Q4 2019 Earnings Call
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Now, let's turn the call over to Mr. Mary Kay Loulo.
Senior Vice President.
I don't senior Vice President corporate development strategy, and Investor Relations Mr. Radone you may begin.
Thanks, and good morning, Thanks for joining us for our fiscal fourth quarter 2019 earnings Conference call. Joining me today, our Jon Gruden, Lars President and Chief Executive Officer, Acceleron, and Barbara boat on Chief Financial Officer.
Before we get started let me begin our prepared remarks by reminding you that certain statements contained in this presentation are forward looking statements and are subject to risks uncertainties assumptions and other factors that could cause actual results to differ materially from another described.
Please refer to today's press release that RFP SEC filings for more detailed concerning risk factors that could cause actual results to differ materially.
In addition on today's call non-GAAP financial measures will be reconciliations between GAAP and non-GAAP financial measures are included in our earnings release issued this morning.
You know beginning with our fiscal first quarter, we adopted the new revenue recognition accounting standard AMC sick. So six on a modified retrospective basis. The focus of our commentary. This morning will be on our financial results under this new standard for the current and prior year period, which will allow for comparability on an apples to apples basis.
As well as comparisons to our 2019 financial guidance.
This morning, we have a lot of ground to cover we'll be discussing our fourth quarter and full year 2019 financial results and our 2020 guidance. We will then switch gears and highlight our news three year financial outlook through fiscal 2022 before opening up the call for Q1 day.
We've included additional details in a comprehensive presentation. They can be accessed on the Investor Relations page of our website at Hill ROM dotcom under events and presentations.
So with that introduction, let me now turn the call over to John .
Thanks, Mary Kay.
Good morning, everybody, let me start by saying 2019 was a very successful year for Hill ROM. We concluded our fiscal year with strong broad based momentum across the portfolio in both the U.S. and international.
In Q4, we achieved 8% core revenue growth and 11% adjusted EPS growth, excluding stock based comp in both periods.
Once again these financial results exceeded expectations.
For fiscal 2019 adjusted earnings of $5.08 per diluted share reflects the sixth consecutive quarter of core revenue growth in mid single digits or higher.
New product revenue was more than $450 million.
Adjusted operating margin was 17.8%.
Margin expansion was driven by multiple factors. These include favorable mix from new products accretive M&A portfolio optimization efforts efficiencies from our manufacturing operations team and ask you in a leverage.
Importantly, disciplined execution more than offset tariffs near term dilution related to surgical consumable divestiture and discrete one time costs in the fourth quarter.
We're also investing back into business to bolster durable topline growth over the long term.
Hill ROM team has delivered each and every quarter this year.
Just simply achieving financial results above expectations.
Both the top and bottom line.
Setting a solid foundation for the future success in 2020 and beyond.
Our category leadership strategy and four strategic priorities continue to deliver significant value to patients caregivers and shareholders.
I couldn't be more pleased with the execution of our team to deliver impressive core revenue growth of 8% in Q4 and 7% for the full year contribution from acquisitions accelerated in Q4 by adding more than 150 basis points to growth and 80 basis points for full year.
One of the most exciting highlights was the impact of new product innovation on our topline.
We delivered more than $450 million in new product revenue for 2019 compared to $300 million last year exceeding our 2020 objective one your early and materially above our goal.
Well some revenue is cannibalizing the incremental contribution from new products was about 300 basis points for the year.
Performance overall is being driven by eight key products across all three businesses.
New products launched in 2019 include retina Vue 700, imager early sense and watch care.
Several additional new products and the pipeline, we expect durable growth from new products to continue well into the future.
Performance in Q4 was balanced geographically U.S. growth was 9%.
Patient support systems, and surgical solutions grew in double digits and this more than offset anticipated difficult comps in front line care, primarily due to the pent up demand as we launched the monarch best in the U.S. last year.
International growth of 7% is the highest level achieved in seven quarters and it was powered by performance across all three businesses in Asia Pacific Latin America and EMEA.
Now, let me take a moment to review the performance by business at constant currency rates.
First patient support systems revenue grew 11% in Q4 walk core revenue advanced 14%.
This is the highest rate of the year, despite a very challenging comp and centrella last year.
During both the business grew 11% driven by positive contributions from across the broad portfolio of connected care solutions and services, including care communications and smart beds.
This momentum continues to reflect the stable capital spending environment, where the current mix is favorable to our portfolio.
We currently see no signs of this trend changing.
Our detailed analysis of historical hospital capital spending highlights a stable and growing environment since the financial crisis ended in 2009, historically the U.S. med surge category has been the most sensitive segment vulnerable to capital spending shifts and today our portfolio is much more diverse and resilient than it was.
In the past this category only represents 10% or less of our total revenue.
For the year patient support systems core revenue growth was 10%.
Reflecting a strong market response from customers as they embrace hill rom's connected care solutions.
With a continuum from smart bed to smartphone, we are simplifying communications, improving workflows and delivering better outcomes across healthcare.
With more than a million devices that can be connected at the point of care and future digital product opportunities Hill ROM has created a significantly differentiated offering that provides valuable real time clinical data and insights that will drive value by improving workflow safety and quality.
Q4 front line care revenue declined 1% as expected the prior year us growth rate of 8% made for a challenging comparison, excluding this impact front line care revenue increased 3%.
Contributor contributors to growth came from international growing at 7% along with respiratory health products Thermometry and the vision portfolio for the year front line care grew 3%.
Lastly, surgical solutions Q4 revenue declined 6%, reflecting the divestiture of surgical consumables.
<unk> revenue, however, advanced seven sorry, 11% with double digit growth inpatient positioning and select or equipment and a record number of quarterly placements of the integrated table motion the de Vinci robot.
