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Executives

Andy Rieth – Investor Relations

John Greisch – President and Chief Executive Officer

Mark Guinan – Senior Vice President and Chief Financial Officer

Analysts

David Lewis – Morgan Stanley

Larry Keusch – Morgan Keegan

Lennox Ketner – Bank of America

Topher Orr – Goldman Sachs

Catherine Hill – Deutsche Bank

Hill-Rom Holdings, Inc. (HRC) F4Q 2011 Earnings Conference Call October 27, 2011 8:00 AM ET

Operator

Good morning, and welcome to Hill-Rom Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded and will be available for telephonic replay through November 4, 2011. 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 transmission of the text or audio is not permitted without the written consent of Hill-Rom. (Operator Instructions) Now, I would like to turn the call over to Mr. Andy Rieth. Please go ahead.

Andy Rieth – Investor Relations

Well thank you, Allie. Good morning, and thanks for joining us for our fourth quarter fiscal year 2011 earnings call.

Before we begin, I’d like to provide our usual caution that this morning’s call may contain forward-looking statements, such as forecasts of business performance and company results, as well as expectations about the company’s plans and future initiatives. Actual results may differ materially from those projected.

For an in-depth discussion of risk factors that could cause actual results to differ from those contained in forward-looking statements made on today’s call, please see the risk factors in our Annual Report on Form 10-K and subsequent quarterly reports on Forms 10-Q. We plan to file our fiscal year 2011 annual report on Form 10-K in November.

Now joining me on the call today will be John Greisch, President and CEO of Hill-Rom and Mark Guinan, Hill-Rom’s Senior Vice President and Chief Financial Officer. The usual ground rules will apply to make the call more efficient. We scheduled an hour in order to accommodate our prepared remarks and leave plenty of time for Q&A. During the Q&A, please limit your inquiries to one question plus a follow-up per person. If you have additional questions, you may rejoin the queue.

Now as you listen to our remarks, we are also displaying slides that amplify our disclosure and I would encourage you to follow along with us. The slides were posted last night on our website and will also be part of the archive.

And with that, I’ll turn the call over to John.

John Greisch – President and Chief Executive Officer

Thanks, Andy. Good morning, everybody. Thanks for joining us today. Despite the challenging economic environments, particularly in Europe, we closed the year with a strong fourth quarter performance on all fronts in line with our guidance. For the full year, we achieved all the key objectives that we focused on in 2011. In light of the economic conditions in the United States and especially in Europe, I am proud of how well our teams executed our plan.

For the full year, we achieved constant currency revenue growth of 7%. We improved adjusted operating margin by 100 basis points while increasing R&D investment by nearly 10%. We also increased adjusted earnings per share by 29% following a 49% increase in 2010.

We delivered significantly improved operating cash flow of $270 million excluding the $47 million in legal settlements and we completed the acquisitions of the minority interest in our encompassed joint venture as well as our Liko distributors in France and Switzerland. As you read in our press release, we also recently received FDA approval for a new powered stretcher, which will improve our stretcher portfolio and enhance our competitiveness in this important product category. The success of our R&D and QARA organizations in getting this product approved and commercialized exemplifies our increased focus on and investment in innovation.

Let me review a few additional fourth quarter highlights. In our North America Acute Care capital business, we continue to see strong performance with our patient support systems product revenue which to remind everyone is our Bed Frame and Surface products portfolio up 30% versus last year. Despite obvious concerns over the economic and reimbursement environments, hospital capital spending in North America appears to be relatively stable as it has been throughout 2011.

Against this backdrop, our North America Acute Care capital revenue in total grew 21% compared to the fourth quarter of 2010, which was the strongest quarter of the year. We also had the highest capital order rate of fiscal 2011 during the fourth quarter and we entered 2012 with a capital backlog that is up approximately 35% compared to last year. Given the strong growth we have seen in this business during 2011, while we remain cautiously optimistic about the stability of the hospital capital spending environment, we do expect to see lower growth rates in this business during 2012.

Moving beyond North America, despite some strong performances during the quarter in several regions, the international business remains challenging for us. During the quarter, we saw low single digit constant currency revenue growth in Europe, a turnaround from the third quarter. At the same time, as expected, we saw declines in several other regions leading to an overall decline of 8% in international constant currency revenues compared to last year which as you may recall was the strongest quarter of 2010.

