in the case of your integration one.
And so we remain very active from a valuation point of view and our rigor around the financial discipline, you know smaller a privately held companies probably represent better near term opportunities.
It's it's really difficult for larger and certainly larger public companies.
To meet our financial criteria in today's environment, but.
It's not that we're not looking.
I think our strategy around tuck in and bolt on M&A is there's a more likely a set of expectations in the near term.
And be bar with you want to touch on capital allocation priorities. I think goes also part of next question.
You know I think you covered it really well John you know our capital allocation priorities remain the same you know first and foremost you know we're looking to support the growth of the business and you know finding the right.
In a deal it is top of our lives.
Absent the right M&A will continue to support our dividend we'll continue.
To look at share repurchases as a lever to offset dilution where appropriate.
But you know absent a the right M&A beyond our support of dividends and share repurchases were going to continue to pay down or does it.
We're really pleased in this environment to see our.
Our debt ratio declined to 2.9.
Which is which is you know at historically low number for us so.
We're going to continue to stay disciplined and look for the right deals and the deals that are going to drive our top and bottom line growth overtime.
Thanks Mark.
Larry Kirsch is on the line with from Raymond James What the question. Please state your question.
Thanks, and good morning, everyone I'm just a couple here John I'm wondering if he can you know perhaps talk a little bit about for the trends that you're seeing in the business through the fiscal third quarter and and sort of.
How you're thinking or how how July progress.
Yeah, Let me I'm, probably address that two ways, Larry wondering what the Capex and one with our down businesses, the 40% of our portfolio that was negative.
Ill start with a ladder in that group and 40% of revenue that was negatively impacted by coated.
Breaks down into three categories, one care com, which would talk briefly about earlier.
The second one is all of our physician office businesses in front line care everything from vision care to vital side.
And complementary well nothing boundary countries and the other part of the portfolio, but all of our physical assessment tools.
And then our surgical business as well as some of the safe patient handling equipment in our PSS portfolio.
Those are the three big elements and they're all they're all on different recovery curves I would say their comments I mentioned earlier is one of the quicker once they come back.
And we're seeing we saw nice uptick in the trend of as though we exited the quarter.
And our outlook for Q4, as you know kind of getting back to.
You know work, we hope to show some growth in that category in Q4, or if not we'll come pretty close.
And ER, our front line care portfolio, where you can imagine.
Primary care physician office, because it's we're not as higher priority as elective surgeries.
In the returned to health care demand, so that one slow to show recovery in Q3, but definitely show signs in the month of June and we're seeing that that trend continuing with the July.
So were again, that's that's on its way back to two pre covert type of levels, we believe in the coming quarter.
And then the surgical business as well and seek patient handling which doesn't involve many times and installing infrastructure in the ceilings of the hospital or youre, given the importance of or activity and resumption of surgical backlogs and let them surgery.
That's one of the reasons, you're not we're not saying, we don't anticipate seeing a significant.
Increase in those businesses from Q3 Q4.
But we do expect and and have schedules to see those those product lines going back in our new fiscal year.
Starting in October so they're going to come back we feel very confident going to come back. It's just a slower recovery curve in that area.
The the other every I'd comment on as Capex and in particular U.S. Capex our international.
Backs is really not impacted in the markets. We're in and the products were in if anything it's favorable because of the need for more bed capacity anymore I see you bed capacity and other parts of our portfolio that are.
Experiencing a tailwind in this environment.
In the U.S. These were more the uncertainty is I'm sure everyone's heard his commentary on that from providers as well as other.
Companies in the industry.
We we're we're actually very favorably positioned we know that the <unk> one of them through a couple of top priorities for our customers is.
Work flow and clinical communications with the full caregivers to caregiver and caregiver to patient that's the positions our care accomplishments pretty well as a priority.
And I see you capacity and I see your needs for critical care equipment.
Well, that's vital signs equipment or or I see you bet. So those are going to have relative high priority even in a constrained capital environments in the U.S. So it will be.
Certainly challenging environment for the next couple of quarters.
