Hill-Rom Holdings, Inc.
Q3 2017 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Good morning, and welcome to Hill-Rom's Fiscal Fourth 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 Miss Mary Kay Ladone, Vice President, Investor Relations at Hill-Rom. Miss Ladone, you may begin.

[Mary Kay Ladone:]

Thanks and good morning everyone. Thanks for joining us for our fiscal fourth quarter 2017 earnings conference call. Joining me today are John Greisch, President and Chief Executive Officer of Hill-Rom; and Steve Strobel, our Chief Financial Officer. Before we get started, I like to mention that we issued two separate press releases this morning in advance of today's call, and have posted two presentations that will complement our discussion today. These materials can be accessed on the Investor Relations page of our website, at hillrom.com under Events and 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, 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 releases 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. Reconciliation between GAAP and non-GAAP financial measures are included in our earnings press release. Now, I'd like to turn the call over to John.

[John Greisch:]

Thanks, Mary Kay. Good morning, everybody and thanks for joining us. As Mary Kay mentioned there are two topics we will be covering this morning. First we will begin with our recent financial performance. I will provide some brief highlights and then Steve will walk through the fourth quarter performance and 2018 outlook in detail. We will then shift gears and discuss Hill-Rom’s long-term strategic objectives through 2020. As always, we will provide ample time to answer your questions. So let us get started. As you saw in our earnings release issued this morning, we ended 2017 with positive momentum and are pleased to report strong financial results. For the quarter, we delivered adjusted earnings of $1.32 per diluted share, exceeding our guidance range. This represents an increase of 12%, our ninth consecutive quarter of consistent double-digit earnings growth. This performance reflects solid core revenue growth, execution on margin expansion initiatives, and a lower tax rate, which helped offset a modest impact from recent hurricanes. For the year, adjusted earnings increased 14% to $3.86 per diluted share. This included adjusted operating margin expansion of about 100 basis points to 16.3%, a record level for our company. Importantly, our 2017 performance reflects an improvement in adjusted operating margin of 450 basis points since 2015 reaching the low end after just two years of our three year expectation of 450 to 550 basis points. From a revenue perspective, core growth, which excludes Mortara and divestitures was 3% on a constant currency basis, both for the quarter and the full year. While we have made very good progress in establishing a more stable and diversified business, our continued focus is on driving accelerated top line growth over the long term. One of the most compelling highlights from 2017 was the turnaround in our international business. We ended the year with core growth of 4% despite some economic challenges in several regions. With strong execution and disciplined focus on higher margin growth drivers we expect the international revenue profile and margins to sustain this positive trend into 2018 and beyond. U.S. core patient support systems revenue advanced 3% for the full year, including 5% growth from products and services, including high single-digit growth in clinical workflow solutions. During 2017 we made significant progress in shaping our PSS portfolio to support higher margin platforms, divesting nonstrategic businesses with prior-year annual revenue of approximately $75 million. Our work will continue as we move through 2018 as we selectively focus on exiting additional lower growth and lower margin products like our third party surfaces, and our third-party rental business. Turning to Front Line Care, revenue increased 10% this year including Mortara. While we got off to a slow start in Q1 related to the change in [indiscernible] in 2016, the base Front Line Care business delivered revenue growth of approximately 5% over the last nine months. Capping off another successful year as part of Hill-Rom, Welch Allyn is performing well delivering innovative new products, capitalizing on new markets and channels and providing a strong platform and avenue for future M&A initiatives. We also continue to be excited about Mortara, its growth prospects and compelling financial benefits. The integration is proceeding on track, and cost synergy benefits are in line with our expectations. We have successfully managed through high U.S. channel inventories at the time of the acquisition, and are encouraged by the positive momentum in Mortara’s strong order flow and backlog. The acquisition was immediately accretive and is expected to be increasingly accretive in the years ahead. Lastly, the growth in our surgical solutions business was outstanding, increasing 7% on a constant currency basis. This was the result of double-digit growth in our patient positioning and surgical equipment businesses. Innovation remains a key strategy for our company. In 2017, new products contributed approximately $150 million in revenue and are expected to drive accelerated revenue growth and margin expansion in 2018 and beyond. Let me take a moment to reflect on some of these key achievements. First, we launched the Monarch Airway Clearance System, and Welch Allyn home blood pressure monitor in the Front Line Care business, and the TruSystem 3000 Mobile Operating Table in our surgical solutions business. In PSS, we launched the Envella Air Fluidized Therapy Bed for wound care; the Accella bed system for higher acuity patients in intensive and acute care settings outside the United States; and most recently, the Centrella Smart bed system aimed at transforming care by providing increased patient safety, satisfaction and caregiver efficiency. We are very excited about the potential Centrella has to accelerate the med surg bed replacement cycle, particularly during a favorable capital spending environment. While still in the early days of the launch, feedback from clinicians has been positive, and our backlog is building, including some early competitive gains. In addition to new product launches, we continue to capitalize on several other innovative products, such as the Welch Allyn RetinaVue imager for diabetic retinopathy screening. During the year, physicians screened more than 90,000 patients generating annual revenue just under $10 million, including an ongoing recurring revenue stream. With the mounting incidence of diabetes and more than 30 million Americans with the disease today this continues to be one of our most exciting growth opportunities. And finally, placements of Integrated Table Motion reached a record level this quarter, and again exceeded our expectations. 2017 revenue reached approximately $25 million. Before turning the call over to Steve, let me update you on the effect of recent natural disasters, and an update on our Aspen Surgical facility in Las Piedras, Puerto Rico. As a reminder, at this facility we manufacture Bard-Parker surgical scalpels and blades, which account for approximately $60 million in annual revenue. As we stated in a press release a few weeks ago, our facility sustained minor structural damage and temporary loss of power due to hurricane Maria. Repairs have largely been completed and manufacturing operations have resumed. To date, we have successfully managed inventory levels across our global distribution network to minimize disruption in the supply of product to customer. The earnings impact in the fourth quarter was approximately $0.01 and we expect our first-quarter revenue and adjusted earnings per share to be negatively impacted by approximately $5 million and $0.03 per share. Our primary focus continues to be supporting our extraordinary team and their families, and to minimize the temporary disruption in supply to our customers. With that, I will 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 $1.03 per diluted share in the fourth quarter compared