Our capital order intake in Europe has been relatively stable over the past several quarters. However, I think we will continue to see pressure in this region where we expect to endure non-linear performance in the near future as we saw it during the second half of this year. Outside of Europe, we had difficult revenue comparables during the second half of the year. However, we experienced improving orders in these regions over the last two quarters and remain optimistic about near-term growth prospects.

In our North American Post-Acute business, we saw modest growth in the quarter despite increasing reimbursement pressures for our customers. While our Home Care and Extended Care businesses saw low to mid single digit declines for the full year, our Respiratory Care business had another strong year with 10% growth. We expect to see a similar pattern of growth rates among our Post-Acute businesses as we move into 2012.

Mark will comment on overall margin and profitability performance in a few minutes. However, we are pleased with the 100 basis point improvements in adjusted operating margin for the full year. We had some headwinds during the second half of the year, but we remained confident in our ability to drive consistent margin improvement going forward in line with our long range plan objectives.

One final highlight. During the quarter, we completed the leadership team with the appointment of Andreas Frank to the position of Senior Vice president for Corporate Development and Strategy. Andreas joins us from Danaher and will head up our corporate strategy and M&A activity. So to summarize, before I turn the call over to Mark, we had a great close to the year and posted with solid improvement in all of our key objectives for 2011.

Given the increasingly challenging environments in all of our markets, I’m very pleased with the 7% constant currency top line growth and 29% adjusted earnings per share growth for the full year. For 2012, while I believe our North America Acute Care business will remain solid, we will need to navigate the volatility that exits in Europe. We’ve put in place a strong team internationally over the past year and I’m confident we will effectively manage the challenges in these markets during 2012.

Overall, I think we are well positioned as we move into next year to deliver results in line with our long range plan objectives. We’ve made great progress over the past two years. We will continue to be prudent as we move into 2012 and remain focused on executing our plan to improve earnings and cash flow as well as deploying our capital to drive shareholder value over the long-term.

With that, let me turn the call over to Mark before I make some closing remarks and open the call to Q&A.

Mark Guinan – Senior Vice President and Chief Financial Officer

Thank you, John, and good morning to everyone on the call. Before we get started, I want to highlight many of the figures we will discuss today are adjusted or non-GAAP measures. Reconciliations to our reported U.S. GAAP numbers are included in the appendix to our slide deck.

Now, let’s get started with revenue. On a consolidated basis, reported fourth quarter revenue increased 8.6% or 6.8% on a constant currency basis to $431million, led by our North America Acute Care segment. Our capital sales increased 11.9% to $360 million or 9.9% on a constant currency basis. This was driven by a 20.7% improvement in North America Acute Care, led by 29.7% growth from our patient support systems platform. This strength was partially offset by 9% constant currency decline in our international segment, primarily driven by declines in the Middle East and Asia Pacific regions. As you may recall, we experienced unusually strong Middle East performance in Q3 and Q4 of fiscal 2010 based on a number of large one time orders.

Our European capital business reflected a small uptick in spite of the tough prior year comparable and the strained economic conditions in Europe. Consolidated rental revenue increased slightly to $114 million with growth in our international segment offsetting a decline in North America. Domestic revenue increased 11.6% to $309 million, while revenues outside the United States increased 1.7% to $122 million aided by favorable foreign exchange rates. On a constant currency basis, revenues outside the United States decreased 4.1%, an improvement over the decline of 7.7% experienced in the third quarter.

Looking at revenue by segment, North America Acute Care increased 14.7% to $273 million led by significant growth in both our MedSurg and ICU products. Orders continued to be strong as we experienced our eighth consecutive quarter with the year-over-year increases. Backlog is up 35% versus a year ago on our strongest quarterly orders to becoming a standalone public company, and we continue to be encouraged by the positive trend in our North America capital business. North America Acute rental revenue declined 2.4% year-over-year in our traditionally weakest rental quarter of the year. We continue to experience pressure on rental volumes as hospitals seek to reduce daily operating costs.

Moving to our North America Post-Acute Care business revenue improved just under 2% to $53 million, our strongest quarter of the past two years. As we experience growth in both our Respiratory Care and Home Care businesses while our Extended Care business came in flat with the prior year. International revenue declined 1.7% to $105 million or 7.6% in constant currency. Europe experienced 2% constant currency growth in a tough environment. Our business in rest of the world regions experienced year-over-year declines coming after tough prior year comparables mentioned earlier.