Until hospitals see the full benefit of.
Governments government stimulus and support.
So far.
25 billion out of.
At about 75 billion has slowed to them.
And maybe really more feature stimulus packages.
That combined with the return of normal elective surgery volumes and normal consumption of health care and the acute care environment, certainly help shore up their financial certainty.
The combination of those two events and we would food we anticipate that over the coming couple of quarters. That's the financial certainty around Capex will significantly improve in the United States.
In the near term our portfolio is well positioned for there for their most pressing urgent requirements.
Okay terrific that was really helpful. And then just too for Barb.
I guess one thing I was thinking about was you know certainly to the record margins that you said this quarter.
But as you start to ramp down some of that manufacturing that was you know flexed up to meet coated related demand.
How should we think about you know kind of margin in the fourth quarter and and.
I see you know that that will trend back down a bit so some thoughts around that and then.
On the cash flow from ops, which was up.
As you mentioned, 5% year to date looks like your <unk>.
GAAP net income was up significantly more in the year to date and.
Feels like at least as I looked at it quickly it looks like there's a fairly meaningful increase in inventory.
So again, how do we how do we think about you know kind of inventory levels going forward and improvements in cash flow from UBS.
Hey, Larry Thanks for the question I hope you're doing well.
Let me start with gross margin. So you know gross margin for Q3 was at record levels, 53.8% and we're really pleased with that.
As we highlighted in our presentation that's online.
About 180 basis points of that really is related to the onetime kobin sales that we saw in Q3.
On a year to date basis. If you look at our performance you know, we our year to date for the first nine months.
51.7% Andy.
One times, where we're tracking really well for the full year.
In fact, if you go all the way back to you know sort of our aspirations at the beginning of the year for gross margin expansion, we're tracking well against that.
As you think about Q4, the there are probably two things you want to consider one is that we won't have the one time coded benefits.
But the second thing to keep in mind is that the benefit that we've been receiving from the divestiture surgical consumables business.
That's given us about a 50 basis points lift to each of the quarters. So far this year, that's going to anniversary in August. So so we will not see the same level of benefit in Q4. So you want to keep in mind those two pieces.
But overall in terms of the expansion in gross margin, we continue to be really pleased with it it's tracking along our long term aspirations.
Volumes in manufacturing variances to date and in our expectations are going to have an immaterial impact on the full year.
This is really coming down to our efforts on the portfolio optimization.
Our M&A, our new product launches and the overall portfolio mix, that's driving the bulk of the improvement.
Supported by ongoing productivity improvement from our our outstanding operations team.
So that's how I would think about gross margin.
As we turn and we talk about cash flow and we look at inventory. We did have a a significant build of inventory in Q3.
I really that was driven by a couple of different things wanted it was sort of a reaction or are the result of the fact that we did see parts of our portfolio that 40% of our portfolio, we saw softness in demand in the quarter.
And we saw that demand.
It takes time for the supply chain to match up with that demand.
The other part of the build was a conscious build to make sure that we have the flexibility to continue to meet customer demand.
And just given how fluid the market is we've deliberately held a little bit more to make sure that we're in a position to meet demand as it as it moves.
I should think about Q4, I wouldn't expect a substantial change in our inventory levels as we think about Q4, but we expect as we had next to your those things will start to normalize more as we as we go into 2021.
I hope that answers your question, Yeah, I know that was terrific. Thanks to both the appreciate it.
Yeah, and maybe just one clarification on that.
Excess inventory of component tree.
We don't see any any risk to oh obsolescence in that kind of inventory build of our supply chain. Okay hearing religion clarification. The this is deliberate choices about volumes not about any risk of obsolescence.
Okay got it thank you.
Bob Hopkins from Bank of America's online with a question. Please state your question.
Oh, Thank you and good morning.
So I've some just good morning.
I know, it's confusing time things are kinda all over the play so I've got a.
I'm just some clarification on the guidance and then some longer term a longer term question first just just to be clear on the.