to $0.77 in the prior year. Excluding special items, adjusted earnings of $1.32 per diluted share increased 12%, exceeding our guidance range of $1.26 to $1.30 per share. Now let me briefly walk through the P&L before turning to our 2018 financial outlook. Starting with revenue. Fourth quarter revenue of $738 million grew 5%. On a constant currency basis, revenue increased 4%. Domestic revenue increased 3%, while international revenue advanced 5%. Strong international performance reflects continued momentum across multiple geographies, particularly in the Middle East where we benefited from our one Hill-Rom approach with some large competitive wins. Core revenue increased 3%, in line with our guidance. As a reminder, core revenue excludes the impact of foreign currency, Mortara and divestitures in both the current and prior year. Before moving on, keep in mind that as I discuss each business segment, I will address revenue growth on a constant currency basis only. Starting with Patient Support Systems. Revenue of $371 million declined 4% while core revenue increased 1%. As expected, domestic revenue was down 2%, but after adjusting for divestitures U.S. core revenue increased 2%. Product and service revenue, which primarily includes bed and patient handling systems, clinical workflow solutions and services increased 4%. This was partially offset by a decline in rental revenue. As we discussed, a portion of our rental business pertains to lower growth, third-party equipment with annual revenues of approximately $40 million. Going forward, as John alluded to earlier, we will be excluding this and third-party surface revenue from core growth as we continue the exit from these businesses. In international, patient support systems revenue on a core basis declined 1%. Improving trends particularly in the Middle East and Latin America offset softness in Europe and Asia-Pacific. Now moving to Front Line Care, revenue was $245 million, an increase of 16%; excluding Mortara, Front Line Care revenue grew 3%. This performance was driven by the contribution from new products, strong growth of thermometry and blood pressure monitoring devices and double-digit growth in our respiratory care business. In the U.S., the base business declined 2.5% driven by lower revenue in our vital signs monitoring franchise following two strong quarters of mid-teens growth. International revenue was again strong, and increased 17% excluding Mortara. This was the result of our focus in investment in leveraging Hill-Rom’s geographic presence, brand and infrastructure. Lastly, Surgical Solutions revenue increased 7%, in total $122 million. Performance was led by U.S. growth of 10%, with a record quarter for Integrated Table Motion placements, and contribution from other innovative products like the iLED7 and the new TS 3000 Mobile Operating Table. Revenue outside the U.S. grew 3%, driven primarily by strong momentum in the Middle East. Now turning to the rest of the P&L. Adjusted gross margin accelerated sequentially and improved 100 basis points to 49.3%, a record high. Compared to last year adjusted gross margin expanded 10 basis points. Margins were improved by portfolio diversification, new product launches, ongoing benefits from cost and sourcing efficiencies and the accretive contribution from Mortara. These benefits were partially offset by lower Surgical and third-party rental margins and the hurricane impact. Collectively these factors created a margin headwind of approximately 50 basis points. R&D spending of $32 million, was flat versus the prior year, while for the year R&D as a percentage of revenue, was maintained at 4.9%, consistent with our long-term objectives. Adjusted SG&A of $190 million increased 3%, primarily due to the addition of Mortara. Excluding Mortara, SG&A declined in low single digits. Disciplined cost management more than offset selling and marketing investments supporting new product launches and enhancing our global capabilities. For the full year, the SG&A ratio of 27.1% of revenue, improved 70 basis points versus last year. Our adjusted operating margin in the fourth quarter was 19.3%, the highest level of the year. This reflects an improvement of 320 basis points sequentially, and an improvement of 70 basis point improvement compared to last year. For the full year 2017, adjusted operating margin was a record 16.3%, reflecting an expansion of 100 basis points versus 2016. The adjusted tax rate was 25.8% in Q4; adjusted earnings advanced 12% to $1.32 per diluted share. Turning to cash flow, cash flow from operations in 2017 was $311 million, and improved $30 million or 11%, while capital expenditures totaled $98 million. Free cash flow for the year of $214 million, is 8% higher than last year and we returned nearly $100 million to shareholders through dividends and share repurchases. Now let me conclude this portion of the call by providing our fiscal first quarter and full-year 2018 outlook. Starting with the full year, we expect reported revenue growth of 3% to 4%, and constant currency growth of 2% to 3%. Core revenue is expected to increase approximately 3%. This growth excludes foreign currency, Mortara, completed divestitures and nonstrategic assets we may exit. Collectively, divestitures and nonstrategic revenue in 2017 totaled approximately $100 million, and is expected to decline by approximately $50 million in 2018, $30 million of which has already been divested. Now by business segment. On a constant currency basis, we expect the patient support systems revenue to be comparable to the prior year, reflecting the impact of completed divestitures and anticipated product exits. Core PSS revenue is expected to increase in low single digits, reflecting a continuation of a stable capital spending environment. For Front Line Care, we expect core growth in the low to mid-single digits. Including Mortara, growth is expected to be in the high single digits. Lastly, we expect low to mid-single digit growth for surgical solutions, including the hurricane impact mentioned earlier. From a profitability standpoint, we expect adjusted gross margin to expand approximately 50 basis points and approach 49%, R&D spending of approximately 5% of sales, adjusted SG&A of approximately 26.5% of sales, adjusted operating margin of approximately 17.3%, representing 100 basis points of expansion. We expect other expense including interest of approximately $90 million. We project a tax rate of approximately 29%. And lastly, we expect a share count of approximately 68 million shares. So to summarize, this guidance translates into adjusted earnings of $4.22 to $4.30 per diluted share. From a cash flow perspective, we project continuing strong operating cash flow of $330 million to $340 million with capital expenditures of approximately $110 million. We expect free cash flow to total $220 million to $230 million. For the first quarter, we expect reported revenue growth of approximately 3%, and constant currency growth of approximately 2%. On a core basis, we expect revenue to be approximately flat. This outlook reflects consistent underlying fundamentals, the difference in the phasing of some large customer orders year-over-year in the Front Line Care business, and the hurricane impact in our surgical solutions business. We expect adjusted earnings of $0.77 to $0.79 per diluted share, which includes the estimated earnings headwind from hurricane related disruption of $0.03 per share. In terms of revenue and earnings savings through the remainder of this year, there are a couple of factors to keep in mind. First, we expect core revenue to accelerate as we ramp up new products, including Centrella, over the course of 2018. Second, consistent with recent years, we expected adjusted gross and operating margins to be higher in the second half of the year compared to the first half. Specific to 2018, second half will benefit from higher revenue, improved surgical margins, lower hurricane related expenses, the benefit of Mortara synergies, and savings related to our cost and business optimization initiatives. This concludes our overview of our 2017 achievements and 2018 guidance. Now, I'll turn the call back over to John.

