Hill-Rom Holdings, Inc.
Q4 2015 Earnings Call Transcript

Published: 5 Nov 2015

[Operator:]

Good morning, and welcome to the Hill-Rom Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, the conference call is being recorded and will be available for telephonic replay through November 10, 2015. See Hill-Rom's website for access information. The webcast will also be archived in the Investor Relations section of Hill-Rom's website, www.hill-rom.com. If you choose to ask a question today, they'll be included to any future use of this recording. Also note that any recording, transcript or other transmission of the text or audio is not permitted without the written consent of Hill-Rom. Now, I'd like to turn the call over to Mr. Andy Rieth, Vice President-Investor Relations.

[Blair Andy Rieth:]

Well, thank you, Amanda. Good morning, and thanks for joining us on our fourth quarter fiscal year 2015 earnings call. Before we begin, I'd like to provide our usual caution that this morning's call contains forward-looking statements, such as forecasts of business performance and company results, as well as expectations about the company's plans and future initiatives. Actual results may differ materially from those projected. For an in-depth discussion of risk factors that could cause actual results to differ from those contained in forward-looking statements made on today's call, please see the Risk Factors in our Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q. Also, we will discuss certain non-GAAP or adjusted financial measures on today's call. Reconciliations to comparable GAAP financial measures can be found in our earnings press release, the associated Form 8-K, and are also available as part of the presentation materials posted on our website. Joining me on the call today will be John Greisch, President and CEO; Chief Financial Officer, Steve Strobel; and our Chief Operating Officer, Carlyn Solomon. The usual ground rules will apply to make the call more efficient. We scheduled an hour in order to accommodate our prepared remarks and leave plenty of time for Q&A. During Q&A, please limit your inquiries to one question plus a follow-up per person. If you have additional questions, you may rejoin the queue. As you listen to our remarks, we are also displaying slides that amplify our disclosure. I would encourage you to follow along with us. The slides were posted on our website and will also be a part of the archive. With that, I'll turn the call over to John.

[John J. Greisch:]

