Hill-Rom Holdings, Inc.
Q1 2017 Earnings Call Transcript

Published: 27 Jan 2017

[Operator:]

Good morning and welcome to Hill-Rom's Fiscal First Quarter Earnings Conference Call. During the presentation all participants will be in a listen-only mode. At the end of management's prepared remarks we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded by Hill-Rom and is copyrighted material. It cannot be recorded, rebroadcast, or transmitted without Hill-Rom's written consent. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Mary Kay Ladone, Vice President, Investor Relations at Hill-Rom. Ms. Ladone, you may begin.

[Mary Kay Ladone:]

Thanks, Kaley, and good morning, everyone, and thanks for joining us for our fiscal first quarter 2017 earnings conference call. Joining me today are John Greisch, President and Chief Executive Officer of Hill-Rom; and Steve Strobel, Chief Financial Officer. On today's call, John will discuss highlights for the quarter and overview for the full year. Steve will then present additional detail on the company's financial performance for the quarter and financial outlook for 2017 before opening the call up for Q&A. I'd also like to mention that in addition to the press release issued this morning, we have posted a supplemental presentation, which can be accessed on the Investor Relations page of our website at hill-rom.com under Events & Presentations. So, with that introduction, let me begin our prepared remarks this morning by reminding you that certain statements contained in this presentation are forward-looking statements rather than historical facts and are subject to risk and uncertainties 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, in today's call, non-GAAP financial measures will be used to help investors understand Hill-Rom's ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available as part of the presentation on our website. Now, I'd like to turn the call over to John.

[John Greisch:]

Thanks, Mary Kay. Good morning everyone and thanks for joining us today to discuss our first quarter financial results and outlook for the second quarter and full year 2017. I will begin with some brief comments on our performance before turning the call over to Steve for additional details. After that we will open the call up for Q&A. Reflecting on the quarter, we continued to execute against our strategic priorities, leveraging our strong global brands and geographic footprint, driving innovation, transforming the portfolio with an accretive acquisition and a non-core divestiture and delivering solid earnings through disciplined financial management. As we announced earlier this month worldwide revenue of $637 million declined 3% on a constant currency basis. In addition to a difficult comparison to the prior year, growth was impacted by the timing of certain international and U.S. distributor orders, and lower revenue from businesses recently divested or that we may divest. Importantly during the quarter we experienced stable customer demand across our U.S. Patient Support Systems portfolio with a healthy increase in orders and backlog, supporting our expectation for solid U.S. growth for the remainder of the year. We saw renewed momentum in our Surgical Solutions business with double-digit growth in the United States, while Front Line Care performance was challenged by the change in Welch Allyn’s fiscal year and distributor order timing. With consistent growth in end user demand, our full year revenue expectation for Front Line Care continues to be mid single-digit growth. As expected, revenue outside the U.S. was lower than the prior year, but as we look forward we expect international performance to return to growth beginning in the second quarter driven by improvements in several key geographies. Despite the decline in revenue and unfavorable foreign exchange, adjusted gross margin expanded by 40 basis points and adjusted operating margin improved by 140 basis points reflecting ongoing execution of our margin expansion plans and disciplined cost management. As a result, adjusted earnings of $0.75 per diluted share increased 10% reflecting our improved ability to manage through short-term revenue volatility and deliver strong earnings growth. Before turning the call over to Steve I would like to take a moment to highlight some of the outstanding progress we have made in expanding our capabilities, capitalizing on new product introductions and partnering with customers to enhance outcomes for patients and their caregivers. Most notably, earlier this month we announced an agreement to acquire Mortara Instrument, a leader in diagnostic cardiology and patient monitoring technology for $330 million in cash. The net consideration is approximately $290 million, including the present value of a $40 million tax benefit. This strategic transaction expands Hill-Rom's diagnostic cardiology franchise, and complements and enhances Welch Allyn’s presence in vital signs monitoring. The transaction also has compelling financial benefits as it accelerates revenue growth, is accretive to adjusted gross and operating margins, provides approximately $10 million in annualized cost synergies, is immediately accretive to adjusted earnings, and is expected to deliver double-digit ROIC by year three. We look forward to closing the transaction during our fiscal second-quarter. In addition, we continue to make internal investments with the development of innovative products and service solutions, while capitalizing on a number of product introductions to drive accelerated future growth. A sample of this is our launch of the Welch Allyn Home Hypertension Program. This enables patients to monitor their blood pressure outside the physician office using the clinically-trusted connected Welch Allyn Home Blood Pressure Monitor. We are also seeing good traction with RetinaVue 100 Imager, a breakthrough handheld technology for primary care settings, which makes diabetic retinopathy screening simple and affordable. Diabetic retinopathy is a leading cause of blindness among working-age adults because it often goes undetected. With early detection and treatment, as much as 95% of vision loss cases can be prevented. Since the product was launched last year, physicians have screened over 70,000 patients with RetinaVue and have diagnosed more than 5000 patients with potential vision complications, improving patient outcomes through early detection and treatment. During the quarter, in our PSS business, we introduced the Envella Air Fluidized Therapy bed with an advanced surface that provides the highest quality wound care, accelerated healing and reducing complications, leading to improved clinical outcomes and an overall lower cost of care for patients with complex wounds. We also continue to be pleased with the positive reception and increased placements of the Integrated Table Motion for the da Vinci Xi Surgical System. Revenue exceeded our expectations during the quarter and contributed to the strong momentum in the surgical solutions business. The Surgical System and table seamlessly integrate, allowing surgeons and anesthesiologists to make a comprehensive range of table adjustments easily and efficiently during surgery, representing another example of how Hill-Rom advances patient safety and addresses significant challenges our customers face. We also continue to leverage our strong brand equity and customer relationships. We are starting to capture revenue synergies with recent success in bringing together Hill-Rom's acute care relationships through a new business with Welch Allyn’s differentiated vital signs portfolio, which improves patient satisfaction and delivers enhanced connectivity to the [EMR]. Lastly, we continue to optimize our portfolio, investing to accelerate growth of higher margin core brands, while divesting non-core assets. During the quarter, we completed the divestiture of the architectural products business, which generated revenues of approximately $25 million in 2016. The architectural products and WatchChild divestitures, which are now behind us, along with other potential actions provide an opportunity to direct resources, investment and focus on the core growth platforms that fit our long-term strategy. To summarize, we are pleased with the continued execution against our strategic priorities and are confident in our ability to achieve our 2017 financial guidance and long-term objectives. Our core revenue growth is expected to accelerate to the 4% to 5% range beginning in the second quarter and with strong margin expansion opportunities ahead of us, we expect to deliver double-digit earnings growth for the year in line with our previously provided full-year guidance. Our financial results and outlook reflect our commitment to drive sustainable performance through focused commercial and operational execution and strategic investments [Indiscernible] customers and shareholders. With that, let me turn the call over to Steve.

