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Edited Transcript of HRC earnings conference call or presentation 26-Apr-19 12:00pm GMT

Q2 2019 Hill-Rom Holdings Inc Earnings Call

BATESVILLE Apr 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Hill-Rom Holdings Inc earnings conference call or presentation Friday, April 26, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barbara W. Bodem

Hill-Rom Holdings, Inc. - Senior VP & CFO

* John P. Groetelaars

Hill-Rom Holdings, Inc. - President, CEO & Director

* Mary Kay Ladone

Hill-Rom Holdings, Inc. - SVP of Corporate Development, Strategy & IR

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Conference Call Participants

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* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Frederick Allen Wise

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* John Hsu

Raymond James & Associates, Inc., Research Division - Research Analyst

* Kristen Marie Stewart

Barclays Bank PLC, Research Division - Research Analyst

* Matthew Charles Taylor

UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices

* Matthew Ian Mishan

KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst

* Robert Adam Hopkins

BofA Merrill Lynch, Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good morning, and welcome to Hill-Rom's Fiscal Second Quarter 2019 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'd 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.

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Mary Kay Ladone, Hill-Rom Holdings, Inc. - SVP of Corporate Development, Strategy & IR [2]

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Thanks, and good morning, everyone. Thanks for joining us for our Fiscal Second Quarter 2019 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 our prepared remarks this morning by reminding you that certain statements contained in this presentation are forward-looking statements and are subject to risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those described. Please refer to today's press release and our SEC filings for more detail 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.

As you know, beginning with our fiscal first quarter, we adopted the new revenue recognition accounting standard, ASC 606, on a modified retrospective basis. The focus of our commentary this morning will be on our financial results under this new standard for the current and prior year periods, which will allow for comparability on an apples-to-apples basis as well as comparisons to our 2019 financial guidance.

With that introduction, let me now turn the call over to John.

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John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [3]

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Thanks, Mary Kay. Good morning, everyone, and thanks for joining us today. We are very pleased with our strong performance in the first 6 months of fiscal '19. In addition to financial results that were above expectations in Q1 and Q2, we continue to execute on our category leadership strategy and 4 priorities, advancing differentiated health care solutions, expanding our geographical presence in emerging markets, transforming the portfolio to enhance outcomes, and drive value for patients, caregivers and our shareholders.

Turning to Q2, we delivered another quarter of accelerated core revenue growth, driven by positive new product momentum across our diversified -- diverse portfolio, leading to financial results that exceeded our guidance on both the top line and bottom line. For the second quarter in a row, core revenue growth increased 6%, reflecting continued progress towards establishing a more durable and diversified business profile. This also represents our fourth consecutive quarter of driving mid-single-digit core revenue growth for the company.

Our focus on operational execution led to margin expansion of 50 basis points, and we delivered adjusted earnings of $1.14 per diluted share, an increase of 12% versus the prior year. This represents our 15th consecutive quarter of double-digit earnings growth. Importantly, this strong performance provides flexibility to reinvest in our key growth initiatives and sets a solid foundation for achievement of both our short-term and long-term financial objectives.

Our Hill-Rom team continues to focus on our vision of advancing connected care by executing on our category leadership strategy and our 4 priorities. The first priority is advancing differentiated solutions and innovation. Diversification and new products are an important driver of improving our revenue mix and shifting our weighted average market growth rate into the mid-single-digit range. Again this quarter, approximately 50% of our revenue is from categories that are growing at 4% or greater, demonstrating progress toward our 2020 goal of achieving 60% of total revenue from these higher growth categories. The contribution from new products has been a significant driver of top line growth in the first half of the year, contributing approximately 300 basis points of growth and revenue that now exceeds $200 million. This is on track with our expectations of driving $400 million in new product revenue growth for fiscal '19.

Supporting this performance continues to be several innovative products including Centrella, the Connex Vital Signs Spot Monitor, the Monarch Airway Clearance System, Integrated Table Motion and our Vision Care portfolio. In total, 8 new products represent 90% of the new product revenue.

Our vision of advancing connected care is focused on addressing significant challenges faced by our customers such as falls and patient deterioration that may cause readmissions, costly complications, lower reimbursement or penalties. With our growing footprint of more than 1 million devices that can be connected at the point of care, Hill-Rom has a differentiated offering in providing valuable real time clinical data and insights through our Centrella Smart+ bed, Vital Signs monitoring devices and our Nurse Call and mobile communications platforms. We will continue to invest in innovation, connectivity and data getting information to caregivers and proactively anticipating patient needs.

Let me turn to our second priority, which is expanding internationally and penetrating emerging markets. While we're still in the early stages of a turnaround, we are encouraged by our mid-single-digit growth in Asia-Pac and Latin America so far this year. In addition, we are stabilizing growth in emerging markets, which only represents 9% of Hill-Rom's total revenue today.

