U.S. Markets open in 21 mins

Edited Transcript of HRC earnings conference call or presentation 1-Nov-19 12:00pm GMT

Q4 2019 Hill-Rom Holdings Inc Earnings Call

BATESVILLE Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Hill-Rom Holdings Inc earnings conference call or presentation Friday, November 1, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

================================================================================

Conference Call Participants

================================================================================

* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Frederick Allen Wise

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

* Kristen Marie Stewart

Barclays Bank PLC, Research Division - Research Analyst

* Lawrence Soren Keusch

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

* 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

* Michael Stephen Matson

Needham & Company, LLC, Research Division - Senior Analyst

* Robert Adam Hopkins

BofA Merrill Lynch, Research Division - MD of Equity Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and welcome to Hill-Rom's Fiscal Fourth 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.

Now I'd like to turn the call over to Ms. Mary Kay Lalonde (sic), Senior Vice President -- Ladone, Senior Vice President, Corporate Development, Strategy and Investor Relations. Ms. Ladone, you may begin.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, and good morning. Thanks for joining us for our Fiscal Fourth 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 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.

This morning, we have a lot of ground to cover. We'll be discussing our fourth quarter and full year 2019 financial results and our 2020 guidance. We will then switch gears and highlight our new 3-year financial outlook through fiscal 2022 before opening up the call for Q&A. We've included additional details in a comprehensive presentation that can be accessed on the Investor Relations page of our website at Hillrom.com under events and presentations.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Mary Kay. Good morning, everybody. Let me start by saying 2019 was a very successful year for Hill-Rom. We concluded our fiscal year with strong broad-based momentum across the portfolio in both the U.S. and International. In Q4, we achieved 8% core revenue growth and 11% adjusted EPS growth, excluding stock-based comp in both periods. Once again, these financial results exceeded expectations.

For fiscal 2019, adjusted earnings of $5.08 per diluted share reflects the sixth consecutive quarter of core revenue growth in mid-single digits or higher. New product revenue was more than $450 million and adjusted operating margin was 17.8%. Margin expansion was driven by multiple factors. These include: Favorable mix from new products, accretive M&A, portfolio optimization efforts, efficiencies from our manufacturing and operations team and SG&A leverage. Importantly, disciplined execution more than offset tariffs, near-term dilution related to surgical consumable divestiture and discrete onetime costs in the fourth quarter. We are also investing back in the business to bolster durable top line growth over the long term.

The Hill-Rom team has delivered each and every quarter this year, consistently achieving financial results above expectations on both the top and bottom line and setting a solid foundation for the future success in 2020 and beyond. Our category leadership strategy and 4 strategic priorities continue to deliver significant value to patients, caregivers and shareholders. I couldn't be more pleased with the execution of our team to deliver impressive core revenue growth of 8% in Q4 and 7% for the full year. Contribution from acquisitions accelerated in Q4 by adding more than 150 basis points to growth and 80 basis points for the full year.

One of the most exciting highlights was the impact of new product innovation on our top line. We delivered more than $450 million in new product revenue for 2019 compared to $300 million last year, exceeding our 2020 objective 1 year early and materially above our goal. While some revenue is cannibalizing, the incremental contribution from new products was about 300 basis points for the year.

Performance overall is being driven by 8 key products across all 3 businesses. New products launched in 2019 include RetinaVue 700 Imager, EarlySense and WATCHCARE. With several additional new products in the pipeline, we expect durable growth from new products to continue well into the future.

Performance in Q4 was balanced geographically. U.S. growth was 9%. Both Patient Support Systems and Surgical Solutions grew in double digits, and this more than offset anticipated difficult comps in Front Line Care, primarily due to the pent-up demand as we launched the Monarch Vest in the U.S. last year.

International growth of 7% is the highest level achieved in 7 quarters and it was powered by performance across all 3 businesses in Asia Pacific, Latin America and EMEA.

Now let me take a moment to review the performance by business at constant currency rates. First, Patient Support Systems revenue grew 11% in Q4 while core revenue advanced 14%. This is the highest rate of the year despite a very challenging comp in Centrella last year. Excluding Voalte, the business grew 11%, driven by positive contributions from across the broad portfolio of connected care solutions and services, including care communications and Smart beds. This momentum continues to reflect the stable capital spending environment, where the current mix is favorable to our portfolio. We currently see no signs of this trend changing.

Our detailed analysis of historical hospital capital spending highlights a stable and growing environment since the financial crisis ended in 2009. Historically, the U.S. Med-Surg category has been the most sensitive segment, vulnerable to capital spending shifts. And today, our portfolio is much more diverse and resilient than it was in the past. This category only represents 10% or less of our total revenue.

For the year, Patient Support Systems core revenue growth was 10%, reflecting a strong market response from customers as they embrace Hill-Rom's connected care solutions. With a continuum from Smart bed to smartphone, we are simplifying communications, improving workflows and delivering better outcomes across health care. With more than 1 million devices that can be connected at the point of care and future digital product opportunities, Hill-Rom has created a significantly differentiated offering that provides valuable, real-time clinical data and insights that will drive value by improving workflow, safety and quality.

Q4 Front Line Care revenue declined 1%. As expected, the prior year U.S. growth rate of 8% made for a challenging comparisons. Excluding this impact, Front Line Care revenue increased 3%. Contributors to growth came from international growing at 7%, along with respiratory health products, thermometry and the Vision portfolio. For the year, Front Line Care grew 3%.

Lastly, Surgical Solutions Q4 revenue declined 6%, reflecting the divestiture of surgical consumables. Core revenue however advanced 7 -- sorry, 11% with double-digit growth in patient positioning and select OR equipment and a record number of quarterly placements of the Integrated Table Motion for the da Vinci robot. For the full year, surgical core revenue growth was 5%.