[Steven Strobel:]

Thanks, John, and good morning everyone. As mentioned in the press release, we reported GAAP earnings of $0.36 per diluted share compared to $0.07 in the prior year. Adjustments to reported earnings primarily include intangible asset amortization, acquisition, integration, and other special charges that are not reflective of ongoing up performance. On an adjusted basis, earnings of $0.75 increased 10% and we are in line with our previously issued guidance. These results reflect stable U.S. customer demand and continued margin expansion, which allowed us to absorb the negative impact from foreign exchange and deliver double-digit earnings growth. Now, let me briefly walk through the P&L before turning to our financial outlook for the second quarter and fiscal year 2017. Starting with revenue, for our fiscal first quarter revenue of $637 million declined 4%, and on a constant currency basis declined 3%. As previously disclosed, this performance can be attributed to three transitory factors. First, as expected we faced a difficult comparison to the prior year due to a change in Welch Allyn’s fiscal year-end, a large customer purchase last year in Patient Support Systems, and a challenging macroeconomic environment in international markets. Second, revenue growth was impacted by the timing of certain international and U.S. distributor orders, primarily in the Front Line Care business. And lastly, we generated lower revenue from businesses we recently divested or may divest, which impacted the top line growth by approximately 100 basis points in the quarter. As we look forward, given a stable U.S. environment and more favorable international comparison we expect accelerated revenue growth for the remainder of the year. Before moving on to each of these segments, let me remind you that during the first quarter we transitioned to a new reporting format with three global businesses, Patient Support Systems, Front Line Care and Surgical Solutions with the major change being that Patient Support Systems now combines the previous North America PSS and international PSS segments into one global business. As I discuss each business, I will address revenue growth on a constant currency basis only, which we believe provides investors the best assessment of underlying operational performance. Starting with Patient Support Systems. First quarter revenue on a global basis of $335 million declined 1%. Domestic revenue, which accounts for almost 75% of the total business, grew 3% despite a difficult comparison with a large customer order from last year and lower revenue from divested businesses. Collectively these factors impacted U.S. growth by more than 200 basis points, reinforcing our view that our underlying business continues to be stable. Furthermore, U.S. orders in the quarter increased 4%, while the backlog increased 7% versus the prior year after adjusting for divested businesses. Importantly, U.S. performance continues to be strong driven by strong growth of higher margin products, including Clinical Workflow Solutions, specialty frames and our patient handling and service offerings. International revenue declined 11% driven primarily by lower revenue from the long-term care business in Europe and challenging comparisons including in the Middle East. Moving to Front Line Care. Global revenue for the quarter was $202 million and declined 8%. Domestic revenue was lower by 5%, while international revenue declined 16%. As a successful first year as part of the company, we anticipated a challenging first quarter due to the alignment of Welch Allyn’s fiscal year with Hill-Rom's September 30th year-end. Performance however was further affected by the timing of U.S. distributor orders of approximately 5 million and continued challenges in Latin America and the Middle East. Some highlights in Front Line Care include accelerated contribution from the new products John mentioned earlier, growth of MetaNeb, and a low single-digit growth across the portfolio in Europe. Given stable end-user demand and accelerated contribution from new products we remain confident in our ability to drive mid single-digit growth in this business for the year. Lastly, the Surgical Solutions business had a solid quarter with revenue of $100 million, which increased 3%. Domestic revenue advanced 10%, while international revenue declined 3%. Strong performance was driven by double-digit growth in key markets such