Hill-Rom Holdings, Inc.
Q4 2016 Earnings Call Transcript

Published: 3 Nov 2016

[Operator:]

Good morning and welcome to Hill-Rom's Fiscal Fourth Quarter Earnings Conference Call. 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, Crystal. Good morning, everyone, and thanks for joining us for our fourth quarter 2016 earnings conference call. Joining me today will be John Greisch, President and Chief Executive Officer of Hill-Rom; and Steve Strobel, Chief Financial Officer. On today's call, John will provide an overview and discuss highlights for the quarter and full year. Steve will then present additional detail on the company's financial performance and discuss the financial outlook for 2017 before opening up the call 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 this presentation, including comments regarding our financial outlook, business plans and future initiatives, contain forward-looking statements that involve risks and uncertainties, and of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more detail concerning 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 J. Greisch:]

Thanks, Mary Kay. Good morning, everybody. Thanks for joining us today. We're very pleased to announce our results for the fourth quarter and full year and provide our financial outlook for 2017. 2016 was a very successful year for Hill-Rom. We achieved record sales, adjusted earnings, and cash flow, and met or exceeded expectations on virtually all key financial metrics. This performance reflects the value of our diversified portfolio, disciplined focus on commercial and operational execution, and our commitment to margin improvements across our businesses. Clearly, we're building on a very strong foundation. We have some of the most trusted and respected brands in the healthcare industry and have transformed our business into an innovative portfolio of market leading products with broad geographic reach. I'd like to take a few minutes to highlight several achievements from this past year. Let me start by saying our commercial teams continued to execute well, delivering 3% full year pro forma constant currency growth. This includes full year growth in the U.S. of 8% that was balanced across the portfolio. The strength, however, was offset by international declines, most notably in our Middle East and Latin America regions. Adjusted operating margin of 15.3% for the year expanded by 350 basis points, driven by accretion from Welch Allyn, positive mix, benefits from our supply chain initiatives, and SG&A leverage. Adjusted earnings of $3.38 increased 28%, ahead of our guidance. Operating cash flow of $281 million reached an all-time high, providing flexibility to contribute $30 million to our U.S. pension fund and debt repayment of more than $100 million during the year. Complementing this strong financial performance were a number of other significant achievements. We successfully integrated Welch Allyn, which has resulted in an organization with greater diversification, scale and broader geographic reach. On the integration front, we are ahead of our plan to drive at least $40 million of synergies by 2018. We continue to invest in innovative products and service solutions, while capitalizing on a number of product introductions to drive accelerated future growth. Some examples include the launch of Integrated Table Motion for the da Vinci Xi Surgical System in collaboration with our partner Intuitive Surgical. The Surgical System and table seamlessly integrate, allowing surgeons and anesthesiologists to make a comprehensive range of table adjustments easily and efficiently during surgery. We are pleased with the initial launch of this product and are optimistic about its potential to augment our growth in the coming year. Second, we introduced the Welch Allyn RetinaVue Imager, a breakthrough handheld technology which makes diabetic retinopathy screening simple and affordable for primary care settings. Diabetic retinopathy is the 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. Third, we made enhancements to the Welch Allyn Connex Spot Monitor, an easy-to-use vital signs monitor that provides comprehensive and accurate blood pressure measurement, pulse oximetry and temperature using a single device. And lastly, we introduced the VisiVest Airway Clearance System, a connected therapeutic solution for patients with chronic lung disease, designed to inform decisions caregivers make for their patients, resulting in reduced risk of respiratory infections. During the year, we also created a strategic partnership with Haldor Advanced Technologies to exclusively market its ORLocate suite of products. The ORLocate solution is an innovative system that leverages RFID technology to track, manage and analyze sponges and surgical instruments during and post surgical procedures, thereby improving patient safety and operational efficiency for hospital customers. We've progressed plans to optimize our global manufacturing network with the initiation or completion of several manufacturing facility closures, and with the acquisition of Tridien Medical, a manufacturer and developer of support surfaces and patient positioning devices. This acquisition allows for the insourcing of a significant supply function that will further streamline our supply chain operations. Finally, we remain focused on enhancing our product portfolio with the announced divestiture of non-core products, including WatchChild, an integrated perinatal data management system and our architectural products business, which provides headwall systems to hospitals. These divestitures, along with other actions contemplated for the second half of 2017, provide an opportunity to direct resources, investment and focus on core growth platforms that fit our long-term strategy. To summarize, we're pleased with the improving strength of our financial position and execution against the strategic priorities outlined at our investor conference last year. We enter 2017 with confidence in our ability to drive sustained margin improvement in margins, earnings and cash flow, as well as accelerating core revenue growth for the future. With that, let me turn the call over to Steve.