For the full year surgical core revenue growth was 5%.
As you know in 2019, we continue to successfully reshape our portfolio through strategic growth oriented acquisitions, and select divestitures of low growth businesses.
In 2016, we've divested.
Since 2016, we've divested more than $300 million of annualized noncore non strategic revenue.
While this has muted reported revenue growth our fourth quarter results are encouraging indication that our focus on innovation along with these strategic portfolio moves are contributing to topline acceleration.
As we've mentioned 2020 at the last fiscal year with non core revenue.
The acquisition Abry technologies, and Volte represent excellent examples of how we plan to strategically deploy capital to advance category leadership in higher growth higher margin categories, while adhering to our rigorous strike strategic and financial criteria to generate attractive returns, it's still early days, but both.
Integrations remain on track Volte in particular continues to exceed expectations with strong revenue growth. We're also beginning to uncover commercial synergies as we expand our care communications market leadership and drive incremental value over the long range outlook.
And with the Breeze less 2000 ventilator, we're looking forward to leveraging our vertically integrated direct commercial model in a new attractive market.
With this disruptive noninvasive respiratory therapy for patients in both the acute care and home settings.
Lastly, the divestiture of Sir do consumables underscores our decision to exit of business that was a headwind to our growth aspirations as strengthens our ability to focus resources and capital toward the future Hill ROM.
Since the divestiture does not qualify for treatment as discontinued operations, we're absorbing the related earnings dilution in our fiscal 2008.
Natural guidance.
Excluding the divestiture in the base year, we expect to deliver 11% to 13% adjusted earnings per diluted share in fiscal 2000.
In summary, we are exiting 2019 position of strength and momentum.
We are energized by our progress and look forward to 2020 M. beyond another chapter in our transformational journey.
Today, we are unveiling a compelling 2023 year financial outlook.
A multiyear plan of durable mid single digit revenue growth.
Double digit earnings growth and strong cash flow.
This plan includes the benefit of new product momentum.
Emerging market penetration and value creation from recent M&A.
We also included transformational investments in our infrastructure and commercial capabilities to sustained long term topline growth and enhance profitability. We look forward to providing additional details later in the call today.
Finally, as I reflect on my first year as CEO I'm extremely proud about progress and what we've accomplished.
I want to personally acknowledge the global team at Hill ROM for their unwavering commitment to our mission and for their winning spirit.
At Hill ROM, our passion continues to be on enhancing outcomes for patients and caregivers providing connected in advanced solutions that adds significant value to the delivery of health care across all care settings from the hospital to the surgical suite to the physician's office add at home.
As we look to the future we will continue to build on this solid foundation and in pursuit of our vision of advancing connected care.
Thanks, and let me now turn the call over to Barb.
Thanks, John and good morning, everyone.
Our commentary this morning, we'll focus on fourth quarter results on a comparable basis to the prior year period adjusted for a FC success Hicks. Please.
Please use the supplemental schedules posted to our website to follow along.
For the fiscal fourth quarter under revenue accounting standard HFC 606, we reported GAAP earnings of 41 cents per diluted share.
These results include after tax special items for late into intangible amortization acquisition and integration costs and other special charges.
Adjusted earnings of $1.69 cents per diluted share exceeded our guidance range of $1.64 cents to $1.66 cents per diluted share.
I will now review the quarter by piano line item.
Starting with revenue.
For the fiscal fourth quarter reported revenue of $783 million increased 3%.
4% on a constant currency basis.
Core revenue advanced 8% exceeding our guidance range of approximately 5% core growth.
Acquisitions contributed more than 150 basis points, so excluding acquisitions core growth was 6%.
Adjusted gross margin of 49.9% expanded 30 basis points over the prior year driven by execution across all three businesses.
Tremendous support from our global operations team.
Gross margin expansion continues to benefit from positive product mix, including the impact of new products accretive M&A as well as operational improvements.
Collectively operational performance provide flexibility to once again absorb tariffs and raw material inflation and offset discrete one time costs of approximately $4 million or five cents per diluted share.
Excluding these one time costs gross margin expanded 80 basis points for the quarter and for the year inline with our expectations.
R&D spending for the quarter was $36 million, reflecting our ongoing commitment to innovation and investments in key programs to drive future growth.
Adjusted SGN day of $191 million increased 3% due to strategic investments primarily in emerging markets as well as the impact of recent acquisitions.
Our adjusted operating margin in the fourth quarter was 20.9%, reflecting an improvement of 30 basis points compared to the prior year.
Excluding the onetime cost mentioned earlier operating margin expanded 80 basis points for the quarter and 100 basis points for the year.
The adjusted tax rate was 19.5%.
Stock based compensation with the benefit of four cents per diluted share in the quarter, presenting a significant headwind when compared to when compared to the 15 cents benefit last year.
So bottom line adjusted earnings for the fourth quarter increased 3% to $1.69 cents per diluted share.
Excluding stock based compensation earnings per share increased 11%.
Now turning to cash flow.
Cash flow from operations for the year was $401 million.
Capital expenditures totaled $73 million and as a result, we generated free cash flow of $328 million, which is 7% higher than last year.
In terms of the balance sheet and financial leverage our debt to EBITDA ratio at the end of September with 3.2 times, and we have returned $177 million to shareholders through dividends and share repurchase share repurchases during the 2019 fiscal year.
Let me conclude this portion of the call with our guidance for fiscal 2020.
First for the full year, we expect revenue growth of 1% to 2% both on a reported and constant currency basis.
Core revenue is expected to be in the 5% to 6% range, excluding the incremental benefit from acquisitions core revenue growth is expected to be MD, 4% to 5% range.
