Hill-Rom Holdings, Inc.
Q4 2014 Earnings Call Transcript

Published: 5 Nov 2014

[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 November 12, 2014. See Hill-Rom's website for access information. The webcast will also be archived in 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 transmission of the text or audio is not permitted without the written consent of Hill-Rom. (Operator Instructions) Now I'd like to turn the call over to Mr. Andy Rieth, Vice President, Investor Relations.

[Blair A. Rieth:]

Thank you, Stephanie. Good morning, and thanks for joining us for our fourth quarter fiscal year 2014 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 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 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 (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 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, everyone. Thanks for joining us. I’m pleased with the progress we made throughout the year. Despite challenging environments in our North American and European patient handling businesses, we delivered improved year-over-year adjusted earnings per share in each of the last three quarters. For the fourth quarter, I’m particularly pleased with our 10% reported revenue growth, which includes a two-month contribution from TRUMPF Medical, growth of 5% in our North American capital business, and another strong quarter in our Surgical and Respiratory Care businesses. Adjusted earnings of $0.74 were up 4% compared to last year and ahead of guidance. During the quarter, we advanced our strategy by completing the TRUMPF acquisition. TRUMPF with a strong history of market leading innovation more than doubled our surgical franchise, adding $250 million of revenue to our portfolio. As you may recall, TRUMPF’s revenues are split roughly 20% in the United States and 80% elsewhere with about one-third of their sales in emerging and developing markets. We are excited about our ability to accelerate TRUMPF’s growth and I am very pleased with the performance of the business thus far. As we close the year, we announced two critical appointments to our Executive team. Carlyn Solomon would join us November 17 as our Chief Operating Officer. Carlyn joins us from Edwards Lifesciences where he spent nine years, most recently leading its Critical Care and Vascular Businesses. Having worked with Carlyn previously, I’m proud that someone with his experience and proven ability join our team. He will have responsibility for all of our global commercial, R&D, supply chain and quality operations. Last week, we announced the appointment of Steve Strobel as our Chief Financial Officer effective December 1. Steve brings to Hill-Rom a wealth of experience in large global organizations as well as smaller entrepreneurial environments. Most recently, Steve was CFO at BlueStar Energy Solutions and previously served as Treasurer and Corporate Controller at Motorola and Owens Corning. Steve also serves on the Board of Newell Rubbermaid where he chairs the audit committee. I’m excited to have Carlyn and Steve join Hill-Rom and look forward to working with them and the rest of our leadership team to continue to drive Hill-Rom to new heights in the years ahead. Before I turn the call over to Mike, let me comment on a few additional highlights for the quarter and the full year. 2014 was the first full year for the launch of several exciting new products including Progressa, our new global ICU bedframe, which drove the highest annual ICU revenue in three years. The Allen Advance Spine Table in our surgical business, Centuris, a new Med/Surg bed for many of our international markets as well as MetaNeb and VitalCough in our respiratory care business. These new product introductions and our recent acquisitions have been instrumental in allowing us to secure several competitive wins. Fourth quarter orders in our North America capital business were at the highest level since the fourth quarter of 2011, and our year-end backlog in this business was up 5% sequentially and 50% compared to a year ago. We saw a steady growth throughout 2014 in our Surgical and Respiratory Care businesses with revenue up 6% for the quarter and 7% for the full year excluding the contribution from TRUMPF. This performance reinforces our strategic need for and the value of portfolio diversification going forward. International had a mixed year with strong growth in Asia-Pacific and Latin America offset by declines in Europe and the Middle East. We expect to see improved growth rates internationally in 2015 particularly in the Middle East region. During the year, we took additional actions to aggressively manage our cost structure with the elimination of approximately 200 North American positions and the announcement of a restructuring of our European operations. We expect the annual benefit of all these actions once fully completed in fiscal 2016 to be approximately $30 million. Adjusted operating margins for the full year were down compared to last year due to the revenue decline for the year and the unusually low margins in the first quarter. Excluding the impact of TRUMPF, we expect to improve operating margins in 2015. Looking ahead to 2015, as you will hear from Mike, when he walks you through our detailed guidance, we’re expecting adjusted earnings growth of between 8% and 10%. Despite the strong fourth quarter order rates and year-end backlog in North America, we’re maintaining a relatively cautious outlook for the full year. We expect the quarterly volatility that we experienced during 2014 in our North American capital business and certain other regions around the world to continue, so we’ve taken a prudent view on the full year as we look to 2015. Going forward, we will continue to aggressively pursue acquisitions in our strategic focus areas of patient mobility, wound care and prevention, surgical safety and efficiency, clinical work flow and respiratory health, while we pursue our growth strategy, we will also continue to focus on optimizing our core business and integrating TRUMPF. With that, let me turn the call over to Mike. Mike?