[Steven J. Strobel:]

Thanks, John, and good morning everyone. We are very pleased to end the year with fourth quarter adjusted earnings of $1.18 per diluted share, which increased 33% and exceeded our guidance of $1.12 to $1.14 per share. As mentioned in the press release, we reported GAAP earnings of $0.77 per diluted share compared to a loss of $0.16 per diluted share in the prior year. Adjustments to reported earnings primarily include intangible asset amortization, debt refinancing, integration, and other costs. Now, let me briefly walk through the P&L before turning to our financial outlook for 2017, starting with sales. Fourth quarter revenue of $706 million exceeded our guidance range and increased 23%. On a constant currency basis, revenue rose 24%. Including Welch Allyn in both the current and prior year period, pro forma constant currency revenue increased 1%. We were pleased by North America PSS growth of 5% and Front Line Care pro forma growth of 6%. However, as in prior quarters, revenue outside the U.S. declined as macroeconomic headwinds in the Middle East and Latin America resulted in project delays. Excluding these regions, total company pro forma revenue in the quarter increased 3% on a constant currency basis. For 2016, reported revenue of approximately $2.7 billion advanced 34%. On a pro forma constant currency basis revenue increased 3%. Now, let me turn to revenue by segment. As mentioned earlier, fourth quarter revenue for North America Patient Support Systems increased 5% to $290 million, and for the year, revenue of nearly $1.1 billion advanced 8%. This was another outstanding year as higher margin platforms, including Clinical Workflow Solutions, services, and our patient handling portfolio are enhancing diversification, improving revenue visibility through more recurring revenue streams, and driving accelerated growth. We also continue to benefit from a stable hospital capital expenditure environment. In fact, total orders for North America PSS were up 5% this quarter and our backlog increased 11% versus a year ago. Turning to our International PSS business, revenue of $92 million while relatively flat sequentially declined 12% on a reported basis and 11% on a constant currency basis. For 2016, revenue of $360 million declined 15% and was 12% lower on a constant currency basis. While this was a challenging year for overall International PSS, one bright spot was Asia Pacific where we continued to experience strong demand and double-digit growth. Asia Pacific is now our second largest region within the International PSS business and its strong mid-teens growth this quarter helped to mute declines across other geographies. Front Line Care revenue for the quarter of $212 million increased 6% on a pro forma constant currency basis. For the year, revenue of $810 million increased by more than 6%. Capping off a successful first year as part of Hill-Rom, Welch Allyn continues to perform well, delivering constant currency pro forma growth of 7% ahead of our expectations. This performance reflects strong growth in the U.S. across key product areas such as physical assessment and vital signs monitoring, as well as from key products like RetinaVue and our Spot Vision Screener. In addition, the Respiratory Care franchise recorded growth of approximately 2% for the quarter on a constant currency basis and growth was driven by our MetaNeb System, which combines airway clearance and aerosol delivery into an integrated therapy for our patients. Moving to Surgical Solutions, revenue of $112 million in the quarter declined 6% on a reported basis and 5% on a constant currency basis. Significant headwinds in the Middle East drove this decline. In addition, we faced a very difficult comparison in our U.S. Surgical business where we posted a record quarter in 2015. For the year, Surgical Solutions revenue of $408 million declined 3% or 1% on a constant currency basis, as lower revenue in the Middle East and Latin America more than offset mid single-digit growth in the U.S. and double-digit growth in Europe. Contributing to the U.S. and European growth is positive traction with our Integrated Table Motion and strong revenue growth of the surgical positioning business at Allen Medical. Turning to the rest of the P&L, adjusted gross margin in the quarter of 49.2% not only represents the highest level for 2016, it's also the highest level achieved since 2010. This represents a 260 basis point increase compared to an adjusted gross margin in the fourth quarter last year of 46.6%. Gross margin expansion was driven by accretion from Welch Allyn, positive mix from across the legacy Hill-Rom portfolio, and benefit from cost and sourcing efficiencies. For the full year, the adjusted gross margin of 48.1% expanded by 280 basis points and was in line with our guidance. Moving on to operating expenses, R&D in the quarter of $32 million increased 31% year-over-year, primarily driven by the addition of Welch Allyn. For the year, our investment in driving innovation totaled $134 million or 5% of revenue. For the quarter, adjusted SG&A as a percentage of revenue was 26.1%, down 160 basis points versus the prior period. For the year, adjusted SG&A of 27.8% of revenue was down 110 basis points. Adjusted operating profit for the quarter was $131 million. Given significant gross margin expansion and SG&A leverage, adjusted operating margin for the