And what you're saying about the fourth quarter <unk>, what are you, saying about the fourth quarter in terms of absolute dollar revenues.
Well I'll start with that ill turn over to borrow but we haven't we haven't specified Bob explicitly I think the best we can articulated on page 20, a slide presentation, we provided.
What we're saying that 60% of though we're providing overall second half.
You know outlook.
What we believe the revenue of the 60% resilience in the 40% impacted how they look for the second half and you can certainly do the math and back into what the fourth quarter looks like.
But but when you do that you'll see you know we're projecting a a decline in fourth quarter revenue overall, which is heavily driven in fact, primarily driven from the surge in bed.
Along in that we saw and were able to deliver in Q3.
And as you know boggling customers were were desperate to get this product and delivered immediately.
Thankfully, we were able to meet those requirements, but as a result of that we'd have a non linear.
The transition between Q3 in Q4 of our resilient products, because we delivered over $100 million.
Bennett of of benefit effect, you know financially around beds, and then another $25 million of monitoring spending leaders that are that that will be a onetime stockpiling order in Q3, So those things don't repeat.
Hence our attempt to smooth that out over the second half of the year and say look this is what the second half what looks like repeats take two quarters in average amount.
Right No I I understand I mean, I think everyone gets that there's a lot of moving pieces right. Now we're just I'm just trying to understand you know.
For the purpose of clarity for people because we're just getting a lot of questions. On you know I realize that gave us some things to work with in terms of map, but it seems like it would be sort of maybe in a low 700 million dollar range for the fourth quarter.
We do all that math is out does that kind of Rockwell and I think what we tried yeah, well, we try to do Bob and I'll, Let me I'll, let Bob chime in here, but we try to do is.
Underpin it with the 540 right on the EPA side.
Because there are lot of puts and takes on the revenue line and quite frankly, it's quite difficult for us to.
That's why we're not providing guidance, we don't have the ability to provide accurate outlook on the topline. However, there's enough other levers in the personnel that we feel we have enough certainty, where we are not fiscal year to say 540.
Yes for the full year is something we feel confident because the floor.
And that would give us exclude the surgical consumables divestiture last year, that's 11% growth year over year.
So again, our ability to deliver in highly uncertain times.
Delivered double digit EPS.
For the for our fiscal year.
On the work like we're quite proud of problem. So yeah, I know and that makes total sense. It's just that you are providing information in the slide deck and I'm just trying to understand what her out information implies about the fourth quarter. It looks like to me. It's kinda very low 700 million and I just wanted to see if we were kind of doing the math right.
Well just to reiterate.
When we when we look at.
Wouldn't responses to suspended guidance last quarter. It was because it's very difficult to pinpoint the exact net.
Impact on the portfolio of all the puts and takes.
And as John has highlighted it around the bed orders in Q3, and our ability to deliver on that in Q3 and the subsequent impact on Q4.
It's not just about the net impact it's the timing of the net impact that that becomes challenging.
And so you know we obviously are running loads of scenarios is looking at where things could be and as we are preparing for today wanted to make sure we're providing as much clarity as we could.
So so again, where we came back to was this floor and it really as a floor on the EPA off of the 540, where do we feel confident we can deliver there.
And and then I'm, providing be the thoughts about what the second half one look like on the 60 and 40.
And and you know as you're doing the math back you know that will give you sort of the range. If you will and the floor that you can work back to from a revenue standpoint of what we think the quarter is gonna look like but remember that the timing the timing in particular, it's it's the net impact of the puts and takes but it's also the times.
And how that falling within our quarters, there's there's more fluid nature to it than that we've traditionally seen.
Okay. That's fair amount, let me just yeah, let me follow on about Hey, like I wouldn't.
Maybe just comment Bob I'm, not going to objector comment either way to your number of 700 million in the quarter, but let me just say.
The last few quarters. We said please don't extrapolate off of these quarterly results right. This quarter end the prior quarter and whatever our result in a being in Q4, we would probably say the same thing again, so yeah. So even though you might get indefinitely or number for Q4, you can't extrapolate off.