Accelerating growth in China is a near-term priority and represents a significant market opportunity for Hill-Rom. With new leadership now in place, we are in the early days of reinvigorating our commercial operations and have completed our go-to-market plans as well as our investment plans to support meaningful future growth acceleration. We will begin to turn on targeted investments in the second half of this fiscal year aimed at building our category leadership where we are well positioned to compete and win. While we do not expect this to be a significant contributor to 2019 performance, we expect to see some traction and begin realizing benefits in the second half of fiscal 2020 and beyond.

Our third priority is transforming the portfolio through M&A and portfolio optimization initiatives. As we've previously discussed, we continue to actively divest and wind down lower growth and lower margin noncore businesses, which are not strategic to the company. This has strengthened the portfolio and enabled us to focus our energy and resources to drive more durable, consistent core revenue growth.

M&A continues to be an important part of our strategy and diversification, and we are very pleased to recently announce the acquisition of Voalte, which closed earlier this month. Voalte is a pioneer and leader in mobile health care communication with a consistent track record of generating durable double-digit revenue growth in an attractive fast-growing $2 billion-plus global market. Voalte's comprehensive communications platform currently connects over 220,000 caregivers, supporting secure voice, alarm and text communications. Combining Voalte with our Clinical Workflow Solutions business, builds on our leadership in care communications, creating a continuum from Smart+ bed to smartphone. Voalte accelerates our digital and mobile communications platform capabilities and scale with a substantial installed customer base and strengthens Hill-Rom's connected solutions and our evolving digital offering to deliver real time insights.

We funded this transaction through our existing credit facility, leaving plenty of dry powder and balance sheet flexibility to execute on additional future deals as we continue to assess targets in our growing funnel. This acquisition is an excellent example of how we plan to strategically deploy capital with a disciplined approach, adhering to our rigorous strategic and financial criteria to generate attractive returns.

Our final priority is driving operational execution and strong financial performance. We've previously discussed our business optimization program focused on accelerating growth, reducing complexity and improving our cost structure. We have made significant progress and are executing on numerous initiatives which have allowed us to reinvest more into digital and emerging market opportunities in fiscal '19.

As a reminder, we expect to drive $50 million of pretax savings over the next 2 years, which are not included in our long-range plan.

In summary, we are making tremendous progress with strong financial performance, operational execution and maintaining focus on our 4 strategic priorities. We are confident in our ability to achieve our updated commitments, strengthen our business portfolio and deliver innovative health care solutions consistent with our vision of advancing connected care.

With that, let me turn the call over to Barb.

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Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [4]

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Thanks, John, and good morning, everyone. For the fiscal second quarter, under the new revenue accounting standard ASC 606, we reported GAAP earnings of $0.74 per diluted share. These results include after-tax special items related to intangible amortization, business optimization, acquisition and integration costs and other special charges.

On an adjusted basis, excluding special items, earnings of $1.14 per diluted share advanced 12% and exceeded our guidance range of $1.09 to $1.11 per diluted share. These results reflect accelerated core revenue growth, continued margin expansion and strategic investments to drive future growth. As Mary Kay mentioned, our commentary this morning will focus on second quarter results on a comparable basis to the prior year period adjusted for ASC 606. Please use the supplemental schedules posted to our website to follow along.

Now let me briefly walk through the P&L before turning to our financial outlook. Starting with revenue. For the fiscal second quarter, revenue of $714 million increased 1% on a reported basis and 3% on a constant currency basis. Core revenue grew 6% for the second consecutive quarter, exceeding our guidance of approximately 4%. Core revenue growth adjusts for the impact of foreign currency, divestitures and nonstrategic assets we may exit, including the Surgical Solutions International OEM business.

Domestic revenue on a core basis increased 10% in the second quarter, driven by solid growth in Front Line Care and Surgical Solutions and double-digit growth in Patient Support Systems. As expected, given the challenging comparison to the prior year period for -- from some large capital projects in the Middle East and Canada, international core revenue declined 3%. Excluding the large orders last year, international core revenue increased 3%, in line with first quarter performance.

Moving on to the business segments, I will address revenue growth on a constant currency basis only. Starting with Patient Support Systems. Revenue of $360 million increased 5% and core revenue advanced 9%. For the fourth consecutive quarter, we generated strong double-digit growth across our key product categories in the U.S., including Med-Surg bed systems, Clinical Workflow Solutions and safe patient handling equipment. Outside the U.S., core Patient Support Systems revenue declined 7% as solid growth in Europe and Latin America was more than offset by the difficult comparison in Canada and the Middle East.