[Michael S. Macek:]

Thank you, John and good morning to everyone on the call. To start, fourth quarter revenue increased 9.6% to $480 million on a consolidated basis. This increase was largely due to our recent acquisition of TRUMPF. However, we also reported year-over-year organic sales growth for the quarter of approximately 1%. This organic growth was driven by higher revenues in Surgical and Respiratory Care in North America, partially offset by decreases from our international segment. Capital sales increased 13.7% to $390 million including the impact of TRUMPF and organic growth of 2.3%. Rental revenue decreased 5.3% to $90 million. Domestic revenue increased 5% to $304 million. Revenue outside the United States increased 18% to $176 million due to the TRUMPF acquisition. Looking at revenue by segment, North America increased 0.9% to $247 million. North American capital sales increased 4.8% to $186 million year-over-year. Our fourth quarter capital orders increased 20% versus the prior year, and we ended the quarter with a backlog up 50%. This strong backlog position includes several large orders received under newly awarded contracts. We expect to recognize the revenue from those orders over the next two quarters. However, despite the recent strength, our full year orders have been approximately flat over the past two years. North America rental revenue declined 9.3% or 2.4%, when excluding the impact of the third party reimbursed home care rental business which Hill-Rom exited over the past year. Moving to our Surgical and Respiratory Care segment, revenue increased 67.2% to $107 million. Specifically, Surgical revenue increased 93.5% year-over-year driven by the TRUMPF acquisition and mid-single digit organic growth. We continue to be pleased with the performance of our Surgical business, which had organic growth of approximately 8% this year. Respiratory Care also performed well this quarter, with revenue increasing 7.2% year-over-year. International revenue declined 2.5% to $126 million or 2.2% on a constant currency basis. This decrease was driven by declines in Europe, partially offset by increases in Asia-Pacific, Latin America and the Middle East. Adjusted gross margin was 45.6% for the quarter, a decrease of 70 basis points compared to the prior year. On an organic basis, gross margin was relatively flat. Year-over-year adjusted capital margin was flat at 44.6%, organic improvement of approximately 90 basis points was offset by lower TRUMPF margins. Adjusted rental margin decreased 240 basis points to 49.9% driven by pricing pressures and higher cost in our field service infrastructure, primarily associated with anticipated volume increases in 2015. However, on a year-to-date basis adjusted rental margins were relatively flat year-over-year. Moving on to operating expenses, our R&D investment increased 20% year-over-year, excluding TRUMPF R&D was up 7.8%. Adjusted selling and administration expenses increased 11.1% year-over-year, including TRUMPF and were 28.7% as a percentage of sales. Adjusted operating profit for the quarter was $60 million representing 12.4% operating margin. In comparison to the prior year, adjusted operating margin decreased 150 basis points, largely driven by higher variable compensation expense and the TRUMPF acquisition. On a sequential basis, the operating margin was flat, primarily due to the fact that Q4 had an unusually high level of variable compensation expense, due to the strong underlying operation --operational performance. The adjusted tax rate for the quarter was 25.9% compared to 26.6% in the prior year. The improvement was driven primarily by geographic mix. So to summarize the income statement, adjusted earnings per diluted share of $0.74 increased 4.2% over the prior year. Full year operating cash flow was $210 million compared to $263 million last year, down primarily due to lower earnings and a lower contribution from working capital, including outflows from our restructuring actions. Now let’s move on to our guidance. For fiscal 2015, we expect reported revenue growth of 11% to 13%. This reflects low single-digit constant currency organic revenue growth, a negative impact from currency of between 1% and 2% at current rates, and full year revenue contribution from TRUMPF. We expect fiscal 2015 adjusted EPS to be in the range of $2.42 to $2.48 per diluted share. Our 2015 financial outlook reflects the following. Revenue growth in the low single digits in North America, driven by our patient support systems products, which are growing at a faster rate, also the 2014 exit from the third party home care rental business negatively impact this growth rate by approximately 1.5%. International constant currency revenue, approximately flat with last year; surgical and respiratory care organic constant currency revenue growth in the low single digits; gross margin of approximately 45% to 46% as organic improvements in capital margins are more than offset by the impact of TRUMPF and lower rental margins. R&D spending of approximately 4% to 5% of sales, SG&A that is improving as a percentage of sales reflecting the benefits from our prior year restructuring actions, a tax rate of approximately 30% to 31% and approximately 58 million shares outstanding for the year. We project 2015 operating cash flow to be approximately $250 million. We also anticipate approximately $110 million of CapEx investment for the full year. The year-over-year increase is driven by the need to invest in our rental fleet to support volume increases from recent contract wins as well as the addition of TRUMPF capital expenditures. Moving to the first quarter, we are projecting reported revenues to increase 14% to 16%. This reflects low single digit constant currency organic revenue growth, a negative impact from currency of approximately 2% at current rates and revenue contribution from TRUMPF. We expect adjusted EPS to be in a range of $0.44 to $0.48 per diluted share compared to $0.36 in fiscal 2014. With that, I will turn the call back to John for concluding comments. John?