Non core revenue totaled $150 million in 2019, and it and is expected to total approximately $25 million in 2020.
The vast majority of the year over year decline is attributed to the completion of the 2019 surgical consumable divestiture.
The remainder relates to the pending exit of the international surgical Oh Im products, which we can plan to complete before the end of 2020.
As we have mentioned 2020 is the last year, we will report non core revenue as core and constant currency growth rates begin to converge and 2021.
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From a profitability standpoint, we expect adjusted gross margin to expand 102 150 basis points.
We expect R&D to increase in low single digits, representing approximately 5% of sales.
We expect adjusted SGN, Hey, I've, approximately 27.5% of sales.
This reflects the impact of recent M&A transactions investment in key growth initiatives as well as business optimization savings.
Our guidance also includes a step up investment related to a global IP transformation, including an enterprise resource planning effort to consolidate and streamline our I T systems.
This multiyear investment will modernize and transform the way, we do business improved customer service and our customers experience as well as drive future operating efficiencies and incremental savings by year three of our new financial outlook.
As a result of solid gross margin expansion and strategic investments, we expect an adjusted operating margin of approximately 18.5%.
With savings from our recent debt refinancing we expect other expense, which includes interest of 75 to $80 million to $80 million.
And lastly, we expect a tax rate of approximately 20% and a share count 67.7 million shares.
This translates into an adjusted earnings guidance range of $5.46 to $5.56 per diluted share.
On a reported basis adjusted earnings per share growth is expected to be into 7% to 9% range.
When excluding the impact of the surgical consumable divestiture.
Adjusted earnings per share growth is expected to be in the 11% to 13% range.
From a cash flow perspective, we expect operating cash flow of approximately $430 million, including the impact of transaction related outflows and capital expenditures of approximately $100 million, which includes the first year of our I T investment.
This translates into free cash flow guidance of approximately $330 million.
For the fiscal first quarter, we expect revenue to be comparable to the prior period during prior year period on both reported and constant currency basis.
Core revenue is expected to increase 5% to 6%.
Excluding acquisitions, we expect core revenue growth of approximately 4%.
We expect adjusted earnings excluding special items of $1.87 cents to $1.89 cents per diluted share.
Thanks, and now I'll turn the call back over to John .
Thanks Bar.
At this point I'd like to turn into our three year outlook through 2022. As a reminder, details are also available in our earnings presentation posted to our web site.
For those of you that a follow Hill ROM you know that we have significantly diversified our business enhanced our value propositions and improved our durable growth profile through deployment of both organic and inorganic investments.
Leading to an exciting and compelling transformation in fact, this year you'd see an updated brand for the company, reflecting these changes.
We have established a trial a strong track record of performance has consistently met or exceeded expectations.
We're entering 2020 with us with solid momentum and high confidence.
Our objective today is to share with you how we plan to sustain this elevated level of performance as we execute our plans.
With a solid 2019 foundation clear strategy and seasoned leadership team, we will continue to drive enhanced value by executing on our four strategic priorities.
First let me start with category leadership to accelerate topline growth with innovative new products and solutions.
We continue to focus on high value high growth and high margin categories.
Where organic R&D efforts can drive market and drive growth above the market.
With a solid base a more than $450 million in new product revenue in 2019, we expect to launched five to six new products each year through 2022.
New product launches will result in the contribution of approximately 200 basis points of growth annually over the three year plan.
Our second objective as international expansion and driving penetration in emerging markets.
Enhancing access to care in emerging markets as a source of untapped potential for Hill ROM.
This is not this not only represents a significant growth opportunity it will be a key driver of reducing quarterly variability across our total international business.
Today International represents approximately 30% of our global revenue and emerging markets represents only 9% of our global revenue.
As emerging markets provide increased access to quality health health care patients will benefit from our company is unique and competitive offering and select product areas.
And recent investments will further strengthen hill rom's competitiveness.
As mentioned we are in the early stages of reinvigorating our commercial operations in these markets with new leadership organizational capabilities and a focus on key strategic products.
We expect meaningful growth acceleration over this period.
Over the next three years emerging market growth is expected to increase to high single digits in 2020 and ramp up the double digits thereafter, adding approximately 100 basis points of topline growth annually over this three year period.
Third.
M&A.
It's a key component to our strategy and we've made great progress and strengthening our portfolio. The recent acquisitions of Volte and breeze create a durable new source of growth over a multiyear period additional M&A opportunities exist to drive accretive revenue enhanced margin profile, while strengthening our clinical and economic value proposition.
Our customers.
We will continue to be prudent in evaluation of these opportunities adhering to our rigorous strategic and financial criteria to generate attractive returns, we expect future M&A to be incremental to the three year plan where outlining today.
Lastly, we are committed to driving operational execution and strong financial performance. Our three year outlook includes a core revenue growth of approximately 5% double digit earnings growth and significant cash flow generation. The PNM profile reflects a commitment to driving value by continuing to stay focused on both organic and inorganic.
Investments that already completed.
To accelerate topline growth, while improving our operating margin profile.
Given our confidence we elected to take a multiyear investment to transform our IP information systems.
Including the enterprise resource planning initiative.
And while this is expected to be modestly dilutive to operating margin in the near term. We believe that the exit the time is right now to execute on this decision and position us for future growth and success.
So this as a backdrop today, we're providing details on our on our financial outlook through 2022, Let me turn the call back over to Barb and hopefully her voice can hang in there.
Rest of this call before we open the call up for acuity.
[laughter].
You mean.
Thanks, John .
It is my pleasure to present details regarding hill rom's financial outlook through 2022.