Thanks, Andy. Good morning, everybody. Thanks for joining us. We just completed one of the most successful years in our company's history. Over the past year, we have significantly improved our portfolio and customer value proposition with the additions of Trumpf and Welch Allyn. With these acquisitions and strength in our core businesses over the past 12 months, we posted record revenue and adjusted earnings. Revenues increased 20% for the quarter. Adjusted operating income was up 41%, while adjusted earnings were up 20%. These results were well ahead of the guidance we provided at our September Investor Conference driven by stronger-than-expected contributions from Welch Allyn, Trumpf, and North America. Throughout 2015, we launched several exciting new products, all of which contributed to the 7% constant currency organic growth we achieved for the quarter and for the full year. Our new product launches included our new bariatric offering Compella, our LikoGuard Overhead Patient Lift, enhancements to our market-leading ICU frame Progressa, and several exciting new products across our Surgical and Respiratory Care franchises. Our R&D team has consistently been delivering new product launches over the past several years, adding to our growth across the portfolio. Our North America business in Surgical and Respiratory Care franchises had a great fourth quarter and full year. Offsetting these strong performances was a tough year in our International business. However, we are very pleased with the growth of the entire portfolio throughout 2015. The most significant event for us in 2015 was the completion of the Welch Allyn acquisition. As you all know, Welch Allyn is an incredibly valuable global brand. Welch Allyn's portfolio adds significant depth and breadth to ours and to our channel presence in the acute care space, as well as in other healthcare settings. I could not be more excited by the acquisition of Welch Allyn and how it will significantly contribute to the value that we bring to our customers and patients around the world. The integration has gone very well over the past few months, and our teams are working across the company to leverage the combined value we will bring to the customers. At the same time, immediately following the acquisition, we completed the majority of our planned head count synergies and we are well on our way to achieving at least $40 million of savings that we committed to at the time we announced the acquisition. On the margin front, as we committed six months ago, even without the benefit of Welch Allyn, we delivered an adjusted operating margin in the second half of the year that was up over 200 basis points from the first half of the year. Welch Allyn further added to our margin performance in the fourth quarter. For the full fourth quarter, we posted an adjusted operating margin of 14.6%, up 220 basis points from last year, of which 110 basis points were contributed by the accretive impact of Welch Allyn. Let me provide a few more fourth quarter highlights. In North America, capital orders were flat year-over-year. However, excluding HCA orders, order volume was up, reflecting continued strength in hospital CapEx and outstanding execution by our commercial team. Our capital backlog in North America was down about 11% at the end of the fourth quarter due to the large backlog for HCA last year. Backlog excluding HCA was up year-over-year. Our North America rental business grew strongly with a 13% year-over-year increase due to higher volumes. Surgical and Respiratory Care business also had another strong quarter with 6% constant currency growth, marking the 10th consecutive quarter of growth. Our International business continues to be challenging, declining 5% on a constant currency basis. We continued to experience weakness in parts of Europe and the Middle East, while Asia Pacific grew year-over-year. Before I turn the call over to Steve, let me add some additional commentary looking back on the full year. Our North America capital business had an outstanding year with revenue up 17%. While comparisons will become more difficult next year, order trends remain solid and we're entering 2016 with a second largest fourth quarter backlog in the last four years. Our Surgical and Respiratory Care business continued to perform well with 4% organic constant currency growth. In addition, Trumpf had a very solid year, particularly in the United States where we were able to leverage the Hill-Rom channel strength and to grow for the full year in excess of 25%. As previously mentioned, we had another successful year of new product introductions, launching more clinically relevant and higher margin products across the portfolio. For the full year, we increased our R&D spending by over 25%. Improving our cost structure and expanding margins remain critical priorities. We improved adjusted SG&A in 2015 by 120 basis points as a percent of sales excluding Welch Allyn. Even with incremental investments in some of our growth initiatives and higher incentive compensation expense, adjusted SG&A for our legacy Hill-Rom business grew only 1% for the full year. So to summarize, we are pleased with the progress we have made over the last year across the company. As we look ahead to 2016, we are confident that we will deliver solid revenue growth, improved adjusted operating margins and earnings and strong cash flow. With that, let me turn the call over to Steve.

[Steven J. Strobel:]

