Hill-Rom Holdings, Inc.
Q3 2013 Earnings Call Transcript

Published: 25 Jul 2013

[Operator:]

Good morning, and welcome to the Hill-Rom Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for telephonic replay through July 31, 2013. 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, it will be included in any future use of this recording. Also note that any recording, transcript or other transmissions of the text or audio is not permitted without the written consent of Hill-Rom. [Operator Instructions] Now I would like to turn the call over to Mr. Andy Rieth, Vice President, Investor Relations.

[Blair A. Rieth:]

Thank you, Stephanie. And good morning, and thanks for joining us for our Third Quarter Fiscal Year 2013 Earnings Call. Before we begin, I'd like to provide our usual caution that this morning's call contains forward-looking statements, such as forecast 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 earlier on our website. Joining me on the call today will be John Greisch, President and CEO of Hill-Rom; and Mike Macek, Vice President, Treasurer and Interim CFO. The usual ground rules will apply to make the call more efficient. We've scheduled 1 hour in order to accommodate our prepared remarks and leave plenty of time for Q&A. [Operator Instructions] 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 last night on our website, and will also be part of the archive. With that, I'll turn the call over to John.

[John J. Greisch:]

Thanks, Andy. Good morning, everybody, and thanks for joining us here today. We're pleased to report another quarter of adjusted earnings in line with our guidance. Although revenue was slightly less than we expected, adjusted gross margin was stable compared to last year, and disciplined operating expense management allowed us to deliver earnings consistent with our guidance. In light of continued volatility in hospital capital spending in most of our markets, expense management and continued focus on cash flow generation will remain our operational priorities. We remain committed to returning cash to shareholders. Year-to-date, an excess of 50% of our operating cash flow has been deployed toward dividends and share repurchases. Let me spend a few moments commenting on the quarter. North America revenue was consistent with the first 2 quarters of the year, and relatively flat compared to the prior year. This is an improvement over the first half of the year, where we experienced a 7% decline in North America revenue. Sequentially, in our important U.S. Patient Support Systems product category, revenue increased 16% compared to the second quarter, a strong competitive performance from what we have seen. On the order front, North American capital orders were up approximately 7% compared to the prior year, and up 6% sequentially. This is the strongest quarterly year-over-year growth we have seen for 2 years. While I am encouraged by the strength in our orders and sequential growth in our capital revenue, I remain cautious about the overall hospital capital spending environment. That said, we expect to see continued momentum in our North American capital business in the fourth quarter, traditionally our strongest quarter of the year as many of you know. Internationally, third quarter revenue last year was unusually strong due to performance in Eastern Europe and the Middle East. As a result, International revenue was down 8%, as expected compared to last year, but flat sequentially. Revenue and capital orders in Europe were essentially flat year-over-year, although orders were down slightly on a sequential basis. Overall, we expect our International revenue in the second half of the year to be relatively consistent with the first half, in line with our previous guidance. Turning to our Surgical and Respiratory Care business, we're excited about the progress we are making. Our Allen surgical business introduced a new spine table for surgical procedures, unlike anything else on the market, allowing us to enter an exciting new category. Our Respiratory Care business recently received 510k clearance for MetaNeb 4.0, an enhanced airway clearance device, which is being commercialized in the second half of the year. And while Aspen has been affected by lower surgical procedure trends, we are pleased with the integration and contributions made in their first year as part of Hill-Rom. Before I turn the call over to Mike, I want to summarize a few key additional points. On the R&D front, in addition to the new Allen Advance Spine Table and the MetaNeb 4.0, during the third quarter, our Healthcare IT business introduced a Hand Hygiene Compliance system designed to help reduce hospital-acquired infections. In addition, during the fourth quarter, we planned to launch Progressa, our new and innovative next-generation critical care bedframe, which will ultimately replace our market-leading total care products. So despite the revenue and margin pressures over the past year, we have maintained our commitment to increased R&D investment, and I am pleased to see the progress we are making in this important area. At the same time, we continue to focus on aggressively managing our SG&A. For the quarter, SG&A was up over last year, as reductions in our operational SG&A were offset by the addition of the Aspen business and higher incentive compensation expense, due to an unusual expense benefit in the prior year. Despite the increase in SG&A dollars and the fact that Q3 revenue was slightly lower than Q1 and Q2 this year, operational SG&A as a percentage of sales in the third quarter was the lowest of the year. I also expect this percentage to decline further in Q4. At the same time, we are aggressively managing our SG&A, we continue to invest to strengthen our quality organization and to address several legacy field corrective actions. On the FDA front, we don't have any new information to report at this time. We expect the agency to come in later this year for a follow-up reinspection in Batesville. We've made a lot of progress over the past year, and I believe we are well prepared for that reinspection. So overall, I'm pleased with our ability to effectively manage the business in a dynamic external environment. Despite some revenue challenges, we are delivering earnings in line with our guidance, we are launching several exciting new products and we are aggressively managing our cost structure, while investing in several key areas such as R&D and QARA. We're also focused on delivering consistent and sustainable cash flow and deploying our cash in value-creating ways. This year, we again increased our dividend, 10%. And year-to-date, we have repurchased nearly $70 million of our shares. At the same time, we continue to actively pursue M&A opportunities to diversify our portfolio and strengthen our overall profitability. We remain committed to these strategies going forward. With that, let me turn the call over to Mike, our interim CFO. Mike?