We have a compelling vision and want to ensure that you have a clear understanding of how is that it is expected to manifest itself in the financial performance and Hill ROM over the next several years.
Before we get into the detail, let me take a moment to review the key assumptions included in our projections.
First we assume no major changes to the global macro environment, we are assuming persistent competitive conditions and modest price pressures in select areas of the portfolio.
We also assume as stable hospital capital spending environment in the United States.
As we've discussed reported revenue incorporates a headwind related to the non strategic assets, we have exited including the surgical consumable divestiture in 2019, and the expected exit of the international surgical O M products in 2020.
This non core revenue totaled approximately $150 million in 2019 and $25 million in 2020.
This outlook assumes the permanent repeal of the medical device excise tax constant foreign exchange rates and excluding the unusual non recurring items and special charges.
We are not including any benefits from future M&A, nor any incremental impact from additional tariffs or potential healthcare government or tax reform.
Now given these assumptions, let me describe that 2022 financial objectives.
With fiscal 2019, serving as the base here, we expect core revenue to grow at a rate of approximately 5% on a compound annual basis through 2022.
This growth is inclusive of recent acquisitions as these acquisitions anniversary early in the outlook and their incremental 2020 benefit is negligible to the three year revenue compound annual growth rate.
As mentioned, we expect the non strategic revenue of approximately $150 million in 2019 to be a headwind to the reported topline compound annual growth rate by approximately 100 basis points.
Therefore reported revenue is expected to grow approximately 4% on a compound annual basis at current foreign exchange rates.
Core growth and constant currency growth begin to converge in 2021.
In addition, we expect very balanced core growth across the three businesses each growing and mid single digits on a constant currency basis over the planning period.
We expect our reported adjusted earnings per diluted share to grow at least 10% on a compound annual basis from 2019 through 2022.
Excluding the surgical consumables in the base year of 2019, we expect adjusted earnings per diluted share to increase at least 12% compounded over the three year period.
Our accelerated growth and performance is expected to drive significant cash flow and we expect to generate approximately $1.4 billion and cumulative operating cash flow between 2020, and 2022 with capital expenditures totaling approximately 325.
$5 million over this timeframe.
Consistent with our strategic objectives, we will continue to deploy a very disciplined approach to capital allocation.
As we identified value, creating opportunities, we will not be reluctant to deploy capital and resources towards organic or inorganic initiatives to feel accelerated profitable growth.
And the absence of these opportunities deleveraging the balance sheet will be our top near term priority.
In summary, our outlook Reconfirms, our commitment to durable mid single digit topline growth and continued double digit problem bottom line growth.
Now for the purposes of financial modeling, we're providing our view as of today on the other piano line items.
As you know due to a wide variety of factors, which could materialize over the next three years the shape of the piano may evolve overtime as we manage to our top and bottom line commitment.
On the margin front, we expect at least 250 basis points of gross margin expansion.
Achieving a 2020 to your adjusted gross margin of approximately 52% compared to 49.5% in 2019.
Our model shows adjusted operating margin to expand by approximately 300 basis points to approximately 21% by 2022 from 17.8% in 2019.
Gross margin expansion is expected to be driven by new product and geographic mix the accretive benefit from recently completed acquisitions and improved manufacturing cost and productivity.
In recent years Hill ROM has demonstrated an ability to drive strong operating performance, while being diligent and managing gionee and driving efficiency across the business.
As we continue to focus on driving durable sustainable topline growth. Our 2022 plan includes investment and key initiatives to support this future growth.
As a result, we expect SGN, a as a percentage of revenue to be approximately 26.5% in 2022, and R&D spending to be approximately 5% of revenue annually.
We have executed well across our business optimization initiatives and are pleased to have already achieved approximately two thirds of our estimated $50 million and pre tax savings over the last few years.
As you know these savings are intended to be reinvested to align resources with key priority growth areas expand internationally and optimize global capabilities across the business.
We are projecting an annual interest expense of $75 million to $80 million.
Including benefits from our recent debt refinancing and the underlying tax rate for hill ROM of approximately 20% over the period.
We're also assuming a stable share count of approximately 67.7 million shares.
In summary, we believe this to be a very balanced plan with consistent durable and sustainable mid single digit topline growth and double digit adjusted EPS growth in each year, including 2020, when excluding the impact of the surgical consumable divestiture.
We look forward to updating you quarterly on our execution.
Thanks, and I'll turn the call back over to John .
All right, let me wrap up our prepared comments this morning, and summarize that our transformation continues.
We're capitalizing on the strength of our core business focused on accelerating durable and profitable revenue growth and generating strong earnings and cash flow over the next three years, new product momentum continues to build.
We are advancing our pipeline and penetrating emerging markets.
And we continue to pursue M&A transactions that are accretive to our growth and margin profile, while generating attractive returns.
We have a solid foundation and are great team.
With a compelling strategies disciplined operational execution and financial strength, we are excited about our future and driving value for patients customers and our shareholders.
So operator with that will turnover that call for today.
Thank you we will now begin question and answer session. If you have a question. Please press star one on your Touchtone phone if you wish to move so from MCU. Please press the pound key if you're using speakerphone. Please lift the handset to ask your question.
We will pause for a moment, while the list is been compiled I'd like to remind participants that this call is being recorded and a digital replay will be available on the Hill ROM web site for seven days at Www Dot Hill ROM Dot com.
Our first question comes from the line of Matt Taylor.
With.
Yes. Your question please.
Hi, Thank you for taking my question.
So I wanted to ask a little bit about fiscal 21st.