Thank you, John, and good morning, everyone. Fourth quarter revenue was $574 million, up 19.6% or 24.8% on a constant currency basis. This increase was driven by our acquisitions of Welch Allyn and Trumpf along with constant currency organic sales growth of 6.7%. This organic growth was driven by higher revenue in North America in Surgical and Respiratory Care. Capital sales increased 22.9% to $479 million. Excluding acquisitions, capital sales increased 6.4% on a constant currency basis. Rental revenue increased to $95 million, a 5.5% increase. Domestic revenue increased 26% to $384 million, while revenue outside the United States was $190 million, up 22% on a constant currency basis. Turning to revenue by segment, North America increased 12.2% to $278 million. North America capital revenue increased 11.8% to $208 million on the strength of patient support systems and Clinical Workflow Solutions sales. Fourth quarter capital orders were approximately flat with the prior year, but were up 9% for the full year. The fourth quarter backlog decreased by 11% versus prior year. However, as John mentioned, large orders and backlog associated with HCA contracts a year ago significantly impacts that year-over-year comparison. Excluding HCA, orders and backlog were up year-over-year. North American rental revenue increased 13.4% to $69 million, reflecting solid execution and new contract wins. Moving to our Surgical and Respiratory Care segment. Revenue increased 32% to $141 million, driven by the contribution from Trumpf and organic constant currency growth of approximately 6%. This organic growth was highlighted by record performance in our Allen and Aspen Surgical businesses. Moving to International, revenue declined 16.2% to $106 million or about a 5% decline on a constant currency basis. Growth in Asia Pacific was offset by continued pressures in Europe and the Middle East. Rounding out revenue, the Welch Allyn business, which we acquired on September 8, contributed revenue of $50 million for the quarter, which was better than we expected. Adjusted gross margin was 46.6%, an increase of 100 basis points compared to the prior year. Excluding Welch Allyn and Trumpf, adjusted gross margin increased approximately 80 basis points on favorable geographic and product mix along with other cost initiatives. Year-over-year adjusted capital gross margin increased 150 basis points to 46.1%, driven by favorable product mix and the addition of Welch Allyn. Excluding the impact of acquisitions, the increase in our organic capital gross margin was approximately 110 basis points. As we discussed at the Investor Conference, we expect Welch Allyn to be meaningfully accretive to our gross margins going forward. Adjusted rental gross margin in the quarter was 49.3%, a decrease of 60 basis points versus the prior year. Moving on to operating expenses; R&D increased 13.4% year-over-year, driven by the addition of Trumpf and Welch Allyn. Adjusted SG&A increased 15.6% year-over-year, largely driven by Trumpf and Welch Allyn. But as a percentage of sales, adjusted SG&A decreased 100 basis points. Adjusted operating profit for the quarter was $84 million, an increase of 40.9% from 2014. This improvement was accomplished despite $25 million of FX headwind in the top line. Operating margin for the quarter was 14.6%, an increase of 220 basis points versus the prior year. Excluding Welch Allyn, adjusted operating margin increased 110 basis points in the fourth quarter versus the prior year. The adjusted tax rate for the quarter was 27.8% compared to 25.9% in the prior year. This increase was driven primarily by geographic mix and variances in discrete tax items year-over-year. So, to summarize the income statement, which is adjusted earnings per diluted share of $0.89 in our fourth quarter, an increase of 20.3% over the prior year. As John mentioned, we experienced a stronger than expected contribution from both our core business and Welch Allyn. That brings our full year 2015 adjusted EPS to $2.64, up 17.3% from 2014, despite an FX headwind on the top line of approximately $94 million. Year-to-date GAAP operating cash flow of $214 million, includes approximately $21 million of one-time Welch Allyn acquisition-related outflows, net of the tax affect. Adjusted for that, our operating cash flow of $235 million was in line with our expectations and prior guidance. Capital expenditures increased to $121 million, primarily driven by the incremental investment in our rental fleet earlier this year. Free cash flow adjusted to exclude outflows for the Welch Allyn acquisition was $114 million, slightly ahead of our previous guidance. Now, let's move on to 2016 guidance. For fiscal 2016, we expect reported revenue of between $2.66 billion and $2.70 billion. Our forecast is based on the following assumptions

[John J. Greisch:]

Thanks, Steve. Our fourth quarter concludes a very successful year, both in terms of our financial results as well as the advancement of our growth strategy. Our full year constant currency growth of 7% reflects solid execution across the entire company. Our increased investment in R&D over the past several years has yielded a steady rhythm of new product launches, supporting this growth. At the same time, we have aggressively managed our SG&A structure. These actions, together with efficiencies across our supply chain, are yielding solid improvement in adjusted operating margins, as evidenced by our 220 basis point improvement in the fourth quarter. Strategically, our acquisition of Welch Allyn is a significant step in our journey to build a stronger, more diverse portfolio with compelling solutions for our customers. It is early days but the cultural integration and financial performance are both ahead of expectations. The Welch Allyn acquisition is a perfect example of what we need to do to execute the strategy, we laid out at our Investor Conference, that is establishing Hill-Rom as a premier partner to global healthcare systems by providing differentiated solutions to our customers and patients. At the same time, we're highly focused on improving our global sales and marketing capability, driving operational excellence and continuing to pursue growth through acquisitions. We have a strong leadership team, a clear strategy and high confidence in our ability to deliver on the long-term commitments presented at our recent Investor Conference, including 3% to 5% organic revenue growth, 450 basis point to 550 basis point improvement in our adjusted operating margins, and high teens growth in adjusted earnings per share. At the same time, we will deliver over $1 billion in operating cash flow, and maintain our disciplined approach to value-creating capital deployment. With that, operator, please open the call to questions.

[Operator:]

Thank you. Our first question comes from David Lewis of Morgan Stanley. Your line is open.

[David Ryan Lewis:]

Sorry, can you hear me?