[Michael S. Macek:]

Thank you, John, and good morning to everyone on the call. Before we get started, I want to reiterate Andy's comments at the outset that many of the figures we will discuss are adjusted or non-GAAP measures. Reconciliations to our reported U.S. GAAP numbers are included in the appendix to our slide deck. Also, given that currency movements had minimal impact in the quarter, I will focus my revenue comments solely on reported revenue. On a consolidated basis, third quarter revenue increased 4.4% to $424 million. This increase was driven by revenue from our acquisition of Aspen, partially offset by declines in International capital sales and North America rental revenue. Excluding Aspen, revenue declined approximately 3% compared to last year, mainly due to expected declines in International regions outside of Europe. Capital sales increased 7.5% to $323 million, again driven by the acquisition of Aspen. This growth was partially offset by a decline in our International segment, predominantly in Eastern Europe and the Middle East. Consolidated rental revenue decreased 4.5% to $101 million. The decline was partially attributable to the previously announced exit from unprofitable portions of our home care business. Domestic revenue increased nearly 9% to $281 million, again led by the incremental revenue related to the Aspen acquisition. Revenue outside the United States was down 3% to $143 million. Looking at revenue by segment. North America reported a decrease of just under 1% at $239 million, with the increase in capital sales offset by declines in rental revenue. Capital sales increased 1.7% to $167 million, with U.S. Patient Support Systems sales flat with the prior year, but up nearly 16% sequentially. Capital orders for the quarter were up, both sequentially and versus the prior year. Compared to the prior quarter, our order backlog also increased slightly. While order patterns have remained relatively steady over the past 7 quarters, Q3 orders were slightly above average over this period. North America rental revenue declined 6.1%. Absent the previously announced exit from our portion -- a portion of our home care business, the North America rental business was down 4%. This was due to ongoing reimbursement and other cost pressures on our customers. Moving to Surgical and Respiratory Care segment. Revenue increased 95.3% to $62 million, driven by the addition of Aspen. On an organic basis, revenue increased approximately 2%, reversing from negative trends we've seen in prior quarters. Specifically, Allen Medical revenue increased approximately 7% year-over-year. Respiratory Care revenues were relatively flat both year-over-year and on a sequential basis, stabilizing after revenue declines in the first half. International revenue decreased 7.9% to $123 million as expected, due to strong results in Eastern Europe and the Middle East in the prior year. Revenue in Western Europe was down slightly from last quarter and year-over-year. Orders in Europe were down slightly, sequentially, and up over last year as the environment in Europe remained difficult, but relatively stable. Adjusted gross margin for the quarter was comparable with the prior year at 45.9%, but was down 140 basis points sequentially off a very strong second quarter showing. Year-over-year, adjusted capital margin was up 70 basis points on improved product and geographic mix, while rental margin declined 130 basis points. On a sequential basis, overall margins were down, primarily driven by unfavorable product mix, coupled with reduced leverage of our field infrastructure cost on lower seasonal rental revenues. Regarding operating expenses, R&D investment for the quarter increased nearly 4% year-over-year. As you know, we are anticipating the launch of Progressa, our new critical care frame, later this year, which has been a key driver in our higher R&D investment. Although adjusted operating expenses were down nearly $5 million sequentially, primarily as a result of previously announced cost-reduction initiatives, adjusted SG&A expenses for the quarter increased 12.1% year-over-year to $133 million. The largest driver of this increase over the prior year relates to the incremental SG&A from the Aspen acquisition made last year, along with the corresponding intangible amortization. Also contributing to the increase were higher incident compensation cost, increased QARA expenditures and to a lesser extent, the medical device tax. These increases were partially offset by the aforementioned cost reduction initiatives. Excluding the incremental intangible amortization from our 2012 acquisition and medical device tax, adjusted SG&A as a percent of sales was 30.2%, the lowest level this year. Adjusted operating profit for the quarter was $45 million, representing a 10.6% operating margin. This performance was flat to last quarter, but down 230 basis points versus last year's comparable results, due to higher SG&A and R&D. The adjusted tax rate for the quarter was 30.8% compared to 32.2% in the prior year. The lower rate in the current year was primarily the result of the inclusion of the current year research and development tax credit and favorable period tax adjustments, partially offset by reduced income and lower tax rate jurisdictions. For the summarized income statement, adjusted earnings per diluted share of $0.49 in the third quarter were in line with our guidance. Adjusted EBITDA for the year-to-date period was $223 million, down roughly 6% from the prior year, even though adjusted net income in the same period declined 16%. Our third quarter operating cash flow was $55 million. Year-to-date operating cash flow of $158 million compares to $187 million last year, down primarily due to higher tax payments and lower contribution from receivables. During the quarter, we repurchased 700,000 shares of common stock for approximately $26 million, bringing our total for the year to $70 million. This share repurchase activity is consistent with our capital allocation strategy of returning a significant portion of our operating cash flow to shareholders as one of our key levers for creating value. We also announced a 10% increase in our quarterly dividend, bringing our annual rate to $0.55 per share. Now let's turn to our fiscal 2013 guidance. We now expect our full year revenue growth to be approximately 5%, narrowed from 5% to 6%. We have also narrowed our adjusted EPS guidance to $2.04 to $2.06 per diluted share from $2.03 to $2.09 previously. This full year 2013 financial outlook reflects the following