as Europe and the U.S., where we continue to see positive tractions with our Integrated Table Motion and robust revenue growth of our surgical positioning products. Turning to the rest of the P&L, adjusted gross margin in the quarter of 47.5% improved 40 basis points year-over-year. Gross margin expansion was supported by improved portfolio diversification and continued benefits from cost and sourcing efficiencies. R&D spending of $32 million, was down 5% versus the prior year period primarily due to timing of projects, while as a percentage of revenue the ratio remained at 5% consistent with our long-term objective. Adjusted SG&A of $177 million declined 7%. Our team remains focused on disciplined cost management, which resulted in an SG&A ratio of 27.8% of revenue, an improvement of 100 basis points versus prior year. As a result, adjusted operating profit for the quarter totaled $93 million. Given continued gross margin expansion and SG&A leverage, adjusted operating margin improved 140 basis points over last year to 14.6%. Other expense of $21 million is $2 million lower than last year, primarily due to interest savings generated from the refinancing of our credit facilities late last year and the benefit from further debt repayment. The adjusted tax rate was 30.2% compared to 30.6% in the prior year. So, rounding out our Q1 P&L on the strength of expanded margins, earnings advanced 10% to $0.75 per deluded share. Turning to cash flow. Cash flow from operations of $71 million in the first quarter improved $25 million versus the prior year, while capital expenditures totaled $22 million. Free cash flow of $49 million improved by $20 million, an increase of 70% versus last year, providing flexibility to return $41 million to shareholders including $30 million through share repurchases. Finally, let me conclude my comments this morning by providing our updated 2017 financial outlook which does not include any impact from the acquisition of Mortara Instrument. For the year, we now expect revenue growth of approximately 1%, on a constant currency basis we expect revenue to increase approximately 2%. Hill-Rom's core revenue which excludes the impact of completed and potential divestitures from both periods is expected to increase 3% to 4% on a constant currency basis. You may recall that our original full-year revenue guidance on both the reported and constant currency basis was approximately 3%. We now expect foreign currency headwind of approximately 1% point in about a 1% point impact related to the year-over-year change in revenue from the non-core businesses we divested or may divest. As a reminder, the 2016 annual revenue associated with these divestitures was approximately $75 million. Now, about business segment, we continue to project low single digit constant currency revenue growth for patient support systems. This reflects a stable capital environment driving a low to mid-single digit growth in the U.S., while we expect international revenue to be down low single digits. As John, indicated earlier, we continue to expect mid-single digit constant currency growth for frontline care as well as for our surgical solutions business. From a profitability standpoint, we expect adjusted gross margin to be approximately 49%, we expect R&D spending of approximately 5% of sales, and we expect adjusted SG&A of approximately 27% of sales. This results in adjusted operating margin expansion of more than 125 basis points. We are estimating interest expense in the range of $80 million of $85 million and a tax rate of approximately 30%. And finally, we expect approximately 67 million shares outstanding for the year. So, to summarize, this guidance translates into adjusted earnings of $3.74 to $3.82 per deluded share reflecting growth of approximately 10% to 13%. From a cash flow perspective, we continue to project 2017 operating cash flow of $330 million to $340 million in capital expenditures in the range of $120 million to $130 million. For the second quarter 2017, we expect revenue growth of 2% to 3% and on a constant currency basis, we expect revenue to increase 3% to 4%. Our core revenue again which excludes the impact of completed or potential divestitures is expected to increase 4% to 5% on a constant currency basis. And finally, for the second quarter, we expect adjusted earnings of $0.77 to $0.79 per deluded share. And with that, I'll turn the call back over to John for closing comments.