[John Greisch:]

Thanks, Steve. At this point, we would like to share an update on our long-term strategic and financial plan through 2020. As a reminder, you can use the presentation posted into our website to follow along, as our remarks will generally coincide with these slides. So let us begin with Slide 3. Our objective this morning is to share our confidence in our ability to execute this plan, achieve our commitments and drive enhanced shareholder value. For those of you that have followed Hill-Rom, that we have been on an exciting journey, and the transformation has been quite compelling. We are proud of our performance and our accomplishments and are entering 2018 with strong momentum. On Slide 4, you can see the progression of our transformation. Revenue for the company is expected to more than double from 2010 and exceed $3 billion by 2020 well adjusted operating margins are expected to approach 20% reflecting 800 basis points of improvement over this ten year period. I am extremely proud of this seasoned management team we have assembled and have the utmost confidence in their leadership, broad healthcare expertise and commitment to positioning Hill-Rom for sustained success. In addition to strong team we now have a global organization aligned to support a one Hill-Rom vision. These factors have been significant drivers in achieving the 2015 long term financial objectives ahead of expectations in creating meaningful value for shareholders. We don't plan to stop here. Today we look forward to 2020 with confidence and optimism. With the solid foundation in place we are focusing on accelerating growth, enhancing outcomes with innovative products and solutions, continuing the transformation through M&A and portfolio optimization initiatives and driving operational execution and strong financial performance. So let me take a moment to review our strategy and accomplishments before turning the call back to Steve to review our financial outlook. First, our strategy has been very consistent over the last few years and is aligned with several important industry trends which are outlined on slide five. We talked a lot of these in the past so today I will make just a few brief comments. Clearly, provider consolidation has been occurring not only in the United States but around the world, this dynamic placed the Hill-Rom’s heritage and our commercial strength. We are adapting and shifting selling strategies to match this new reality. Whether to the enterprise accounts team in the United States or our integrated international organization we are well positioned to navigate this changing customer landscape with a strong brand equity and trust we have built spanning decades. Enhancing access to care in emerging markets is a key growth driver for most healthcare companies and Hill-Rom is no exception. As emerging markets provide increased access to quality healthcare, investments we have made further strengthen Hill-Rom's competitiveness. Information and connectivity have also become critical elements to providing quality healthcare, enhancing patient experience, lowering length of stay, and driving efficiencies across the healthcare continuum. Getting information to caregivers and proactively anticipating patient needs not only provides clinical and economic value but is key to our achieving Hill-Rom's mission. Lastly with the growing pressures no healthcare cost, we are experiencing a migration of care from the acute care hospital into lower cost care settings. Hill-Rom's leadership in these care settings is invaluable. Investments and innovation, connectivity and data will allow us to enter new markets and channels creating even more opportunities to drive accelerated growth and value in the years ahead. Our mission is clear, and we have a unique and compelling value proposition. We are helping people get better care both inside and outside the hospital. We have a strong platform with three growing and sustainable businesses each of which is delivering meaningful innovation. From the emergency room, operating room, intensive care, and med-surgeon environments to the ambulatory, post-acute and home care settings the competitive advantage we have established addresses complex needs across the care continuum. We are proud of our recent accomplishments towards achieving our mission which are listed on slide 7. We have been very active over the last three years carefully laying the ground work, assembling the right team and putting in place the right organization. We have been launching new products, strategically optimizing the portfolio and diversifying our product offering. As we have done this, we have also been integrating acquisitions, driving synergies, diligently managing costs, and achieving our financial objectives. On slide 8 I can see you can see the results. Since 2015 core revenue has consistently grown at approximately 3% per year while we’ve observed significant macroeconomic headwinds in several geographies. We have expanded our adjusted operating margin by 450 basis points over the last two years to 16.3%. We have increased earnings per share and operating cash flow by 20% on a compound annual basis. This has resulted in top tier shareholder return performance relative to our peers over this period. So we feel very good about the progress today. Slide 9 provides an overview of our 2020 LRP highlights. This plan is focused on four objectives. The first is to accelerate growth. This should be accomplished by advancing Hill-Rom's strong brands, geographic footprint and further penetrating our large and growing markets. The second objective is to advance innovation via new products. Thirdly we will continue with our portfolio transformation. We strengthened our portfolio with M&A and optimization initiatives, well at the same time improving revenue diversification. Lastly, we are committed to driving operational execution and strong financial performance with accelerated core revenue growth and double-digit earnings growth on generating significant cash flow. Turing to slide 10, not only have we diversified our portfolio, we have expanded internationally and extended our presence well beyond the hospital into new care settings. Today, our international business accounts for approximately 30% of total revenue. Historically, it has been focused under legacy hospital bed franchise. However, as we required new businesses and divested others and realigned our international organization we have broadened our portfolio to enhance our international growth opportunities. And beginning in 2017 we have altered our international growth trajectory. Going forward we expect our international business to be a key contributor to our growth. In addition revenue outside the hospital which includes the non-acute and home care settings accounts for roughly 20% of total revenue. As several new products ramp overtime we expect this percentage to increase. As we look across the portfolio we are encouraged by the size of the various markets we participate in and the stability of their growth profile is indicated on slide 11. In total we estimate that our weighted average market growth is in the low single-digits with stable market growth as a baseline we are confident about growing faster as we expand internationally, enter new product areas and accelerate revenue contributions from new products. New product innovation has become a primary driver of our durable growth as we have ramped up R&D over the last three years and successfully generated positive momentum with new product approvals. On slide 12, you can see that our new product pipeline is robust and we expect to drive a steady cadence of launches through 2020. We are constantly innovating to ensure doctors, nurses and caregivers have products they need to protect patients, speed recovery, and manage their healthcare conditions. Moving to slide 13, I would note that we are in the early innings of ramping up new product revenue and taking full advantage of their potential. Our R&D investments are already driving strong returns and by 2020 are expected to generate more than $350 million of revenue with accretive gross margins. Importantly, at least half of these products have impressive market potential with many in access of $100 million and in most cases these represent new incremental markets for the company. The first step of comment on is the growing vision screening portfolio with the retina view imager and spot vision screener. Each of these vision products addresses needs in markets totaling more than $200 million. In respiratory care, we are very excited about the Monarch Mobile vest which allows patients to be active and productive while receiving therapy. Another exciting opportunity is the Welch Allyn Home blood pressure monitor. Today more than 6 million home blood pressure devices are sold annually representing an existing U.S. market of $500 million. And in the hospital setting we expect the augment growth with new systems and technologies like a mobile nurse call system and the watch care and confidence device. These are just a few examples that reflect the optimism we have about the potential to accelerate our revenue growth over the long range plan with projected new product revenue of $350 million. As I mention earlier we have made great progress towards transforming and strengthening our portfolio. Through a series of acquisitions outlined on slide 14, we have enhanced our customer value proposition and financial profile. At the same time while meeting strict strategic and financial criteria, these acquisitions have provided an avenue for revenue diversification. On slide 15, you can see that we have significantly improved our revenue diversification, the result of our M&A investments as well as through our portfolio optimization initiatives. So with this as a backdrop, today we are providing our 2020 LRP objectives which are outlined on slide 16. As you can see we expect our strong momentum to continue for the accelerated revenue growth, adjusted operating margins approaching 20% and double-digit growth and adjusted earnings for share and operating cash flow. With that let me turn the call over to Steve who will review the long term financial objectives in detail before opening the call for Q&A.