In recent quarters, we have expressed caution with respect to our international markets and this caution has been warranted. But, we are encouraged by the 14% constant currency sequential revenue growth we saw over the third quarter. In the rest of the world, order patterns are now relatively stable following a strong second half of last year. And overall international orders for the fourth quarter were the highest of the year. However, we continued to be cautious regarding our international business and the timing of any improvements is uncertain as concerns over our austerity measures in Europe continue.

Moving to margins, we posted solid adjusted gross margin performance for the quarter at 48.7%, while this represents a 70-basis point decline year-over-year, both capital and rental margin showed sequential improvements over our third quarter of 40 basis points and 80 basis points respectively.

Our capital margins were down year-over-year despite the higher fourth quarter volumes primarily due to the effects of $2.6 million warranty charge for field retrofit actions on two products, which adversely impacted capital margin by 80 basis points. Total gross margin was impacted by 60 basis points due to this warranty charge. We also experienced continuing pressure on commodity and fuel prices. Early in the year, we said that we expected inflationary pressures to increase in the second half of the fiscal year and they materialized as expected. We believe the margin decline in our rental business relates to the efforts by hospital to reduce operating costs, which is adversely impacting our rental volumes especially in North America Acute Care. With that said, we feel this trend is stabilizing as sequentially we did not experience further erosion over Q3.

Regarding operating expenses, our R&D investments for the quarter increased 4% year-over-year, a slightly slower rate of growth than our previous quarters and was driven by specific project timing. As we have previously discussed we expect to continue to increase investments in R&D over time and rate faster than our revenue growth rate.

SG&A expenses for the quarter increased by 8.5% year-over-year to $125.9 million, and were flat as a percentage of revenue at 29.2%. Sequentially, operating expenses were up 1% from the prior quarter but as a percentage of revenue improved by 320 basis points. The year-over-year SG&A increase was primarily the result of higher variable compensation costs on the higher revenue, the unfavorable effects to foreign exchange and higher legal costs.

Adjusted operating profit for the quarter was $68 million, representing a 15.9% operating margin, down 50 basis points versus last year’s comparable results. As noted previously, the drop in gross margin for the quarter associated with the field retrofits was the primary driver. This brings our fiscal 2011 adjusted operating margin to 13.5%, 100 basis points improvement over the prior year as John, previously mentioned.

The adjusted tax rate for the quarter was 30.9% compared to 29.9% in the prior year. The slightly higher rate in the current year was primarily the result of lower current period tax benefits and higher losses in jurisdictions where no tax benefits are being recognized. It is also important to note that during the quarter we recognized a tax benefit of $21.5 million or $0.34 per share primarily associated with the release of valuation allowances previously recorded against international operating loss carry forwards. As a result future income generated in related jurisdictions will be subject to statutory tax rates for financial reporting purposes. Although we will benefit on a cash basis if the loss carry forwards are utilized. This benefit was excluded from our adjusted earnings.

Summarizing the income statement, adjusted earnings per diluted share were $0.72 in the fourth quarter representing a 7% increase compared to $0.67 in the prior year. One final comment on operating results before I move on to cash flow and our guidance for fiscal 2012. During the quarter we had three items netting to $5.1 million of pre-tax expense in our GAAP earnings that are not reflecting in our adjusted earnings. These are in addition to the international tax benefit referred to earlier that was also excluded from our adjusted results. The most significant of the three items relates to a $5 million litigation charge as a result of a settlement reached on the Freedom Medical lawsuit.

The second item relates to acquisition and severance cost of $1 million incurred in relation to our recently completed acquisition of Liko distributors in France and Switzerland. Some additional integration costs are also likely to be incurred in the coming months. The last item, a continuation from earlier in the year and when that will continue into fiscal 2012 is a $900,000 benefit reflected in rental gross margin related to an ongoing vendor product recall action.

Moving on to cash flows, our full year operating cash flow was 270 million excluding litigation settlement payments compared to our guidance of $230 to $240 million. Our full year operating cash flow increased 59% on higher earnings improved day sales outstanding, lower inventory levels and reduced tax payments.