[John Greisch:]

Thanks, Steve. We're pleased with how we started the year, overcoming several Q1 revenue headwinds and delivering strong adjusted earnings and cash flow growth. We continue to leverage our strong brand equity and geographic foot print to bring more innovative solutions to our customers, improve patient care and enhance outcomes. We're transforming our portfolio with divestitures of non-core assets while expanding capabilities in diagnostic cardiology with the accretive acquisition of Mortara, which offers compelling financial benefits and enhances our company's future growth and financial profile. I'm pleased with our ability to deliver strong earnings growth for the quarter and reaffirm our full-year earnings and cash flow guidance while accelerating core revenue growth to the 4% to 5% range for the remainder of the year. Finally, we are strengthening our foundation as we continue to drive sustainable and profitable growth, capitalize our new product launches, drive operational execution and margin expansion and make strategic investments that create long term value for patients, customers, and shareholders. With that, operator, let's open the call up for Q&A.

[Operator:]

Thank you. [Operator Instructions] I would like to remind participants that this call is being recorded and a digital replay will be available on the Hill-Rom website for 30 days at www.hill-rom.com. Our first question comes from the line of David Lewis with Morgan Stanley. Your line is open.

[David Lewis:]

Good morning.

[John Greisch:]

Hi David, how are you doing?

[David Lewis:]

John, maybe I -- a quick question for you and then two financial follow-ups as well. So, John, I'm just thinking about the second quarter guidance of 4% to 5% and I know that's consistent with your initial acceleration guidance you provided last year. But shouldn’t 2Q be higher than that given some of the orders here pushed from the first to second quarter?

[John Greisch:]

Yes, David. We're coming out with what we think is a prudent outlook for the quarter. The Welch Allyn flip on the distributer orders will certainly have an impact on Q2 as I mentioned in my comments. We're expecting international to return the growth and PSS coming into the quarter has a solid backlog also. As you've seen over the year, there is always uncertainties within our portfolio and we're trying to take a prudent outlook as we look forward but we're confident that the 4% to 5% accelerated growth rate for the rest of the year is something that we can count on. And we owe to your point, if we can do better than that, obviously we're going to push as hard as we can to do so. But we're trying to avoid any surprises and come out with what we think is a prudent approach to both the topline and double digit bottom line consistence going forward.

[David Lewis:]

Okay, that's very clear. Then maybe just one financial and maybe back to John. So, just financed, I think about Mortara, you've given some parameters around that. We kind of have that at $0.06 this year, $0.18 next year, is that close enough for government work. Then for John, just topping on this whole confidence from the 2Q guidance, well international recovery it's been a little elusive these last couple of years. What is your confidence that international is structurally better positioned and it's going to structurally recover in the back half of the year as opposed to just sort of recovering on easier comparables? And I'll jump back in the queue. Thank you.

[John Greisch:]