[John J. Greisch:]

Thanks, Mike. As you all know, Mike is acting CFO for us, following Mark Guinan's resignation for another opportunity. I've worked closely with Mike in his role as Treasurer in the past 3.5 years, and I look forward to the contributions he will make to the company as he assumes the interim CFO role. An external search is well underway, and I'm confident we will attract a great individual as our permanent CFO. As you've seen with our year-to-date results, we continue to see a challenging but reasonably steady environment in most of our markets. We are making solid progress and we will continue to stay focused on the initiatives we have discussed this morning, and in more detail at our recent May Investor Conference, those being margin expansion, tax flow improvements and disciplined capital deployment. With that, operator, please open the call to questions.

[Operator:]

[Operator Instructions] Now our first question comes from Larry Keusch with Raymond James.

[Lawrence S. Keusch:]

John, I know that you're obviously not ready to provide guidance for fiscal '14. But given the fact that it sounds like the environment is stabilizing for you guys, I was wondering if you can just sort of help us think about perhaps, the larger puts and takes that might be relevant for the coming year.

[John J. Greisch:]

Sure, Larry. You're right, I'm not prepared to discuss 2014 specifically, not surprising to you or anybody else on the call, but just a couple of comments. North America, obviously, as I said in my comments, this is the first quarter where we've seen growth in our order rates, the strongest growth in our order rates for a couple of years. So the momentum shift appears to be modestly moving in the right direction. I don't want to get too far out over our ski tips, as I would say, on this one, but the growth we saw here in Q3, both in orders and our capital revenues, were up a couple percentage points after a first half decline of 7%. Those are obviously momentum items moving in the right direction. So as long as that continues, obviously, we'll start seeing some improvements in our North American market. As I said in my comments, it's still a choppy, lumpy environment, and we need to manage that accordingly. But certainly, relative to the revenue declines we've seen for the past 6 or 7 quarters, it's encouraging to see that turn around. Europe continues to be challenging, flat to slightly down. I don't feel too badly about, but we've yet to see any real signs of improvement in Europe, so we remain pretty cautious there. And as you recall from the investor conference, one of our key initiatives over the next several years is taking some actions to improve the profitability in Europe, and then we remained focused on doing that. In our third segment, Surgical and Respiratory Care, I think I've commented in the last couple of quarters, Aspen's revenues have been relatively flat. Good news on Aspen, if you look at Q3, revenues are up sequentially, about 3% over what we saw the first half of the year. So despite some of the trends in surgical procedures, we've seen some growth in Aspen relative to the first half of this year. And I love the business, we've got some revenue challenges relative to where I hoped it was going to be, but we're starting to see some good signs in that business. And Respiratory Care, similarly, we saw revenue declines in that business in the last several quarters, and that's slightly turned here in Q3. So more up arrows than down arrows, relative to where we've been the last few quarters. And we'll see how that plays out as we approach 2014. So long-winded answer to your question, but I wanted to touch on each of the businesses, as you said, at a reasonably high level.

[Lawrence S. Keusch:]

And just as a follow-on question. Just as we think about, again, '14, is there anything we should be aware of in the composition of the line items within the P&L? Either comp wise or anything, again, that we should be thinking about broadly? And as part of that, just the QARA cost that you guys referenced, any way to quantify how much spending is going on with that? And does any of that go away, actually, once you kind of resolved the issues with the FDA, or is that kind of now a new run rate for what you have to spend on those items?