[John J. Greisch:]

Yeah. Hey, David.

[David Ryan Lewis:]

Sorry about that. So, John, a couple quick questions here. The first is on margins. I wonder if you could help me walk from the fourth quarter margin contribution of Welch Allyn into next year. So, 110 basis points of Welch Allyn was sort of heavier than you were expecting for the fourth quarter, next year, guidance kind of implies at least or close to 250 basis points of margin. So, how was Welch Allyn that impactful in the fourth quarter and sort of what's the implied contribution for EBIT and basis points relative to that 250 basis points in 2016?

[John J. Greisch:]

Yeah, let me answer that a couple different ways, David. Firstly, the legacy business had a great quarter as well as Welch Allyn had a really strong mix and higher than expected revenue contribution for the quarter, both of which led to the 220 basis point improvement year-over-year in Q4. And as you said, half of that is Welch Allyn, half of that is Hill-Rom. If you look at 2016 full year, and look at it two different ways, if you take Welch Allyn out of 2015, so forget the three-week contribution they've made, for the company, 2015 to 2016 operating margins up about 300 basis points. Some of that we obviously got in the last few weeks of the fourth quarter, with the addition of a great mix with the Welch Allyn. But old Hill-Rom, the new Hill-Rom, up 300 basis points year-over-year. Welch Allyn, as we said, at the time we bought it, will contribute about two-thirds of that with the legacy Hill-Rom businesses operating margin increasing again roughly 100 basis points on its own.

[David Ryan Lewis:]

Okay. That's very helpful. And then...

[John J. Greisch:]

That make sense?

[David Ryan Lewis:]

John, just a – yes, it does. Thank you.

[John J. Greisch:]

Just to add to that. I mean we obviously were pleased with Welch Allyn's contribution here in the fourth quarter. We only owned it for three weeks, but coming out of the gates, with potential disruption risk that you often see on the back of acquisitions, we obviously haven't seen, and I don't expect to see that going forward either.

[David Ryan Lewis:]

Okay. Very helpful. And then just a question broadly on HCA contribution for next year. I think you suggested what the HCA backlog was, your underlying backlog sounds like it's up low single digits, I'm not sure if I'm in the right ballpark there, but for next year, 2016, is HCA still a growth tailwind or, on a relative basis, just given the strong performance in 2015, is it – is this somewhat of a headwind in 2016?

[John J. Greisch:]

Yeah. A couple comments, David, and then I'll ask Carlyn to add to it. So just to put some perspective on HCA, you recall last year they placed a big order in the fourth quarter of fiscal 2014. The timing of their orders this year, that's coming in Q1 here of 2016. We've won the business and it's flowing here in Q1. So it really is a timing issue for our biggest customer. You're in a reasonable ballpark; non-HCA backlog's actually up a little bit more than you stated. So the underlying trend of orders, HCA is going well in its timing and non-HCA continues to be reasonably healthy.

[David Ryan Lewis:]

Okay. Thank you very much.

[Carlyn D. Solomon:]

And just to add to that, our HCA continues to go well. We're also negotiating on a number of opportunities with HealthTrust, which could help us again this year. But it's still a little early to tell where those end up.

[David Ryan Lewis:]

Okay. Thank you.

[Operator:]

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

[Travis L. Steed:]

Good morning. This is Travis Steed on for Bob.

[John J. Greisch:]

Hey, Travis. Good morning.

[Travis L. Steed:]

Morning. So last quarter, you had a little more of a challenge with translating revenue growth to better margins, but this quarter you did a much better job with that. Can you talk about what changed from this quarter versus last quarter?

[John J. Greisch:]

Well, let me start Travis with, we did exactly what we said we're going to do. I think a couple quarters ago, we said the second half operating margin was going to be up a couple hundred basis points over the first half and that's exactly where we landed it here. So, we were pleased with the performance here in Q4 and all the actions we've been taking are beginning to take hold. If you look at last year, Q3 to Q4, we saw little to no sequential improvement on operating margin; this year we're up, I think, 300 basis points from Q3 to Q4. So the momentum we've got going into 2016 is quite strong. Q4 is always our strongest operating margin quarter. We get the operating leverage double benefit, if you will, on the stronger revenue in our fiscal fourth quarter. So you're going to see a little drop-off in Q1 based on the guidance that Steve laid out. But the actions we've taken to drive the operating leverage benefit here in the fourth quarter and second half of the year is exactly where we thought it would be and Welch Allyn's exactly what we expected it would be as we move into 2016.