Okay, David. I'll take both of those quickly. On Mortara, we'll comment specifically on the guidance impact on Mortara on our next earnings call. The only think I would caution people on is we've got a year-end shift with Mortara just like we had with Welch Allyn. The year-end had been December, it's going to be September, and obviously the timing of exactly when we close the deeper impact 2017 guidance specifically. But we'll comment specifically on that, as we close the deal and get into our next earnings call. So, I'd rather not even comment on whether you're close enough for government work as the bids are -- are exactly that or not. But I think we laid out enough specifics about the deal and our excitement about the EBITDA margins that they're going to have, the synergies that we've got and everything else. But we'll get specific later on. International, you're right, the growth has been elusive, I think I've been commenting over the last several quarters that we've got a team in place now that we did not have in full a year ago. We had some hiccups last year particularly in the second quarter as you remember with some of the integration activities, particularly in Europe. Those are behind us and that comp is obviously going to be a bit favorable for us here in Q2. And we're beginning to see the redeployment of resources away from some of our lower margin and lower growth product opportunities into our surgical and frontline care business, I think you saw that here in the first quarter with strong surgical growth not only in the U.S., but we saw a solid growth in surgical in Europe. The headwinds that we had in the first quarter, particularly the Middle East are going to be behind us. The tough comps for the Middle East were as you maybe call, we saw upwards of a 50% decline in our surgical business and PSS business last year. Those adversary here as we close the first quarter. So, somewhat easier comps in some of the more capital intensive business in the Middle East. Stronger execution in Europe. I'm really excited about our prospects in Europe. We've got the team fully in place and my comments in my prepared comments about returning to growth for international here in Q2, I obviously wouldn’t make that commitment. If we didn’t have confidence in it, after too many years of no growth internationally, so it's a combination of all those factors. And some of the new products are going to help also. We recently launched the low cost surgical table that we're producing in China for some of our developing and emerging markets and all of these things are going to contribute to a confident improved performance in our international business going forward.

[David Lewis:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Rick Wise with Stifel, your line is open.

[Rick Wise:]

Good morning, John. Couple of questions, back to guidance again, I think it's pretty clear that the down in 2017 guidance are constant currency basis from three to two is because of the first quarter. I just want to make sure that I was clear that this is no – you are not walking back any guidance or growth outlook for the second, third and fourth fiscal quarters in any way as part of that, correct?

[Steven Strobel:]

Hi, Rick this is Steve. That's correct. I mean the decline is really 1.4 FX that we saw in the first quarter throughout the rest of the year with we expect anyway and the other point was strictly related to the devastated businesses and the impact that has on our outlook for reported.

[Rick Wise:]

Right and as you said obviously closing Mortara and continuing with the divestiture is going to bump up more than 4%, 5% kind of range. And Steve just continuing on the up, what you did bump up to your operating margins and guidance 125 bibs of expansion you had guided to 100 and again that doesn't include Mortara or those extra divestitures. I just want to make sure I understood the driver there.

[Steven Strobel:]

Yes. I mean we see better impact of some of the ongoing efforts on product line optimization not the least of which is getting rid of some of the products that were low growth and low margins. So that's really the impact on our improved impact on our margin outlook.

[John Greisch:]

Rick, this is John. Couple of additions on that later point. Yes, we also started the year with an operating margin improvement of 140 basis points so that obviously is going to carry through to improving over the year and we are managing the heck out of our cost structure. We have got uncertainties out there that everybody at this call is well aware of and we are confident with our revenue outlook that we have got. But in the uncertainty that we are trying to managing in we are also managing the heck out of our cost structure we did here in the first quarter. So Q1 operating margin ahead of expectations flows into a full year outlook as we look forward. I just want to make one point on your first comment. The 4% to 5% core growth outlook for Q2, Q3 and Q4 does not include any benefit from Mortara, in our overall guidance doesn't include as Steve said in his prepared comments any benefit from Mortara, so when we get to…

[Steven Strobel:]

Yes, we will that when we announce second quarter results.

[Rick Wise:]

But again, I think it's reasonable to assume that Mortara at least sustains or would be very supportive of that outlook if not enhancing to reflect on it?

[Steven Strobel:]

Yes, I mean it's going to be added to…

[John Greisch:]

Yes we expect it to be accretive, absolutely.

[Rick Wise:]

Just one last one from me, just thinking about the Retina Vue launched and integrated table motion where are we in those launches? Is this a – are these multiyear opportunities that are going to – this isn't just a one year great launch and then it becomes a growth headwind in your two and three. These are multi-year opportunities I assume. Is that the right way to think about it? Thank you very much.