Now moving on to Front Line Care. Revenue increased 4% to $243 million. New products, including the Connex Spot Monitor, the Monarch mobile vest and our Vision Care portfolio continue to be the key growth drivers. Domestic revenue increased 4%, while international revenue grew 3% with solid performance across Europe, Asia-Pacific and the Middle East.

Lastly, Surgical Solutions revenue of $112 million declined 2%, while core revenue increased 1%, resulting from a challenging comparison related to last year's rebound in post-hurricane revenue of surgical consumables as well as the timing of large capital projects in the Middle East. Revenue growth is primarily attributable to record placements of the Integrated Table Motion and a high single to low double-digit growth in U.S. operating room and patient positioning equipment.

Now turning to the rest of the P&L. Adjusted gross margin of 49.4% improved sequentially by 110 basis points and improved 20 basis points when compared to strong margin performance last year. Gross margin expansion continues to reflect the positive contribution from product mix as well as benefits from manufacturing productivity and procurement efforts, which collectively more than offset the impact of tariffs and raw material inflation.

For the first half of the fiscal year, adjusted gross margin expanded 40 basis points.

R&D spending of $37 million increased 5% versus the prior year, reflecting our ongoing commitment to innovation and investments in key programs to drive future growth.

Adjusted SG&A of $199 million declined 1% as disciplined cost management and our business optimization efforts more than offset strategic investments we are making to drive future growth. Our adjusted operating margin in the second quarter was 16.4%, reflecting an improvement of 50 basis points compared to the prior year. For the first half of the fiscal year, our adjusted operating margin improved 100 basis points compared to last year.

The adjusted tax rate was 20.4%. Stock-based compensation was a benefit of $0.01 per diluted share versus a benefit of $0.02 per diluted share last year. Excluding the impact of stock-based compensation, our tax rate was 21.2%. So bottom line adjusted earnings for the fiscal second quarter of $1.14 per diluted share increased 12%.

Now turning to cash flow. Cash flow from operations of a $158 million was strong for the first 6 months of 2019, advancing 26%. Higher net income and strong working capital management contributed to this performance. Capital expenditures on a year-to-date basis totaled $31 million, $20 million lower than the prior year period due to project timing. And as a result, free cash flow of $127 million is 71% higher than last year.

In terms of the balance sheet and financial leverage, our debt-to-EBITDA ratio at the end of March was 3.2x, and we have returned approximately $106 million to shareholders through dividends and share repurchases during the 2019 fiscal year.

Let me conclude this portion of the call by providing an update to our guidance for fiscal 2019, which now includes the impact of the Voalte acquisition. As a reminder, our 2019 financial guidance should be compared to the 2018 modified financial results under ASC 606, which are included in our supplemental schedules on the website.

For the full year, we now expect reported revenue growth of 2% to 3% and a constant currency growth of 3% to 4%. Core revenue growth is expected to increase 5% to 6%, including the contribution of Voalte. Excluding Voalte, core revenue is expected to increase approximately 5% at the high end of our original full year guidance range. There is no change to expectations with regards to noncore revenue. As we have mentioned, noncore revenue totaled $110 million in 2018 and is expected to decline to approximately $50 million in 2019. As a reminder, this headwind is incorporated in our reported revenue guidance, while core growth guidance is calculated by excluding the noncore components in both the current and prior year periods.

By business segment, on a core basis, we now expect Patient Support Systems to grow in the 6% to 8% range, reflecting the strong first half performance as well as the contribution of Voalte. We expect Front Line Care and Surgical Solutions core growth to be approximately 4%.

From a profitability standpoint, we expect adjusted gross margin to expand 50 to 70 basis points, reflecting mix and productivity improvements that more than offset incremental costs associated with tariffs and raw material inflation; R&D spending to increase in mid-single digits, representing approximately 5% of sales; adjusted SG&A of approximately 26.5% to 27% of sales, reflecting the addition of Voalte and reinvestments in key growth initiatives. As a result, we now expect adjusted operating margin expansion of 80 to 100 basis points.

We continue to expect other expense including interest of approximately $90 million, and we now expect a tax rate of approximately 21% and a share count of 67.5 million shares. This results in adjusted earnings per share guidance of $5.02 to $5.06 per diluted share at the high end of our previous guidance of $4.98 to $5.06, and reflecting both our strong first-half performance and the modest dilution related to the Voalte acquisition. From a cash flow perspective, we continue to project operating cash flow of approximately $420 million, capital expenditures of approximately $90 million and free cash flow of $330 million.

For the fiscal third quarter, we expect revenue growth to increase approximately 2% or approximately 3% on a constant currency basis. Including the contribution from Voalte, we expect core revenue to increase approximately 4% to 5%. We are providing guidance for adjusted earnings of $1.20 to $1.22 per diluted share.

Thanks, and now I'll turn the call back over to John.