[John J. Greisch:]

Thanks Mike. First, I want to thank Mike for his leadership as interim CFO over the past several months. I look forward to continuing to work with him in the future as we pursue our ambitious agenda. As I mentioned in my earlier comments, we are pleased to have delivered fourth quarter adjusted earnings above our expectations. Our outlook for 2015 reflects the stability we have seen in our core business over the past several quarters, and the benefit of our recent major contract wins. However, we expect the CapEx environment for our products to remain volatile quarter-to-quarter in North America, and in addition, we’ve yet to see any meaningful recovery in Europe, and we are mindful of the uncertain economic climate there. On the acquisition front, TRUMPF’s performance thus far has exceeded our expectations. The enhanced value proposition for our customers is going early wins for us. Our commercial teams around the world are integrating seamlessly and we are very excited about the opportunity ahead of us as our integration work continues. Looking forward, with the additions of Carlyn and Steve, we are well positioned to execute the strategy that we have been discussing with you, including leveraging our channel strength through portfolio diversification and geographic expansion, driving growth through innovation and acquisitions, and continuing to expand our margins. We made great progress in all of these areas during 2014. The acquisition of TRUMPF added a meaningful global highly innovative surgical business through our existing surgical franchise doubling its size. Although relatively small it exemplifies our strategy of enhancing and broadening our portfolio with market leading brands that brings significant value to our customers and leverages our channel strength and global presence to accelerate growth. It also supports our geographic growth strategy with the addition of TRUMPF over 40% of our revenue will now be generated outside the United States. Although, TRUMPF is margin dilutive in the near term, we remain confident that with our proven record of operational discipline, we will drive significant improvements to TRUMPF’s margins through both top-line growth and cost synergies. Importantly, TRUMPF affords us another growth platform in one of our six key strategic focus areas. We also saw accelerated growth in our organic surgical and respiratory care business, which posted full year growth of 7%. Given the challenges in our core patient handling business, this performance demonstrates the value of our strategy and pursuing multiple avenues for growth. We’re also driving growth through our new product introductions, in particular Progressa and our Allen Advance Spine table, which are also strengthening our sales execution at the large IDM system level. So the breadth of our value proposition is being enhanced by our innovation investments as well as by our acquisition strategy. On the margin front, we remain committed to driving improvements to our gross and operating margins despite some near-term headwinds. Excluding TRUMPF, operating margins in our existing businesses are expected to improve in 2015 by approximately 50 basis points driven by low single-digit revenue growth, improved productivity and SG&A leverage, partially offset by pricing pressures particularly in our rental business. As has been infused, since I arrived at Hill-Rom, we remain focused on improving operational execution and strengthening our leadership positions in our core businesses to continue generating strong sustainable cash flow. At the same time, we remain committed to deploying our cash flow in a disciplined manner consistent with our capital allocation strategy and in line with our strategic focus on growth. With that operator, please open the call to questions.

