Hill-Rom Holdings Management Discusses Q1 2014 Results - Earnings Call Transcript

Jan.23.14 | About: Hill-Rom Holdings, (HRC)

Hill-Rom Holdings (NYSE:HRC)

Q1 2014 Earnings Call

January 23, 2014 8:00 am ET

Executives

Blair A. Rieth - Vice President of Investor Relations

John J. Greisch - Chief Executive Officer, President and Director

James K. Saccaro - Chief Financial Officer and Senior Vice President

Analysts

David R. Lewis - Morgan Stanley, Research Division

Travis Steed - BofA Merrill Lynch, Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

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 January 29, 2014. See Hill-Rom's website for access information. The webcast will also be archived in the Investor Relations section of Hill-Rom's website, www.hill-rom.com. If you choose to ask a question today, it will be included in any future use of this recording. Also note that any recording, transcript or other transmissions of the text or audio is not permitted without written consent of Hill-Rom. [Operator Instructions]

Now I would like to turn the call over to Mr. Andy Reith, Vice President, Investor Relations.

Blair A. Rieth

Well, thank you, Stephanie. Good morning, and thanks for joining us on our first 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 Jay Saccaro, Senior Vice President and 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 your Q&A. [Operator Instructions] As you listen to our remarks, we are also displaying slides that amplify our disclosure. I would encourage you to follow along with us. The slides were posted 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, and thanks to all of you who have joined us this morning. As you saw in our press release, we have a lot to discuss this morning. Let me start with our first quarter results, with which we are clearly disappointed. We came into 2014 expecting continued volatility throughout the year in our North American capital business, similar to what we experienced during 2013. However, we did expect to see modest growth on a full year basis.

Following a weak fourth quarter, we were surprised by the sequential weakness in orders and revenue here in the first quarter. Economic uncertainty for our customers continues to impact the timing and the level of capital spending for our key product categories. The weak order rates the last 2 quarters and the volatility over the past year reflect the challenges we continue to experience in our core market.

Most of the weakness we are seeing in our capital business is in our high-margin med-surg product category. So not only were orders and revenues weaker than expected, but our margin mix suffered as well. As a result of all of these factors, we have lowered our full year revenue and earnings expectations from our original guidance.

Before I comment on the quarter's results and our revised outlook in more detail, I want to provide some perspective on the restructuring actions announced in our press release. As we have demonstrated consistently over the past several years, we are fully committed to improving our long-term operating margins. We have spoken frequently about the need to improve our profitability and to streamline our cost structure. Today's actions are the latest initiatives we are taking as part of our commitment to drive margin improvements in both our U.S. and European operations.

Given the expected continued the volatility in our capital business in North America, and the challenging health care environment in our European markets, we believe this restructuring will improve our overall profitability and cash flow generation, position us well for the challenges of the coming months and years and place us in the best possible competitive position. The actions today include the plant closure of one facility and rationalization of capacity across our European footprint. In addition, we'll be consolidating much of our European back office infrastructure into a new shared services center. These actions will be executed over the next 2 years. In the U.S., we plan to further rationalize our cost structure by reducing our salaried workforce by approximately 5%.

Over the past 4 years, excluding net headcount additions from our acquisitions, we reduced our total global headcount by approximately 1,000 positions, or 15%. The actions we announced today will drive further improvements to our cost structure and margin profile, in line with our long-term objective to improve operating margins by 300 to 400 basis points. Jay will cover more of the specifics later, but when completed, we expect our annual earnings per share to benefit by approximately $0.35 per diluted share as a result of these actions. For 2014, we expect the benefit to be approximately $0.09 per share, excluding onetime charges.

As I step back and look at our business over the past 2 quarters, the vast majority of our lower-than-expected order intake is due to CapEx reductions or delays by our customers, as opposed to competitive losses of Hill-Rom accounts. We're confident that we have the right products and teams in place to maintain our leading position in our core product categories. That said, with volume and pricing pressures increasing, we believe the revisions to our existing guidance for 2014 are appropriate.

Turning to the first quarter results. As I mentioned previously, the majority of the shortfall was due to weaker-than-expected revenues in our North American capital business. We entered the year with a weaker backlog than the prior year, and capital orders for the quarter were the lowest level we have seen on a quarterly basis for over 3 years, particularly in our high-margin med-surg business.