As you know, in 2019, we continued to successfully reshape our portfolio through strategic growth-oriented acquisitions and select divestitures of low-growth businesses. In 2016, we've divested -- since 2016, we've divested more than $300 million of annualized noncore, nonstrategic revenue. While this has muted reported revenue growth, our fourth quarter results are an encouraging indication that our focus on innovation, along with these strategic portfolio moves, are contributing to top line acceleration. As we've mentioned, 2020 is the last fiscal year with noncore revenue.

The acquisition of Breathe Technologies and Voalte represent excellent examples of how we plan to strategically deploy capital to advance category leadership in higher-growth, higher-margin categories while adhering to our rigorous strategic and financial criteria to generate attractive returns.

It's still early days, but Voalte integration has remained on track. Voalte in particular continues to exceed expectations with strong revenue growth. We are also beginning to uncover commercial synergies as we expand our care communications market leadership and drive incremental value over the long-range outlook.

And with the Breathe Life2000 Ventilator, we are looking forward to leveraging our vertically integrated direct commercial model in a new, attractive market with this disruptive noninvasive respiratory therapy for patients in both the acute care and home settings.

Lastly, the divestiture of surgical consumables underscores our decision to exit a business that was a headwind to our growth aspirations and strengthens our ability to focus resources and capital toward the future Hill-Rom. Since the divestiture does not qualify for treatment as discontinued operations, we are absorbing the related earnings dilution in our fiscal '20 financial guidance. Excluding the divestiture in the base year, we expect to deliver 11% to 13% adjusted earnings per diluted share in fiscal '20.

In summary, we are exiting 2019 from a position of strength and momentum. We're energized by our progress and look forward to 2020 and beyond, another chapter in our transformational journey.

Today, we unveiling a compelling 2020 and 3-year financial outlook, a multi-year plan of durable mid-single-digit revenue growth, double-digit earnings growth and strong cash flow. This plan includes the benefit of new product momentum, emerging market penetration and value creation from recent M&A. We also included transformational investments in our IT infrastructure and commercial capabilities to sustain long-term top line growth and enhance profitability. We look forward to providing additional details later in the call today.

Finally, as I reflect on my first year as CEO, I'm extremely proud of our progress and what we've accomplished. I want to personally acknowledge the global team at Hill-Rom for their unwavering commitment to our mission and for their winning spirit. At Hill-Rom, our passion continues to be on enhancing outcomes for patients and caregivers, providing connected and advanced solutions that adds significant value to the delivery of health care across all care settings, from the hospital to the surgical suite to the physician's office and at home. As we look to the future, we will continue to build on this solid foundation in pursuit of our vision of advancing connected care.

Thanks, and let me now turn the call over to Barb.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, John, and good morning, everyone. Our commentary this morning will focus on fourth 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.

For the fiscal fourth quarter, under revenue accounting standard ASC 606, we reported GAAP earnings of $0.41 per diluted share. These results include after-tax special items related to intangible amortization, acquisition and integration cost and other special charges. Adjusted earnings of $1.69 per diluted share exceeded our guidance range of $1.64 to $1.66 per diluted share.

I will now review the quarter by P&L line item, starting with revenue. For the fiscal fourth quarter, reported revenue of $783 million increased 3%, 4% on a constant currency basis. Core revenue advanced 8%, exceeding our guidance range of approximately 5% core growth. Acquisitions contributed more than 150 basis points, so excluding acquisitions, core growth was 6%.

Adjusted gross margin of 49.9% expanded 30 basis points over the prior year, driven by execution across all 3 businesses with tremendous support from our global operations team. Gross margin expansion continues to benefit from positive product mix, including the impact of new products, accretive M&A as well as operational improvement.

Collectively, operational performance provided flexibility to once again absorb tariffs and raw material inflation and offset discrete onetime cost of approximately $4 million or $0.05 per diluted share. Excluding these onetime costs, gross margin expanded 80 basis points for the quarter and for the year, in line with our expectations.

R&D spending for the quarter was $36 million, reflecting our ongoing commitment to innovation and investments in key programs to drive future growth. Adjusted SG&A of $191 million increased 3% due to strategic investments primarily in emerging markets as well as the impact of recent acquisitions.

Our adjusted operating margin in the fourth quarter was 20.9%, reflecting an improvement of 30 basis points compared to the prior year. Excluding the onetime cost mentioned earlier, operating margin expanded 80 basis points for the quarter and 100 basis points for the year.

The adjusted tax rate was 19.5%. Stock-based compensation was a benefit of $0.04 per diluted share in the quarter, presenting a significant headwind when compared to the $0.15 benefit last year. So bottom line, adjusted earnings for the fourth quarter increased 3% to $1.69 per diluted share. Excluding stock-based compensation, earnings per share increased 11%.

Now turning to cash flow. Cash flow from operations for the year was $401 million. Capital expenditures totaled $73 million. And as a result, we generated free cash flow of $328 million, which is 7% higher than last year.

In terms of the balance sheet and financial leverage, our debt-to-EBITDA ratio at the end of September was 3.2x, and we returned $177 million to shareholders through dividends and share repurchases during the 2019 fiscal year.

Let me conclude this portion of the call with our guidance for fiscal 2020. First, for the full year, we expect revenue growth of 1% to 2%, both on a reported and constant currency basis. Core revenue is expected to be in the 5% to 6% range. Excluding the incremental benefit from acquisitions, core revenue growth is expected to be in the 4% to 5% range.

Noncore revenue totaled $150 million in 2019 and is expected to total approximately $25 million in 2020. The vast majority of the year-over-year decline is attributed to the completion of the 2019 surgical consumable divestiture. The remainder relates to the pending exit of the international surgical OEM products, which we plan to complete before the end of 2020. As we have mentioned, 2020 is the last year we will report noncore revenue as core and constant currency growth rates begin to converge in 2021.

From a profitability standpoint, we expect adjusted gross margin to expand 100 to 150 basis points. We expect R&D to increase in low single digits, representing approximately 5% of sales. We expect adjusted SG&A of approximately 27.5% of sales. This reflects the impact of recent M&A transactions, investment in key growth initiatives as well as business optimization savings.