[John J. Greisch:]

Yes, we've adjusted out the one-time expenses associated with the remediation. I forgot what that is this quarter. It's a couple of million bucks, each of the last 2 quarters. So the nonrecurring items, we've adjusted out here, we probably got a couple more quarters of spending in that level or slightly less, as we wrap up the remediation activities. On the ongoing QARA investments, it's pretty much in the run rate right now, and it's up. On a year-over-year basis, it's probably going to be at $10 million addition to our SG&A from where we were say, 12, 18 months ago, which we've obviously been able to absorb and offset due to some other actions. So I don't see anything unusual coming in next year, Larry, other than some possible one-time restructuring actions as we pursue some of the profit improvement initiatives that we talked about at the investor conference.

[Operator:]

Our next question comes from David Lewis of Morgan Stanley.

[Jonathan Demchick:]

This is actually Jon Demchick, in for David. I had a question on balancing returning cash to shareholders and strategic acquisitions. It's been a year about -- it's been about a year since the Aspen acquisition. I was wondering how the pipeline of potential targets is backing up, and if the priority remains that diversifications are consumables? Also, what do you think the appropriate amount of cash return to shareholders would be, if you can't find an appropriate acquisition?

[John J. Greisch:]

Yes, a couple of answers to that question. The allocation that we've laid out for the past 2 or 3 years is what you should expect us to pursue with, I think, what was it, Andy -- 25% -- 20% of our operating cash flow returned to shareholders -- 15% to 20% return to shareholders. I think I was pretty clear at the investor conference. In the absence of M&A activity, we'll return more. And I think what you've seen this year with slightly over 50% of our operating cash flow being deployed towards dividends and share repurchases, probably a fair assumption to make in the absence of any M&A activity. We are aggressively looking at a number of things. The pipeline that Andreas and I and others are engaged with is healthy, but we're going to remain disciplined around what we go after. So despite the revenue challenges, I don't want to panic into an acquisition mode just for the sake of going after opportunities if they don't meet either our strategic objectives or financial objectives, and we're going to remain disciplined around both of those.

[Jonathan Demchick:]

Very helpful. Also, I had a question on, I guess, rental margins, which has been declining over the past few years. With the home care exit, we would've expected the decline to maybe slow a bit, but that doesn't really appear to be the case into the quarter. So I was just wondering if there was any color that you can add on the drivers to the lower rental margins and when we could expect those to stabilize.

[John J. Greisch:]

The main driver, Jon, is really our biggest rental business, which is our North American rental therapy business. You're right, the margins in that business have been under pressure for the last couple of years, largely on the back of hospitals' attempts to reduce their operating expenses, and that includes rental expense for the products that we rent to them. We're aggressively going after reducing our service network infrastructure cost in an attempt to keep up with those pressures. And we're doing that as quickly as we can. Home care, it was a relatively small business for us. I think as Mike said, it accounted for about 1/3 of the rental decline this quarter. And in terms of revenue, as a percentage of our total rental business, it was relatively small. So a positive impact, but not enough to offset the margin pressures in the rental therapy business.