In our ICU product category, we had a solid quarter led by strong orders for our new ICU product, Progressa, demonstrating the value this product brings to our customers. Well, today, we have a healthy quote bank of large orders, we expect to continue to see the timing delays that we have experienced for the last several months with many customers, making it more difficult to forecast the timing of orders, and therefore, revenue for this part of our portfolio. As a result of this uncertainty, we are increasingly cautious about hospital capital spending for our capital products, and, therefore, the outlook for the rest of this year.

Internationally, our first quarter was down about 8% due to an unusually strong first quarter last year in the Middle East and Latin America. Europe remains relatively stable. And for the full year, we expect our overall International business to be relatively flat to last year.

I'm pleased with the performance of our Surgical and Respiratory Care business this quarter. The 7% growth is the strongest quarterly growth rate we have seen for several years, and I'm encouraged by the momentum we have developed in this business over the last 6 months. New products and improved execution across our businesses are driving improvement in this segment.

On the innovation front, I'm pleased with the reception of Progressa and the Allen Advance spine table have received in the first full quarter that they have been on the market. Moreover, during the quarter, we launched our new med-surg bed, Centuris [ph], designed for emerging and developing markets.

In the talent area, we have welcomed 2 new members to the executive team over the past several months. We'll be hearing from Jay Saccaro, our new CFO, in a few minutes. He joins us from Baxter, where he held a number of key strategy and financial roles during his 11-year career there, including Corporate Treasurer and CFO for Baxter's European operations in Zürich. Jay and I have worked together in the past, and I'm thrilled to have him on the team.

In addition, I'm excited to welcome Taylor Smith as President of our Surgical and Respiratory Care group. Taylor joins us from Cardinal Health, where he held a number of senior executive sales, marketing and general management roles. Both Jay and Taylor bring significant experience to our company and will be instrumental to driving growth and value in the future.

Looking ahead to the outlook for the rest of the year, we obviously expect our revenue profile to be much more challenging than what we had projected in our original guidance. Stringent cost controls and the benefit of our restructuring actions will mitigate some of the revenue shortfall we now expect. But as Jay will enumerate later, we have lowered our adjusted earnings per share guidance for the full year by about $0.24. With continued focus on cash flow, we expect to deliver another solid year of free cash flow, excluding this year's restructuring charges.

So to wrap up, before I hand off to Jay, 2014 has obviously not started out as anticipated. While we expected continued volatility in North America based on our first quarter results, we clearly underestimated how much more volatile 2014 will be. The restructuring actions announced today reflect our ongoing commitment to margin expansion and streamlining of our cost structure. While these actions are difficult, I am confident that we're taking the right steps to position our company to achieve our long-term financial objectives. We will remain focused on optimizing our core businesses, improving long-term operating margins, generating strong and consistent cash flows, and deploying our capital in a disciplined, value-creating way in the future.

With that, let me turn the call over to Jay before I wrap up and open the call up to Q&A. Jay?

James K. Saccaro

Thank you, John, and good morning to everyone on the call. First, I want to mention that I am excited to join John and the rest of the team here at Hill-Rom. Hill-Rom is a company that has a great brand and strong market positions. However, I have to acknowledge that I share John's disappointment with the results that we reported today.

Before we get started, I want to reiterate Andy's comments at the outset that many of the figures we will discuss are non-GAAP measures. Reconciliations to our reported U.S. GAAP numbers are included in the appendix to our slide deck.

To start, first quarter revenue decreased 8.2% to $393 million on a consolidated basis, or 8.8% on a constant-currency basis. This decrease was driven by lower North America and International capital revenues. Partially offsetting this decline was a 7.3% increase from our Surgical and Respiratory segment.

Capital sales decreased 8.9% to $295 million, again, driven by North America and International. Consolidated rental revenue decreased 5.9% to $98 million, also driven by declines in North America. Domestic revenue decreased 9% to $249 million, while revenue outside the United States was down 7% to $144 million.