[Travis L. Steed:]

Okay. Maybe just to follow up on the International business, can you talk about some of the progress you've made there and things still in your to-do list to improve that business? And then can you also talk about how much of it is being more impacted by the economic factors versus what you can fix internally?

[Carlyn D. Solomon:]

Yeah. Travis, this is Carlyn. So, first of all, to kind of give you a broad overview what's happening for us internationally. We have some areas of the company that aren't doing that well. Saudi Arabia is an area that we've really taken a hit. I would say that that's largely economic. When we go out and do research, talk to other companies, talk to distributors in Saudi Arabia, our experience there doesn't appear to be a whole lot different than others. We have some parts of Europe where we saw very nice growth. Our big issue in Europe, and including Germany, our big issue in Europe this year has been France. And I would say that's probably a bit of a mix, some economic and some we didn't perform at the level we should have performed at. If you look at Asia Pac, we had a very good year, particularly in Asia. Asia grew what you would expect Asia to grow. So we were really pleased with that. Australia wasn't quite as strong as we had hoped, but overall Asia Pac did well for us. And then Latin America, to kind of round this out, you, overall, had more economic impact, I would say, than anything we did or did not do. As a company, we particularly saw Brazil get tougher for us as well. So, hope that helps.

[Travis L. Steed:]

Very good color. Thanks a lot.

[Operator:]

Thank you. Our next question comes from David Roman of Goldman Sachs. Your line is open.

[David Harrison Roman:]

Thank you. Good morning, everybody. I wanted just to ask one logistical question that hopefully Andy won't count against me here, which is, in your reporting for the quarter, it looks like it's consistent with what you have been reporting sales on a trailing basis, but the presentation that you provided at the Analyst Meeting had a different grouping or presentation of revenue. How are you going to give numbers on a go-forward basis?

[Steven J. Strobel:]

Yeah. David, this is Steve. Obviously, we need to align our operating structure and the rest of our infrastructure along the lines of what we laid out at the Investor Conference and we will start reporting that way as that structure gets put in place and we start operating the business specifically that way. We have a lot of work to do yet to get our organization and infrastructure in place for the international part of the business, and once that is put in place then we will start reporting that way.

[John J. Greisch:]

David, this is John. I think at the Investor Conference we commented that we'll be doing that sometime during 2016. And as Carlyn gets his team fully in place, so we got management accountability matching the segments, as Steve said, that we laid out at the Investor Conference, we'll do that. It will probably be in the first half of 2016.

[David Harrison Roman:]

Okay. Got it. That's helpful. And then, John, maybe you could just spend a second on the overall external environment. It seemed you just had a pretty strong FY 2015, some of the data points coming out from the publicly traded hospitals have shown some pressure on their margins, which I think historically we've talked about that being a good barometer of future CapEx spending. But in your commentary, it sounds like you're still seeing a fairly healthy backdrop for hospital CapEx spending, so maybe any update you could provide over the past couple months, how those markets have trended, would be helpful.

[John J. Greisch:]