[Steven Strobel:]

Thanks John. It's my pleasure this morning to present details regarding Hill-Rom's long range financial outlook through 2020. John has laid out a compelling vision for the company and my objective is to ensure that you have a clear understanding of how that vision is expected to manifest itself in the financial performance of Hill-Rom over the next several years. Turning to slide 18, the P&L profile reflects the commitment to driving value, targeting appropriate investments to accelerate top-line growth while improving our operating margin profile. Before we get into details let me take a moment to review the assumptions included in our projections. First, we assume a stable capital spending environment in the United States and no major changes to the global macroeconomic environment. We do not anticipate any disruptive market entrance in any major markets. However, we are assuming a persistent competitive environment and modest price pressures in select areas of portfolio. As we have discussed reported revenue incorporates a decline in revenue of nonstrategic assets we may exit before 2020. Non-strategic revenue totaled approximately $100 million in 2017, about one-third of which has already been divested. 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 acquisitions or business development initiatives nor any impact from potential healthcare or tax reforms. So given these assumptions let me describe the 2020 LRP objectives which you can find on slide 19. With fiscal 2017 serving as the base year, we expect core revenue to grow at a rate of 45% on a compound annual basis through 2020. We expect the nonstrategic revenue I mentioned earlier of approximately $100 million in 2017 to negatively impact the reported top-line care by approximately 100 basis points. Therefore reported revenue is expected to grow in the 3% to 4% range. On the margin front, we expect to drive at least 150 basis points of gross margin expansion achieving a 2020 adjusted gross margin of approximately 50%. While adjusted operating margin is expected to expand by more than 300 basis points and be in the 19% to 20% range by 2020. We are projecting a tax rate for Hill-Rom of approximately 29% over the LRP period and this does not include benefit from potential U.S. tax reforms or any actions we may take to reduce the tax rate over time in the absence of reform. We’re also assuming a stable count of approximately 68 million shares as we've assumed the level share repurchases to offset the diluted impact of stock compensation. Rounding off the P&L this translates into adjusted earnings per diluted share growth of 10% to 12%. From a cash flow perspective we expect to generate more than $1.1 billion in cumulative operating cash flow between 2018 and 2020 with capital expenditures totaling approximately $350 million over this timeframe. Now let me take a few minutes to provide additional information on each key metrics. Turing to slide 20, contributing to core revenue growth of 4% to 5% of solid expectations across the portfolio including the expected 2020 contribution from new products of more than $350 million. On slide 21, you can see the attractive growth prospects across each business. First, core patient support system is expected to grow in the 3% to 4% range. In the context of a stable capital spending environment, we expect low to mid single-digit growth in the clinical workforce solutions and patient handling businesses. New products mentioned earlier are also expected to be key contributors to this core revenue trend. Within Front Line Care, we expect revenue to grow 6% to 7%. The Mortara contribution accounts for about 200 basis points of this growth. In addition, new products and expanded indications are meaningful contributors as we advance our leadership in the ambulatory channel and capitalize on new products and our growing presence in the retail channel with Welch Allyn home products. In surgical solutions, we expect revenue growth of 3% to 4% driven by focus on safety, efficiency and partnering with other medical technology companies to improve the breadth of our offering around the world. Turning to gross margin, we expect to drive meaningful expansion over the next several years in achieving adjusted gross margin of approximately 50% by 2020. On slide 22 we outlined the key drivers. Gross margin expansion is expected to be driven by ongoing portfolio optimization efforts, improved manufacturing costs through supply chain and footprint actions and we also expect to enhance our product and geographic mix as higher-margin products drive growth in key markets and new products carry accretive margin profiles. In recent years Hill-Rom has demonstrated an ability to drive strong performance as you can see on slide 23, we will continue to invest to support future growth well being diligent in managing G&A and driving efficiency across the business. As we mentioned in today's press release we expect to generate approximately $50 million in pretax business optimization savings over the next several years. Some of this will be reinvested to align resources with key priority growth areas, expand internationally and optimize global capabilities across the businesses. These initiatives will periodically require restructuring charges which will be identified as special items and excluded from adjusted earnings. Collectively, over the LRP period, these factors contribute to an operating margin of 19% to 20% by 2020, an improvement of more than 300 basis points this includes driving SG&A as a percentage of revenue down to between 25% and 26% and investing in R&D at a rate of approximately 5% of revenue. Turning to cash flow, our accelerated growth and performance is expected to drive significant cash flow over the LRP and consistent with our strategic objectives, we will continue to deploy a very disciplined approach to capital allocation. This will include deleveraging the balance sheet as our top near term priority, however 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, as John mentioned earlier M&A is a key component of the strategy. Attractive M&A opportunities exist to drive accretive revenue growth and enhance margin and P&L profile and strengthen our clinical and economic value with our customers. We will continue to be prudent in our valuation of these opportunities adhering to our rigorous strategic and financial criteria to generate attractive returns. In closing, we covered a lot of ground today and we hope you have an appreciation for the strength of the core business and opportunities to expand margins and drive strong earnings and cash flow over the long range of plan. Now, let me turn it back over to John.

[John Greisch:]

Thank, Steve. As Steve, said we covered a lot of areas similarly but let me just wrap up our canvas briefly here. So summary our journey continues our team continues to successfully execute on our strategic priorities. We've got a strong platform. We're focused on accelerating our durable and profitable growth while continuing to enhance margins for capitalizing and investing in new products or advancing our pipeline and expanding into new markets internationally, we've got a solid foundation and a great team that I'm incredibly proud of. With the compelling strategy, strong financial and operational execution, we're committed to continue to create above average, significant value to shareholders. Operator with that, let's open the call for Q&A.

[Operator:]

Thank you. We will now begin the question and answer session. [Operator Instructions] 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. And our first question comes from the line of David Lewis of Morgan Stanley. Your line is now open.

[David Lewis:]

Good morning and thanks for the very, very concise presentation, I'm going to show a lot of discipline this morning, I will only ask us three questions. So, the first John, I will start kind of short term and obviously you have two questions on a longer term outlook which I think is where people are more focused. So, I just want to talk about the progression of 2018 specifically the first half of the year, I think the single biggest question we get in this morning is you obviously got in below your annual growth rate at the core for the first quarter but yet obviously implying acceleration sort of thereafter hence the concern is the first quarter is your easiest comp, the second quarter your hardest comp, so how can people get conviction in the annual guidance if you're guiding to sort of flattish growth against the easiest comp of the year, that’s the sort of the question I want to ask and couple of follow ups.