[John Greisch:]

Good question Rick. Let me address both of those products independently. So Retina Vue, we are in the early stages of having launched that product about nine months ago now. The real exciting part of about Retina Vue in addition to providing enhanced care for diabetic patients, for us it's going to provide us with an ongoing recurring revenue stream off of the fitness screening revenue that we did going forward. So that should continue to grow as screens increase and the number of patients that are being screened today obviously is a very small percentage of the overall diabetic population. So that one looking forward I think we are really excited about continued growth for a sustainable amount of time. And an incredibly high margin recurring revenue stream on the screening revenue that we get which is 25 bucks a screen that comes to us with virtually no cost attached to it. Integrated table motion that's also been out about nine months and we are still at the lower end of penetration has been growing very strongly I think in our Q4 last year sequential growth was 50% over what we obtained in Q3. We expect a strong quarter with that here in our second quarter following intuitive, seasonal placements of the Xi robot. So, we are not at full penetration by any means with that and that should be a sustainable product for us as well as Xi placement continue to be strong coming out of an intuitive but we have yet to catch up with the existing Xi population as well as follow the Xi placement that intuitive continues to put in the market on a pretty strong basis.

[Rick Wise:]

Thanks again.

[Operator:]

Thank you. Our next question comes from the line of Bob Hopkins with Bank of America. Your line is open.

[Bob Hopkins:]

Thanks. Good morning. Can you hear me, okay.

[John Greisch:]

Bob. Sure.

[Bob Hopkins:]

Great. Good morning. So John, just to start with you if it's okay, you obviously had some nice success finding attractive deals and success in transforming the company the way laid out a few years ago. And I am curious in the heels of Mortara, can you just talk about your confidence are there more of these $200 million, $300 million, $400 million accretive type deals out there and can you also just talk about your the capacity you have to kind of do these kind of deals and transform the company so what's the leverage ratio that you are comfortable with, are there more of these out there, confidence that you are going to be able to continue to diversify the business?

[John Greisch:]

Yes, I will take the first part of that Bob and maybe Steve can address the capacity and leverage points. Yes, there are I think, always going to be opportunities out there so it's kind of like cost reductions, you never get to the end of the line in terms of trying to drive productivity inside the company and there is a lot of smaller and larger deal opportunities out there we have been fortunate the last few years with Trumph, well challenged Mortara and they are all meaningful additions to us. And I am confident that we’re going to continue to be able to add to the portfolio. I’d love to another well challenged kind of size out there to really continue to transform the portfolio but that was a pretty unique opportunity for us and Steve takes on the capacity question that's not in our cross here as it all today going from a size perspective. But I’m confident that there are more towers out there and enabling us to do something like that every 12 to 18 months, yes I am particularly in the swim lanes that we are trying to plan. So I am not too worried about that I think the pace at which we do them, the pace at which we successfully integrate them and obviously the pace at which we can financially afford them is probably more of a retarder then availability of attractive targets out there.

[Steven Strobel:]

Yes, you think about the capacity topic Bob, we go back to before well challenged the company was quite significantly you could say underleveraged and we came out of that deal financing most of it with debt some of it was with equity if you recall, but coming out of that with $2 billion of debt and leverage ratio in the 4.5 range we ended this year having on our plan for deleveraging slightly under 4. Mortara will add probably 40 basis points or so to our leverage. So we would be back up a little bit. We expect that we will continue our deleveraging now over time to get close to 3 not quite under 3 as we had thought but close to $3 billion in 18. So where does that leave us in terms of what we can do going forward I think John said it well actually we are really intent on figuring out ways to find assets that are going to be incredible provide us growth platforms and growth trajectories in the swim lanes that we really interested in the Mortara _ really hit a bull's eye for us in that respect. And so, I think once we go through the integration process here and continue to de-lever as we have done we can since we purchased well challenged we will evaluate opportunities as they come look at their what they can contribute to EBITDA what we might be able to do with the balance sheet as appropriate at the time. So nothing like you said like John said probably nothing like well challenged unless we were to get quite differently creative with what we do with the balance sheet but certainly from a debt financing standpoint we have got sufficient, clearly sufficient capacity to adequately and efficiently finance Mortara and will evaluate things as they come going forward.

[John Greisch:]

Bob, I think with where we positioned the company now with operating margins somewhere north of 16% this year and a relatively low capital intensity portfolio in terms of capital expenditures the strength of the cash flow that comes out of the business every year really is going to be the fuel that enables us to do what Steve just described. So we feel good about capacity and about targets.

[Bob Hopkins:]

That's super helpful. One just quick follow-up on the 2017 guidance that you provided on the revenue side, could you actually raising your core revenue growth guidance a little bit from what you gave previously despite it being pretty early in the year and despite some at least the potential for some uncertainty on capital so I guess with that in mind what are you seeing on the capital front and what gives you the confidence to tweak that core revenue growth guidance a little higher here so early in the year?