[Operator:]

Thank you. (Operator Instructions) Our first question comes from David Roman with Goldman Sachs. Your line is open.

[David H. Roman:]

Thank you, good morning everyone. Can you hear me, okay?

[John J. Greisch:]

Good morning, David. Hear you loud and clearly, how are you doing?

[David H. Roman:]

Okay, thank you, hey John. So first question just on the business and second, financial, I’m trying to square all the moving parts together here with commentary around orders that we’ve seen over the past couple of quarters, the numbers at the hospitals are putting up, and then that your outlook for 2015 on revenue, can you may be just help us understand what your assumptions are in terms of order translation to revenue that’s contemplated in the guidance for 2015.

[John J. Greisch:]

Sure, you’re right. There are a lot of moving parts here. Specific to your question and I assume your question was particularly to North America, David. We’ve been pleased with obviously the fourth quarter order rates that we achieved, we were pleased with some of the competitive wins that we enjoyed over the past couple of quarters and as Mike said in his prepared comments on a year-over-year basis, order rates were relatively flat in the last couple years with as you know some significant volatility on a quarter-to-quarter basis. The backlog that we have at the end of fiscal 2014 stretches into the next couple of quarters. So there is a little bit more extension of the backlog than we typically have. So that’s not immediately translatable into Q1 revenue – a fair percentage of it will go into Q2. Relative to our outlook for orders in 2015, we’re expecting relatively flat to slightly up quarters, 2015 versus 2014, I think as you heard from Mike, our North American capital revenue expectation is growth in the low single digits and in his comments, he also alluded to the fact that our core patient support business revenues will be up at a higher rate than that evidencing both the strong backlog and some improvement year-over-year in order rates that we’re expecting. That said as you know as well as anybody, the quarterly volatility of this business is a tough one to manage and we’re taking a relatively cautious outlook because of that fact as we look into 2015. I think all of the macro science that you mentioned improving performance from hospitals, improving order rates that we’ve seen in the last few quarters that’s obviously all good news for us, we feel very good about the competitive lens we had as we close 2014. But that said the timing and volatility of the trend on a shorter term basis gives us a little caution as we look in to 2015.

[David H. Roman:]

Great, and that makes sense and I guess what you are saying is, at this point in the fiscal year, there’s no sense of getting ahead of yourself given the nature of the end markets?

[John J. Greisch:]

Yeah, I think that’s fair, David, I mean as you’ve said and we’ve talked several times, the volatility in this business is a tough one and we’ve missed a couple times on our expectations for order rates and I don’t want to get out over a ski tips here prematurely.

[David H. Roman:]

Got it and then Mike on the financial side, I think I’m looking at it correctly, if I look at 2014 at least the first nine months of the year to try to take out the TRUMPF acquisition, it looks like you’re actually generating more pretax operating leverage in 2014 then you are planning to generate in to this in 2015 and the way I’m getting there is if I take out the $0.12 to $0.15 of accretion from TRUMPF, it looks like not significant earnings growth in the base business, is that, is that a fair assessment and if so what’s driving that?

[John J. Greisch:]

Yeah, the math is reasonably accurate, I think we mentioned in our prepared comments, excluding TRUMPF, we’re expecting about a 50 basis point improvement in operating margins in 2015. If you want to get to the core business excluding TRUMPF and I know it’s hard to peel those numbers out, specifically, but just give you some highlights, revenue growth low single digits in the core business, SG&A year-over-year essentially flat in the core business. We’ve got some restructuring benefit from what we did last year, we’ve got some inflationary pressures and we’ve got some strategic investments for making in a few markets around the world as well as in certain parts of our North American sales force. We’ve also got some rental margin pressure as we look into 2015, as you saw Q4 rental margins were relatively weak compared to a year-ago as Mike mentioned that was driven by both price pressures and cost investments that we made in advance on 2015 volume growth, but on a year-over-year basis rental margins are not going to see the improvement that we saw in 2014 in the first nine months. So net-net, the core business up about 50 basis points in operating margin, hopefully with some revenue tailwinds and additional cost improvements we can do better than that, but that’s what we are signing up for right now. And then TRUMPF, as you rightly said adds roughly $0.12 to $0.15 of earnings.