[John Greisch:]

Let me to take that David, this is John. If you look at our historical sequencing Q1 is always our weakest quarter as you mentioned. If you look at last year, we actually had a negative revenue performance in Q1, I think we were down about 3% overall in the first quarter and that's not been unusual for us coming off of a very strong fourth quarter. Despite that, we accelerated the growth throughout the year and close the year with a 3% core growth rate, despite weaker performance in Asia Pacific. So when I look at 2018, a couple of points on the sequencing. First half and second pretty normal progression both in terms of revenue earnings sequencing and margin improvement performance, as point number one. Point number two, as you well know, we had some quarterly volatility as we've gone through the years, we don't want to miss a quarter as we go into 2018, so we baked in our normal Q4 to Q1 progression as we look to Q1 with the high degree confidence in the first quarter and a high degree confidence in the full year. It was a 3% top line revenue growth for the full year and a double digit earnings performance, we're continuing the momentum that we've built here in ’17. So, I think actually as I look at the first quarter of ’18 versus how we started ’17, the confidence in our ability to deliver on the full year actually I think is higher than it was coming out of a really weak first quarter and ’17 and it as you all know ’17 we came off of a yearend change for Völker, we're coming off a yearend change for Mortara. So, the moving pieces as much as I’d like them to be reduced faster, we've still got a few of them and we're just looking at Q1 here relatively conservatively but still with confidence in our ability to deliver on a quarterly basis and for the full year as we look at ’18.

[David Lewis:]

Okay, John very clear. Thank you for that it and I think that would be helpful for those listening. So two questions on the LRP versus, I really want to spend more time, but first is the innovation so you said weighted average market growth rate John, 2% to 3% today you want it to become, you want it be 4% to 5% growth at the end of the LRP, so how does that shift over time? Do you think it says the 2% to 3% end-market growth rate exposure moves higher across the LRP or you just think it's geographic expansion and you're going to be taking more share and you snuck in from an innovative perspective, just talk about one program, the vital signs patch you snuck in late 2020? Few words about that just given how transformed I think they could be to your business model and then I had one last one for Steve and I'll jump back in queue.

[John Greisch:]

Okay, I just want to comment on Q1 David, we mentioned in our prepared remarks the hurricane in Puerto Rico is impacting us about 5 million bucks in Q1, so that’s close to a point of growth also and that was kind of earning’s perspective $0.03, so we'll get most of that back as we go through the year hopefully, but that is a headwind on the first quarter also. So your question on innovation, do I expect our overall growth rate for the markets in which we participate to improve over the time, I think the short answer that is yes. With the new products I touched on a few of them so I won't repeat in my prepared comments, you're very familiar with some of the new products that we're excited about, I think not only are we getting into new markets for us but I think we're creating demand in several areas for new products and therefore accelerating the growth potential for the markets in which we participate. The underlying base markets, I think we are going to stay in the low single digits and our job there is obviously get our fair share of those markets while adding to the growth rate with some of the new products and whether it's that division products, some of the other products that we are reducing across PSS and surgical, I do think we're going to be accelerating the overall market growth rate potential that we're participating. The patch for Völker, we've talked about that in previous meetings, it's an investment that we've made about a couple of years ago to really get us into a whole new vitals monitoring area. There’s a number of companies going after the same thing, we're excited about the opportunity that we're putting a fair bit of money and a fair bit of effort behind and hopefully we'll have that introduced at the end of the LRP period here. So it’s probably a little premature to talk about exactly how big that can be but clearly going after not only in the hospital but outside the hospital opportunities to help patients to get better care with products that are applicable in the hospital as well as in post acute and at home settings that product fit squarely in that strategic objective that we have.

[David Lewis:]

Okay, thanks John, last quick one from me it's more for Steve but Steve's across the LRP, $750 million of free cash, I just wonder if you could be a little more granular about obviously the some debt pay out that you can get your to 2.5 leverage target, certain way there by just getting the EBITDA margins up over time. So, I wonder how do you think about that number in terms of debt pay down versus potential share buybacks? Are there any share buybacks in LRP number? And then how John are we thinking about transformational versus incremental deals over this three year period of time? Thanks so much. Sorry for the three questions.

[Steve Strobel:]

Thanks David, it's good. Out of the 750 of free cash flow, obviously a good chunk of that is going to go toward debt pay down, there will be some remainder I call it 400 million or so of debt paid down over that timeframe and the remainder is going to be partially some share buyback because I mentioned we've got some built in to offset the stop comp dilution. There will be 100 million to 200 million left that I think we're going to have the option of either opportunistic acquisitions with keeping our leverage ratio where it is or additional buybacks or the increased dividend that we're going to have that we would anticipate to have over that timeframe as well at our normal dividend increased rate. So we've got plenty of flexibility out of the remaining out of that cash flow, the free cash flow that we have over that timeframe to, I think continue to deleverage as we said our top priority was as well as take advantage of opportunities to continue to provide better growth for the company and better profitability.

[John Greisch:]

David on your last question, transformational versus incremental, I think the expectations should be more on the incremental side as we go forward. We've got a lot to execute here in the LRP and a lot of exciting growth opportunity margin expansion value creation opportunities in front of us and we feel great about where we are today, in terms of being at the high end of our pier TSR performance the last few years and we're going to focus on continuing to be there and if we actually queue what's in front of us I think we've got a great chance to continue to do that and a big part of it is what you have asked with your previous around innovation and I think it's probably one of the more underappreciated things about our company this year the $150 million that we referred to in our prepared comments about revenue generation from products launched over the last couple years that's going to go to at least 350 over the LRB period with a pretty steady ramp as we go forward. So executing that executing the margin expansion, the cost optimization and issues we've got that will keep us plenty busy and like we did with Mortara here in 2017 as we can add strategically obvious incremental M&A opportunities. We're going to push for those as well.

[David Lewis:]

Okay. Thanks so much.

[John Greisch:]

Thanks for your concise questions.

[Operator:]

Thank you and our next question comes from Rick Wise with Stifel. Your line is now open.

[Rick Wise:]

Good morning John. Let me start with the international, obviously it has been and you called that as a key growth contributor to as fiscal ’17. How much of that stronger the better performance in ’17 was easier comps and how much is truly sustainably faster growth and maybe just as part of it and saying that just help us understand why international you believe is now sustainably at a faster grower?

[John Greisch:]

Sure Rick. Short answer is it's absolutely sustainable. As I look across the globe and the portfolio that we now have why am I confident in that, if you look at 2017, I think the core growth for international was 4% I expect that sustained to improve as we move into 2018. What we've done and efficient to getting rid of lower margin lower growth products within the portfolio, we're also redeploying some of the resources in adding to the resources to put some muscle behind the products in markets where we have lower penetration today and that’s largely surgical in frontline care. We saw really strong double digit growth in frontline care in international in 2017, I think those opportunities are still in front of us. We've also got a significantly stronger team starting with Carlos Alonso who runs our international business, he's now been here two years. The team he's put in place at the country and the region level, I've got a tremendous amount of confidence in their ability to leverage the portfolio focus and the higher growth higher margin opportunities, it's exactly what we did in 2017. We're still into a couple tough markets, the PSS business in Europe had a tough fourth quarter but despite that we still put up a pretty strong growth in internationally overall and I think the most compelling answer to your question is as I look at 2017 with the 4% growth that's at a time when the fastest growing region for most healthcare companies Asia went backwards for us and we had a few stumbles there and we corrected those, we had a good fourth quarter in Asia so my confidence in international is incredibly high as we go forward. And the other 2017 growth momentum driver that we had was in our surgical business overall, not just internationally but here in the U.S. and I think I challenged on the last call why did we guide for a lower growth rate for surgical in the fourth quarter on the back of 7% growth for the first three quarters, we were wrong with our conservative outlook. We actually grew 7% again in the fourth quarter, as you heard from Steve for 2018 we're guiding surgical now into the low single digits. Hopefully we're being conservative there again but between surgical overall globally and international those growth drivers maintaining those growth rates are really critical and I've got a lot of confidence that we can do that albeit with a bit of a more cautious outlook on surgical as we go into 2018.