Yeah. Let me take a couple cuts at that, David. One specific to your question on what do we see externally, and two, how does that translate into our 2016 guidance. As I said in my comments, HCA obviously is a bit of an impacter for us just because it's our biggest customer, but that's just timing. We've won that business the last two years. We got it in Q4 of last year, we're getting it in Q1 of – last year being 2014, we're getting it in Q1 of 2016. Ex-HCA, as I mentioned in my comments, orders for the quarter and certainly for the year were up year-over-year and backlog at the end of the year is up year-over-year, and reasonably healthily up also. I think capital orders for the full year were up 9%, even though we had HCA slip out of 2015 and into 2016, while it was in 2014 last year. So we're not seeing any real changes in the stability and the strength of hospital CapEx. We've got a pretty active order book right now. And I think we feel reasonably good that 2016 is going to look a lot like what we laid out at the Investor Conference, low to mid single digits, which I think is what our guidance is for 2016. That said, as you flip from 2015 to 2016, our North America capital business was up 17% in revenue in 2015. And before we layer Welch Allyn into the portfolio, that's half our business. So, that was a big driver to 7% constant currency growth we saw in 2015. You do the math on that business growing in the low to mid single digits, you got Surgical and Respiratory and Trumpf growing in mid single digits, and you've got International improving from minus 5% to flat. And then you layer out 1 point or 2 points of FX, that's where you get to the, call it, 3-ish percent growth for 2016. So the impact on the strength in North America capital, big impact obviously on our 2016 guidance. But the stability that we want to see in this business, we're certainly seeing. We don't expect it to grow double digits in 2016 clearly, I think you guys would question our judgment if we came out with another double digit capital growth in 2016, but we certainly expect it to be steady, solid low to mid single digit growth and we see nothing at this point to deviate from that plan.

[David Harrison Roman:]

Okay. And then on – lastly on Welch Allyn, you talked about in your prepared remarks, having completed the head count reduction, reaffirming the commitment to $40 million, minimum, of cost savings. Can you maybe just go into a little bit more detail on the components of that $40 million, and given that you've completed the head count reduction, why wouldn't we see a disproportionate amount of that materialize in FY 2016?

[Carlyn D. Solomon:]

Yeah, so this is Carlyn, David. Like you said, we organized ourselves in a way that we could minimize the disruption to employees by quickly announcing any significant head count reductions that we saw could be made and should be made to make the business more efficient. And some of this just dealt with, first of all, you had a lot of the senior leaders that left the company. And so that was a positive impact. And then we went through kind of function-by-function, and using the strength and the capability that Hill-Rom has, we factor that in to what we would be able to do at Welch Allyn. And we made those adjustments within days after closing the deal. And that gives our employees there kind of a lot of stability, they know what their situation is one way or the other. So that's largely completed. Some of the additional things that we'll do to drive the synergies are going to be a little bit longer range things. They're things like material cost reductions, improvements and efficiencies that we're getting after right now. So overall, it may be – there is slightly more this year in there for our cost reductions, but we see this kind of factoring out like we said we would and we committed to over the next three years.

[John J. Greisch:]

David, we're obviously pushing it hard, and we'll get the savings in the bank as quickly as possible. The other piece that's part of $40 million is some footprint consolidation, and that's going to take a couple years, two years, to three years to get done. But Carlyn and his team are obviously working hard to get as much of that $40 million in as soon as possible, but we're sticking with the commitment that we made a couple months ago at this point in time.

[David Harrison Roman:]

Okay. Terrific. Thank you very much.

[John J. Greisch:]

Thanks a lot.

[Operator:]

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

[Larry S. Keusch:]

Hi. Good morning, everyone.

[John J. Greisch:]

Hi, Larry.

[Steven J. Strobel:]

Hi, Larry.

[Larry S. Keusch:]

So, Carlyn, you did a great job just running through sort of the complexion of the overseas business and what was economic and what was perhaps execution related. But I was hoping you could revisit a little bit about what you guys specifically are going to do there to try to turn the business around outside of just the economic issues. Obviously, down 5% in the fourth quarter and looking for flat next year. So really just trying to get a sense of what's on the agenda here for you guys to execute better over there.