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John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [5]

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Thanks, Barb. To summarize we're very pleased with our first half performance and look forward to building on that momentum in 2019 and beyond. We are encouraged with core revenue growth, which has increased to 6% in the first half of 2019, and in the mid-single digit range for the last 4 consecutive quarters. We have also delivered double-digit adjusted EPS growth for 15 consecutive quarters. New product momentum continues to build. We are actively increasing R&D spending to drive our category leadership with differentiated solutions and innovation. We are turning on investments to increase our international presence and expand our footprint in emerging markets like China. And we are very excited to build on our vision of advancing connected care with the recent acquisitions of Voalte.

With that, let me open up the call for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from line of Bob Hopkins of Bank of America.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [2]

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First question I want to ask was just on the guidance. You guys had a very strong fiscal quarter with that 6% growth number above your guidance. But then the guidance on the same basis that you're giving for fiscal Q3, I believe has you coming down from like 6% growth all the way down to 3% growth. So I'm just wondering if you could explain why the growth is so much slower in fiscal Q3 versus fiscal Q2, and frankly in fiscal Q1.

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Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [3]

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I'll be happy to take that. So to recap, when we're looking at Q3, our guidance is that we'll have core revenue of 4% to 5%. Excluding Voalte, it will be 3% of 4%, okay. So 4% is really where you want to be thinking about our core revenue for the third quarter. It does slow in the second half of the year. But remember as we've talked previously, we have more challenging comps for Patients Support Systems as well as Front Line Care in the second half of the year. Last year specifically in Q4, as you saw the ramp up of Centrella and the Monarch Vest, we saw very strong performance in the U.S. in the latter part of the year. And so we are expecting more difficult comps. And we're going to see lower U.S. growth in the second part of the year. Does that help?

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [4]

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It does. I'm just curious. Is it -- so is the difference the between 6% that you're growing in Q2 and the 4% -- 3% to 4% that you're guiding to for Q3, is that all comps? Or is there anything that you see as deteriorating a little bit separate from comps in the quarter versus what business trends you're seeing today?

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John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [5]

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No, Bob. I think -- it's John. One of the things to reflect on from last year was the Monarch launch that took place is going to anniversary. When we launched the Monarch Vest, we had effectively pent up demand that was released in Q3 and Q4 last year. So when Barb mentioned the Front Line Care comp, that's specifically one of the comps we have. And then we know, not specific to Q3, but in Q4, the PSS comps on Centrella are -- it was a large quarter for the Centrella launch last year in Q4. So the combination of tough comps in Q3, Q4 in Front Line Care and PSS are things that we're factoring into this guidance. Offsetting it, we would expect to see a better performance, that in International that would be neutral to accretive to our growth in the second half of the year. As you probably saw, international was a bit of headwind in the first half of the year for us to overcome. So all in all, in terms of the underlying question of the confidence level in our guidance, I would say we have full confidence in the guidance we're providing you here. We're factoring in the various puts and takes of business comps and international in this guidance and our confidence level in the underlying business, ex Voalte, is full and complete for Q3 and Q4.

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Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [6]

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And the last thing I would add there is for the full year, we are guiding to 4% to -- sorry 5% to 6% on core growth; 5% excluding Voalte, which is at the high end where we started the year. So our performance for the year is in line with what we were looking for, for the full year. And as John said, confidence in the second half of the year is high. We're in good shape.

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Operator [7]

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Your next question comes from the line of John Hsu of Raymond James.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [8]

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First question. I was just curious, philosophically, this idea of core growth, clearly, you -- as you mentioned you are excluding divestitures, nonstrategic assets and FX. But presumably, I'm just kind of curious about the thought process as far as including Voalte. And obviously, it's helpful that you gave the color for the updated guidance excluding Voalte. But again, just curious on that core growth, first question is why did you exclude -- or why did you include, rather, Voalte in those numbers?

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Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [9]

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Thanks for the question. We give a lot of encouragement to keep things as simple as possible, with core, noncore. We felt like for the Voalte contribution, which is pretty small for this year. I mean we've talked about how it's modestly dilutive, and from a top line standpoint, it'll deliver a -- some additional growth on the top line this year. But we're estimating by 50 basis points, not much more than that. We thought like it was simpler to keep it in, given the small contribution, rather than introduce a new set of metrics that would be core, noncore, organic core, organic noncore, however you would want to go for it. So we tried to keep the message as simple as possible. And the -- like we said, the Voalte contribution is small enough that by giving you insight into the core revenue growth differences, we thought that was a good compromise.