[John Greisch:]

Yes, I think what we’ve raised is probably how we look at the revenues excluding the divested businesses. So it's up slightly. But I think we came into the year with expectations that Q2, Q3 and Q4 were going to be in the 4% to 5% range which is pretty much where we have got the outlook now. So in the whole schema things I think it's pretty consistent with what our outlook was three quarters ago. But we feel good about the front line tier business, if you look at our segment guidance for the year I think it's in-line with what we communicated three months ago. For all three of the businesses PS, surgical and front line care. And international is really as big of lever for us as anything. It's been a drag at us and having confidence that's going to turn to growth for the next three quarters is a big change and outlook for us relative to where we have been in the last several years.

[Mary Kay Ladone:]

Hey Bob, it's Mary Kay. I would comment that the core growth from last quarter of approximately 3% assume that the divestitures we are going to be flat year-over-year and our new guidance from a core perspective excludes the divestiture which are under performing. So in our core growth in the first quarter included the core business still performing fairly well and that's pretty consistent now with our new full year guidance.

[Bob Hopkins:]

Great. Thanks for the help.

[Operator:]

Thank you. Our next question comes from the line of Matthew Mishan of KeyBanc. Your line is open.

[Matthew Mishan:]

Good morning and thanks for taking the questions. The front line care number was probably the most surprising to me and to get to mid single-digits for the year you are going to need to do about 8% or so for the remainder of 2017 and that space. How confident are you guys that you can hit like high single-digits on a consistent basis in that space and as if you do so over the next several quarters that's sort of an appropriate run rate going into 18?

[John Greisch:]

Well, we have got the distributive timing flipping from Q1 to Q2 Matt, don't forget which is not insignificant for front line care overall. We are seeing good growth with our new products. We have mentioned Retina Vue and sale on home we have also got the respiratory care product MetaNeb that's been growing nicely and is going to contribute to the growth for the rest of the year. We are also launching a new mobile vest product in our respiratory care business later this year. So some new products are going to drive some growth and as you said consistent performance here in Q2, Q3 and Q4 much stronger than what we saw in Q1. So obviously we feel confident about it since it's built into the Hill-Rom guidance for the company.

[Steven Strobel:]

Matt, another I think another element to think about that we are excited about is the opportunity to further leverage and build on the leverage of our enterprise accounts group and further integrate well channel into the efforts there. So there is on a variety of fronts we feel there is going to be nice acceleration in front line care.

[Matthew Mishan:]

I think that's fair. And then in your presentation you are now putting a market size or a target recurring revenue on Retina Vue that's about $200 million plus can you kind of walk through how you get to that number and is that total market size you think or is that a number you think you can get to?

[John Greisch:]

I think it's an addressable market that we think is realistically addressed Matt. I think if every single diabetic gets screened once a year the number is bigger but we don't think that's a realistic outlook. Some of them are already getting screened at their ophthalmologist or elsewhere so we took a view on what percentage of the diabetics are going to get screened at the GP's office which is obviously nowhere near the 30 million rough patients in the U.S. but we try to ballpark what we think is a realistic addressable market size.

[Matthew Mishan:]

Okay. And then just last question on integrated table motion. I don't want to put words in your mouth and sometimes I guess we hear something we want to hear but I believe you said that it was came in better than you had thought in the quarter better than expected like there is a lag in that product. I am just curious why was it a little bit better than you had thought in the quarter and how are you looking at kind of adoption of that penetration rates with the da Vinci robot?

[John Greisch:]

Yes. So it was slightly ahead of our budget expectations here for Q1 as you recall we had a pretty solid Q4 which for us at the end of our fiscal year which tends to be our seasonal strength for our capital related products. Sequentially it was actually down a little bit off of a seasonal high Q4 we are going to see a strong bounce back here in Q2 as we lag the placements that intuitive has with his placements and then we had a strong fourth quarter for the quarter end December. So it is a little lumpy as we chase the placements that intuitive has. The attachment rate I think I commented on the last call. The software sales at the time the table is being sold by intuitive is north of 50% which gives us an opportunity to more easily sell the table as a follow-on if the customers have already purchased the integrated software with the table. So the attachment rate has been improving over the last nine months. As the software sales percentage has also improved. So our confidence in this being I think we quantified in the 25 millionish range of an opportunity for us once the traction is sustained. We still feel really good about that as revenue target for this product and we will quite get there in fiscal 17 but it will be pretty close to that this year.