[David H. Roman:]

Got it, thank you very much.

[John J. Greisch:]

Yeah. Sorry for the long-winded answers, hopefully it answered it.

[Operator:]

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

[John J. Greisch:]

Bob, are you on the line?

[Travis Steed:]

Hey, sorry, this is Travis Steed on for Bob. Good morning.

[John J. Greisch:]

Hi, Travis, good morning.

[Travis Steed:]

So last quarter you felt about, you felt better about the bed market than you had for several quarters, do you feel a little less positive on the market today than you did last quarter, just kind of want to see how your views have changed over the past three months?

[John J. Greisch:]

No, not really, Travis, my optimism last quarter I think was validated by the strength of our orders in the fourth quarter, which were at the highest level since the fourth quarter 2011 and up 20% year-over-year and I think 17% sequentially. So we had a great quarter in the fourth quarter in our bed business in terms of competitive wins in order rates for the quarter. Looking into 2015, I don’t expect to see that kind of growth rate on a year-over-year basis, I think that would be highly improved and assume that we are going to see double-digit growth in the business where there is limited volume growth on the unit basis. So as I mentioned in my comments to the first question, our expectation next year is slightly higher than low single digit growth in what we call our patient support systems products which is the bed business here in North America. So that’s a significant improvement over what we saw in fiscal 2014 where I think for the year we had revenue declines in the core business. So the positive optimism from a quarter ago, we reflected itself certainly in the order rates in the fourth quarter and I think if you look at the year-over-year growth rate, Travis, we are going from a lower to mid-single digit revenue decline in the PSS business to a – as Mike said, a mid-single digit-ish growth rate in 2015, that’s a pretty significant improvement from where we were over the last 12 months.

[Travis Steed:]

Alright, can you talk about your revenue growth profile in 2015, excluding some of those multi-year contracts that you announced last year, I mean last quarter, is that like one to two points of growth next year, and also can you talk a little bit about the incremental headwind from incentive compensation in 2015, what you have incorporated into your dot ends?

[John J. Greisch:]

Yeah I’d rather not pull out any specific orders Travis, I mean the overall market is really the most relevant factor to look at and competitive wins and losses come and go for everybody, and I think to pull out any individual orders since I think inconsistent and maybe certainly less relevant information, so I think my comments to your first question, I think I’d standby. Incentive comp, as Mike said, the fourth quarter, we had a very, very strong fourth quarter operationally and both on a sequential basis and year-over-year basis. Q4 we did absorb a higher level of incentive comp in the fourth quarter, and still delivered earnings ahead of our guidance and ahead of last year. Looking ahead to 2015, it’s going to be somewhat higher than 2014, but not materially impacting our outlook as we look at 2015 versus 2014.

[Travis Steed:]

Okay, thank you.

[John J. Greisch:]

Thanks Travis.

[Operator:]

Our next question comes from David Lewis with Morgan Stanley. Your line is open.

[Jonathan Demchick:]

Hello this is actually Jon Demchick on for David.

[John J. Greisch:]

Hey Jon, good morning.

[Jonathan Demchick:]

Good morning. I’ll start Mike, I wanted to start with a quick modelling question. I was looking at annual and 1Q guidance. It does appear that 1Q margins are expected to be I guess a bit lower than the normal probation that the business would normally, I guess lend itself to, I was wondering if there was anything that we should be thinking about as we pace out expenses throughout the year.

[John J. Greisch:]

Well we don't specifically comment on the Q1 margins, so I would just refer to the full year numbers that we gave, along with our normal seasonality of our business and historical trends.

[Unidentified Company Representative:]

The only thing I’d add Jon to Mike’s comments is, if you go back to his comments on the rental margins in Q4, we have had some advanced investment needed to support some of the rental growth that is coming off of some of the contract wins that we had, that will flow into Q1 as well to some degree. Those contracts are staggered starting August 1, in one case, January 1 in another and some here during Q1 of 2015, but in order to be ready to handle those conversions we have had to do some investment spending ahead of the curve.