And you drove a lot of new product revenue here in fiscal 19 could you talk about your confidence in being able to continue getting that kind of 200 to 300 basis points contribution from new product revenue in 20, and what are the major drivers of that.
Yeah. Thanks, Matt.
We have a lot of great conference actually in our product pipeline, we expect to be launching as mentioned in the prepared comments, yes, five to six new products per year over the three year period, but in fiscal 20.
A little more specifically it is actually more than six products, but its six significant product launches that old fiddle to placements in 2020.
They come across all three of our businesses both up all three equally PSS frontline, Karen and our surgical business.
So those products, we haven't for competitive reasons is going to disclose the specifics of them but.
We feel really good about the products or that are coming in the marketplace.
And really what helped offset some of that these the centrella.
Performance that we saw this year as as mentioned in prior meetings, we do expect the centrella double digit growth rate in fiscal 19 too.
To come down to more or like a low single to mid single digit growth rate in fiscal 20. So.
Taking that into account, we feel really good about our 200 basis points of incremental growth that we expect from the new product portfolio in total.
With the biggest.
Adjustment there of having a very.
Prudent.
Outlook for the Centrella performance in fiscal 2000 off of some really.
Hi, double digit performance in fiscal 19.
Yes, Thanks, and then it sounds like the goal in the briefs.
Acquisitions are doing well in integrating well can you talk a little bit more of the outlook for those what kind of sustainable growth can you drive with those deals and maybe talk about peak sales or some kind of other measure for us to understand what the longer term opportunity is there.
Yes ill [laughter].
You know in Q4 Breeze really was immaterial to contribution only had one month in the quarter. So it wasnt even.
On the on the Measurability skill.
In Q4, so all that acquisition growth in Q4 was come from Volte.
Which which you would see sequentially growing from Q3 to Q4, which we love that was our intention and when acquiring the business it would fit very nicely with our care communications portfolio.
And we would begin to accelerate.
The the order and revenue performance of that have that assets in that business and that's exactly what it's done in fact is beating our expectations.
So we're really pleased with how that's performing.
Just two more quarters ahead of us before that Annualizes and rolls into the base.
Organic growth rate. So we're we're pleased with that on the breed front.
It's it's early days, but the integration is going really well, we just had a big meeting with the combined team a few weeks ago.
There are really excited to have this portfolio come together.
And and come to market with a full respiratory health portfolio.
That now includes the new disease state of Seo Pee Dee Ann.
And that as you know when we've talked about before to the noninvasive ventilation category is a high double digit grower.
And it's up and it's a large market and it's a market for us that is all upside because we've never had a product offering in this category for us so for us to come in with a very substantial sales organization.
Combined with brief and a vertically integrated DMV.
To capture all the value.
In this opportunity we're we're quite bullish on the long term prospects of building out a respiratory health business for the disease state CRPD and other related.
Diseases, but see if it is the biggest one so.
Pretty excited about those two and off to a great start Matt. Thanks for the question.
Great. Thanks, Jeff.
David Lewis of Morgan Stanley is on the line with the question.
Please state your question.
Great just a couple from me John just you know we're quickly in emerging markets. So you just kind of L. RP versus 2020, the other piece sort of calling for.
Double digits m. growth kind of through the plan, which makes perfect sense in 2020 is that a realistic expectation for the emerging markets business.
No we're projecting David a high single digit on emerging markets, we aspire to do better and of course, but.
And we exited the year in Q4 with our emerging markets growing at 8%. So we're exiting 19 in the right position to sustain that performance, that's what's baked into our guidance for fiscal 20.
And like I say, we like the way things are tracking with our investments in emerging markets, we would aspire to do better, but what's baked into guidance is a high single digit number.
For emerging markets and a low single digit growth number four established markets, which is probably given historical performance over a multiyear period.
A much more.
Prudent and.
I guess balanced outlook between the two.
Because of emerging in the southeast.
Okay, and just say two two quick ones for me first just on an individual difference in fiscal 2000, you a sincere the five to six guide versus US. It does appear I think its molten breed is for Bolton Viiv total revenue contribution for next year is a in a number in excess of 70 million a decent way of thinking about those two contributions.
Are there any sort of back half loaded dynamics to brief for us to consider.
That's for you John and then for Barb I, just wonder just at a high level, we think about fiscal 2022, the long term mill RP.
There are some differences in terms of kind of gross margin expansion operating margin expansion just wonder if you could talk about how the next three year outlook varied for the prior through your outlook as it relates to mixed driven benefits on gross margin and the opportunity of for middle the income statement leverage. Thanks, so much.
Yes, so on on the acquisition outlook, we would expect acceleration in the back half the year would the Breeze acquisition, we really are acquiring a product that was in its very beginning of a product launch so.
Yes, although it had a base of revenue when we acquired the company of around 10 million. It's it's almost more.
More realistic to think of its from the starting from from the starting line together. So we expect as we bring the two organizations together and build our build our sales proficiency.
That will ramp towards the back half the year and become a contributor of around 5200 basis points in the back half of the year.
Breed and as I mentioned earlier volts going to anniversary mid year.
We'd like to ways performing at this point.
So in total you take it all together, it's about a full 100 basis points, maybe little more of contribution from acquisitions over.
Over the full of course, the year, maybe on 50 basis points.
Average in two together.
So hope that answers your question, David ill pass over to Barb.
David how are you.
So your question I think was around how is the gross margin and operating margin the evolving and the new three your outlook versus the prior three your outlook.
I think in aggregate the improvement we're seeing is very similar in terms of where we're seeing what the improvement looks I should look like over the next few years.
When you think about gross margin I think the way that I wouldn't look at a gross margin in the mix. There is we've seen over the past couple of years.
The drivers of gross margin expansion to really be about the product mix.