[Operator:]

Our next question comes from Matt Miksic with Piper Jaffray.

[Matthew S. Miksic:]

So I was juggling a couple of calls here this morning, John, and I apologize if you did hit this already. But I'm understanding this is a choppy, as it always is, hospital capital market. Can you talk a little bit about what, in the quarter, drove some of the strengths or improvements in the order and the backlog trends?

[John J. Greisch:]

Yes, the good news is, unlike some of our quarters over the past several years that there was no large individual order that accounted for a percent of -- lumping percentage of the growth, it was pretty solid performance really across the board here in North America, with no big one-time orders driving it. It's, as I said, still choppy and obviously, competitive, but we saw a good performance across all of the regions with nothing unusual driving the growth. And as I commented in my prepared comments, expect a solid fourth quarter as well.

[Matthew S. Miksic:]

And is that -- I mean, in the past that has been a fairly predictive metric going forward. Obviously, for several quarters, pointing kind of in the wrong direction, and now kind of pointing in the right direction. Is that kind of what goes into some of your confidence in Q4?

[John J. Greisch:]

Yes, plus the order bank that we're looking at -- the quote bank that we're looking at. And as you know, the fourth quarter is normally our strongest quarter. If I look at this on a little bit of a longer-term basis, we've had, I think Mike commented on this in his comments, relative stability quarter-to-quarter over the past couple of years. And even if you look at this year, Q1 orders were up slightly; Q2 orders were down; Q3 orders, up even more strongly, and as I said in my comments, the strongest growth we've seen for a couple of years. So I think the momentum here in the second half of the year, unless we get surprised, this is definitely going to be the strongest second half or strongest 2-quarter period of orders for us for the last 8 quarters for sure. And what we see in the pipeline gives us that confidence together with the other normal Q4 strength that we always see at the end of our fiscal year.

[Matthew S. Miksic:]

Okay. And then, if you could maybe give us an update on some -- where some of the opportunities are, or where they remain in the European operations for sort of closing the margin gap as we talked about a number of times over the past few years between U.S. and Europe. Particularly, given the fact that the business there is more muted, and it's a little tougher for us to see. And I would love to get just an update as to where you see the opportunities and what kind of progress you feel like you've been making.

[John J. Greisch:]

Well, we haven't made enough progress over the past couple of years with Europe. And obviously, the macroenvironment has provided us, along with everybody else, with an additional set of challenges relative to our profit improvement initiatives. And going forward, I think we talked a little bit about this at the Investor Conference, one of the areas for improvement is going to be taking a look at our footprint in Europe from a manufacturing perspective and rationalize where we can, the footprint that we have today. With Volker and our existing facilities, I think we have 7 -- 6 or 7 manufacturing facilities over there. And given the revenue pressures, we're taking a hard look at that, along with some of the back office expense consolidation opportunities. So it's certainly tougher than we had hoped it was going to be, to get our European profitability up anywhere near our North American levels and is largely tougher because of the macroenvironment with the austerity pressures, and all the other pressures that you're all too familiar with. But we do have opportunities that we talked a little bit about in the Investor Conference and over the next year or 2, we're going to be aggressively going after those. At the same time, our International business outside of Europe, even though it's as choppy as our North American business, as a result of the tender nature, the order tender nature about the business, I'm pleased with the progress we've made there over the past 2 or 3 years. And I'm confident we're going to continue to see some growth in those regions, albeit on a bit of a choppy basis, on a quarter-to-quarter basis.

[Operator:]

Our next question comes from David Roman with Goldman Sachs.

[David H. Roman:]

I wanted just to follow up on that last question regarding European operating margins, and clearly, the macroenvironment isn't doing anybody any favors there. But can you maybe just talk about how much of the opportunity really exists to improve European profitability; and how do you think about that in terms of management time and resource allocation versus essentially focusing those efforts on some of the more attractive growth markets outside the United States?