[Rick Wise:]

Thanks and turning to the operating margin targets in LRP, actually should be clear does that assume in the latter, at some point that you get rid of non-strategic remaining assets at 100 million you're called out, how do we think by the timing there of divestiture and again would that be incremental that the way we think about it?

[John Greisch:]

We strip it out of our core growth projections Rick, I think Steve mentioned, last year it was about 100 million bucks going down to 15 and 18 and 30 reduction, we've already divested the remaining 50 as you look at ’18 yes our objective is to exit that revenue as quickly as we can, just like we did comment in ’17 the timing on that is going to depend on how we exit it but by the time we get to 2020 yes the expectation is that that will be gone but we tried to isolate that out of our core revenue guidance for the period of 4% to 5%.

[Steve Strobel:]

But Rick that is in the margin, so that killed into our margin progression, yes.

[Rick Wise:]

Got you and just two last one from me, obviously a large noise about potential drop in corporate tax rate, it would seem to be positive for you guys if it's 20% to25%, I assume there's no structural reason that would prevent you from enjoying a lower or benefiting from a lower tax rate. But would you reinvest or reinvest half of it back in business or let it fall off the top and how do we think about that?

[Steve Strobel:]

Rick, this is Steve. Thanks for that. There's a lot of -- still despite the publication yesterday I think there's still a lot of water to go under the dam before we really understand the implications and you're right, right off to bat in terms of it were just a rate reduction off the top that would be favorable to us but there are some devils in the details here, particularly around some provisions that look to be excise taxes on payments made by U.S. companies to foreign affiliates. So, I think we're going to need to work through that because obviously we do import from locations in Germany, in Sweden, in Mexico, in Singapore products into the United States. So that could be a offset to that top-line reduction, having said that we're obviously going to go through and assess and model in detail as the details of the tax plan becomes more apparent as to whether or not we would, if we do end up getting a benefit from this down the road and up reinvesting that in the business, more likely than that I think that would end up dropping to the bottom line and improve our EPS but the word of caution there is that I don't have a clear model because there's not enough specificity as to what the eventual outcome is going to look like here for tax reform.

[John Greisch:]

Yes Rick this is John, I will just reinforce what Steve said. If we benefit from a lower rate than as I said given where we're starting from it's probably likely net-net that there if something gets done will be at the front end of the beneficiary line here but we will not be reinvesting that back into the business. I think, as we said in our prepared comments we're looking at reducing complexity and taking SG&A particularly G&A out of the business to reinvest to support the growth and that's where the new reinvestment growth opportunities going to come from. So, if we can’t get any benefit lower taxes, it will fall to the bottom line.

[Rick Wise:]

Got you. Just last for me, you're guiding to 3% that's sort of in line with the way you're thinking about the average of your end markets it seems for fiscal 18, I appreciate the need and desire for conservatism, maybe the question is if we think about the potential accelerators of growth in fiscal 18, if we sit here in here in 12 months from now, I mean where could fiscal ’18 turn out to be better on top line or a specific business or a product launch or how do we think about that side of the equation? Thank you.

[John Greisch:]

Sure Rick. Thanks for that question. Where it might take sell it just come from, I think it's probably two areas, one are the new products that I referred to Centrella we are really excited about, we just launched that towards the end of fiscal ’17, we just recently trained our sales team on it about three weeks ago. So, they're hitting the ground hard with that product as we speak. I think as we go through ’18 you'll see an acceleration of that product relative to the growth for the entire company. So, Centrella other new products that we touched that were included in the slide deck that would be the one area where I think we may have some accelerators relative to the guidance that we have for ’18. The second is what you initially asked about international, the momentum there that we had coming out of ’17 despite a weak spot as I mentioned in PS sales in Europe, I feel really good about it and given the challenges we've had internationally historically that you're all too familiar with, the success we've had in ’17 I'm optimistic as I said about that continuing and sustaining itself going forward and to the extent there's even stronger performance with the team we have now placed that that would be the second area. Surgical, as I mentioned we've guided to a low single digit growth on the back of a 7% growth in ‘17. So, I think we've got 2 or 3 tailwind as I've said in my first response to David's question, we have taken a cautious view towards just, in the spirit of not disappointing ourselves or the street with any quarterly trailing year recognizing we've got some quarterly volatility as well.

[Rick Wise:]

Thank you.

[Operator:]

Thank you. And our next question comes from Bob Hopkins of Bank of America. Your line is now open.

[Bob Hopkins:]

Thanks. Can you hear me okay?

[John Greisch:]

Bob, good morning.

[Bob Hopkins:]

Good morning, thanks for taking the question and congrats on a really strong 2017 start but I want to ask -- my first question on your guidance for earnings for 2018 because it seems like the guidance is kind of in-line with the long range plan in terms of growth, around that 10% level for 2018 but it was my impression heading into this call that the potential accretion from the Mortara deal, it would be on top of sort of normal operating leverage. So, I guess my question on the EPS guidance is it seems to me to suggest either very little accretion from Mortara or slightly lower underlying margin assumptions or maybe just a lot of conservatism and I was wondering if you could sort of help me which one is it, what's going on with Mortara accretion? Thank you.

[John Greisch:]

Yes, so let me address Mortara briefly then Steve can add to the accretion comments. So, we are really pleased with Mortara out of the gate here, I think I mentioned in my opening comments, we had some channel inventory to deal with earlier in the year but we came in pretty much as expected for the eight or nine months that we own the company, I guess about eight months that we all did in ’17, Margins are exactly where we thought they would be, the synergies that we identified at the time we required roughly 10 million over two years, we are on track to achieve that, we are looking for solid growth in ’18 with Mortara. So momentum is trending well. We are making investments elsewhere in the company to drive some of the growth behind the new product introductions that we talked about and sitting here today, nothing has changed on Mortara. The margin, the gross margin line, the operating margin line that we're looking at for next year 50 BIPS on the gross line and a 100 BIPS on the operating line, again in line with our expectations as we go forward, recognizing Mortara is a piece of it. So it is a accretive, it is in line with our expectations and to the extent there is any other margin either conservatism or other investments we made elsewhere to somewhat mitigate that accretion for Mortara it's probably in those two buckets. As I said, I don't want to sit here and say we're being conservative for ’18 because our guidance is our guidance but I think I talked about where might the accelerator is be but we are making investments behind some of our growth opportunities that I mentioned also earlier Bob.