Looking at revenue by segments, North America revenue decreased 12.4% to $205 million. Capital sales decreased by 14.3% to $136 million. The lower order patterns we experienced at the end of 2013 worsened during Q1. This resulted in North American Q1 orders and the backlog position at the end of the quarter to each decline approximately 20% in comparison to the prior year. However, as we evaluate our current order pipeline, we do expect order patterns to improve in relation to Q1 performance, as is reflected in the guidance numbers that I will touch on shortly. But this further underscores the quarter-to-quarter volatility of capital orders that we have seen in recent periods.

North America rental revenue declined 8.4%, but increased 3% sequentially. We continue to experience pricing pressures in our North American rental business.

Moving to our Surgical and Respiratory Care segment, revenue increased 7.3% to $63 million, driven by growth across all 3 of our businesses. Specifically, Allen Medical revenue increased 15.4% year-over-year, Aspen revenue increased 7.7% and Respiratory Care revenue increased 1.6%. As John mentioned, we were particularly pleased with the performance of these businesses in Q1.

International revenue decreased 7.5% to $125 million. On a constant-currency basis, quarterly revenue declined approximately 10%, driven primarily by lower revenue in the Middle East and Latin America where we had unusually large tenders a year ago. Other regions were stable compared to the prior year.

Adjusted gross margin of 45.2% for the quarter was down 60 basis points compared to the prior year. Year-over-year, adjusted capital margin was down 80 basis points, driven by -- primarily by unfavorable product mix in North America and the impact of lower overall volumes on our manufacturing base.

Rental margin experienced a slight decline of 20 basis points due to the continued price pressures we face, primarily in North America. However, we partially offset this by effectively managing our cost structure and the field infrastructure that supports this business.

Regarding operating expenses, our R&D investment decreased 4.7% year-over-year following the launch of several key products in the second half of last year. As a percent of sales, our R&D investment was comparable to last year at just over 4%.

Adjusted selling and administrative expenses were roughly flat with the prior year. However, excluding the impact of the medical device tax, which was not implemented until January of 2013, adjusted selling and administrative expenses were down just over 1%.

Adjusted operating profit for the quarter was $33 million, representing an 8.5% operating margin. In comparison to the prior year, operating margin was down 350 basis points, mainly due to the lower revenue, gross margin declines and the medical device tax. As you will see with our guidance, we expect operating margins for the remainder of the year to be significantly stronger than Q1.

The adjusted tax rate for the quarter was 32.6% compared to 32.9% in the prior year. I will further address the tax rate when we update our annual guidance.

So to summarize the income statement, adjusted earnings per diluted share of $0.36 in the first quarter represented a 33% decline, compared to $0.54 in the prior year. Adjusted EBITDA for the quarter was $54 million compared to $75 million in the prior period. The decrease was driven by the lower earnings. Our first quarter operating cash flow was $42 million, compared to $65 million in the prior year.

During the quarter, we repurchased 1 million shares of common stock for approximately $42 million. This year, repurchase activity is consistent with our capital allocation strategy of returning a significant portion of our operating cash flow to shareholders as one of our key levers for creating value.

Now, let's turn to our review of the restructuring program. In line with our longer-term objectives and our commitment to improving operating margins and our overall cost structure, we are implementing a comprehensive restructuring program today. In summary, this will include a reduction of our European manufacturing footprint and capacity, with the planned closure of one facility and the downsizing of capacity throughout our European manufacturing network; and the streamlining of operations, both in the U.S. and Europe, with a focus on both near-term savings and a long-term cost-effective infrastructure. These efforts include the establishment of a shared services center in Europe.

Upon completion, these actions will result in the elimination of approximately 350 net positions in the United States and Europe, representing about 5% of Hill-Rom's global workforce. We anticipate substantially completing the U.S. portion of the restructuring during the second quarter of 2014, and the restructuring in Europe to be completed over the next 2 years. When all actions are complete, we expect the savings to be approximately $30 million on an annual basis, or approximately $0.35 per diluted share.

For fiscal year 2014, we expect savings to approximate $8 million when excluding restructuring charges, and this is reflected in the guidance numbers I will share.

Upon completion of all actions, we expect restructurings charges of approximately $50 million, with $15 million to $20 million to be incurred in the second quarter of 2014. Remaining charges will be incurred throughout the restructuring period.