[Jonathan Demchick:]

Understandable, very helpful, just a follow-up I guess on the rental business, I was wondering if it would be possible to get, I guess a little more color there, I mean, it sounds like with the additional investment we would expect may be rental revenues to even grow and how that kind of counteracts with the fact that rental margins are probably slow as to even be more of an incremental headwind in 2015 again, I’m just trying to balance how the contract suggest that rental – that rental business should be doing better, but margins I guess still appear to be going down, is there any way to then kind of reconcile that?

[John J. Greisch:]

Yeah, I’ll give you a couple comments, some orders will be repeat, so what I said earlier I think in response to David’s question, we did see rental margins improve in the earlier part of 2014, so I think the team did a great job offsetting some of their price pressures with some productivity improvements in our service network. Year-over-year as we look to 2015 versus 2014, I think my comments were rental margin expectations on a full year basis are expected to be relatively flat. So the operating leverage benefit that we saw in 2014, we don’t expect to see that in 2015. That said, as you see in what we disclosed, rental margins overall even with the pricing pressures are still at a 50% level slightly ahead of that I think for the full year of 2014, so it’s a very attractive business to us financially, but more importantly it’s a very attractive business to us from an overall value proposition that we have with our customers, we were the only company that has a full range of capital products, rental products, clinical workflow products as well as surgical and respiratory portfolio that we bring, so I think our ability to integrate ourselves particularly with some of our larger customers with a full offering of capital and rental products is enabling us to win some of these and maintain relationships we have with some of the larger systems and on top of that it’s a higher margin business even with the pricing pressure and we expect to continue to be a higher margin business in 2015 than most of our capital businesses are.

[Jonathan Demchick:]

Thank you very much.

[Operator:]

Our next question comes from Larry Keusch with Raymond James. Your line is open.

[Lawrence S. Keusch:]

Good morning everyone.

[John J. Greisch:]

Hi, Larry, good morning.

[Lawrence S. Keusch:]

John, I had I guess two bigger picture questions, I guess the first one was how well optimized do you think actual generation is out of your core sort of frame business and I guess where I’m going with this is, if this is going to continue to be a business that’s not really going to be very growthy, are you really maximizing the cash flows that you can get out of this to really deploy that elsewhere, I guess that’s question one.

[John J. Greisch:]

Yeah, there is still more to come, Larry, as I think we’ve been speaking to over the last couple of years and even the operating margin improvement in our core business that we’ve guided towards for 2015 is a piece of that improvement. Beyond 2015, the restructuring that I alluded to and the benefits on the back of that particularly in Europe where the benefits are not going to be seen until after fiscal 2015 for the most part, that’s going to generate more cash out of the core business, so from an operating margin perspective, we still feel very good about our ability to continue to squeeze operating margin improvements, I think with Steve and Carlyn coming on Board that ability gets enhanced even further and we’re committed to continue to drive both margin improvement and cash flow improvements. As you said, the business itself is not going to be growthy to use your term and stability is a nice change for this business from where we have been in the last couple of years and offsetting the price pressures in rental or other pressures that we’ve got, I think we can continue to do that and drive operating margin improvement as we go forward. Not going to be perfectly linear on a quarter-to-quarter basis, but that’s okay, that’s the nature of the beast of this business as you well know, but looking ahead absolutely more cash flow generation opportunities.

[Lawrence S. Keusch:]

Okay, and then the second question is on the acquisition strategy, obviously you’re willing to take on lower margin businesses as you did with TRUMPF and take on the dilution for margins, but I guess coming back to TRUMPF what levers do you think you have to pull to get those margins up and is this a business that can become neutral to operating margins or even accretive over time?