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Mary Kay Ladone, Hill-Rom Holdings, Inc. - SVP of Corporate Development, Strategy & IR [10]

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And John, it's Mary Kay. Noncore also is defined as things that we divested, wound down on nonstrategic, and Voalte, obviously, as a strategic acquisition for us, so we didn't feel with that, that fit into a noncore definition.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [11]

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Okay. That's fair. And I guess just following up on that, could you just help us bridge the fiscal 3Q guidance, both top and bottom line and for the year? Just I know it's small, but just for Voalte, can you help bridge us both on revenue as well as EPS?

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Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [12]

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So for the second half of the year, what we're saying is that Voalte will contribute about 50 basis points of core revenue growth. From a second half of the year in terms of EPS dilution, we think it's going to be $0.05 of dilution.

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Mary Kay Ladone, Hill-Rom Holdings, Inc. - SVP of Corporate Development, Strategy & IR [13]

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And that's split evenly Q2 -- or Q3 and Q4, John.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [14]

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Okay. Great. Excellent. And then last one for me. Obviously, new products have done very well, tracking -- it looks like tracking to the $400 million plus, and which is obviously ahead of the original long-range plan. So just I know we're kind of halfway through the year. So just looking ahead, clearly, there is still some legs to this growth and it's pretty broad-based with the 8 products driving 90% of it. So I guess just where are we in that progression? And I guess maybe looking at fiscal '20, presumably you would expect that to -- momentum to continue. So any color that you could provide around that would be very helpful.

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John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [15]

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Yes, thanks, John, it's a great question. I think that's fundamental to our high confidence in the guidance we're providing and the updated guidance we're providing. It's been a significant growth driver. It's been the dry powder or the secret sauce, if you will, that's enabled us to drive 4 quarters of mid-single-digit growth. It is the confidence that allows us to raise our guidance for the rest of this year. So it's a big contributor. We have some new products that are just launching that are going to start contributing as we get towards the second -- the end of this year, namely EarlySense, WATCHCARE, the Voalte acquisition will also add to that later in the year as well. So we feel very good about the performance of our new products. It probably contributed in the range of 300 basis points in the first half of the year, and we expect it to continue to drive great performance for us and keep us in that mid-single-digit range.

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Operator [16]

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Your next question comes from the line of Matt Taylor of UBS.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [17]

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So the first thing I wanted ask was if you could give us some more perspective about how you think Voalte will grow under your purview? And then any color on the margins of that business would be helpful, too.

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John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [18]

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Yes. Matt, it's John, I'll take that question and then turn it over to Barb for the margin discussion. So the -- first of all, the customer response to the acquisition and the announcement of the acquisition and now that we're integrating the organizations together, the response in the employees has been equally positive and really phenomenal. Customers are delighted to see the combination of Hill-Rom and Voalte coming together in the -- to quote of the customers, a significant one, they said this is their 2 favorite companies coming together, this is awesome. So when bringing together Nurse Call, clinical communications tools with a secure mobile device and mobile platform that is really a leading platform and has nice sustained track record of growth and a really nice installed base with some extremely large teaching hospitals as well as large IDNs. We feel really good about the combination, and our customers are giving us great feedback about our ability to scale more significantly together. The resources required to integrate these systems into a clinical environment, establish all the connectivity and reliability and then be able to ongoing provide the service and support is a capability that Hill-Rom brings to the table that Voalte was in the process of building out. So this really -- the combination of 2 really is a 2 plus 2 equals 5 type of scenario. So we're very pleased with that as well as the customer feedback. And I'll let Barb talk about the margins.

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Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [19]

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So as we've talked about acquisitions and M&A, what we've said is we want to look for things that not only are a strategic fit, but something that's going to be accretive to both top line as well as to our margins. And Voalte fits exactly in there. The growth on the revenue line, you should think about in terms of double digits. But I would want to make everybody aware that as part of the purchase accounting treatment of deferred revenue, we are going to see a slower ramp-up in revenue in the latter half of this year and the first part of fiscal year 2020 as we let the purchase accounting of deferred revenue work its way through the system. But you should be thinking about top line revenue growth for Voalte in the double digits. And when you think about margins, you should think about them being accretive to the Hill-Rom portfolio.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [20]

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Okay. And then I did want to follow up on some of the comments that you made in the prepared remarks on emerging markets. So it sounds like this will be an investment year and you could see some growth benefits later in 2020. I guess could you talk about, a, how you think the emerging market business could grow once your through making those investments? And what are the gating factors or investments that you're making that are keeping you from getting a benefit earlier?

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John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [21]

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Yes. Good question. The emerging markets, just to step back a little bit, our performance so far this year has been -- in Latin America and Asia-Pac has been mid-single-digit growth. We do expect as we get towards the end of the year that those 2 regions of emerging markets begin to get to double-digit growth in the second half of this year. If you add on the investments we're talking about making now and intend to make in the second half of this year in China. We certainly expect China to be a driver of that growth in the Asia-Pac region and sustain a double-digit growth profile going forward. Got the timing of turning on the investments in the second half of this year. As early as 12 months and certainly by 18 months, we would expect that region to begin to perform at that type of level on a sustained basis, double digits that is.