[John J. Greisch:]

That's a good question, David. Let me tell you what we've done to make sure we don't get too distracted from that. I think you're aware, we've -- one of the things we've done in Europe, we've actually added significant investment to our management structure over there. When I got here, we didn't really have a European management team to speak of, and we put in place some very experienced individuals in Europe and have the structure that you would expect us to have for a business the size of that. That team is largely accountable for driving the cost improvement initiatives over there, and then the profit improvement initiatives. So a supply chain leader, a President of Europe, a CFO for Europe, positions that you would expect to be there, we didn't have 3 years ago. We've got that team with a great set of experience, some of whom I worked within the past, some of whom are new. So those guys are really the ones driving the actions there. Alejandro Infante, the Head of International for us, has teams in place in the Middle East, Asia and Latin America, and he's able to certainly spend an appropriate amount of his time, and we're able to put the appropriate resources in those regions to ensure that we're not missing growth opportunities there. So I'm not too worried about the resource allocation or the time distraction. The degree of difficulty of executing the actions is clearly high, but we've got the right team in place in Europe to take care of that without sucking too much of our time here into that.

[David H. Roman:]

And then maybe just looking at your comments on orders. I think if I remember correctly, the first fiscal quarter of '13 showed decent order trends and then revenue in the second quarter came up a little bit short of expectations. And then order growth this quarter sort of bounced back a little bit, I mean, much more significant, I think, than what occurred in the first fiscal quarter. And you're heading into what I think is the easiest comp of the year in North America. So I guess, why wouldn't Q4 be much better? So I just look at what North America did in the fourth quarter of last year on an FX neutral basis, and you assumed the same momentum that trend on a year-over-year basis. Q4 looks like it actually could be much higher than what's been that down 4% organic type number.

[John J. Greisch:]

I think that's correct. I think you'll see a strong -- the strongest year-over-year quarter for North America in the fourth quarter. And your memory is correct, Q1 orders were up slightly over the first quarter of last year, Q2 down sequentially and year-over-year, and then as I mentioned, Q3, strongest quarter year-over-year growth we've seen for a couple of years. So your assessment is right. I expect the fourth quarter in North America, both in terms of revenues and orders, to be a pretty solid quarter for us. So the 4% organic decline that Mike cited, that's a full year number, not for the fourth quarter.

[David H. Roman:]

Okay, I got it. Then lastly, obviously, we've returned a lot of cash to shareholders this year, but you've been pretty clear that M&A, being a top priority, is sort of to diversify your business potentially into more disposable categories. But to get disposals to be any meaningful percentage of sales, that sounds like it would take a lot of transactions. So I mean, is there an ideal mix that you've thought about? 5 years out, you want the business to be 50-50 capital disposables or 60-40? Any perspective that you can provide what you ultimately want the company to look like?

[John J. Greisch:]

The capital today -- if you think of capital -- 2 capitals, stripping out service, which I think we lumped into our capital revenue number. Even Aspen is reported in our capital number. But as I look at it, if I think of the business in 3 buckets, 2 capital sales, rental revenue and then service or disposable revenues. Capital is about 60%, 65% today. I'd like to see that under 50%, is something we've set out there for ourselves as a goal, just to reduce the volatility that we have. It's either going to, as you said, require a number of transactions, which obviously have risk associated with them, or take a look at some more meaningful things that can have an impact on us in the near term. And we're looking at both kinds of opportunities for us constantly.

[Operator:]

[Operator Instructions] Our next question comes from Gary Lieberman with Wells Fargo.

[Gary Lieberman:]

At the Investor Day, it seemed like you were somewhat cautious to, I guess, predict or think that healthcare reform was going to meaningfully help the capital cycle in the U.S. And it seems like you're at least incrementally happy about the second half of this year. Does it give you any reconsideration from what you're hearing or what you're seeing from customers in the U.S., to think that potentially, next year might be incrementally better than what you were thinking?