Now let's move on to our full year 2014 guidance. We now expect full year revenue to decline in the range of 2% to 4% on a constant-currency basis, in comparison to the prior range of approximately 1% growth. At current exchange rates, we now expect a favorable impact of currency of approximately 1%.

Our full year adjusted EPS guidance is now $2.18 to $2.28 per diluted share, in comparison to our previous range of $2.43 to $2.51. In our revised 2014 guidance, we have eliminated a $0.03 per share benefit associated with the R&D tax credit. This benefit was included in our previous guidance.

When compared to 2013 results, this revised full year 2014 financial outlook now reflects segment constant-currency revenue performance of the following: a revenue decline of 5% to 7% in North America, revenue growth of 4% to 5% in Surgical and Respiratory Care and flat international revenue; gross margin of a 46% to 47%; R&D spending, in line with our recent trends as a percentage of revenue, at just over 4%; flat SG&A as a percentage of sales, reflecting the benefits from the aforementioned restructuring actions; a tax rate of approximately 31% to 32%, which is an increase from our previous guidance of 30% to 31% to reflect the impact of the R&D tax credit not being reinstated; and the number of shares outstanding for the year to approximate 59 million.

We project 2014 operating cash flow to be in the range of approximately $250 million to $260 million, when excluding the impact of cash outflows from the restructuring program that we announced today. We also anticipate $70 million to $75 million of CapEx investment for the full year. And finally, we expect adjusted EBITDA to be in the range of approximately $280 million to $290 million.

Moving to the second quarter, we are projecting revenue to be down 2% to 4% in constant currency. At current exchange rates, we expect a favorable impact from currency of approximately 1%. We expect adjusted earnings of between $0.50 to $0.53 per diluted share, excluding acquisition-related intangible amortization of $0.08 per share. This compares to $0.56 in fiscal 2013 on a comparable basis, excluding $0.07 of acquisition-related intangible amortization.

With that, I'll turn the call back to John for concluding comments. John?

John J. Greisch

Thanks, Jay. Clearly, this quarter was a surprise. As everyone on this call knows, hospital capital spending will continue to be under pressure, and our capital products are expected to be under even more pressure than most. As lumpy as our capital revenues have been historically, this is the first time we have missed our quarterly earnings guidance since we began providing quarterly guidance 2 years ago. Clearly, we underestimated the CapEx delays and reductions impacting our products, resulting from the pressure our customers are experiencing.

In contrast to the challenges in our capital business, I'm very pleased with the performance of our Surgical and Respiratory Care business this quarter. We built momentum in that business throughout 2013, and we expect to see continued growth in that segment for the remainder of 2014. The performance of this business in the first quarter demonstrates the value of the portfolio diversification strategy we have been pursuing. We will continue to be disciplined in our approach towards future diversification opportunities.

As Jay mentioned in his guidance remarks, we do not expect the disappointing margin profile of Q1 to be repeated in the remainder of 2014. We expect our operating margins to return to the levels of 2013 for the remainder of the year, and to show a significant improvement over the first quarter levels. Despite the revenue and earning reductions for the full year, we are committed to delivering free cash flow, excluding restructuring charges near the level of our original guidance. We have delivered consistent cash flows each of the past 3 years despite highly volatile revenue, and we're committed to doing the same in 2014.

In closing, as we have been doing in recent years, we are taking the appropriate actions to improve the long-term profile of our current businesses. While we stay focused on optimizing our core business, we will continue to pursue strategic additions to our portfolio in a disciplined manner. We are committed to continuing to take all necessary actions going forward to stay on the path we've been on for past 4 years of improved margins, consistent cash flows and increasing shareholder value.

With that, operator, please open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from David Lewis with Morgan Stanley.

David R. Lewis - Morgan Stanley, Research Division

John, I want to come back to one of the things you said in your prepared remarks. I mean, you talked about pressure on the end markets, but specifically in the high-end segment of the market. I'm wondering if you could just provide us more detail. Is that competitive pressure on the high-end segment of the market, or that's simply customer preference, looking for low-end bed solutions versus high-end bed solutions?