Oh I get that so let me just let me ticket stocked up for a second just with one one additional question on the on the 540.
I.
I guess two quick things one is whereas there conservatism built into that number just maybe some thoughts around you know the kind of.
What assumptions are underlie that and that's type already in where there might be some conservatism and then you know I know you know there's it's touching on certain time, but John maybe you could just comment on once we get through all this like what is your view kind of on based on what you know right now just in terms of how you think about the.
The growth outlook for the business as you see it right now thinking a little bit longer term, what real from or maybe a revenue and earnings perspective, just some rough thoughts on on how you're thinking about this this business long term based on all the new learnings over the course of the last couple of quarters I'll leave it at that the venue yeah. Thanks, I'll turn the first part of that question.
At a bar bona Fide 40 in the puts and takes.
Happy to take it.
So I think you know, we talked a little while ago about gross margin and the expectations for Q4.
So you should not be expecting you know a repeat of 53.8% in in Q4, but our overall trend towards gross margin expansion. You know have not been significantly out of line then with where we stated our goals for the beginning at the beginning the year.
And you know and I think that says that we continue to kind of lean into our expectations around gross margin expansion.
With regards to operating expense leverage you know we saw very good operating expense leverage in Q3.
As we saw expenses decline year over year because of the impact on the business as we all moved to remote working.
Now in Q4, as you think about operating expenses.
There are couple of things that'll be a little bit different as you think about Q4. One is as John has talked about activity has picked up and so our spend level. You know is expected to to pick up as well just because we're out in the marketplace and were reconnecting with customers. So it's a different level of normal activity in Q4.
Sure.
Lots of the investments that we turned on in Q3, we will continue to find as we go into Q4.
But our overall commitment to both the gross and operating margin expansion.
Remain remained strong and we believe we're on a good path to be able to deliver on those for the year.
The uncertainty around Q2, or Q4, and where relative to that 540 is going to come down to the net impact.
Oh, the puts and takes on the portfolio and the timing of those that's really the question and why we're not giving specific guidance because there are so many moving pieces as you highlighted earlier.
So let me then answer the second part of that question and I'll point to our actual results first.
And say the Hill ROM today is not to help them up yesterday.
And the results year to date and what we're now projecting for the full year.
Illustrate that right the diversity of our portfolio, the resiliency of our portfolio and our ability to navigate through.
This pandemic and financial uncertainty that go with it and still deliver double digit EPS growth and revenue growth.
In sum.
At some level, we'll know the next quarter would that full year performance looks like.
It's pretty remarkable, especially compared to our peer group.
Long term.
Our vision and our direction of going toward a connected care and advancing connected care environment.
It's become more relevant than it ever has done.
And the growth vectors will be driven off of new products, which we continue to see nice acceleration in the current quarter it'll be driven by select investments in emerging markets.
And then driving off of you know for key product category areas respiratory health.
Care Communications.
Our smart bed and nice you market expansion opportunities, including a flexible I see you offering.
And then patient monitoring and the applications for patient monitoring Impella held in remote patient monitoring and really connected care in both the hospital in the home.
For for physical assessment tools as an exit.
As an example, so.
The long term growth vectors and growth vehicles or in our portfolio today I think we're showing that resilience in our current results.
And our aspiration that we outlined in our El RP.
Or three year plan from a from earlier this year.
That aspiration still holds to be a consistent mid single digit Rover and provide double digit EPS growth over the long period.
Time, and we think we're very well positioned to do that.
Thank you.
David Lewis with Morgan Stanley is online with a question. Please state your question.
Hi, Good morning, just a a couple of follow US here I, just I hate to go back to to Bob's question, but I'm I'm going to.
Oh gosh, the fourth quarter it varies guidance out there in your in your DAC and it does it's just kind of assess it kind of 695 to 710 range for the fourth quarter.
It's sort of arrange implied by your Jack.