quarter was 18.6%, an increase of 400 basis points versus the prior year. With the 2016 adjusted operating margin expanding 350 basis points to 15.3%, we are increasingly confident in our ability to achieve our targeted 450 basis point to 550 basis point improvement by 2018. This will be realized with disciplined focus on a number of opportunities, including driving further synergies from the Welch Allyn integration. In fact for the year, we finished ahead of schedule with approximately $30 million of our targeted $40 million in synergy savings over those three years. In addition, we're making great progress on our portfolio optimization initiatives, supply chain and cost efficiencies, as well as the implementation of our manufacturing network and facility optimization plans. The adjusted tax rate for the quarter was 28.2% compared to 27.8% in the prior year, and for the full year, the tax rate was 29.2%, flat with the prior year. In summary, we are very pleased with our financial results for the year. Our fourth quarter adjusted earnings of $1.18 per share exceeded our guidance and brought full year adjusted earnings to $3.38, an improvement of 28% over 2015. Turning to cash flow, our 2016 operating cash flow increased $67 million to $281 million. During the quarter, we elected to make a voluntary contribution to our U.S. pension fund of $30 million and incurred $4 million to refinance our existing debt. Excluding these items, operating cash flow would have been $315 million, roughly in line with our expectations. Capital expenditures for the year of $83 million declined significantly from 2015, which included large investments in our rental fleet. Given strong operating cash flow generation and effective management of capital expenditures, we exceeded our expectation for free cash flow and reduced our debt by $101 million. Finally, let me conclude my comments this morning by providing our 2017 financial outlook. We are revising our segment reporting beginning in the first quarter of 2017. As a result, we're providing revenue guidance this morning in the new format for three global businesses, Patient Support Systems, Front Line Care, and Surgical Solutions. Patient Support Systems now combines the previous North America and International segments into one segment. Going forward, we will report the U.S. and international revenue for each of these global businesses on a quarterly basis. For your convenience, we've included the historical quarterly reclassified sales for 2015 and 2016 in our earnings presentation issued this morning and have also posted the schedules to the Investor Relations section of our website. Now turning to our outlook for 2017, we expect revenue growth of approximately 3% on both the reported and constant currency basis. We project low single-digit revenue growth for Patient Support Systems on a constant currency basis. While we continue to expect a stable capital environment driving low to mid single-digit growth in the U.S., we expect international revenue to be approximately flat to slightly down. For Front Line Care, we expect mid single-digit constant currency growth, driven by underlying market growth and accelerated sales of innovative products like RetinaVue, Spot Vision Screener, and our next-generation, Respiratory Care Vest product. And for Surgical Solutions, we expect mid single-digit constant currency growth. As we have previously discussed, over the course of 2017, we expect to divest non-core, lower growth and lower margin assets that accounted for approximately $75 million of revenue in 2016. We expect to update our revenue guidance over the course of the year as the timing of these actions is finalized. From a profitability standpoint, we expect to expand adjusted gross margin by approximately 50 basis points to 75 basis points. We expect R&D spending of approximately 5% of sales and adjusted SG&A of approximately 27.5% of sales, resulting in adjusted operating margin expansion of approximately 100 basis points. We are estimating interest expense of $80 million to $85 million and a tax rate of approximately 30%. And finally, we expect approximately 67 million shares outstanding for the year. To summarize, this guidance translates into adjusted earnings of $3.74 to $3.82 per diluted share, reflecting growth of approximately 10% to 13%. From a cash flow perspective, we project 2017 operating cash flow of $330 million to $340 million and capital expenditures of approximately $120 million to $130 million. The increase in capital expenditures is primarily due to investments we are making in the facility expansions and the equipment upgrades as part of our supply chain optimization plans, as well as investments in our IT infrastructure. For the first quarter of 2017, we expect revenue growth on both a reported and constant currency basis to be approximately flat depending on the timing of certain divestitures. Revenue growth will be impacted by the particularly strong results last year that included a large customer order and a very strong finish by Welch Allyn, as they completed their fiscal year. Adjusting for these items, revenue growth in the quarter would be approximately 3%. Finally, we expect adjusted earnings per diluted share in the first quarter of $0.75 to $0.77, representing growth of 10% to 13%, in line with our full year guidance. And with that, I'll turn the call back over to John.