Our guidance also includes a step-up investment related to a global IT transformation, including an enterprise resource planning effort to consolidate and streamline our IT systems. This multi-year investment will modernize and transform the way we do business, improve customer service and our customer's experience as well as drive future operating efficiencies and incremental savings by year 3 of our new financial outlook.

As a result of solid gross margin expansion and strategic investments, we expect an adjusted operating margin of approximately 18.5%... With savings from our recent debt refinancing, we expect other expense, which includes interest, of $75 million to $80 million. And lastly, we expect a tax rate of approximately 20% and a share count of 67.7 million shares. This translates into an adjusted earnings guidance range of $5.46 to $5.56 per diluted share. On a reported basis, adjusted earnings per share growth is expected to be in the 7% to 9% range. When excluding the impact of the surgical consumable divestiture, adjusted earnings per share growth is expected to be in the 11% to 13% range.

From a cash flow perspective, we expect operating cash flow of approximately $430 million, including the impact of transaction-related outflows and capital expenditures of approximately $100 million, which includes the first year of our IT investment. This translates into free cash flow guidance of approximately $330 million.

For the fiscal first quarter, we expect revenue to be comparable to the prior period -- prior year period on both a reported and constant currency basis. Core revenue is expected to increase 5% to 6%. Excluding acquisitions, we expect core revenue growth of approximately 4%. We expect adjusted earnings, excluding special items, of $1.07 to $1.09 per diluted share.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Barb. At this point, I'd like to turn to our 3-year outlook through 2022. As a reminder, details are also available in our earnings presentation posted to our website.

For those of you that have followed Hill-Rom, you know that we have significantly diversified our business, enhanced our value propositions and improved our durable growth profile through deployment of both organic and inorganic investments, leading to an exciting and compelling transformation. In fact, this year, you could see an updated brand for the company reflecting these changes.

We have established a strong track record of performance that has consistently met or exceeded expectations, and we are entering 2020 with solid momentum and high confidence. Our objective today is to share with you how we plan to sustain this elevated level of performance as we execute our plans. With a solid 2019 foundation, clear strategy and seasoned leadership team, we will continue to drive enhanced value by executing on our 4 strategic priorities.

First, let me start with category leadership to accelerate top line growth with innovative new products and solutions. We continue to focus on high-value, high-growth and high-margin categories where organic R&D efforts can drive market -- can drive growth above the market. With a solid base of more than $450 million in new product revenue in 2019, we expect to launch 5 to 6 new products each year through 2022. New product launches will result in the contribution of approximately 200 basis points of growth annually over the 3-year plan.

Our second objective is international expansion and driving penetration in emerging markets. Enhancing access to care in emerging markets is a source of untapped potential for Hill-Rom. This is not -- this not only represents a significant growth opportunity, it will be a key driver of reducing quarterly variability across our total international business.

Today, international represents approximately 30% of our global revenue and emerging markets represents only 9% of our global revenue. As emerging markets provide increased access to quality health care, patients will benefit from our company's unique and competitive offering in select product areas, and recent investments will further strengthen Hill-Rom's competitiveness.

As mentioned, we are in the early stages of reinvigorating our commercial operations in these markets with new leadership, organizational capabilities and a focus on key strategic products. We expect meaningful growth acceleration over this period. Over the next 3 years, emerging market growth is expected to increase to high single digits in 2020 and ramp up to double digits thereafter, adding approximately 100 basis points of top line growth annually over this 3-year period.

Third, M&A. It's a key component to our strategy, and we have made great progress in strengthening our portfolio. The recent acquisitions of Voalte and Breathe create a durable new source of growth over a multi-year period. Additional M&A opportunities exist to drive accretive revenue and enhance margin profile while strengthening our clinical and economic value proposition to our customers. We will continue to be prudent in the evaluation of these opportunities, adhering to our rigorous strategic and financial criteria to generate attractive returns. We expect future M&A to be incremental to the 3-year plan we are now planning today.

Lastly, we are committed to driving operational execution and strong financial performance. Our 3-year outlook includes a core revenue growth of approximately 5%, double-digit earnings growth and significant cash flow generation. The P&L profile reflects a commitment to driving value by continuing to stay focused on both organic and inorganic investments that are already completed to accelerate top line growth while improving our operating margin profile.

Given our confidence, we elected to take a multi-year investment to transform our IT information systems, including enterprise resource planning initiative. And while this is expected to be modestly dilutive to operating margin in the near term, we believe that the time is right now to execute on this decision and position us for future growth and success.

So with this as a backdrop today, we are providing details on our financial outlook through 2022. Let me turn the call back over to Barb, and hopefully, her voice can hang in there for the rest of this call and before we open the call up for Q&A.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, John. It is my pleasure to present details regarding Hill-Rom's financial outlook through 2022. We have a compelling vision and want to ensure that you have a clear understanding of how it is expected to manifest itself in the financial performance of Hill-Rom over the next several years. Before we get into the details, let me take a moment to review the key assumptions included in our projections.

First, we assume no major changes to the global macro environment. We are assuming persistent competitive conditions and modest price pressures in select areas of the portfolio. We also assume a stable hospital capital spending environment in the United States. As we've discussed, reported revenue incorporates a headwind related to the nonstrategic assets we have exited, including the surgical consumable divestiture in 2019 and the expected exit of the international surgical OEM products in 2020. This noncore revenue totals approximately $150 million in 2019 and $25 million in 2020.

This outlook assumes the permanent repeal of the medical device excise tax, constant foreign exchange rates and excludes unusual nonrecurring items and special charges. We are not including any benefits from future M&A nor any incremental impact from additional tariffs or potential health care, government or tax reform.

And now given these assumptions, let me describe the 2022 financial objectives. With fiscal 2019 serving as the base year, we expect core revenue to grow at a rate of approximately 5% on a compound annual basis through 2022. This growth is inclusive of recent acquisitions as these acquisitions anniversary early in the outlook and their incremental 2020 benefit is negligible to the 3-year revenue compound annual growth rate. As mentioned, we expect the nonstrategic revenue of approximately $150 million in 2019 to be a headwind to the reported top line compound annual growth rate by approximately 100 basis points. Therefore, reported revenue is expected to grow approximately 4% on a compound annual basis at current foreign exchange rates.