John J. Greisch

Yes, I just want to clarify my comment if you left with that impression, David. The -- when we refer to the med-surg segments as the segment that had the highest pressure, that's really not the high end. Our ICU product category, where Progressa and TotalCare historically have played, is more of the high-end market. That's actually been pretty stable. So the weakness that we saw this quarter had -- was in the med-surg category, which is where the vast majority of the businesses -- of the 800,000 licensed beds here in the States or North America, that's about 75% of the total bed capacity, is in what we call med-surg. So that the weakness has been there, the products that we have in that category, VersaCare, Advanta 2, the product that we launched a few years ago, that's where we saw weakness. I don't see, really over the last couple of years, the weakness that we've experienced, including this quarter, to be competitively driven. We try to analyze that as best as we can, recognizing there's no publicly reported apples-to-apples comparisons. But as we track our competitive position over the past couple of years, I'm pretty confident that our share position has been stable. This quarter was obviously much weaker for us than we expected, and that -- and weaker than what we've seen over the past several quarters, and it was largely in that med-surg category. Again, call it in the $3,000 to $12,000 bed category versus the $20,000 to $30,000 ICU bed category.

David R. Lewis - Morgan Stanley, Research Division

Okay. Very helpful, John. And then you've talked about the pressures the hospitals are facing, it does seem that there was an incremental change maybe the last 3 to 6 months. And when you talk to hospital customers, procurement officers, CFOs, what do you think is their -- sort of their primary fear? Because you've made a very specific point in this call that you think it's your capital, not necessarily broader capital, if I heard that correctly. So I'm trying to understand what you think, incrementally, is this hospital consolidation, is it fears over ACA, utilization concerns? If you could help us there, that would be great.

John J. Greisch

Yes, good question, David. Yes, I think it's pretty clear from your research and several others. Hospital CapEx is relatively flat to slightly positive on an overall basis. I think what we've been feeling -- last year, our core North American bed business was down in, I think, around mid-single digits, maybe high-single digits year-over-year. So our product category, clearly, isn't following the overall trend of flat to slightly up. Why is that, which I think is the guts of your question, and what are we hearing from customers in that regard. I think, clearly, as you know and everybody on the call knows, our products are largely a replacement buy for hospitals, either replacing old beds or replacing capacity that's being rebuilt with new wings or new hospitals as old capacity is taken out. So that's driving most of the spend on our product category. What are we hearing from customers as to why there's more pressure on our products than others? It's clearly not a revenue-generating CapEx for hospitals. It's one that I think customers are deferring where they can because it's not generating revenue. We do believe we have significant outcomes improvement and cost benefit for hospitals, whether it's reduced pressure ulcers, reduced patient falls and other benefits that we bring to our patients and our customers with the combination of our beds, our lifting products, our therapeutic surfaces, et cetera. But in the ranking of priorities to hospitals relative to other revenue-generating products, I think our product category is under more pressure than others that you guys are familiar with. And we're seeing that more intently over the last several quarters, and we expect it to continue. Obviously, not at the level that we saw in Q1. But that's -- I apologize for the long-winded answer, but I think both of those questions are really critical questions. The share maintenance, which I very strongly believe we are holding, but the continued pressure in our products category in the world of tight CapEx driven by all the things that you mentioned, reimbursement pressure, ACA, reducing capacity of beds over time, et cetera.

Operator

Our next question comes from Bob Hopkins with Bank of America.

Travis Steed - BofA Merrill Lynch, Research Division

This is Travis Steed on for Bob. Do these results and the restructuring impacts your plans look for M&A opportunities, given the company's commitment necessary to restructure, and could we see a greater focus on buy back as a result?

John J. Greisch

Well, I think you saw a pretty strong buyback in Q1. As Jay mentioned, we bought back 42 million of stock in Q1, which was one of our higher quarterly rates, certainly over the past several years. And we've been pretty consistent in our communication that in the absence of M&A, we're going to aggressively use our balance sheet for share buybacks, while at the same time, preserving flexibility to pursue acquisitions. The first part of your question, does this change our either ability or appetite to do acquisitions? Financially, it absolutely doesn't change it. As Jay said, we've got about a $50 million investment to execute the restructuring. That's going to be over the next 2 years, so it's not going to constrain our financial ability to do acquisitions. I think, if anything, the volatility that you've seen in our business over the past several quarters, and really the past couple of years, has accentuated this quarter with the weakness in Q1. If anything, that adds to the appetite to continue to diversify the portfolio, reduce the volatility and get more stability in our business, as was demonstrated by our Surgical and Respiratory Care business in Q1 on the back of strength from our Aspen acquisition, as well as strength in the Allen business that we currently have.