[John J. Greisch:]

Yeah, I think there is significant opportunity here, Larry from a number of different fronts that the top-line revenue synergies around the world, we’re obviously going to focus on their higher margin products to drive accretion to their existing margins and I think that’s a real opportunity for us here in the States as well as in the Middle East and Asia Pacific particularly and our teams on the ground are as I said in my comments integrating seamlessly towards that end. On the cost front, the levers that pull, I’ll put in three buckets, procurement, TRUMPF has been a very German focused company, so many of their suppliers, many of the relationships they have got are local – almost in the friends and family category, I think as we work together to drive a more sophisticated procurement strategy, taking out material cost is certainly a big opportunity and it’s still a big opportunity for us in our core business back to your first question. There is also SG&A opportunities combining sites, combining offices around the world, which we’re getting on top quickly and then ultimately to the extent there is any footprint consolidation of manufacturing facilities that’s an additional lever for us to pull, so I’m highly confident we can improve their margins over time, just to come back to your – the first part of your question, TRUMPF was a bit of a unique animal for us to bring into the portfolio, high quality products, strong brands in one of our core strategic areas that really gave us a meaningful presence and the overall part of our strategy is not to add lower margin businesses to the portfolio so I think TRUMPF was a bit unique and we obviously did it with the intent and confidence that we’re going to improve their margins over time, which we’ll be well on track towards doing over the next couple of years.

[Lawrence S. Keusch:]

Okay, terrific, thanks very much.

[John J. Greisch:]

Thanks, Larry.

[Operator:]

Our next question comes from Matthew Miksic with Piper Jaffray. Your line is open.

[Unidentified Analyst:]

Hey, good morning, this is Rick in for Matt.

[John J. Greisch:]

Hi, Rick, good morning.

[Unidentified Analyst:]

Good morning, two questions. First is on seasonality, we’ve seen a fair bit of acceleration in Q3 across device space and the expectation with this will continue to year end, to what extent that you guys are seeing the same thing in acute care capital, is it more than you usually see. My second question is on emerging markets, could you talk a bit about how you are positioned in these emerging markets, in the BRIC regions and what your strategy is to penetrate these markets, to supply these markets and how important it is for you to appear in these lease markets? Thank you.

[John J. Greisch:]

Sure, I won’t associate a lot of seasonality to this business with, you got to remember that the percentage of, I’ll speak specifically to the bed business first, but the percentage of beds that are actually being replaced and capital being deployed to do so is in the, call it 7% to 8% of the installed base. The timing of when those investments are made are really on an individual hospital or an individual system basis and again they are replacing products every 12, 13 years so, it’s hard to describe seasonality to our kind of capital products because they are more episodic than they are recurring CapEx stream across the market place and if you look at our business, the volatility that I speak to often, I think really is driven by that timing of spending. Our fourth quarter was obviously a very, very strong quarter for us in terms of orders but that was really driven by underlying strength in the market as well as Mike mentioned a couple of the large competitive wins that brought high degree orders into our backlog during the fourth quarter, so I don’t view seasonality as a real factor in this business, it’s more based on timing decisions of investments, system-by-system, again just because it is not a recurring revenue stream across the board as a more consumable product would be. If you look at our Surgical and Respiratory Care business that’s pretty steady throughout the year. I think we were up 6% to 7% pretty much every quarter, so again not a lot of seasonality in that business either. Emerging markets I think we are well-positioned, we made significant investments in the Middle East and Asia Pacific particularly, we’ve had good success in Russia with the Moscow modernization program that has been underway in the last couple of years and we’ve got good presence in most of the BRIC markets, India is a relatively small market for us, only a few million dollars of business and given the price points on most of our products it has not been a huge market for us, but the launch of the product I mentioned in my prepared comments in Centuris, I think that product specifically is directed towards the emerging and developing markets and with the feed on the street that we have and the distributor representation we have in those markets, I’m proud to say that we have growth opportunities in those markets going forward.

[Unidentified Analyst:]

Great, thank you.

[John J. Greisch:]

Good, thanks, Rick.

[Unidentified Analyst:]

Thank you, Rick.

[Operator:]

Our next question comes from Gary Lieberman with Wells Fargo. Your line is open.

[Unidentified Analyst:]

Thanks, good morning, this is Ryan Halsted on for Gary.

[John J. Greisch:]

Hi Ryan, good morning.

[Unidentified Analyst:]

Good morning, coming back to the rental business, similar question to the first, I guess just for the quarter given the strength in the hospital volume trends I’m just curious what has sort of kept the rental business from growing as we would expect?