Core growth and constant currency growth begin to converge in 2021. In addition, we expect very balanced core growth across the 3 businesses, each growing in mid-single digits on a constant currency basis over the planning period. We expect our reported adjusted earnings per diluted share to grow at least 10% on a compound annual basis from 2019 through 2022. Excluding the surgical consumables in the base year of 2019, we expect adjusted earnings per diluted share to increase at least 12% compounded over the 3-year period.

Our accelerated growth and performance is expected to drive significant cash flow, and we expect to generate approximately $1.4 billion in cumulative operating cash flow between 2020 and 2022 with capital expenditures totaling approximately $325 million over this timeframe. Consistent with our strategic objectives, we will continue to deploy a very disciplined approach to capital allocation. As we identify value-creating opportunities, we will not be reluctant to deploy capital and resources towards organic or inorganic initiatives to fuel accelerated profitable growth. In the absence of these opportunities, deleveraging the balance sheet will be our top near-term priority.

In summary, our outlook reconfirms our commitment to durable mid-single-digit top line growth and continued double-digit bottom line growth.

Now for the purposes of financial modeling, we are providing our view, as of today, on the other P&L line items. As you know, due to a wide variety of factors which can materialize over the next 3 years, the shape of the P&L may evolve over time as we manage to our top line and bottom line commitments.

On the margin front, we expect at least 250 basis points of gross margin expansion, achieving the 2022 adjusted gross margin of approximately 52% compared to 49.5% in 2019.

Our model shows adjusted operating margin to expand by approximately 300 basis points to approximately 21% by 2022 from 17.8% in 2019. Gross margin expansion is expected to be driven by new product and geographic mix, the accretive benefit from recently completed acquisitions and improved manufacturing cost and productivity.

In recent years, Hill-Rom has demonstrated an ability to drive strong operating performance while being diligent in managing G&A and driving efficiency across the business. As we continue to focus on driving durable, sustainable top line growth, our 2022 plan includes investments in key initiatives to support this future growth. As a result, we expect SG&A as a percentage of revenue to be approximately 26.5% in 2022 and R&D spending to be approximately 5% of revenue annually.

We have executed well across our business optimization initiatives and are pleased to have already achieved approximately 2/3 of our estimated $50 million in pretax savings over the last few years. As you know, these savings are intended to be reinvested to align resources with key priority growth areas, expand internationally and optimize global capabilities across the business.

We are projecting annual interest expense of $75 million to $80 million, including benefits from our recent debt refinancing and the underlying tax rate for Hill-Rom of approximately 20% over the period. We are also assuming a stable share count of approximately 67.7 million shares.

In summary, we believe this to be a very balanced plan with consistent, durable and sustainable mid-single-digit top line growth and double-digit adjusted EPS growth in each year, including 2020, when excluding the impact of the surgical consumable divestiture. We look forward to updating you quarterly on our execution.

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

--------------------------------------------------------------------------------

John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [7]

--------------------------------------------------------------------------------

All right. Let me wrap up our prepared comments this morning and summarize that our information continues. We're capitalizing on the strength of our core business, focused on accelerating durable and profitable revenue growth and generating strong earnings and cash flow over the next 3 years. New product momentum continues to build. We are advancing our pipeline and penetrating emerging markets. And we continue to pursue M&A transactions that are accretive to our growth and margin profile while generating attractive returns. We have a solid foundation and a great team. With a compelling strategy, disciplined operational execution and financial strength, we are excited about our future and driving value for patients, customers and our shareholders.

So operator, with that, we'll turn over the call for Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) I'd like to remind participants that this call is being recorded, and a digital replay will be available on the Hill-Rom website for 7 days at www.hill-rom.com.

Our first question comes from the line of Matt Taylor with UBS.

--------------------------------------------------------------------------------

Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [2]

--------------------------------------------------------------------------------

So I wanted to ask a little bit about fiscal '20 first. You drove a lot of new product revenue here in fiscal '19. Could you talk about your confidence in being able to continue getting the kind of 200 to 300 basis points contribution from new product revenue in '20? And what are the major drivers of that?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Thanks, Matt. We have a lot of great confidence actually in our product pipeline. We expect to be launching, as mentioned in the prepared comments, 5 to 6 new products per year over the 3-year period. But in fiscal '20 a little more specifically, it's actually more than 6 products, but it's 6 significant product launches that will take place in 2020. They come across all 3 of our businesses, both -- all 3 equally: PSS, Front Line Care and our Surgical business. So those products we haven't, for competitive reasons, kind of disclosed the specifics of them. But we feel really good about the products that are coming in the marketplace and really will help offset some of the Centrella performance that we saw this year.

As mentioned in prior meetings, we do expect the Centrella double-digit growth rate in fiscal '19 to come down to more like a low single-digit to mid-single digital growth rate in fiscal '20. So taking that into account, we feel really good about our 200 basis points of incremental growth that we expect from the new product portfolio in total, with the biggest adjustment there of having a very prudent outlook for the Centrella performance in fiscal '20 off of some really high double-digit performance in fiscal '19.

--------------------------------------------------------------------------------

Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [4]

--------------------------------------------------------------------------------

Got you. And then it sounds like the Voalte and the Breathe acquisitions are doing well and integrating well. Can you talk a little bit more about the outlook for those? What kind of sustainable growth can you drive with those deals? And maybe talk about peak sales or some kind of other measure for us to understand what the longer-term opportunity is there.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. I'll take that question. In Q4, Breathe really was immaterial to comp. It only had 1 month in the quarter, so it wasn't even on the measurability scale in Q4. So all that acquisition growth in Q4 was coming from Voalte, which you would see sequentially growing from Q3 to Q4, which we love. That was our intention when were acquiring the business: It would fit very nicely with our care communications portfolio and we would begin to accelerate the order and revenue performance of that asset and that business. And that's exactly what it's done. In fact, it's beating our expectations. So we're really pleased with how that's performing. There's 2 more quarters ahead of us before that annualizes and rolls into the base organic growth rate. So we're pleased with that.