And if you look at your earnings guidance. It implies 17% margin ish on sort of that number. So are you are you, saying 625 to 710 sort of isn't the range implied by the slides, where you sort of saying, we don't have as much confidence and the revenue we have a lot more confidence in the earnings I'm I'm, sorry, I'm still confused and just I want to make sure expectations are very closely set here before we exit the.
Call.
Yeah, like I say work, because we're not explicitly giving guidance David we provided we did our best to provide as much color as we could and and I think you're seeing that and backing into numbers that I can say look yeah, you're you're in your in their bags of code.
But we're not going to explicitly affirming that you're certainly in the rights of code and so as Bob we don't need to evade the question.
We tried to do the opposite we tried to probably as much color as possible on current results in second half year results. So you can get to that kind of a range that you just outlined.
You have a lot more confidence that our ability with moving levers and everything down the PML to provide a hard number on the floor for EPA.
Okay that gives us a race and work with thank you and so it kind of related that.
Either for Bob or John D.
Mr sort of fear that this business trough dynamic I think you've been asked this question a lot sort of Fourq, you sort of paint that picture as these tailwinds and headwinds cros and sort of any given quarter, but could it back half of your core gross around 2%.
Is there a decent way of thinking about the business floor or a decent proxy for the first half of next year or the reasons to believe that picky about the peak and the trough third and fourth at an average is just a that's just not very good number a 2%.
Yeah, I mean address that John or how long they start carb, Sir your let's start.
So so I think that it's difficult you know and as we've talked about it we would not extrapolate surely off of Q3.
And as John commented earlier, we wouldn't extrapolate off of Q4.
Even taking the average of those two David could could present. Some challenges you really have to think about the shape and the speed of the recovery that were seen in the underlying portfolio much as John talked about it earlier you know we're seeing different speed based on whether you are in care coms worse.
Physical diagnostics versus say patient handling and and surgical.
And then we're going to to have in the near term some of the the lumpiness around the U.S. capital market and the impact on the bed sales as a result of the the really phenomenal.
Volumes that we had in Q3.
So there's a lot of moving lines that are moving at different speeds and therefore, I think even taking just a second half.
Is it troublesome sort of extrapolation I wouldn't I wouldn't advised doing that I think they look I'd have to bear with us a little longer as the pandemic rolls out and we have clear trajectory on where 2021 will be.
And the next somewhere together, we'll we'll have more information be able to talk more about that then.
Okay, and just to tumor for questions for me I apologize you mentioned bar, 40% to the business can exit fiscal 20 with double digit growth, which is encouraging any sense of a range or for Fortunately the other 60% of the business.
So we've we've given you in the second half of the year, we've talked about the the 60% and where we see that growing in the 20% range.
I think we've also talked about that in that 60%, we continue to see double digit growth on subcategories around the monitory.
Around patient monitoring.
Those areas continue to to.
Grow as we think about Q4.
Okay, but that's six you view that 60% of the business can exit this year kind of flat is that too aggressive.
We spoke about how we think that year over year collectively that group is going to look very similar to what we saw in Q4 last year.
It really does wild card there Dave the wildcard there David is the bed business right made that there was such a surge in Q3 it relative to last year in Q4, we're obviously youre showing a decline.
In them in the math that we're providing here.
It's that is the piece as we talked before that is going to be nonlinear.
Generally positive over a multi quarter kind of period of time, but quarter to quarter in this kind of environment, it's going to show some.
Some positives and negatives.
From quarter to quarter, and just gonna be non linear that's just unfortunately, that's the nature of the pandemic at Wynn.
Total till I understand and just lastly, John.
He just more specifically I mean, you've expressed some confidence recently and ERP and the first half CR P.. If we assume that guidance range fourth quarter is correct. It's kinda do 3% to 5% core growth here in a in 2020 did closer to seven in 2019. So you kind of just 5% growth in the first half of the L. RP.
To deliver you're out there for you have to do 5% growth in the back half DLR piece, if you think about 21 and 22.
Are you now feeling that you can do a 5% to the back half they'll RP or it's now just looking like it's more likely you can do that 5% to the next two years, if 21 comes in lower.