[Carlyn D. Solomon:]

Yeah. So, we're increasing pretty dramatically our operational cadence. And by that I mean getting deeper on every aspect of the business, making changes. So, literally in the past few months, and I think you saw – met Carlos Alonso, probably just heard him speak when we were at the Investor Conference. We swapped out our leader in Europe. We brought in a very seasoned veteran that I know from my past that I think is going to make a huge impact. We've changed and are in the process of changing our German leader, our leader in France and we're also – so on the personnel side, we're very, very focused on that. We're also looking at how do we integrate these businesses to take costs out of our structure internationally. So we are integrating Welch Allyn into the International structure. As we mentioned, we're integrating Trumpf into our structure and what that's going to allow us to do is shape some extent of what it takes to deliver the products internationally and give us more strength. Places like China and other places, size and your gravitas really matters and pulling this all together into a single customer experience center will make a big difference as well. So that kind of covers the expense side. So we covered leadership. We've covered expense. And now to get strategically, one of the areas of opportunity that we have is, and I'll mention two, are some of the products that we have that drive higher margin in the U.S. we don't offer in all of the international community. And so, we're starting to correct that. These are product lines like our Clinical Workflow Solutions. It's offered on a very limited basis overseas and it has a nicer margin and it's a product that others would like to have, so we're starting to develop that for the international market. And there are other products that I spoke about at our Investor Conference that we're going to offer overseas as well. The higher margin, higher med tech component of a product that I think will really help lift us. And then finally, there's just allocation of resources. Today, we're going to have the opportunity to take some of our resources that today are selling lower margin, long-term care type solutions and move them into the higher margin, higher growth potential products like a Welch Allyn overseas. So that gives you kind of a broad brush of what we're doing with people, with expenses in strategic way.

[Larry S. Keusch:]

Okay. That was really helpful. And then just quickly for Steve, I know you guys have talked about this. I just want to make sure that we're thinking about it correctly going into 2016 is, again, just given the solid strength in your cash flow from ops, again how do we think about capital deployment for the coming year? And is there even any ability or chance that you might do M&A or is that really better to think about a little further out?

[Steven J. Strobel:]

I think as we said in the Investor Conference, we're very excited about the stability of the cash flow that the combined operation has. Obviously, we had a great cash flow with the base Hill-Rom business, combined nice cash flow with Welch Allyn. Our immediate focus is on deleveraging, but as we said in the conference, we're always going to be looking for ways to profitably grow the business. And so, as opportunities present themselves, we'll obviously take a look at them and look at whether or not there's other creative ways for us to make sure that we can mind our balance sheet, but also grow the top line and grow it profitably. So, immediate term is deleveraging, but we're keeping our eyes open and our options open going forward.

[John J. Greisch:]

Hey, Larry. This is John. Just to add briefly to that. You should absolutely expect us to continue to be focused on M&A. It was a big part of the strategy that we laid out in September. We've got room. We are confident we can find opportunities that match our strategy and we're not going to take a year off. So, we're going to maintain the discipline we followed. We're committed to doing that and we're also committed to investing to grow the company, while at the same time, as Steve said, deploy our capital to deleverage in the absence of any M&A.

[Larry S. Keusch:]

Excellent, great. Thanks, guys.

[John J. Greisch:]

Thank you.

[Operator:]

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

[Matt Mishan:]

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

[Blair Andy Rieth:]

You bet. Good morning, Matt.

[Matt Mishan:]

Good morning, Andy. I just want to start off with rental. First off, congratulations on a very strong North America rental quarter, but in the same token, if you look at the total rental revenue growth, there was a significant delta between that and North America. And you also saw that the margins were down. I was hoping you can go a little bit into more detail on those.

[John J. Greisch:]

Well, North America – the majority of our rental business is more than two-thirds of it. I think this time last year on the margin side, I think we said margins for rental this year were going to approximate what the fourth quarter margins were last year, which were just around 50% and that's pretty much where we landed the full year. Obviously, we had some margin compression here in North America that we've talked about throughout the year. The rest of our rental business, it includes the Respiratory Care business and – which has been a flat – more flat business certainly than North America rental this year and those are the two biggest components of our rental business globally. Carlyn?

[Carlyn D. Solomon:]

One thing to add, Matt, we were down year-over-year 60 basis points. In our expense structure were two one-timers that if you took them out, we would have had a slight increase in our margin. So that maybe just gives you a little more detail.

[Matt Mishan:]

Okay. That was definitely helpful. And then I believe I've never seen you call out Clinical Workflow Solutions before as being a positive to the North American business; maybe I'm wrong on that. Could you frame that business for us, like the size of it and maybe what's changed that's now – can be a driver to your North America capital?