On the Breathe front, it's early days but the integration is going really well. We just had a big meeting with the combined team a few weeks ago. They are really excited to have this portfolio come together and come to market with a full respiratory health portfolio that now includes a new disease state of COPD. And that, as you know, when we've talk about before, it's the noninvasive ventilation category is a high double-digit grower and it's a large market. And it's a market for us that it is all upside because we've never had a product offering in this category before. So for us to come in with a very substantial sales organization that combines with Breathe and a vertically integrated DME to capture all the value in this opportunity, we're quite bullish on the long-term prospects of building out a respiratory health business for the disease state of COPD and other related diseases, but the COPD is the biggest one.

So pretty excited about those 2 and off to a great start, Matt. Thanks for the question.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

David Lewis of Morgan Stanley is on the line with a question.

--------------------------------------------------------------------------------

David Ryan Lewis, Morgan Stanley, Research Division - MD [7]

--------------------------------------------------------------------------------

Great. Just a couple for me. John, just more quickly on emerging markets. So just kind of LRP versus 2020. And the LRP's sort of calling for double-digit EM growth kind of through the plan, which makes perfect sense. In 2020, is that a realistic expectation for the emerging markets business?

--------------------------------------------------------------------------------

John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [8]

--------------------------------------------------------------------------------

No, we're projecting, David, a high single-digit on emerging markets. We aspire to do better, of course. But -- and we exited the year in Q4 with our emerging markets growing at 8%. So we're exiting '19 in the right position to sustain that performance. That's what's baked into our guidance for fiscal '20. And like I say, we like the way things are tracking with our investments in emerging markets. We would aspire to do better, but what's baked into guidance is a high single-digit number for emerging markets and a low single-digit growth number for established markets, which is probably, given historical performance over a multi-year period, a much more prudent and I guess balanced outlook between the 2 markets of emerging and established.

--------------------------------------------------------------------------------

David Ryan Lewis, Morgan Stanley, Research Division - MD [9]

--------------------------------------------------------------------------------

Okay. And just 2 more quick ones for me. First, just on -- I mean the [there's a little] difference in fiscal '20 [with your] the 5% to 6% guide versus us, it does appear -- I think it's Voalte and Breathe. Is -- for Voalte and Breathe, total revenue contribution for next year is a number in excess of $70 million a decent way of thinking about those 2 contributions? And are there any sort of back half-loaded dynamics to Breathe for us to consider? That's for you, John.

And then for Barb, I just wondered just sort of high level, you think about fiscal 2022, the long-term LRP, there are some differences in terms of kind of gross margin expansion, operating margin expansion. Just wondered if you could talk about how the next 3-year outlook varied for the prior 3-year outlook as it relates to mix-driven benefits on gross margin and the opportunity of -- for middle of the income statement leverage.

--------------------------------------------------------------------------------

John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [10]

--------------------------------------------------------------------------------

Yes. So on the acquisition outlook, we would expect acceleration in the back half of the year with the Breathe acquisition. We really are acquiring a product that was in its very beginning of a product launch. So yes, although it had a base of revenue when we acquired the company of around $10 million, it's almost more realistic to think of it's from the line together. So we expect, as we bring the 2 organizations together and build our sales proficiency, that, that will ramp towards the back half of the year and become a contributor of around 50 to 100 basis points in the back half of the year on Breathe. And as I mentioned earlier, Voalte's going to anniversary mid-year. We like the way it's performing at this point.

So in total, you take it all together, it's about a full 100 basis points, maybe a little more, of contribution from acquisitions over the full course of the year. Maybe 150 basis points when you average the 2 together. So hope that answers your question, David. I'll pass over to Barb.

--------------------------------------------------------------------------------

Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [11]

--------------------------------------------------------------------------------

So your question I think was around how is gross margin and operating margin evolving in the new 3-year outlook versus the prior 3-year outlook.

I think in aggregate, the improvement that we're seeing is very similar in terms of where we're seeing what the improvement looks -- should look like over the next few years. When you think about gross margin, I think the way that I would look at gross margin in the mix there is we've seen over the past couple of years the drivers of gross margin expansion to really be about the product mix. That's been about the businesses we've been exiting as well as the new products we've been launching as well as then the acquisitions that we're bringing in that are also accretive to gross margin. But the emphasis probably in the early part the 3-year -- the old 3-year plan really was probably getting a lift more from the divestitures and less from the new product portfolio moving it forward.

We've also seen a great contribution from productivity over the past couple of years. Going forward, we will continue to see product mix be a big piece of where we're going to see the expansion as well as productivity. But when you think about the product mix, I would really be shifting away from the impact of the divestitures and more about the impact of the new product portfolio and the new product portfolio being of higher gross margin as well as the ramping up of the recent acquisitions that are higher gross margin and their overall contribution over the next couple of years.

So that would be how I would characterize the difference in the gross margin expansion over the past versus the future and what's driving that.

--------------------------------------------------------------------------------

Mary Kay Ladone, Hill-Rom Holdings, Inc. - SVP of Corporate Development, Strategy & IR [12]

--------------------------------------------------------------------------------

David, it's Mary Kay. I just would add to what Barb said in terms of as we look over the 2022 outlook and the margin -- gross margin expansion in particular. We think about just over half is going to come from the new products and mix and M&A and a little bit less than half will come from the productivity improvements that Barb mentioned.

--------------------------------------------------------------------------------

Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [13]

--------------------------------------------------------------------------------

In regards to -- I'm sorry. Did you want to -- the second part of the question was around operating margin. And just a couple of quick comments on operating margin as we think about the next 3 years. We're still projecting a significant expansion on our operating margin, 300 basis points over the next 3 years.