Travis Steed - BofA Merrill Lynch, Research Division

But given that your appetite really hasn't changed, can you talk about your M&A pipeline, are you still having active conversations, and what has really been the biggest inhibitor so far to doing a deal?

John J. Greisch

Well, the big inhibitor is we're going to be remain disciplined around the types of things that we're looking for, and we're not going to panic. I think I've said that pretty consistently, Travis. I don't like where we are. I don't like the first quarter results. Clearly, a surprise and a big disappointment for us and, obviously, investors. That's not going to force us to panic to buy something that either doesn't fit strategically or doesn't fit our financial objectives. We do have an active pipeline of opportunities that we're engaged in, and that's been consistent over the past year. But we're focused on the areas that we highlighted at the investor conference -- patient handling, surgical efficiency, clinical workflow, respiratory care, wound care, infection control, that's where we're focused. That's where we're going to stay focused. And we will add to the portfolio of those areas as we find assets that meet our financial profile, as well as of those strategic objectives. So I'm very confident we will execute some deals in the areas we're looking at. I'm not going to speculate on the timing, obviously, but we're going to be remain disciplined and not panic just because we've had what clearly is a very disappointing quarter.

Operator

Our next question comes from Matt Miksic with Piper Jaffray.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

So I wanted to come back to sort of the big moving piece in the quarter, which was the slowdown in demand or orders that you saw in your core business. You had talked about a fair amount about sort of the uneven nature of this business, and this is certainly something that we should have expected to happen at some point, maybe not to this degree. But can you -- is this -- and one of the things you talked about was this idea of reduction, a general reduction in sort of the acute care footprint of the U.S. hospital folks. Hospitals wanting to get folks in and out of the hospital faster. And we had seen some of that last year. Is this -- at the hospitals that you're seeing, the pressure from here represents sort of a broader example of that? Or would you chalk this up more to -- from what you can understand, talking to these hospitals, more of a timing issue?

John J. Greisch

I think it's a little of both, Matt. As I think Jay and I both mentioned in our comments, we don't expect the level of Q1 orders to be repeated throughout the rest of the year. I mean, it was over $20 million short of our expectations, which is a pretty big number in our North American capital business. That said, we do expect our med-surg orders this year to be down from last year. I think Jay commented, our North American business, we now expect to be down 5% to 7% for the year. That was not our expectation coming into the year. So I don't see massive capacity coming out of the system in any accelerated rate, relative to what we've seen over the past several years. It's -- as you know, it's been coming down about 1% a year. I haven't seen anything that's going to change that, either in the near term or the midterm. Timing issues, we -- I mean, this was like the perfect storm in the first quarter for us. A lot of orders did get delayed, timing issues certainly impacted our order rate for the quarter. As I mentioned in my comments, we're sitting on a very strong quote bank, with as many larger orders as we've seen for quite some time. Why is that? A lot of them have been backed up as hospitals are delaying decisions in, as I mentioned, in response to the question from David earlier. So I think the timing delays are going to make this even lumpier than it has been, and we saw that in Q1. But I -- at this point in time, we don't expect Q1 to be reflective of the order rates that we expect for the rest of the year.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Okay. And then just -- you mentioned some pressure on kind of, sort of the med-surg category of beds. Is that a -- can you talk at all about if you're expecting this to kind of -- the delay in Q1 to be pushed, to some degree, further into this fiscal year and into the next fiscal year? Is there anything amiss in mix that you can speak to in terms of what you saw and what you're expecting to see in the next couple of quarters?

John J. Greisch

We expect the mix to improve over the rest of this year with med-surg recovering somewhat from the first quarter, and ICU, which is the higher-end product category, to be relatively flat for the next year. So if you think about the mix between ICU and med-surg, that mix will skew a little more towards positive improvement. With med-surg, as I said, I don't expect the Q1 level of our med-surg business to be repeated through the rest of this year. ICU, we expect to be relatively flat throughout the year.