[Unidentified Company Representative:]

I think it’s the same issue that has been in place for the last couple of years, I again wouldn’t necessarily connect the dot of 3%, 4% admissions growth with substantially higher rental needs in the acute care market. I think the pressures that the rental business across the board not just for Hill-Rom, I think you guys have visibility to few other competitors in this business, that the pressures are driven by really the hospital systems trying to focus on reducing operating expenses as much as possible and rental equipment has certainly been one of those categories, I’m using the example where if we are getting paid for Bariatric bed, being rented for five days, two years ago and the hospital only had a patient on it for three days, today, we’re getting paid for three days, because there’s supply chain has gotten much, much, much more sophisticated in most of the systems over the past several years. So looking forward as admissions continue to be steady to improving that will certainly be a tailwind for us in that business, but up until now, unit volume growth for rental we have not seen, we will see that in 15, Ryan both I think for the reason you mentioned as well as some of the competitive wins that we achieved in the latter part of 2014.

[Unidentified Analyst:]

Okay, that’s helpful and then my second question, looks like your guidance is assuming some slowdown in the organic growth of the Surgical business, any color on that would be appreciated?

[Unidentified Company Representative:]

Yeah the only real factor would be, we’ve had a couple of new product introductions over the past 18 months, which drove some of the growth in the couple of those businesses, that anniversary out in terms of the initial impact of the benefit of those launches, we are obviously focused on driving growth through additional innovation in those businesses but no underlying performance deterioration, it maybe just again a cautious outlook toward mid-single digit growth in a market that’s growing less than that some of which we’ve been able to capture with new product introductions.

[Unidentified Analyst:]

Great, thanks for taking my questions.

[Unidentified Company Representative:]

Thank you, Ryan.

[Operator:]

(Operator Instructions) Our next question comes from Matthew Mishan with KeyBanc. Your line is open.

[Matthew Mishan:]

Yeah, great, thanks for taking my questions.

[Unidentified Company Representative:]

Hey Matt.

[Matthew Mishan:]

Can you just talk about some of the changes you made to your sales force in 2013 and may be like in the context of did it hurt you earlier in the year and then at the start to really help you guys later in the year.

[Unidentified Company Representative:]

Good question, Matt. Some of the changes we made I guess I will put them in two buckets, we redeployed some sales resources into – what we call our enterprise sales group, which is a team focused on some of the larger systems and again leveraging the value of the breadth of our portfolio into the HCAs, the extensions etcetera, so that redeployment took place later part of 2013, early 2014, we’ve also rationalized to some degree some of the investments that we’ve got in our sales force. I think it’s probably fair to say there were some impact from those changes and towards the end of 2013 and early 2014, it has exacerbated the volatility in the business, I think at the same time as I’m sure you recall the ACA uncertainty was probably much higher in hospital C-Suites than may be it is today as people are getting some of the benefits from some of the changes that came off of the legislation, so I think we had a tough market at the time and may be a little bit of instability in the sales force, but as we went through 2014 as you saw I think the benefits began to be harvested from some of those changes as evidenced by the strength in our fourth quarter and stability in Q2 and Q3.

[Matthew Mishan:]

Okay, and then I think you talked about some key European tenders being delayed last quarter may be in like France and Saudi Arabia, can you just update us on the status of this?

[Unidentified Company Representative:]

Yeah, some of the French ones have freed up in our favor, which is very, very good news for us and for our business in France. Saudi not a lot of change that there is still that they have got a new Health Minister in place and I think if anything there has been maybe a little more delay, put in some of the. investments that are being made but Hill-Rom position at that market was very, very strong market position and confident as those investments get freed up, we will capitalize on that significantly.

[Matthew Mishan:]

Okay, great. Thank you.

[Unidentified Company Representative:]

All right, thanks, Matt.

[Operator:]

And I’m showing no further questions. I will now turn the call back over to Andy Rieth for closing remarks.

[Blair A. Rieth:]

Thank you, Stephanie and thanks everybody for being on the call. I appreciate you tuning in and I’ll talk to you soon. Thank you.

[Operator:]

Thank you ladies and gentleman that does conclude today’s conference. You may all disconnect and everyone have a great day.