What you'll see though is you'll see some investment on the front end related to IT in particular. And then you're going to see the acceleration of our operating margin expansion in the latter part of the 3-year period as the impact of the IT investment starts to flow through as well as when we see really the greater contribution from the new acquisitions coming through and adding to the operating margin expansion in the latter part of the 3-year plan.

I think with that, we're ready for the next question.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Larry Keusch of Raymond James is on the line with question.

--------------------------------------------------------------------------------

Lawrence Soren Keusch, Raymond James & Associates, Inc., Research Division - MD [15]

--------------------------------------------------------------------------------

Two questions, maybe just starting off for John. Just on the emerging markets and your thoughts through the 3-year LRP. Is this really a China strategy or do you see it broader? And is there any way that you can sort of help us think about how you're thinking about margins for that emerging markets franchise? Is it above the corporate average? Just trying to think about the profitability as you dig in here over the next 3 years on that.

--------------------------------------------------------------------------------

John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [16]

--------------------------------------------------------------------------------

Sure. Yes, thanks for the question, Larry. It's broader than just China. It is an overall emerging markets strategy. However, China is the big -- the biggest opportunity and most material opportunity within that group of geographies. So our definition of emerging markets would be very typical across the sector. We would include LatAm and the Middle East and all of Asia -- all of emerging Asia in that definition as well. So -- but when you look at all of that, the biggest opportunity for us is in China. From a margin point of view, it's actually accretive to the overall corporate margin in total. So we're in the early phases here. As we invest, it's slightly below the corporate level. But as we mature those investments, we would expect it to be above our corporate margin level.

--------------------------------------------------------------------------------

Lawrence Soren Keusch, Raymond James & Associates, Inc., Research Division - MD [17]

--------------------------------------------------------------------------------

Okay. Perfect. And then for Barb, just on the IT platform. I know you've mentioned it a couple of times here, but I guess a couple of questions. Is the right way to think about the step-up in the CapEx in 2020 mostly associated with that ERP system? And how are you thinking about the total investment into the system? And on the other side, how are you thinking about the benefits both just sort of tactically as well as -- or strategically as well as just financially, savings from getting this ERP system in place?

--------------------------------------------------------------------------------

Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [18]

--------------------------------------------------------------------------------

That's a good question. Thanks very much for it. First of all, we believe that the transformation that we're heading into with IT is a key enabler, a key long-term enabler for all 4 of our strategic priorities. So the investment's supposed to take place over the next 3 to 4 years, it's intended to modernize and transform the way we do our business, really improving our customer service and their experience with us. But it will also be driving future operating efficiencies and incremental savings.

The total investment that we're looking at over the next 3 or 4 years, we're estimating to be about $100 million. And that's going to be a mix of CapEx and operating expenses. You are correct that the step-up in CapEx that we're seeing in 2020 is directly correlated with the increased investment we're anticipating in the IT. And then longer term, as we get the transformation moving, we expect to see somewhere between a 20 and 40 basis point expansion in operating margin related to the efficiencies that we get out of this investment.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Bob Hopkins of Bank of America is on the line with the question.

--------------------------------------------------------------------------------

Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [20]

--------------------------------------------------------------------------------

Okay, great. Just a couple of quick follow-ups. Probably just a follow-up on that last one, on the IT transformation. What's the magnitude of the cost running through the P&L, say, in 2020 and 2021?

--------------------------------------------------------------------------------

Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [21]

--------------------------------------------------------------------------------

As we look at 2020, we're estimating approximately $10 million of operating expense related to the IT transformation. It will -- we're still working through our planning, so to say precisely what 2021 will look like is hard to say. It'll probably, in the neighborhood, maybe a couple of million dollars less. But we'll update that as we get closer to 2021.

--------------------------------------------------------------------------------

Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [22]

--------------------------------------------------------------------------------

Okay. And then just 2 more quick ones. On the Voalte side, just curious -- in the quarter, just curious as to what the pro forma growth rate was of Voalte in the fourth quarter. Rough estimates, looks like it might have been approaching 20%, but just curious to see how it did in the quarter on a pro forma basis.

--------------------------------------------------------------------------------

John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [23]

--------------------------------------------------------------------------------

Yes, it's probably a little bit above that number you quoted there, Bob. It's high double digit on an apples-to-apples basis as we look at it. We're really pleased with the performance of the product. We love the way we're competing in the marketplace and the response we're getting from customers around the combination of Voalte plus the Hill-Rom portfolio has been really well received.

As an interesting side note, the care-com business now, while we've been talking all about Centrella all year long, the care-com business has actually been growing at double digits, and it's actually in total larger than the Med-Surg business in total. So care-com is substantially larger as a business segment than our total Med-Surg businesses in the United States.

--------------------------------------------------------------------------------

Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [24]

--------------------------------------------------------------------------------

Interesting. Then one other kind of big-picture follow-up for you, John. And just congrats on a really strong year. Kind of the big-picture question I have is really on the revenue growth guidance in the LRP. Obviously, you sound really bullish on opportunities internationally and opportunities with new products, and yet the LRP growth rate is a little bit below the growth that you're putting up today. Is that just a function of an exceptional year this year? Or are there other headwinds worth calling out in the LRP?

--------------------------------------------------------------------------------

John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [25]

--------------------------------------------------------------------------------

Yes, great question, Bob. And I guess if I would reflect a little bit on the first 6 quarters of being at Hill-Rom, I joined when we were growing at 2% and it's now exiting last year at 8%. So pretty nice acceleration. And on a full year basis, going from 3% in '19 to over 6%, actually 7% this year. So again, nice core revenue acceleration over the year.

As we look forward, especially on a 3-year plan perspective, I think we're -- we'd be well advised to be prudent and balanced and looking at all the puts and takes and things that could happen over a 3-year period. So you'll -- I think you'll see that reflected in our long-range guidance or long-range outlook of 5% top line core growth.