James K. Saccaro

And just a reminder on the call, the -- both of the med-surg and the ICU businesses enjoy favorable margins, overall.

John J. Greisch

Yes, these are our 2 highest product gross margin categories across the company, with the exception of a couple of our smaller businesses in Surgical and Respiratory Care. So when either one of those product category suffers, our margins are going to be impacted, as we saw in this quarter.

Operator

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

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

This is Ryan Halsted on for Gary. I was wondering if you can break out the restructuring plan, I guess, in terms of how much of the $30 million in annualized savings you expect to come from some of the European initiatives versus the North American. And in the North American portion, any sort of detail on rental versus capital might be helpful.

James K. Saccaro

Sure. Thank you for the question. As we look at the savings from the restructuring program of approximately $30 million, as you know, the majority of our cost base is in the United States. And so as far as break out of savings, our current expectation is that the majority of the savings will also come from the United States. As far as specific business segments, I would say a lot of the focus relates to back office operations, which supports multiple businesses. So we will see attendant improvements associated with each of our businesses as a result of this restructuring action.

Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful. And I guess, in the past or last quarter, you mentioned some hopefulness, I guess, on your part for some tailwinds that may come from the ACA. I guess, does it -- does sort of instituting this restructuring, does it kind of diminish, or is your hopefulness, I guess, diminished? And if so, I mean, if there are some tailwinds to potentially arrive in the back half of the year, I mean, are -- would you be able to, I guess, quickly ramp up any type of capacity that you might need to sort of fill that?

James K. Saccaro

Yes. Good question. I would say, as far as the ability to capture upside, this restructuring will not impact that ability at all. Our intent is to preserve flexibility to the extent that there are market recoveries or upsides in specific segments, specific areas or regions. We will have the capacity to capitalize on those opportunities.

John J. Greisch

Hey, Ryan. This is John, let me just add to what Jay just said and clarify a little bit about your question about upside. I don't think I have been saying, at all, that there is tailwind coming our business from the ACA -- from the ACA health care reform activities. I have been asked many times, why am I so pessimistic about the impact on our capital products? Shouldn't there be benefit coming out of the ACA legislation that will drive capacity for our products? The capacity for hospital beds, particularly. I have not been one saying that that's going to be an outcome of ACA. I did say last quarter, I hope the question that was posed, which was, there has to be some tailwind coming out of ACA that I hoped that proved to be the case. But I've been fairly consistent and accused oftentimes as being fairly pessimistic about the impact of ACA, whether it's reimbursement, whether it's patient flow, whether it's payer mix on our capital products, and unfortunately, we've yet to see any tailwind. And I don't want anybody to leave this call thinking that I either came into the year believing there was tailwind or sitting here today because, obviously, the challenges are even greater than what we thought they were going to be as we came into 2014. I continue to hope I'm wrong.

Operator

And I'm showing no further questions. I will now turn the call back to Andy Reith, for closing remarks.

Blair A. Rieth

Thanks, Stephanie. And I'll turn the call over, in turn, to John for some closing remarks.

John J. Greisch

Just a couple final comments and a couple of repeats of what we said earlier. Obviously, this is a tough quarter and one that we are disappointed in. It is the first quarter we've missed over the past 2 years since we've been providing earnings guidance, and we don't feel good about that at all. However, the progress we've made over the past 3 or 4 years, in terms of earnings improvement, margin expansion and consistent cash flows we're consistent to get and stay on that track. The first quarter was clearly a very large speed bump relative to the progress we've made, and we're committed to maintain the progress we made, get our margins back to the levels of last year, as I said in my comments, and continue to generate strong cash flows and invest appropriately, either in share buybacks or portfolio additions, to do what we've been doing the last 3 years.

So we look forward to getting back on that track and getting through the challenging environment that we have with the appropriate actions that we've been taking as evidenced by this quarter. So thanks for joining us this morning.

Operator

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

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Hill-Rom Holdings, Inc. (HRC): FQ1 EPS of $0.36 misses by $0.15. Revenue of $393M (-8.2% Y/Y) misses by $13.04M.