It's been about the businesses, we've been exiting as well as the new products, we've been launching as well as then the acquisition that we're bringing in that are also accretive to gross margin.
But the emphasis probably in the early part of that three year. The old three year plan really was probably getting on lift more from the divestitures and less from the new product portfolio moving forward.
We've also seen a great contribution from productivity over the past a couple of years.
Going forward, we will continue to see product mix, the a big piece of of where we're going to see the expansion as well as productivity, but when you think about the product mix I would really be shifting away from the impact of the divestitures and more about the impact of the new product portfolio and the new product portfolio being up.
Higher gross margin as well as the ramping up of the recent acquisitions that are higher gross margin and their overall contribution over the next couple of years, so that would be how I would characterize the difference in the gross margin expansion over the past versus the future and what's driving that.
David its Mary Kay I, just would add to what Barb sad in terms of as we look over the 20 to.
22 outlook in the margin growth margin expansion in particular, we think about just over half is going to come from the new products.
And next and M&A and a little bit less than half will come from the productivity per in prison, except Bart mentioned.
Okay regarding the operator.
Okay sorry.
I'm sorry did you did you want to.
The second part of the question was around operating margin and just a couple of quick comments on operating margin as we think about the next three years.
We're still projecting you know I'm at a significant expansion on operating margin 300 basis points over the next three years.
What what you'll see though is you'll see some investment on the front end related to I T in particular.
And then you're going to see the acceleration of our operating margin expansion and the latter part of the three year period.
The impact of the investment starts to flow through as well as when we see really the greater contribution from the new acquisition coming through and adding to the operating margin.
Expansion in the latter part of that a three year plan.
I think what that we're ready for the next question.
Larry Krish of Raymond James.
Is on the line with the question.
Please state your question.
Thanks, Good morning, everyone two questions, maybe just starting off.
For John .
Just just on the emerging markets and your thoughts through that three year LLC.
Is this really a China strategy or where do you see a broader and and is there anyway that you can sort of help us think about.
You know, how you're thinking about margins where that emerging markets franchise.
That is above the corporate average just trying to thinking about the profitability as we begin here over the next three years on that.
Sure, Yes, Thanks, a question Larry.
It's broader than just China. It is an overall emerging markets strategy. However, China is the big.
Biggest opportunity and most material opportunity within that group of geographies.
So our definition of emerging markets will be very typical across the sector.
We would include Lat am and the middle East and and all of Asia.
All of emerging Asia in that definition as well so when you look at all all that the biggest opportunity for US is in China from a margin point of view.
It's actually accretive.
To to the overall corporate margin in total so were.
In the early phases here as we invest.
It's slightly below the corporate.
Level.
But as we as we mature those investments we would expect to be.
Above our corporate margin levels.
Okay, perfect and then for Barb.
Just on the T. platform I know you mentioned a couple of times here, but.
I guess couple of questions is the right way to think about this step up in the Capex in 2020.
Mostly associated with that ERP system, and how are you thinking about the total investment into the system and on the other side how are you thinking about the benefits.
You know just sort of tactically as well as or strategically as well as just financially savings from from getting this ERP system in place.
That's a great question. Thanks, very much for first of all and we believe the transformation that where we're heading into with 90 is a key enabler a key long term enabler for all four of our strategic priorities.
So the investment supposed to take place over the next three to four years on its intended to moderate modernize and transform the way we do our business.
I'm really improving our customer service and their experience with us, but it will also be driving future operating efficiencies and incremental savings.
The total investment that we're looking out over the next three to four years were estimated to be about $100 million and that's going to be a mix of capex and operating expenses. You are correct that to step up in Capex that were seen in 2020 is directly correlated with the increased investment we're anticipating in the IP.
And then longer term as we as we get the transformation moving we expect to see somewhere between a 20 and 40 basis point expansion and operating margin related to the efficiencies that we get out of this investment.
Okay terrific. Thanks, guys appreciate it.
Okay.
Bob Hopkins of Bank of America is on the line with the question.
Please state your question.
Okay. Great. Thanks, Good morning, just a couple of quick follow ups.
I was just a follow up on that last one on the I.T. transformation whats the magnitude of the cost running through the piano say in 2020 and 2021.
As we look at 2020 were asked me approximately $10 million of operating expense related to the IP transformation. It will we're still working through our planning so to say precisely what 2021 will look like it's hard to say it will probably in that neighborhood, maybe a couple of million dollars last but we'll.
We'll update that as we get closer to 2021.
Okay, and then just two more quick one thank you for that.
On the volt side, just curious in in the quarter.
I'm just curious as to what the pro forma growth rate was a vote in the fourth quarter.
Rough estimates looks like it might have been.
Broaching, 20%, but just just curious to see how it during the quarter on a pro forma basis.
Yes, probably a little bit above that number you quoted there Bob its high double digits.
On an apples to apples basis.
Looking ahead, we look at it we.
Yeah, we're really pleased with.
The performance of the product we love the way, we're competing in the marketplace and the response, we get from customers around the combination of a bold plus the hill ROM portfolio has been has been really well received as an interesting side note you know the care com business now.
Well, we've been talking all about centrella, all year long the care comp business has actually been growing at double digits and it's actually.
In total larger than the you then the med search business in total so care com is substantially larger.
As a business segment than our total medsurg businesses in the United States.
Interesting and then one other kind of big picture follow up for you John and you know just congrats on a on a really strong year, you know kind of that.
Big Picture question I have is really on the revenue growth guidance Emil RP, obviously, you some really bullish on opportunities internationally on opportunities with new products.
And your deal RP growth rate is a little bit below the growth that you're putting up today.