[John J. Greisch:]

Thanks, Steve. Before we open the call to Q&A, let me make a few closing comments. Clearly, 2016 was a very successful year on multiple fronts. We achieved record financial results, including pro forma sales growth of 3%, in line with our long range expectations of growth in the 3% to 5% range, and delivered adjusted earnings per share up 28% for the year. We're very proud of the margin expansion we have realized both in the legacy Hill-Rom business and at Welch Allyn and we have increased confidence in attaining 450 basis point to 550 basis point of operating margin improvement by 2018. We generated more than $300 million in normalized operating cash flow, reduced debt, and returned $44 million to shareholders in the form of dividends. We continued to invest in innovation, advanced our pipeline and launched several new products that will enhance our customer value proposition and outcomes for patients and caregivers. Culturally, we successfully integrated the Welch Allyn acquisition and are proactively responding to a difficult international macro environment, with important organizational changes that will strengthen our commercial and operational effectiveness around the world. As a result, in 2016, we established a solid foundation. Now, as we look forward, we enter 2017 with strong momentum, a clear strategy and talented team. Our 2017 financial guidance is balanced and aligned with our long-term strategic priorities. We've provided an appropriately prudent revenue outlook, maximizing growth across the portfolio, while at the same time executing on multiple opportunities to drive margin expansion and delivering on our longer term objectives. We remain committed to disciplined financial management and will continue to invest in innovation and business development initiatives to enhance shareholder value and position our company for future success. With that, operator, let's open up the call for Q&A.

[Operator:]

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

[David Ryan Lewis:]

Good morning.

[John J. Greisch:]

Hey, David.

[David Ryan Lewis:]

First, congrats on a solid quarter. I want to talk about guidance here though, a couple points. So I guess first on one revenue and one margin. If you think about the 3% constant currency number, how much divestiture should we think about in that number? Our sense is the organic number could be a little higher than that. Every $25 million of divestiture maybe gets you 1 point. So could you just help us think about that number relative to the divestitures? And I had a quick follow-up on margins.