[Steve Strobel:]

And Bob even with we have mentioned the hurricane impact here in the first quarter obviously it has full year impact as well but even with that and an EPS basis, John mentioned the 100 basis points of operating margins improvement translates into still 9% to 11% EPS growth year over year, 10% in the midpoint. And I think we feel good about the construct in which it includes additional investments behind some of these new products to make sure that they do ramp.

[Bob Hopkins:]

Okay, thank you for that. My second question and last question maybe back on track here, is on Centrella. You've mentioned it couple times on this call as an important launch for the company, I think when I look at the guidance for the division, it doesn't really look like there's any acceleration, or any meaningful acceleration in that. So again same sort of tone to the question is that conservatism other headwinds that would affect core growth in that division, because it does seem like a pretty important launch?

[Steve Strobel:]

That's a great question Bob. The launch feedback so far from customers has been incredibly positive as I mentioned in my comments. The unknown as we go into ’18 is the extent to which it may be able to accelerate the replacement cycle within the med-surg market. As you well know the med-surg market is relatively flat here in the U.S. and 2018 is largely going to be a U.S. and Canada launch for us. So, a question mark that we're evaluated as we go through the year is to what extent can Centrella accelerate the replacement cycle. It's early days to have an answer to that one. So, as we go through the year, we will obviously update everybody on how that's looking. So, between replacing of our existing products in the market we are excited about Centralla’s opportunity to do that with the excitement around the belief that will be able to accelerate the replacement cycle, we will probably in a little cautious on exactly how that's going to play out as we get to ’18. So I have no doubt having been with customers personally that this product is going to be a home run for us. I think the $64,000 question which you're poking at is can it accelerate the med-surg growth rate for us in 2018? And I think that's going to be a function of will it accelerate CapEx spending directed towards med-surg as we go through the year. And time will tell but we are probably be in a little cautious on that one as we are into the year Bob.

[Bob Hopkins:]

Does that market seems stable as generally the capital equipment market as you see it today and as you forecast for next year?

[Steve Strobel:]

It is. It has been very stable throughout the year, both but particularly if you look at med-surg and ICU for us and we don't expect any changes next year. So my optimism for this product and for the ability to really drive some accelerated investments we have seen with the couple of customers, but two customers don't make a year. I think it will accelerate the replacement cycle, but again for obvious reasons I don't want to get out of our ski tips of baking that into our outlook here until we see the few more months under our belt. But the stability to the CapEx environment generally is what we are planning for 2018.

[Bob Hopkins:]

Great. Thanks very much.

[John Greisch:]

Thanks a lot Bob.

[Operator:]

Thank you. And our next question comes from Matthew Taylor of Barclays. Your line is now open.

[Matthew Taylor:]

Hi, thanks for taking the question. So I guess the first thing I wanted to ask is just kind of conceptually when you look at the core guidance of 3% for this year and 4% to 5% for the plan to get to the high end you have to grow 6% over the next two years. You think you can do that with your portfolio and can you help us bridge how you get from three to six. Are we going to exit this year at a higher rate potentially with things like the new bed?

[John Greisch:]

Short answer to that second part of question is yes. We do expect accelerated growth as we go through the year modestly. And your math is obviously correct. If we come out of 18 with 3, we need to drive faster growth in 19 and 20 and again it's going to come from the areas that I mentioned earlier Matt, some of the new products and accelerated growth in our international business. I mean those are really the two big opportunities for us. I don't expect underlying fundamental market growth improvement in PSS, but some of the new products across the portfolio is really where the accelerated growth is going to come from just as we have seen with the new product revenue that we enjoyed in 17 and a ramp of that in the 18, 19 and 20 is going to be a big source of our accelerated growth.

[Matthew Taylor:]

Okay. And what do you think is causing this kind of healthier capital environment. I think a lot of investors are surprised that with U.S. hospitals struggling, it has been so healthy are you really referring to U.S. improvement trends or can you comment on how the capital environment is in different parts of your business?

[John Greisch:]

Yes, I use the words stable, I don't want that to be confused with healthy and improving. So when I look at our truly capital dependent business it's flattish and our bed business is probably the best analog for that comment, so I would say it's stable and in our case particularly with the bed capital relatively flat overall. So I am not sure how you define healthy, but I think stable is what we are seeing. No one is panicking among the providers that I am interacting with but CapEx is continuing to be relatively stable in line with what you guys and others research would indicate as we look forward.

[Matthew Taylor:]

Okay. Thanks very much.

[Operator:]

Thank you and our next question comes from Lawrence Keusch of Raymond James & Associates, Inc. Your line is now open.

[Lawrence Keusch:]

Good morning everyone. So just one quick one and then I just had a couple sort of larger picture questions. So just on the hurricane impacts Steve just to be clear, the $5 million and $0.03 that you articulated for the first quarter there is an anticipation that you will get some of that back throughout the course of the year. Is that correct?

[Steven Strobel:]

A little of it I think. I think there is certainly the cost out of the cost. We are not going to get the costs back, the top-line impact I think there is some loss business there. And so I would say we are planning on getting a little of that back but it's a headwind for 2018.

[Lawrence Keusch:]

Okay that's helpful. And then John, just on the M&A I mean, I think you are clear not to anticipate something transformational and really think about this is as sort of more tuck-in, but as you look out through the LRP can you help us put some framework around how you might be thinking about the M&A? Obviously you have done a bunch over the last couple of years but just wanted to see if there is any sort of changes the way you are thinking about it over the next three years?

[John Greisch:]

Changes relative to where we started maybe some worry, I think obviously the Welch Allyn acquisition and even Trumpf gave us two large platforms to build on as we go forward and I think those two areas are surgical business and the whole Welch Allyn, Front Line Care franchise are the two areas where I think as I look forward you will see us deploy M&A capital to really continue to strengthen those two portfolios. The investments on the bencher side like the patch that we talked about those are obviously part of our growth strategy, but in terms of M&A capital I think Mortara is probably more in-line with what we would like to continue to do add some category leading products into the portfolio where we can leverage our customer relationships and our sales channels. Transformational deals, again I don't want to ever rule out anything but as I mentioned earlier, I think with what we have on our plate and with some opportunities add some meaningful market leading categories like we did with Mortara that's where our focus is going to be.

[Lawrence Keusch:]

Okay that's helpful. And then just lastly, for Steve just again looking through some of the LRP assumptions. Just a two part question, on the margin expansion, the operating margin expansion that you are looking at through that LRP is it fairly ratable or are there parts of perhaps some of the businesses that you are divesting that helps step that margin up more than other parts. So kind of the question is, how to think about that progression through that LRP and then I notice that in the LRP CapEx picks up a little bit 350 million over the course of LRP from just under $100 million in 17 and just wanted to see if there was, is that sort of we should be thinking about that as sort of just moving through the LRP again sort of at a ratable rate or something notable within that period that we should be thinking about?