Is that just a function of an exceptional year this year.
Or are there other headwinds worth calling out in the RP.
Yeah, Great question, Bob and I guess, if I would reflect a little bit on.
The first six quarters of being at Hill ROM join who were growing at 2%.
And it's now exiting last year at 8%, so pretty nice acceleration and on a full year basis going from 3% in 19 to over.
Over six actually 7% this year so.
Again, nice core revenue acceleration over the year as we look forward, especially on a three year plan.
Perspective, you know I think we were we do well advised to be prudent and and balanced and looking at all the puts and takes and things that can happen over three year period. So you'll see I think you'll see that reflected in our in our.
Long range guidance long range outlook of.
5% topline core growth in the near term, we do feel very bullish.
And confident about our outlook.
To drive this growth. However, we had a really strong centrella performance in the in 2019.
It's probably wise again to not think we can sustain that kind of high level double digit growth rates that we saw.
In the med surge category in into 20, so we've we've adjusted our expectations there as we think about our guidance and.
And that's really the primary driver and as new products launched they are continuing to ramp nicely the pricing launched and and we expect to see the new products launching in 2020 to be.
To be.
Starting to perform and contributed to the six products I mentioned the program launched in 2020, so from a headwind point of view, we don't we don't see it.
It's all factored in.
And really thought about having a very balanced perspective on both the next year as well as the next three years.
Great. Okay that makes sense, thanks very much.
Thank you.
Rick Wise of Hill ROM is online with a question. Please state your question.
Rick Wise and fill Ron good morning, you're right.
Hi.
Okay.
The balance sheet.
I mean.
You have done an excellent job.
Delevering the balance sheet generating free cash.
Now 3.2 time.
And you're projecting over a billion dollars could be seems to me well over a billion in free cash flow over the three year period.
You know a couple of questions related to that so.
Oh, yes debt Paydown remains your near term priority pending M&A, where would you like to see it sort of stabilized.
And maybe just.
Well listen to discussion about as you're thinking about them a is that pipeline filled and do you have any particular.
Priorities there John that are you more inclined as you look at the three businesses to focus on adding.
One more the another or no it's more opportunistic.
Yeah. Thanks, Rick.
From cycle not Hill ROM.
But but listen I think ultimately alternative part of the question over to borrow around leverage but in terms of strategic priorities of our capital first and foremost as M&A.
We do see continue to see.
Really nice opportunities to build out our category leadership strategy in all three businesses.
We have a very active process around.
Reviewing our pipeline of opportunities.
We are engaged on multiple fronts. Our team there as you know as it's been significantly enhanced and expanded.
And that's giving us the visibility into a lot more opportunities than we did even 12 months ago. So I.
I like our Optionality in our opportunities there and you know I wouldn't necessarily say were biasing one over the other there.
I Love all three of our businesses and it's going to be really depending on what what kind of opportunities. We see in front of us and which ones were able to pursue as you mentioned I think we had the financial flexibility to do you to do.
A number of these per year going forward.
And this the structure of the company and as decentralized approach allows us to to work on multiple fronts in parallel while we do this so I'll hand, it over to bar for the leverage question.
And thanks to the question on leverage you're right. We're at 3.2 currently which is also where we started the year. So we've maintained 3.2, while doing two acquisitions and returning nearly $180 million back to shareholders throughout the course of the year, which I think is a testament to our strong cash flow generation.
When we think about target range I think that we would you know again, our priority is to fuel M&A and as John just outlined we think that we have a really good opportunities in front of us.
Absent good opportunities, we could see I'm seeing our target leverage going down to somewhere in the two and a half range, but we don't see that at a probability in the near term just because we see lots of opportunities out there for us to invest and really tried.
Continued topline growth.
Great and good luck for me.
Just quickly on PSS.
Your slides to emphasize that you're benefiting from solid orders in backlog is the right. We had read that that business, even with the tough comp is in pretty stable say on the bed front and you're feeling pretty good that's the right take away heading into the this current fiscal year or the new fiscal year and.
Just last John if I could we've talked about some of that potential challenges and headwinds, but if there were a upside, particularly sales side looking at the next three years.
Do you think it would come from is it better execution is it from the new products is that from it faster.
That's emerging market penetration or et cetera, et cetera, or no with all of you Bob. Thank you so much.
Yeah, Okay. Good questions and I think first of all in the PSS business really comfortable and confident with our overall portfolio. There. It's a very balanced portfolio I know in the last year, we've talked a lot about mid surgeons and trello, but it's so it's a large business is very balanced it's got multiple areas of growth.
That are have been delivering very consistently.
Over the last.
Six quarters that I've been here.
In terms of where the future upside or growth is coming from where we could see that kind of.
Performance.
I think the the investments we're making.
In new products acquisitions, and emerging markets are all key focus areas for us, we're very very intentional about where we're investing and now we're tracking and how we're measuring ourselves there.
So.
Again, it comes back to our ability to execute our team is very motivated highly engaged or doing a great job and.
I think big you continue to perform the way they are doing and we'll.
We'll be pleased with the outcome of versus our our our guidance.
Thank you so much.
Matthew Sean of Keybanc.
He is online with the question. Please state your question.
Great. Thanks, John .
You have some very strong assumptions for for international in your plan I just.
Want to get a sense of you know.
You said you could a reinvigorating it you know what went wrong over last couple of years in kind of how are you how are you fixing it.
Yeah, I guess it would start with the premise that are ambitious plans I would say there balanced and.
And Oh, you know appropriately cautious.
Our fiscal 20 guidance has baked into it low single digit growth and in established markets and then exiting with double digit growth as we get to the back half the year. So in total for the year, It's high single digit growth in emerging markets, we're exiting at that level in emerging markets.