[Matthew Mishan:]

Thank you very much.

[Mary Kay Ladone:]

We have time for one more question.

[Operator:]

Thank you. Our last question comes from the line of Larry Keusch with Raymond James. Your line is open.

[Lawrence Keusch:]

Thanks. Good morning and thanks for sneaking me in. So I guess two questions.

[John Greisch:]

Larry, you’re never smock in that.

[Lawrence Keusch:]

I appreciate it. So John, two questions for you. I guess one of the investor concerns across the broader [indiscernible] device sector again concerns about CapEx spending and hospitals placing uncertainties and potentially slowing down so obviously you guys are continuing to think stable is the outlook for 2017 in the U.S. I would like to get some sense of sort of what sort of allows you to say that at this point and perhaps what has been the experience in the past with backlog when hospitals do take a pause in spending because I assume those are not necessarily committed orders. And then the second question is there has been obviously a lot of back and forth with Mexico particularly yesterday and those relationships look strained. So I just want to see if you guys have thought at high level any implications of cross border taxes and so what you are manufacturing exposures down there?

[John Greisch:]

Sure. On the CapEx question Larry, a couple of points, I want to remind everybody our bed frame sales in total today are less than 20% of our overall revenue. So from a companywide perspective significantly, less dependency on bed sales than we have had in the past. Secondly, our PSS business both globally and here in the U.S. about folks in the U.S., because I think your question is more U.S. centric. We had a roughly 3% growth rate here in the U.S. in Q1 which is in-line with our outlook for the full year. I think your mid single-digitish for the U.S. PSS and that 3% growth here in the U.S. was achieved with significantly less than that in our core bed frame revenue. So we are not relying on bed sales to drive our PSS growth like we have in the past. That's been pretty flat to even slightly down in terms of just pure bed sales for the last year or so. So, I think it's important to remember that the dependency on bed overall for the company significantly less than used to be, less than 20% and in the PSS business we are seeing growth from other higher margin product categories like our clinical workflow solutions business, like our service business, like our patient handling product portfolio and our ICU portfolio continues to be very strong but the more volatile business that investors have had angst over are med search business. That has not been the source of our growth over the past year and a half. So I am less worried about that biting us in the rare end in a surprising way than has happened in the past. We are not expecting lot of growth out of med search this year as we go forward. The other product categories that I mentioned are really the ones that are driving a lot of our growth. The confidence of our PSS business here in the state continue to be strong, good orders, good continued steady growth I mean we are not looking at double digit growth by any means but we had a solid increase in the backlog, 7%, 4% increase in orders overall. And the anecdotal conversation that I have or that our field is having no one is hitting the panic button today I think you are hearing from other companies confidence that stability is still the order of the day and that's what we continue to hear and see and we have got a number of growth factors out there with some of the new products that we have talked about as well. So your last question what's happened in the past again I think a lot of that has stuffed to the med surge portfolio where orders declined significantly and today our U.S. med surge business is less than 10% of our overall revenue. So much, much smaller risk impact than what investors have been used to in the past. I think that's a really important change and how we and everybody else should be looking at our company.

[Lawrence Keusch:]

The other question around our Mexican infrastructure.

[Steven Strobel:]

We have got Larry two plans in Mexico obviously we are watching the situation very closely. It's incredibly fluid as you all know. But we manufacture product, we have two door operations there we manufacture product there not all of the product comes back in United States but we do import from Mexico. So obviously there is depending on where the border tax discussion goes in concert with the rest of the things in play for corporate tax reform we are watching it closely and running a variety of scenarios. It's really way too early to comment on what the impact is going to be to us other than to say it is something we are very closely scrutinizing and monitoring. So I am sure there will be more to come as clarity comes to the tax reform. It doesn't sound that's going to be at least in this first go around where ACA seems to be the hot item for the first reconciliation process. But it sounds like maybe later in the summer there will be more light on what the tax regime will look like. But that could change day-by-day. So we are watching it and I think that's as much as I can tell you right now.

[Lawrence Keusch:]

Okay. Perfect. Thank you for the stats guys.

[John Greisch:]

Thanks Larry.

[Operator:]

Thank you. Ladies and gentlemen this concludes today's conference of Hill-Rom Holdings Incorporated, thank you for participating.