[John J. Greisch:]

Yeah, David, this is John. Let me take that one, just to talk about the revenue outlook for the year and maybe take it a little more broadly than just the divestitures. So, as we've been talking about, we're exiting around $75 million of low growth, actually negative growth and low margin revenue. As you heard in our prepared comments, we've announced and completed one divestiture, which was our WatchChild business. That's roughly 10% of the $75 million. And we're hoping to close the Architectural Products divestiture this quarter. That's about a third of that $75 million. The actual impact on the revenue growth rate is going to be relatively modest. I mean it's $75 million of slightly negative growth in the revenue. So you pull that out and the actual uptake on the growth rate itself, relatively small. I think the more important point to focus on is, as we look at 2017, is the timing of our anniversarying a lot of the headwinds that we dealt with last year. As you heard in Steve's comments, the reported 3% constant currency growth rate that we achieved in 2016 would have been about 5% if you exclude the significant impact that we've had from the Middle East and Latin America. That was a couple points. So that cost us about $60 million in revenue last year, big headwind for us obviously. We've got one more quarter to flush through here of those regions' deterioration from where their revenues had been. Here in Q1, that's costing us about 1 point. The other headwinds we've got in Q1, Steve touched on these, Welch Allyn had a very, very large quarter last year in the fourth calendar quarter of 2015 as they closed out their fiscal year. That's another point that we're dealing with here in Q1. And then lastly, the large U.S. customer order in Q1 last year, we don't see that repeating this year, but that's a headwind here in Q1. So, if you look beyond Q1, and I apologize for the long winded path to get here, but if you look beyond Q1 of 2017, our guidance for the second, third and fourth quarter is in the 4.5% to 5% range. We'll get a little pop on that when we get rid of the rest of this low-margin, low-growth revenue, but I think that growth rate for the last three quarters of the year is pretty consistent with what we would have had last year had we not had to deal with the Middle East and Latin America headwinds. And as we flushed those headwinds out of our base as we get through the first quarter here, we feel really good about the 4% to 5% growth that the rest of the year is projected to achieve. So divestiture is a small impact. Obviously, a bigger impact on our margin. We're getting rid of $75 million of essentially zero operating margin revenue. But I think flushing out some of the headwinds that we've had here, all of which I've tried to articulate here in my long winded answer, we feel like the 4% to 5% rate that we're projecting for the last three quarters of this year is really the outlook that we've got going forward.

[David Ryan Lewis:]

Okay. Very helpful, John. I think it's helpful to give people comfort in the organic acceleration story, so thank you. And then sort of another question on 2017 related to margin. So you're bracketing consensus earnings next year, which I think is the prudent move to start. But when I think about fourth quarter margins, which were very strong, finishing about 15% for 2016, our sense is you got maybe 150 basis points in 2017 from mix alone relative to 2016. So I'm looking at like 70 bps of underlying margin expansion for 2017. And frankly, it just looks like it could prove conservative. I guess the question is what's wrong with our math? And I'll jump back in queue. Thank you.

[John J. Greisch:]

We're guiding towards 100 basis point margin improvement over last year. There's some positive mix impact there. There's some supply chain improvement in there. There's some new product benefit in there, all of which are going to continue to drive margins. I think you heard in Steve's comments and mine, we're going into 2017 with increased confidence on our ability to deliver on our LRP margin expansion of 450 basis point to 550 basis point. We got significantly towards those goals in 2016 and at least another 100 basis points here in 2017. So I'm not sure your math is at all wrong as normal. But as you said, we're trying to prudently look into 2017 with all of the uncertainties going on. North America I think is the biggest wildcard for us. Our PSS business has been performing exceptionally well the last couple of years. And I think as you heard in Steve's comments, our guidance for that next year is in low to mid single-digit growth rate. If we continue to see the performance there with all of the uncertainties in the U.S. health system post-election, I think you can see some enhanced performance as we go through the year.

[David Ryan Lewis:]

Okay. Thank you very much.

[Operator:]

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

[Bob Hopkins:]

Great. Good morning. Thanks, everybody. Can you hear me okay?

[John J. Greisch:]

Good morning, Bob.

[Bob Hopkins:]

Morning, John. So I just want to follow-up on David's question, just maybe a little more specifically on the guidance side. So for the first quarter of 2017 and for the full year of 2017, could you just give me what is your guidance for organic revenue growth, ex-divestitures? And then maybe if you could just – the same part of that question, what in dollar amount are you assuming in the Q1 and 2017 guidance for divestitures?