[John J. Greisch:]

No, it doesn't really change my comments at the conference. I think my specific comments then were, do I think healthcare reform was going to grow the population of licensed beds, and therefore have positive impact on capital as a result of that? I firmly believe the answer to that is no as much as I'd like to convince myself otherwise. And if you look at the full year, our North American order expectation for the year is up in low-single digits, pretty much in line with what we laid out there at the Investor Conference for a growth rate for that business. So again, positive Q1, negative Q2, positive Q3 and if I look at Q4, I think our order rate for the year is going at low-single digits. So it's really consistent with the outlook that we laid out there. So no change at all with our expectations, it's going to be a tough low growth business. And as I said, I really don't see the bed population growing for the reasons that we talked about, shorter length of stays, more care being pushed out of the acute care hospitals, et cetera. So I feel good about the momentum we've got going here into the fourth quarter and into 2014. But in terms of significant changes in our outlook, I think the low-single digit growth for this business over the long term is where we continue to believe this business is headed.

[Gary Lieberman:]

And then in terms of market share, how do you feel about -- and maybe on an incremental market share basis, do you feel like you're still holding your own? Or what are you thinking on that front?

[John J. Greisch:]

I do. As I mentioned, sequentially, this -- our North American capital business for our Patient Support business, which is largely our bed frame business, grew 16%. And from what I've seen, that's a pretty strong growth rate relative to, at least, our publicly reporting competitors. So I feel really good about the position that we've got quarter-to-quarter. I'm less focused on than you guys are, but the trends that we see and certainly, the sequential growth that we've seen in the last couple of quarters, I think, is as good as anybody out there. So that tells me our share's maintained to growing.

[Operator:]

Our next question comes from Chris Cooley with Stephens.

[Christopher C. Cooley:]

Just when you think about the backlog and the order book as you're going forward, could you give us a little bit of color in regards to its composition? Are you seeing anything different there in terms of either the price mix that -- accounts you're taking a look at this point in time, size of the beds? And similarly, when should we start to assume that Progressa will start working to that mix and contributing to the order backlog? And then I have one quick followup.

[John J. Greisch:]

Yes, just a quick answer to that set of questions. No real change, Chris, in terms of what we're seeing in buying patterns. Pricing pressure is clearly out there. You know as well as anybody, the pressures that our customers are under, and our value proposition needs to be demonstrated more and more every single day. And with introductions of products like Progressa and some of the other products that I've mentioned here this morning, I'm confident we're enhancing the value propositions we're bringing to our customers to mitigate as best as we can those price pressures. But no real change in the composition of the mix of business that we're seeing. I think the opportunity we have to take advantage as well as anybody of a difficult capital environment is the breadth of our portfolio that brings us -- allows us to bring to our customers value that nobody else has between our capital products, our rental products, our lifting products, some of our IT product, et cetera. So that is something that we're investing a lot of time and resources into to make sure that we're selling the breadth of that portfolio value as well as possible. On Progressa, that will be launching here in Q4. You'll see some benefit of that in the fourth quarter, mainly Internationally, actually, where we're most aggressively launching that initially, and then, bringing it into the North American market Q4, and as we move into 2014. So I expect to see some shipments of that products here in the fourth quarter.

[Christopher C. Cooley:]

Okay, super. And then just one quick clarifying question. I noticed that capital expenditure guidance was reduced to $65 million to $70 million from prior, I believe, it was $75 million to $80 million. Could you just help us there? Was that just a deferral based upon timing? Is that better synergies, maybe a decision not to build additional capacity? Just trying to make sure I understand that as we think about -- I know you're not giving guidance yet for the next fiscal year, but thinking about cash flow for the outyear.

[John J. Greisch:]

Sure. If you look at our CapEx over the last 2 or 3 years, it's been in the $70 million range, no deferrals. As we look forward to this year, the lower number of $5 million, $10 million is more based on our year-to-date spending. And recall that most of our capital spending is directed towards our rental fleet of products that we rent in hospitals or into home care settings, and so it's really not directed towards manufacturing capacity additions. Our manufacturing capital is relatively small. But we're continuing to invest in our rental fleet as necessary to ensure we've got the most updated fleet of products that we have. So I think this year's guidance for CapEx is pretty much in line with the next couple of years, and I'd say it is a level that I would expect to see going forward without too many ups and downs in the outyears.

[Operator:]

And I'm currently showing no further questions at this time. I'll now turn the call back over to management for closing remarks.

[John J. Greisch:]

Thanks, everyone, for your time and attention, and we look forward to speaking with you in the future. That's it for now. Thanks.

[Operator:]

Thank you, ladies and gentlemen, that does conclude today's conference. You may all disconnect, and have a wonderful day.