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Operator [22]

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David Lewis of Morgan Stanley is online with the next question.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [23]

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Just a couple questions for me. John, I thought I'd start off, U.S. core PSS improved, I think actually on a momentum basis and I think it may have been mid-teens-type growth, maybe even a little, even better than last quarter. So Centrella, CWS, patient handling. So I just want to -- in light of that strong performance in the U.S., if you could just sort of talk about the capital environment, how the orders look? And is there sustainability there, frankly, in light some of the overarching concerns on Medicare for All?

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John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [24]

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Yes. Good question, David. In terms of the capital environment and our confidence level of sustaining the growth level in PSS, the capital environment continues to be stable, stable to positive as we've indicated in the past, we see no changes there. We really like the way our order volume and backlog look, continues to be healthy. And again, gives us the confidence to raise our guidance, both for PSS as well as for Hill-Rom overall. So we're feeling good about that environment and the health of that business. And certainly, it's not just Centrella that's been a driver of PSS, it's been for 3 quarters in a row, maybe 4? Four quarters in a row. It's been the Med-Surg business. It's been our CWS or clinical communications business and it's been our safe patient handling businesses for 4 quarters in a row that have really driven balanced performance in that business unit. So we think it only gets better when you add Voalte into it. In terms of the Medicare for All, I guess all I would say there is, it's way too early in the political clinical cycle to comment and be speculative. I do think our products, our portfolio and our innovative solutions do drive a tremendous amount of value for customers and patients in any kind of health care environment. And given the change in our portfolio and diversification of our portfolio, I think Hill-Rom is positioned to be much more resilient to mitigate fluctuations and volatility than we have in the past. So near term, we're focused on running our business and driving mid-single-digit growth and driving value for our shareholders.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [25]

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Okay. And 2 more for me, I'll just ask them together. The first is just, a lot of strength in PSS, a little bit weakness in International -- I'm sorry, Surgical and Front Line internationally. To what extent with the sort of transient issues in the quarter versus things you see sort of playing out into the back half of the year, number one? And then number two, just on Voalte. The first significant capital deployment sort of under your watch. Is this sort of the framework of what we should be thinking or shareholders should be thinking about $100 million to sort of $300 million or $500 million type of capital relatively tuck-in in nature. Give us a sense of whether this is sort of the standard we should think of on a go-forward basis?

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John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [26]

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Yes. Sure. I'll take that last question first. I think when it comes to M&A and tuck-in acquisitions, I think the Voalte is a very good representative deal of what you should expect to see in the future. High growth category, accretive to margins, synergistic and nice strategic fit that all -- kind of checks all the boxes. If we can find more deals that check all the boxes like that one, of that size, plus or minus, we'll be happy to do those on a more frequent basis. When it comes to the International growth. As we entered this quarter, we did expect International to provide a tough comp for us. I'm pretty sure we commented on that in the last call. And that's in fact what happened. We had a really strong -- Europe and Canada had a really strong year last year. And we knew it was going to be a challenging quarter for International. If you -- if we look at international for the first half of the year and remove a couple of places where we had a large project orders -- project-based orders in our Middle East region as well as in Canada, the first half of the year, ex those projects was 3% growth, which is consistent entirely with our International performance over the last couple of years. And as you know, the International business is more exposed to capital purchases and ebbs and flows of capital. But over the longer term, it's been a consistent 3% grower for us. As a result of our weak first half, we expect a better second half in the year for International. So it's going to, again, become either neutral to accretive to our growth story in the second half of this year.

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Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [27]

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David, the only thing I would add to that is I'd like to point out that in the quarter, International revenue for Front Line Care did grow at 3%. So if you go back to the underlying growth rate of International, somewhere in that 3% range. Front Line Care that did not have those strange prior year comps or difficult comps like we saw in PSS and in Surgical, continued to perform in that 3% range.

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Operator [28]

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Matthew Mishan of KeyBanc is your next question.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [29]

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And just following up on the breadth of the business. When I looked at your guidance beginning of the year, I really -- I thought it was balanced across segment and geography really across like 4% to 5% for everything. But it seems like U.S. Patient Support is stronger with everything else a little bit lower. Can you talk about like what's going on outside of U.S. PSS maybe below expectations?