[Steven Strobel:]

Yes, thanks for the question. I think the answer to both of them is, I think about them more ratably if you look at 2018, we will expand our operating margins about 100 basis points in 2018 we have got 300 over the course of the three years. So I think about it ratably as well as on CapEx we don't have any huge borrows in one year or another for spending so again you look at the guidance for 2018 and that fits nicely into kind of ratable approach across the three years.

[Lawrence Keusch:]

Okay, perfect, thanks very much.

[Operator:]

Thank you and our next question comes from Matthew Mishan of KeyBanc Capital Markets, Inc. Your line is now open.

[Matthew Mishan:]

Hi. Good morning and thank you for extending the call. Lot of my questions have been asked but can you talk a little bit about the cadence of the non-core runoffs, the $100 million over three years. It sounded to that I think $30 million or so has already been divested. So it's really $70 million over the next three years that we got to work through?

[John Greisch:]

Yes, I think if you look at 18 I think the number is 50 that's reported revenue for 2018. It's really two components Matt. I’d say one of them is probably definitely going to be gone, roughly half of it will be gone by the end of 18. The other half we are working hard to exit as quickly as we can to. So, margin, sub-average margin and clearly not growing. So the objective is to exit them both as quickly as possible. One I think I can say with pretty good confidence would definitely be exit by 18 which is the third-party surface business. And the other one TBD depending on how we are able to exit that business.

[Matthew Mishan:]

Okay got it. And then what was the Mortara number in the quarter, it sounded like some inventory headwinds started the year, but you are very encouraged about like the order trends and where it's going?

[John Greisch:]

Yes, I was just showing this quarter of the year. I think we said, we expected Mortara to be approximately $70 million through the period that we owned it and we came in right about that number just below it. But the specific number I don't think we reported but it was slightly under $30 million for the quarter. And again, the strongest quarter, you may recall in the last call, we said, we’re coming into Q4 with pretty good backlog and a good order rate and the team really delivered strongly here in the fourth quarter.

[Matthew Mishan:]

Alright, great. And then lastly, bigger picture question, core growth is it 3%, you got in core growth just 3% in 18 but then it's 4% to 5% from 18 to 20. What do you see is driving the acceleration in like 19 and 20 from 18?

[John Greisch:]

Sorry Matt, can you repeat the end of that question?

[Matthew Mishan:]

What do you see as the driver of the acceleration from 3% to get you to the 4% to 5% for the entire long ranged plan in 19 and 20?

[John Greisch:]

Yes. I think it's going to be again the new products that are in, on one of the slides in the presentation, the ones that has been launched as well ones that have come in 18 and 19. International strength, Mortara we think is going to be a contributor also as we go forward. I think they are going to be at about 4% when we brought it and our intent as we did before Welch Allyn is to accelerate that growth so as that becomes part of our core revenue growth which is in the numbers for 18 to 20 I think that's the third piece that I would add to it.

[Matthew Mishan:]

Okay. Thank you very much.

[Mary Kay Ladone:]

And we are going to take our one last question.

[Operator:]

Thank you. And our final question comes from the line of Mike Matson of Needham & Co. LLC. Your line is now open.

[Mike Matson:]

Hi, thanks for fitting me in. Just wanted to ask about the new product revenue numbers that you gave, so you said $150 million in 2017 and you have a target I think $350 million for 2020. So within those numbers do you have a sense of how much of that is sort of incremental revenue versus how much of that is just cannibalizing you’re replacing existing products sales?

[John Greisch:]

Yes, the biggest piece that probably falls into the gray area is Centrella, back to my earlier comment how much of that is replacement, how much of that is going to drive acceleration of CapEx spending in Med-Surg I think is the question that we want to see a few more cards play out before we weigh in on that one. If I look at the rest of the product growth from where we are today going forward most of it is non-replacement new product growth. So of the ones on that slide that was in the LRP deck, Centrella is probably the one that materially falls into the cannibalization bucket. I hope that helps.

[Mike Matson:]

Okay. Thanks. Yes and then surgical solutions had a pretty good year with 7% growth so the longer range plan it looks like you are projecting 3% to 4% that’s a pretty healthy slowdown, is that just conservatism or where there was some kind of one-off reason it was so strong this year?

[John Greisch:]

The biggest, I don't know if I call it one-off, but the biggest impact we had in 17 was the full year of the integrated table motion which probably added two to three points of growth into surgical 7% growth for the year. That said we had a hell of year in surgical and the team delivered consistently throughout the year. So again, in the spirit of maybe longer range conservatism matching the growth rate closer to the market growth rate is what we have chosen to do here. But the momentum we’re moving into 18 is obviously pretty strong for that business. The integrated table motion growth as a percentage of the business is clearly going to slow as we get more penetrated with the da Vinci Xi, but some of the other new products that we have launched here we expect to continue to drive some pretty strong growth for the business going forward.

[Mike Matson:]

Okay. Just on the table motion product. There are some other robotic systems coming to the market. Is there a potential for you to partner with any of those other companies or is this agreement sort of exclusive with intuitive surgical?

[John Greisch:]

It's possible. It’s possible. I think there is some other exciting partnership opportunities within surgical also with some of the hybrid OR companies and some of the other areas that we have developed partnerships with. So that's a possibility going forward Matt for sure.

[Mike Matson:]

Alright. Thanks a lot.

[Operator:]

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to John Greisch for any closing remarks.

[John Greisch:]

Great. Thank you Kenneth. I want to thank everybody for joining us this morning. This is a long call with a lot of prepared comments, so we appreciate you hanging in for as long as you did. We covered a lot of the ground, but as I want to wrap up with a couple of comments and what our real focus is going forward. We have talked a lot about innovations this morning. That is above all others an area where we are going to continue to do invest and continue to drive growth going forward. And as I mentioned a couple of times that is a key element to our achievement of accelerated durable growth rate. And the three things I want to leave you with in terms of the focus areas for our team here is what I just mentioned growth, accelerating growth, clearly an important priority for us. We are coming off what we feel very probably of a very strong 2017 not only from a growth rate but from an overall performance rate and accelerating our top-line growth priority number one. The margin expansion you have seen us deliver over the last several years and as you have seen the LRP we have got our cross hairs squarely focused on a 20% operating margin as we go through the period and the actions taken in terms of portfolio optimization, cost optimization and new product contributions we are confident that we are going to march towards that goals as we go through the LRP here. And the last but not least, we feel great about the value creation that we have achieved over the last several years. And the top tier TSR performance that we have enjoyed the last several years is clearly something that we’re focused on something going forward. So I think we achieved our innovation goals, achieved our accelerating growth goals and continue to focus on our margin expansion. Hopefully you all enjoyed the same kind of value creation that we have demonstrated here in the last several years and we appreciate your support and appreciate the opportunity to take an hour and a half this morning and share our existing plans with you going forward and look forward to seeing many of you on the road in the coming months. So thanks to your time this morning and we will be back in three months with further updates.

[Operator:]

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