[John J. Greisch:]

Let me take a shot at that and Steve can jump in also. So the constant currency organic growth for Q1 is essentially flat. For the full year, it's 3%. I mean that's the guidance for the full year. And again, I won't repeat my entire answer that I gave to David. But if you get past Q1 where we're dealing with headwind from the Middle East, headwind from the Welch Allyn, end of year performance in calendar 2015, and significant order that we had in Q1 of last year here in the States, it's roughly in the 3% range. Importantly if you look the rest of the year at 4% to 5%, that's kind of the confidence that we take away as we look at the underlying sustainable growth rate that we're running at, ex these headwinds. I think the important point, and I may have mentioned this in my earlier answer, Bob, the Middle East and Latin America, which have been far more significant on us than almost anybody else from a percentage perspective, again, it cost us 2 points of growth last year, those two regions today represent less than 5% of our consolidated revenues. So, the risk of those hurting us next year, like they did last year, pretty slim. I think on the divestiture front, as I said, there's roughly $75 million we're getting out of. We've exited $8 million of it as we closed 2016. The Architectural Products will be gone by the end of the quarter. That's about a third of it. The rest sometime in the second half of 2017. So the impact on the growth rate, again, from those revenues disappearing is going to be relatively modest. It will be positive, but it's not a huge positive. It's just getting out of low-growth, low-margin revenue that's the important portfolio move that we're making here.

[Bob Hopkins:]

Okay. So just to be clear, that 3% guidance that you're giving includes the effect of the divestiture, the $75 million of divestitures.

[John J. Greisch:]

It does not consider the positive impact of once those revenues are completely gone, we'll see some modest accretion to the growth rate. So we're not trying to project the timing of when we're going to get rid of them, Bob. So the short answer to your question is, no, it does not reflect the benefit in our run rate once those revenues are gone.

[Steven J. Strobel:]

Aside from the one that's already been announced, the WatchChild. So the rest of the volume is still in. And as I've mentioned, we'll update guidance as we go, and as the actions takes place, we'll update our guidance. As John said, the overall growth rate impact we don't expect to be significant this year, but we'll update guidance as we go.

[Bob Hopkins:]

Okay. And then just maybe one other question on operating cash flow. I think you said sort of ex some of the one-time issues in 2016, you felt like you generated about $350 million in operating cash flow. And I think you just said your guidance for 2017 is $330 million to $340 million. So I'm just wondering why the operating cash flow is a little lower in 2017 than it was in 2016, unless I missed something.

[Steven J. Strobel:]

Yeah, Bob, I might not have spoken very clearly. It's $315 million, 3-1-5.

[Bob Hopkins:]

Sorry about that. Okay.

[Steven J. Strobel:]

Yeah. Sorry. I'm a little hoarse from screaming at the TV last night for the Cubs game, so.

[Bob Hopkins:]

Got it.

[Steven J. Strobel:]

So that could be why I'm – that number came out like, 3-1-5 with after – no, after – if you were to add back the contributions we made for pension and the costs incurred to refinance our debt. 3-1-5.

[Bob Hopkins:]

Okay. Thank you very much.

[Steven J. Strobel:]

Yeah.

[John J. Greisch:]

Thanks, Bob.

[Operator:]

Thank you. And our next question comes from Matthew Mishan from KeyBanc. Your line is open.

[Matthew Mishan:]

Hi. Good morning and thank you for taking my questions.

[John J. Greisch:]

Morning, Matt.

[Steven J. Strobel:]

Hey, Matt.

[Matthew Mishan:]

I'm sorry to go back to this. I just want to make sure it's fully clear on the revenue growth guidance and the impact of the divestitures. So the way we should be looking at it is, in 2016, you finished the year with $2.65 billion in sales. We should, for the constant currency revenue growth guidance, we should be taking into account the fact that the $2.65 billion in sales, we should back out $75 million from that and assume what's remaining is 3% constant currency growth.