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John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [30]

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Yes. Let me address that, and then Barb, we can add on to it. The PSS is clearly having a great year, and they're going to exceed the original guidance we have provided. That's what we're now communicating. International was also -- so we expect it to be 4% to 5%. It's not going to fall below that range. We're calling out more like a 3% growth for the full year. So PSS beating, International behind our -- the range we provided. The other 2 businesses in line with the range we had provided. Albeit, may be at the lower end of the range, but that's where they are as we sit here today. Those -- many of those -- the lower end of the performance on FLC and our Surgery business is largely driven by the International performance.

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Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [31]

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Okay. And then on the U.S. Patient Support, I mean, you guys mentioned tough comps a lot. I'm just curious about the sustainability of U.S. Patient Support going into -- over the next 4 or 5 quarters. Should we be worried about next year at this time? You guys are talking about tough comps in U.S. Patient Support. Are there outsized orders you're getting from your customers?

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John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [32]

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The short answer is, no. To elaborate a little more than that, I mean we feel good about our PSS business. We feel really good about our backlog and order volume coming through. It's diverse, it's a big business, and it's got a lot of diverse double-digit growth drivers in there. So we feel really good about where we stand with our PSS business. As we get into the back end of this year and fourth quarter, we know we have a tough comp. So we're factoring that in. Now maybe we end up being conservative on it, but we rather be that way versus being aggressive. With our guidance philosophy of meet or beat, we factored all these things in and feel very confident about the guidance we're providing today.

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Operator [33]

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Rick Wise of Stifel is online with your next question.

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Frederick Allen Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [34]

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Let me start with off some of your earlier emerging market comments. Just maybe help us understand in a little more detail where you are. I know you hired a great new team and that you worked with them in the past. You're in your -- you said you're in your early days that will be invigorating, then you're going to return on investments. Help us understand what you're doing now, what you're planning and what it means when you say you'll turn on the investments? Is that something internal, commercial, distribution? Just again, frame what's happening with a little more color.

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John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [35]

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Yes. Thanks, Rick. Yes, let's be really specific. In the case of China, which was our primary area that we were investigating and putting an investment plan together, we are turning that on as we speak in the third quarter. So we'll have incremental investment in feet on the street, marketing capability, reimbursement and government affairs, capability, so we can have a real beefed up commercial presence in China to take advantage of the opportunities that we see after doing an extensive amount of research and understanding where our opportunities were for providing leadership and sustained growth. So that is now with the leadership that was in place for about 6 months before and getting the fundamentals in place while doing the investment case and research. We're now turning those investments on and feel very good about the prospects of growth and charging double-digit growth out of China. We're taking that same approach, Rick, in other regions as we finish out the year, so that we're positioned to turn on incremental investments in other emerging markets outside of China.

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Frederick Allen Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [36]

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Okay. And turning back to your comments about your evolving digital platform. You're clearly focused on clinical communication tools. With Voalte, do you have the full bag to really penetrate the full $2 billion market? I'm guessing not. But can you spend a little bit more time on your strategy in connected care? Is it more -- is it going to more M&A centric to get that full bag? Or you're going to fill the gaps internally? Just frame your thoughts there.

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John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [37]

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Sure. Thanks, Rick. So on the clinical communications category or care communications category, we've sized that to be a $2 billion-plus global market. That includes fixed wire Nurse Call systems as well as mobile systems as well as some of the peripheral software and integration elements. So we participate today in approximately 75% of that market. With the Voalte acquisition, it's a -- in terms of its PAM, it's probably 30% penetrated. In terms of its global opportunity, at $2 billion-plus today. So and that market segment is one of our highest growing market segments, I think we've sized it to be a 6%, 7% growth category. So we like the category, we think there's a lot of growth in the category in the future on a standalone communications tool. As you add that into our digital efforts, and our -- and taking connectivity to the digital realm in the future, this is where we have a lot of R&D going on. We expect they'll be launching our first digital service offering in fiscal '20. And we're very busy working on what could the elements of that are. But effectively, as we've talked in the past, it connects -- and as I said in my prepared remarks, kind of a simple way to think of it, it connects the Smart+ bed to the smartphone and all the Internet of Things in between. So we can detect heart rate, respiratory rate, incontinence events, other vital signs, it inputs into this Smart+ bed and then communicate with algorithms and AI in the future, what kind of conditions need to be addressed to a mobile communications platform or a traditional Nurse Call platform. So that's the vision of the digital piece of it. More to come there and our -- again, our first product offering as a digital software solution will be something we're aiming towards the first half of fiscal '20.

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Operator [38]

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Kristen Stewart of Barclays is online with your final question.

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Kristen Marie Stewart, Barclays Bank PLC, Research Division - Research Analyst [39]

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So a lot of the questions have, I guess already been asked, and I just want to echo the sentiment on kind of a little bit of confusion around core with now Voalte. So just the kind of ground things, I guess, is it fair -- I guess you said that basically, it would contribute about 50 basis points to growth in the second half of the year? So that's about like $7 million or so of revenue a forecast that you guys are expecting. Maybe if you could just help us better frame kind of where the revenue base was when you were acquiring it? And just kind of thinking ahead with next year, I think you had already made some comments around expectations for growth. But maybe just help us frame what to expect as this business is included in now?