[John J. Greisch:]

Yeah. We've talked about it in the past. Size-wise, it's just north of $100 million. I'd rather not get any more specific than that. It's growing strongly. It's a big part of our value proposition and we've continued to add new products into that offering, and we've got high expectations for it going forward to really stabilize and accelerate the underlying capital growth of our patient support systems business.

[Matt Mishan:]

Okay. And then just one last quick one for me on Welch Allyn. They made a number of acquisitions I think over the last year, so – I don't think they were very large. I think that they were kind of bolt-on strategic type. Could you tease out the impact of the acquisitions on your revenue growth assumptions for Welch Allyn and maybe what kind of impact those are having?

[John J. Greisch:]

Well, they made an acquisition early in 2015, but year-over-year, the growth rate that Steve laid out, 3% to 5% for Welch Allyn, that's more or less an apples-to-apples comparison. So, there weren't any acquisitions later in the year that are going to have any significant accretive impact on 2016.

[Matt Mishan:]

All right. Thank you very much.

[Operator:]

Thank you. We have a follow-up through the line of David Roman of Goldman Sachs. Your line is open.

[David Harrison Roman:]

Thanks, guys, for squeezing me back in. Just one follow-up, a couple of questions that are coming to me from the investors this morning was just on the Q4 to Q1 revenue dynamic, can you just sort of talk through the delta between what you provided on September 25 and where you ended up for the full year given that was quite significantly better? And then, if any of that was sort of order pull forward or revenue pull forward from what you might have recognized in Q1, given where the targets are coming out for the first quarter versus current consensus?

[John J. Greisch:]

Yeah, David. This is John. I mean there wasn't any pull forward. The growth is probably about $20 million, I think, above what we had said – $20 million to $25 million. A big chunk of that is Trumpf North America, as I mentioned in my comments. They were up 25%. And like any capital business, their fourth quarter tends to be the heroic quarter of the year and we saw that here in fiscal 2015. Welch Allyn over-performed, probably represented 20% of that overall, and the rest of it largely came out of our North American business. But, as you well know, capital business is the toughest one to predict and the vast majority of the $25 million improvement in Q4 came out of various parts of our capital segment. Again, you'll look next year as a full year. I think we're pretty much in line and we are in line with what we laid out at the Investor Conference. We've got some FX drag of 1 point to 2 points on the full year. We've got a bigger FX drag in Q1, 3 points to 4 points. So I think we're right in line with the commitments and the expectations we said in September.

[David Harrison Roman:]

So would you sort of agree the general assessment that the business continues to see pretty good momentum and then in the outlook, you're not making any heroic assumptions here, but continue to feel good about the environment and the opportunities that sit before you?

[John J. Greisch:]

Yeah. I think that's true, David. I'll go back to my comments earlier just – and I think was a response to your question, the macro environment, how does that translate into our guidance next year. Again, think about our North American business, 3% to 5% growth; SRC and Trumpf, same thing, 3% to 5% growth; International, flat. You knock a point to two off of FX. We're right in the zone of where we think this business is long term in terms of low- to mid-single-digit growth. 2015 was clearly an anomaly on our North America capital business but, yeah, I don't think there's anything heroic in 2016. And if we continue to execute along the things that Carlyn said earlier, we might surprise ourselves, but we feel good about the guidance that we put out here. There's significant bottom-line earnings growth. There's significant accretion just in line with what we committed to from Welch Allyn. There's 100 basis point of margin expansion on our core business. And I think we've got everything moving in the right direction and we're pushing to move it as fast as we can on the top line and on the bottom line.

[David Harrison Roman:]

Great. I appreciate you taking the follow-ups.

[John J. Greisch:]

No, my pleasure.

[Operator:]

Thank you. I'm showing no further questions. I would now like to hand the call back to Andy Rieth for closing remarks.

[Blair Andy Rieth:]

Thank you, Amanda, and thanks to everybody for listening in on the call. We look forward to speaking with you. So long.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.