[Steven J. Strobel:]

Well, I think what we're saying is that, looking with the $2.65 billion as the base, we're guiding 3% on that base. As the divestitures take place, we will update what that growth would be on a, I'll call it, a core basis. So we'll normalize and take out what was in 2016 for whatever that divestiture business was taken out for 2017 and give you an updated version of what our core growth rate would look like.

[John J. Greisch:]

Hey, Matt, let me take one more crack at this, because I've probably confused people more than I clarified it from the sounds of it. If you're focusing on the 3% growth rate, the impact of whether these revenues are in or out is in the tenths of a point. It's relatively small. Obviously, $75 million of revenue is going to disappear once we divest these chunks of business that we're looking at divesting, so our revenue is going to go down $75 million. But the actual impact on the growth rate itself, instead of 3%, it might be 3.1%, 3.2%.

[Matthew Mishan:]

3.2%, yeah.

[John J. Greisch:]

It's pretty small. Again, I think the thing to focus on is, once we get these behind us, we won't even be having to talk about them anymore, but the impact on the growth rate itself is relatively small. I think the more important issue is the underlying growth rate as we look beyond our first quarter here. Again, looking at our guidance, looking at what we did last year with the Middle East and Latin America headwinds is more in the 4% to 5% range. I mean that's our guidance for Q2, Q3 and Q4, 4% to 5% growth in those three quarters. So the divestitures are important to get rid of because they're not generating any operating income, but the impact of those alone on our growth rate is really immaterial.

[Matthew Mishan:]

Okay. I think that's fair then. And then on the international side, could you maybe parse out performance in Europe from the Middle East and Latin America? You had a couple – you had some issues early on as you were kind of making the changes. How has the cadence of that progressed through the course of the year?

[John J. Greisch:]

That's a good question. If you look at our performance in Q4, I'll start there with Europe, it was slightly up from Q3 and up from Q2, certainly, which is where we had the issue back earlier in the year. And then, if you look at 2017, Steve mentioned our PSS business internationally, our outlook is flat to slightly down. Again, that's got a head wind from the Middle East, but Europe itself is projected to be pretty steady for us throughout the year. And our outlook here as we go into 2017 is pretty consistent with the outlook that we had in the second half of last year, which was relatively steady. So I'm pleased with the team we have in place. I'm pleased with the structure we've now got in place. And more importantly, I'm pleased with the stability that we're seeing across the portfolio in Europe, not just with PSS stability, but I think in Steve's comments, he commented that our surgical business in Europe was up in double digits for the year. So we're starting to see the benefits of not only the portfolio diversification but also the structure that we've put in place. So satisfied with where we are in Europe, and again, certainly a stable outlook relative to where we were six, nine months ago.

[Matthew Mishan:]

Okay, great. And then last one, if I could just squeeze it in. Can you give us an update on your progress around Welch Allyn generating revenue synergies in the hospital with your core customers? And then also the progress in expanding out that portfolio and where you're at in bringing some of those products in internationally.

[John J. Greisch:]

Yeah, I think everything on Welch Allyn is an up arrow for us at the moment. I mean, the performance has been great in 2016, as we've seen financially. We are beginning to win at the customer level with some big customers for Welch Allyn that had not been in the hunt with some business that we've won on the back of the Hill-Rom relationship. So the revenue synergies, to use your term, we're beginning to see them take hold with some of our larger customers, particularly here in the US. I think internationally, as we leverage the same relationships and infrastructure that we've got in some of the regions internationally, I expect to see the same kind of performance going forward as well. So we feel great about where we are with this business and feel great about the growth acceleration opportunities as we look forward, not just here in the States but internationally as well.

[Matthew Mishan:]

All right. Thank you very much, guys.

[John J. Greisch:]

Thanks, Matt.

[Mary Kay Ladone:]

Crystal, do we have any other questions on the line?

[Operator:]

We have no further questions at this time.

[Mary Kay Ladone:]

Well. Thank you all for joining our call this morning and we will conclude the call at this time.

[John J. Greisch:]

Thanks, everybody.

[Steven J. Strobel:]

Thanks.

[Operator:]

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