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Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [40]

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Kristen, it's Barb. So you're backing into the revenue numbers, and then for each quarter, that's probably in the right neighborhood. But we do need to -- I want you to think about the fact we've got the purchase accounting impact that has probably taken about -- we're estimating about 1/3 of the overall revenues in the second part of the year, we're going to be sort of discounting that. So the $7 million and $7 million each quarter is sort of after a 30% discount or so because of the purchase accounting. And it's just going to suppress the top line growth for a little bit of time until we get through a sale cycle and we get into normal treatment of revenues as new orders are coming in. So that's how you should think about the top line from a Voalte perspective. Going back to the core excluding Voalte, I just want to go back and talk about it. So the beginning of the year, we set guidance of 4% to 5%. And we've had a very strong first half of the year that's been driven predominantly by the U.S. as the International business has had more difficult comps as we've talked about. As you think about the second half of the year, we're going to start to see more difficult comps, especially in Q4 in the U.S. business. And that really goes back to the extraordinarily strong performance we saw in Monarch and Centrella towards the end of fiscal year '18. International is going to have easier comps and you're going to see more growth coming through on International, as John talked about. But the delta between the 2 does mean that you'll get a slightly lower core growth rate in the second half of the versus the first half of the year, just the mix of that business as you work it through. But for the full year, we feel really good about the fact that we're coming out at the high end of our core growth guidance. And feel really good about our ability to demonstrate this year, the mid-single-digit core growth that we aspire to the beginning of the year and we're delivering on the higher end there. So that's how I'd ask you to think about sort of core growth and the mix of the growth drivers throughout the fiscal year '19.

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Kristen Marie Stewart, Barclays Bank PLC, Research Division - Research Analyst [41]

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Okay. Yes. Just to clarify that the $7 million that I was calculating was based off of a full second half number because I think that you had said 50 basis points to the second half. So you're saying that the $7 million was the run rate that it was on a quarterly basis as previously reported. But because of the revenue recognition, it's going to be different?

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Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [42]

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Kristen, thank you very much for that clarification. I want to make sure we're really clear. When we talk about 50 basis points, it's 50 basis points on the full year growth rate, that's all going to come through in the second half of the year. My apologies if I wasn't clear earlier. You're absolutely right. So that's how you get back to $7 million and $7 million in each quarter. Just take your number and double it.

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Kristen Marie Stewart, Barclays Bank PLC, Research Division - Research Analyst [43]

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Okay. Okay, that makes perfect sense. And then just to -- also just further clarify, John, I think on the comments just with the lower end with Front Line Care and also on, I guess the -- those -- what is it, Surgical Solutions business -- too much multitasking this morning for me. And so the lower end there that you're expecting now 4%, that is basically all or mostly attributable to kind of the first half International performance? Because it sounds to me like you're saying that, that part of the business should accelerate in the second half. So I'm just sort of confused why it's now lower, and I just want to make sure I fully understand that.

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John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [44]

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Yes. That's correct, Kristen. It's primarily attributed to the first half performance. Obviously, our -- to the first half of the year below what we expected to be on a full year basis for Surgery. And we're at the lower end of where we expected to be for Front Line Care, and that's primarily driven by our International performance.

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Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [45]

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And also very strong comps. Remember, very strong comps for Front Line Care in U.S. in Q4.

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John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [46]

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Yes.

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Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [47]

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So you get both of those pieces.

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Kristen Marie Stewart, Barclays Bank PLC, Research Division - Research Analyst [48]

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Okay. And the current trends within International that you're seeing, does that change the opportunity in your mind longer term at all in terms of seeing more growth coming out of International? I know you touched a little bit on it in prior questions. But this seemingly was kind of one of your real strong beliefs that bringing into Hill-Rom from the experience you had at Bard and really looking to expand International, which has been a tough area for Hill-Rom as we continue to see.

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John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [49]

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Yes. It doesn't change my confidence and belief in the future for what we can get out of International. It's been -- you have to -- I think in the current context of our portfolio, you have to look at International over a slightly longer period of time and quarter-to-quarter. That's why we try and think about in terms of half year and full year. And when you look at it that way, it's been a pretty consistent underlying 3% grower. We definitely believe with high confidence that we can drive higher growth there with an emerging market investment. And we're turning those on as we speak. And we believe that proof will be in the pudding in the coming quarters that we can move that to a higher level.

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Operator [50]

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Ladies and gentlemen, this concludes today's conference call with Hill-Rom Holdings, Inc. Thank you for joining.