Yes, I would comment this way one.
Our as we just said the quarter to quarter variability and some elements of our business, namely the bed business.
Quarter to quarter, essentially some volatility rights over over a longer period of time and and because of the environment. We're in right now.
The end of this year and likely beginning next fiscal year, it's going to.
Give us some.
Some interesting comps to deal with in fiscal 21.
That said the long term growth trajectory is a long term growth vehicles in our business that are shining through in Q3.
And.
We'll rebounding in.
Q4 for the for the parts that I've been impacted.
We feel we feel very confident that those aspirations can be achieved over a multiyear period.
Okay very helpful. Thanks, so much.
We have time for just two more questions I never go a little bit longer today, but two more questions. Please thank you.
And then the question from Matt Taylor with you'll be S. Please state your question.
Hi, Thank you for taking the questions. So.
I just wanted to ask one about the guidance for the 40% of the portfolio that sees cobot pressure. So I, just I'm, having trouble understanding.
The guidance relative to your comments because you talked in the script about the care coms activity picking up in physician often office visits improving.
So why would it still be down 25% in the second half.
Same as Q3, why wouldn't you see any improvement in Q4.
Yeah. Good that's a good question and the simple answer is tough comps from the prior year, we normally have a really robust Q4.
In the current environment.
We don't expect the same kind of seasonality in our business.
The or quarterly phasing in our business because of the situation that we're in.
That's why we do see sequential improvement of around 10%.
We expect a around 10% sequential improvement between Q3 in Q4 on hold.
And then it was the comment when the other part of that.
Is that the I'm sick patient handling and the surgical business, which is about 15%.
Total revenue.
So 15 of that 40 is really going to be a little bit slower on recovery.
Because I'm getting access to install infrastructure.
Okay, Okay, and one follow up on the longer term I see you opportunity. So Philips is competence for example that they think there could be a doubling of I see you capacity overtime is that a number that you would balance as well do you think it could be greater or less than that.
Yeah, we're holding that number as we speak and and.
During a lotta research, we do believe that say well over a 200 million dollar incremental opportunity over the next four years.
And.
In terms of the Tam.
It will be available so that's an incremental basis, that's kind of a preliminary number that we've dropped.
That we're seeing.
Okay, great. Thanks, a lot John.
Yes.
Matthew mission with Keybanc kids on the line with the question. Please state your question.
Thank you for going on for squeezing me in just on the 200 million dollar incremental opportunity that you're you're talking about you know, there's a big difference and I see you bet per capita and that Tim. If you are talking about developed European countries versus versus you know also including you know emerging markets like India and China, How do you think about the differences.
And in our those included in that Tam as well.
Yes, that's exactly the kind of thing we're doing a two to quantify it because in some of those emerging markets there'll be happy using a low end medsurg spread of as an I see who beds.
And.
Okay very different.
Practices. So that that is the work we need to finalize but the number I gave you have a.
Roughly $200 million or better over the next four years does incorporate that thinking.
Okay, and then just to put all local market dynamics.
And just to put it all into context, where are you out on centrella penetration of the existing basin and did that you know seriously accelerate over over the last quarter or is it still is still fairly well.
It's still fairly low it's around 15% Mark the last quarter, we'll probably give it an uptick of a percent or too, but it's still below 20 easily below 20% of our of our held on base of business in the United States. So we're a long way to go in terms of penetrating that basin and then building our connectivity story.
Of smart that the smartphone and digital product offerings around that as we go into the future.
I appreciate that John Thank you.
Thank you.
Well with that I'll turn it back over to Mary Kay.
And so thank you for the call we went over a little bit but given the climate hopefully everyone has onto the call annually. We want to thank you for a for your questions today I'll turn it back up in America.
Thanks, John just wanted to say thanks for everyone. Sorry, we ran a little later today.
To answer any follow up question during the day. Thanks, so much and have a great weekend.
Ladies and gentlemen, this concludes today's conference call with Hill ROM Holdings incorporated thank you for joining.
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