So I don't think its build with any kind of significant risk as as look at fiscal 2000, and we're enrolling forward in that three year outlook.
Again, I don't think its.
An overly ambitious.
A set of expectations now that said I love seeing results.
For a few more quarters before.
Before raising expectations on on an area that we've had some chronic up and down performance around so.
Let's take it a quarter or time see how things.
Progress and we'll take it from there, but as its as it is.
Quantified and rolled into our guidance I feel really good about it.
Okay, Great and then.
Sorry for asking this question, but I believe a lot of your people have been brought over from from Baxter over over over last several years have you do you take an enhanced look at that certain accounting practices that are that are affecting them and how confident are you that those issues are having also been adopted it helps them.
So so I guess I'll I'll take that question, we know from Baxter first of all I'm not from Baxter and I'm not I'm not aware of anybody on my direct leadership team that came over from Baxter, either so as as we think about.
Our accounting practices.
And our books and records for really confident and what we're doing and how we're doing that.
Thank you very much more.
Great Jack we have time for two more questions Jack.
Mike Mattson of Needham and company.
It is online with a question. Please state your question.
Yes, Thanks, just wanted to start with a.
Free technologies, so I think the non invasive.
At least in categories. This part of the Crown 2021 of competitive bidding so does that affect the breeze products and can you just comment on.
Whether or not you bid there and what do you kind of expect to happen with reimbursement how that will affect that business.
Yes, so we're participating in competitive bidding for that product category. It is part of the competitive bidding process, we knew that going into the acquisition.
It doesn't take effect until 2021 does no no impact whatsoever for fiscal 20.
And we feel good about.
Where where we stand and what our opportunities are and the competitive bidding front.
And I'd be market again, as I mentioned, especially and I'd be in the home, which is where we're focused.
More than more than the probably little more than the acute care categories is a high growing double digit market for us for the overall and we're going to be entering that space from a from a low market share position.
Perfect.
That's helpful. And then just on the Dysmorphic features like early sense or watch here can you give us an upbeat are there any kind of metrics. There you can give us in terms of adoption and impact on growth in the.
Yes, that's business.
Yeah, I think its.
First of all because it really important differentiator to our overall product offering the smart bed.
Due to the smartphone and that hold ecosystem and connectivity and future proofing.
Investments that that customers are making.
Yes in terms of.
Its revenue contribution in fiscal 19, and it hasn't been really that material both of those products, but we do expect them to ramp.
As we enter plenty.
And start seeing.
Dedicated sales team focused on that with some dedicated specialist I will tell you then in areas, where we have turned on and activated the early sense device on our products. We've we've gotten back some incredible stories of.
Patients that were rescuing and detecting.
Changes in heart rate respiratory rate over time as a continuous sensor is deployed in activated.
So bringing that type of alert and alarm onto the nurse call system and not just at the bed side.
And in the future onto the mobile platform is really going to be a very compelling.
Value proposition and game changer in the marketplace for for really helping rescue patients that are.
In deterioration.
And also as we think of our digital product offerings that we'll be rolling out later in fiscal 2008.
That will be directed at patient deterioration and falls that same kind of.
Connectivity and and.
Notification systems will will will be deployed on on the.
Care Communications platform.
Great. Thanks, a lot.
[noise] Kristen Stewart of Barclays is online with your last question. Please state your question.
Hey, good morning, everybody.
Quick.
Clarification on for Bob and then a big picture one.
The one time issue and gross margins can you just to clarify what that was and is it something that I.
I guess occur again.
Hi, Chris and inspire thanks for the question now they really were onetime items, we had some discontinued projects during the quarter as well some small inventory adjustments that were really one offs on in the quarter. They amounted to about $4 million in total, but not something that we would expect to be.
Recurring theme.
That's why we called them out.
Great.
And then I guess, just kind of big picture I guess kind of going back to I think it was on question on on the 5% LR Pete I guess I'm just.
Having a little difficult time and money I guess, it's a little bit of conservatism as you were saying John .
As I think through just some of your numbers that you had inherent just with respect to the new products going to 750 million and Thats contributing 200 basis points annually and then.
On emerging markets, contributing 100 basis points, and just hold being accretive to growth and the opportunities with free the you've done a lot from a portfolio management and acquisition seem pretty positive and doing a lot on the new product front you've got.
All these.
Moving very favorably and I'm, just kind of surprise that.
5% as is the number and.
Thinking ahead Q to the extent that you guys are doing more things on the M&A side. I know you said that those are likely to be additive I want to just make sure that those are really additive to the l. RP because it seems like you've been doing a lot, but seems like a lot of running and standing still I guess on that 5% growth. So just just.
Kind of walk me through I guess, how I should really think about the growth prospects for the company.
Yes, Thanks, Great question, Chris and something obviously spent a great deal of time around.
We feel really good about where we are so let me start was that really good and tremendous amount of conferencing conviction on the go forward outlook and our ability to execute against that that outlook.
That said.
We.
We just to confirm any additional M&A will be on top of what we've outlined today.
It's not going to get somehow rolled into our guidance and our outlook here.
And then secondly, I think until you know the one.
The one part of the of the weighted average market growth rate. If you will that's kind of holding us back a little bit is our more established markets internationally.
And we've got a little bit work to do there you know once we can get those performing closer to the company average in mid single digits.
I think there's room for.
Increase bullishness on the outlook, but until that time.
I think there's a lot of things that can happen over three year period, or we're going to be.
Ill prudent and balanced.
Ladies and gentlemen, this concludes today's conference call with Hill ROM Holdings incorporated thank you for joining.
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