In the near term, we do feel very bullish and confident about our outlook to drive this growth. However, we had a really strong Centrella performance in 2019. It's probably wise, again, to not think we can sustain that kind of high level double-digit growth rates that we saw in the Med-Surg category into '20. So we've adjusted our expectations there as we think about our guidance. And that's really the primary driver. And as new products launch -- they're continuing to ramp nicely, the products that we've launched. And we expect to see the new products launching in 2020 to be starting to perform and contribute, the 6 products I mentioned that we're going to launch in 2020.

So from a headwind point of view, we don't see it. It's all factored in. And really, Bob, about having a very balanced perspective on both the next year as well as the next 3 years.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Rick Wise of Hill-Rom (sic) [Stifel] is online with a question.

--------------------------------------------------------------------------------

John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [27]

--------------------------------------------------------------------------------

Rick Wise of Hill-Rom?

--------------------------------------------------------------------------------

Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [28]

--------------------------------------------------------------------------------

Welcome to the home team.

--------------------------------------------------------------------------------

Frederick Allen Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [29]

--------------------------------------------------------------------------------

The balance sheet. I mean you've done an excellent job of delevering the balance sheet, generating free cash, debt now at 3.2x. And you're projecting over $1 billion -- could be, seems to me, well over $1 billion in free cash flow over the 3-year period. A couple of questions related to that. If debt paydown remains your near-term priority, pending M&A, where would you like to see it sort of stabilize?

And maybe just roll this into a discussion about and as we're thinking about M&A, is the pipeline filled? And do you have any particular priorities there, John? Does it -- are you more inclined, as you look at the 3 businesses, to focus on adding to one more than another? Or no, it's more opportunistic.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Thanks, Rick from Stifel, not Hill-Rom. But listen, I think I mean -- let me -- I'll turn the part of the question over to Barb around leverage. But in terms of strategic priorities of our capital, first and foremost, is M&A. We do see, continue to see, really nice opportunities to build out our category leadership strategy in all 3 businesses. We have a very active process around reviewing our pipeline of opportunities. We're engaged on multiple fronts. Our team there, as you know, has been significantly enhanced and expanded. And it's giving us the visibility into a lot more opportunities than we did even 12 months ago. So I like our optionality and our opportunities there.

And I wouldn't necessarily say we're biasing 1 over the other. There -- I love all 3 of our businesses and it's going to be really depending on what kind of opportunities we see in front of us and which ones we're able to pursue. As you mentioned, I think we have the financial flexibility to do a number of these per year going forward. And this -- the structure of the company and its decentralized approach allows us to work on multiple fronts in parallel while we do this.

So I'll hand it over to Barb for the leverage question.

--------------------------------------------------------------------------------

Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [31]

--------------------------------------------------------------------------------

And thanks for the question on leverage. You're right, we're at 3.2 currently, which is also where we started the year. So we've maintained 3.2 while doing 2 acquisitions and returning nearly $180 million back to shareholders throughout the course of the year, which I think is a testament to our strong cash flow generation.

When we think about a target range, I think that we would -- again, our priority is to fuel M&A. And as John just outlined, we think that we have really good opportunities in front of us. Absent good opportunities, we could see -- seeing our targeted leverage going down to somewhere in the 2.5 range, but we don't see that as a probability in the near term just because we see lots of opportunities out there for us to invest and really drive continued top line growth.

--------------------------------------------------------------------------------

Frederick Allen Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [32]

--------------------------------------------------------------------------------

Great. And just 2 last for me. Just quickly on PSS, your slides emphasize that you're benefiting from solid orders and backlog. Is the right way to read that, that the business, even with the tough comp, is in pretty stable shape on the bed front and you're feeling pretty good? Is that the right takeaway heading into the -- this current fiscal year or the new fiscal year?

And just last, John, if I could. We've talked about some of the potential challenges and headwinds. But if there were upside particularly on the sell side looking at the next few years, is it -- do you think it would come from -- is it better execution? Is it from the new products? Is it from faster o-U. S. emerging market penetration? Or et cetera, et cetera? Or no, it's all of the above?

--------------------------------------------------------------------------------

John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [33]

--------------------------------------------------------------------------------

Yes. Okay. Good questions. And I think first of all on the PSS business, we're really comfortable and confident with our overall portfolio there. It's a very balanced portfolio. I know in the last year, we've talked a lot about Med-Surg and Centrella. But it's a large business, it's very balanced, it's got multiple areas of growth that are -- have been delivering very consistently over the last 6 quarters that I've been here.

In terms of where the future upside or growth is coming from, where we could see that kind of performance. I think the investments we're making in new products, acquisitions and emerging markets are all key focus areas for us. We're very, very intentional about where we're investing and how we're tracking and how we're measuring ourselves there. So again, it comes back to our ability to execute. Our team is very motivated, highly engaged, they're doing a great job. And I think they continue to perform the way they're doing, and we'll be pleased with the outcome versus our guidance.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Matthew Mishan of KeyBanc is online with a question.

--------------------------------------------------------------------------------

Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [35]

--------------------------------------------------------------------------------

John, you have some very strong assumptions for international in your plan. I just want to get a sense of like you said you were kind of reinvigorating it. What went wrong over the last couple of years and kind of how are you fixing it?

--------------------------------------------------------------------------------

John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [36]

--------------------------------------------------------------------------------

Yes. I guess I would start with the premise that they're ambitious plans. I would say they're balanced and appropriately cautious. Our fiscal '20 guidance has baked into it low single-digit growth in the established markets and then exiting with double-digit growth as we get to the back half of the year. So in total for the year, it's high single-digit growth in emerging markets. We're exiting at that level in the emerging markets, so I don't think it's built with any kind of significant risk as we look at fiscal '20.

And when rolling forward in the 3-year outlook, again, I don't think it's an overly ambitious set of expectations. Now that said, I'd love seeing results for a few more quarters before raising expectations on an area that we've had some chronic up-and-down performance around. So let's take it a quarter at a time, see how things progress, and we'll take it from there. But as it is quantified and rolled into our guidance, I feel really good about it.

--------------------------------------------------------------------------------

Matthew Ian Mishan, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [37]

--------------------------------------------------------------------------------

Okay, great. And then sorry for asking this question, but I believe a lot of your people have been brought over from Baxter over the last several years. Have you taken an enhanced look at certain accounting practices that are affecting them? And how confident are you that those issues haven't also been adopted at Hill-Rom?

--------------------------------------------------------------------------------

Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [38]

--------------------------------------------------------------------------------

So I guess I'll take that question...

--------------------------------------------------------------------------------

John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [39]

--------------------------------------------------------------------------------

Were you coming from Baxter?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

First of all, I'm not from Baxter and I'm not aware of anybody on my direct leadership team that came over from Baxter either. So as we think about our accounting practices and our books and records, we're really confident in what we're doing and how we're doing it.

--------------------------------------------------------------------------------

Mary Kay Ladone, Hill-Rom Holdings, Inc. - SVP of Corporate Development, Strategy & IR [41]

--------------------------------------------------------------------------------

Great, Jack. We have time for 2 more questions, Jack.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Mike Matson of Needham & Company is on the line with a question.

--------------------------------------------------------------------------------

Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [43]

--------------------------------------------------------------------------------

Just wanted to start with -- I guess with Breathe's technologies. So I think the noninvasive ventilation category is part of the round 2021 of competitive bidding. So does that affect the Breathe products? And can you just comment on whether or not that you bid there and what you kind of expect to happen with reimbursement, how that will affect that business?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. So we're participating in competitive bidding for that product category. It is part of the competitive bidding process. We knew that going to the acquisition. It doesn't take effect until 2021. There's no impact whatsoever for fiscal '20. And we feel good about it, where we stand and what our opportunities are in the competitive bidding front.

The NIV market, again as I've mentioned, especially NIV in the home, which is where we're focused more than the -- probably a little more than the acute care category, is a high-growing double-digit market for us for the overall. And we're going to be entering the space from a low market share position.

--------------------------------------------------------------------------------

Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [45]

--------------------------------------------------------------------------------

Perfect. That's helpful. And then just on the Smart bed features like EarlySense of WATCHCARE, can you give us an update? Are there any kind of metrics there you can give us in terms of adoption and impact on growth in the PSS business?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. I think it's -- first of all, I think it's a really important differentiator to our overall product offering, the Smart bed through to the smartphone and that whole ecosystem and conductivity and future-proofing investments that customers are making. In terms of its revenue contribution in fiscal '19, it hasn't been really that material, both of those products, but we do expect them to ramp as we enter '20 and start seeing a dedicated sales team focused on that with some dedicated specialists.

I will tell you then, in areas where we have turned on and activated the EarlySense device on our products, we've gone back some incredible stories of patients that we're rescuing and detecting changes in heart rate and respiratory rate over time as the continuous sensor is deployed and activated. So bringing that type of alert and alarm on to the Nurse Call system and not just at the bedside, and then in the future on to the Voalte platform, is really going to be a very compelling value proposition and game-changer in the marketplace for really helping rescue patients that are in deterioration.

And also as we think of our digital profitable offerings that we'll be rolling out later in fiscal '20 that will be directed at patient deterioration and falls, that same kind of connectivity and notification systems will be deployed on the care communications platform.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

Kristen Stewart of Barclays is online with your last question.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I have a quick I guess clarification one for Barb and then a big-picture one. The onetime issue in gross margins, can you just clarify what that was? And is it something that could I guess occur again?

--------------------------------------------------------------------------------

Barbara W. Bodem, Hill-Rom Holdings, Inc. - Senior VP & CFO [49]

--------------------------------------------------------------------------------

Kristen, it's Barb. Thanks for the question. No, they really were onetime items. We had some discontinued projects during the quarter as well as some small inventory adjustments that were really one-offs in the quarter. They amounted to about $4 million in total. But not something that we would expect to be a reoccurring theme, that's why we called them out.

--------------------------------------------------------------------------------

Kristen Marie Stewart, Barclays Bank PLC, Research Division - Research Analyst [50]

--------------------------------------------------------------------------------

Great. And then I guess just kind of big picture I guess kind of going back to I think it was Bob's question on the 5% LRP. I guess I'm just having a little difficult time and maybe I guess it's a little bit of conservatism as you were saying, John.

As I think through just some of your numbers that you have in here just with respect to the new products going to $750 million and that's contributing 200 basis points annually and then emerging markets contributing 100 basis points and just Voalte's being accretive to growth and the opportunities with Breathe, you've done a lot from a portfolio management and acquisitions seem to positive, doing a lot of the new products front. You've got all these things moving very favorably. I'm just kind of surprised that 5% is the number.

And thinking ahead to the extent that you guys are doing more things on the M&A side, I know you said that those are likely to be additive. I want to just make sure that those are really additive to the LRP because it seems like you've been doing a lot, but it seems like a lot of running and standing kind of still I guess on the 5% growth. So just kind of walk me through I guess how I should really think about the growth prospects for the company.

--------------------------------------------------------------------------------

John P. Groetelaars, Hill-Rom Holdings, Inc. - President, CEO & Director [51]

--------------------------------------------------------------------------------

Yes, thanks. Great question, Kristen, and something obviously we spend a great deal of time around. We feel really good about where we are, so let me just start with that, really good, and the tremendous amount of confidence and conviction on the go-forward outlook and our ability to execute against that outlook. That said, we -- just to confirm, any additional M&A will be on top of what we've outlined today. It's not going to get somehow rolled into our guidance and our outlook here.

And then secondly, I think until the one part of the weighted average market growth rate, if you will, that's kind of holding us back a little bit is our more established markets internationally. And we've got a little bit of work to do there. Once we can get those performing closer to the company average in mid-single digits, I think there's room for increased bullishness on the outlook. But until that time, I think there's a lot of things that can happen over a 3-year period, and we're going to be prudent and balanced.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

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