Operating cash flow for the fourth quarter was 33 million compared to 29 million in the prior year. Both periods include significant cash outflows related to special items including approximately 47 million of litigation payments in 2011 and a $50 million pension contribution in the prior year period. Also during the quarter, we repurchased 1.5 million shares of common stock for approximately 45 million. This brings our full year purchases to 3 million shares leaving us with the remaining shares repurchase authorization of about 2 million shares.

Now, let’s turn to our fiscal 2012 guidance. We are projecting full year constant currency revenue growth of 4% to 5%, and adjusted earnings between $2.45 and $2.55 per diluted share or an increase of 8% to 12% over fiscal 2011 adjusted EPS of $2.27. This full year 2012 financial outlook reflects mid single digit revenue growth in North America Acute, low single digit revenue growth in North America Post-Acute and a mid-single digit constant currency revenue growth in our international segment aided by the acquisition of a Liko France and distributorships.

Gross margin of approximately 49% to 50% low double digit growth in R&D spending as we continue to invest in new and innovative products, continued operating leverage of our SG&A infrastructure, operating margin improvement of approximately 100 basis points on the year; a tax rate of approximately 31% to 32%, which assumes the renewal of the R&D tax credit, and the number of shares outstanding for the year to average 63 million.

Finally, we project 2012 adjusted operating cash flow to be in the range of approximately $290 to $300 million. We also anticipate $75 million to $85 million of CapEx investment. One final note on guidance, as you look at the 100 basis point year-over-year improvement we made in 2011on our operating margins, you’ll notice that a disproportionate amount of the improvements was in the first half of the year as we hit inflationary headwinds in the back half and also increased our R&D spending as a percent of sales.

In 2012, we expect to reverse to be true. Our operating margin improvement will be somewhat skewed towards the back half of year as we get a full year of inflation and higher R&D investment behind us to the first six months of fiscal 2012.

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

John Greisch – President and Chief Executive Officer

Thanks Mark. Overall, I am pleased with our performance this year. Revenue and adjusted earnings growth were well above our initial guidance and we achieved significant growth in cash flow. And perhaps most importantly, we solidified our leadership team and positioned the company well for the future. That future in the near term will exist in an uncertain macroeconomic environment.

I think our 2012 guidance reflects a prudent view of the external environment and provides consistent progress towards our long-term commitments. Despite these challenges, I am confident that this leadership team along with a support of Hill-Rom employees around the world will continue to create value for our shareholders.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from David Lewis of Morgan Stanley. Please go ahead.

David Lewis – Morgan Stanley

Good morning.

John Greisch

Hey, David. How are you?

David Lewis – Morgan Stanley

Good. Two quick questions here. The first is either for John or Mark. On gross margins, obviously with the adjustment this quarter (indiscernible) are relatively in line with our numbers. I wondered if you just talk to us about gross margins and the capital business versus a rental business. Have you seen stabilization in sort of that rental margin in any trends in the capital margin side of the business do you think are relevant? And I have one quick follow-up.

Mark Guinan

Sure David, its Mark. As I mentioned in my script, we see rental margins stabilizing – of course we don’t know that the future will bring, but we certainly see some positive signs in terms of stabilization in the rental margins. On the capital margin side, as I alluded to certainly during the back half of the year we experienced some inflation in our cost of goods, in our materials specifically. So that was the trend, but going into 2012 we don’t see a continuing upfront inflation in that stabilizing and actually mitigating some of that as well.

David Lewis – Morgan Stanley

Okay. That’s helpful. And just one last question, European business, obviously there is some revenue from distributor, if you think about that low single-digit growth outlook for 2012, what do you think that growth rate is if you exclude the inorganic benefit and how are you thinking about the European business in your 2012 guidance as it relates to a stable pan-European environment or you’re forecast in a worsening Pan European environment? Thank you.

Mark Guinan

Yes, I think the guidance for international was mid single digits. If you pull out the benefit of the two Liko distributors, it’s more like 1% or 2% growth, that total revenue from those two distributors was about $15 million David. So, it’s roughly a 4% benefit. Within Europe, we are looking for a decline in our European revenue 2012 where growth coming from other regions to offset that. So again I think we’ve taken a prudent view in Europe as we mentioned in our prepared comments. We have seen stabilization in our European order rates for last two quarters, but give the volatility that exists over there from a planning perspective we’re assuming a slight decline in revenues in 2012 in Europe.

David Lewis – Morgan Stanley

Great. Thank you very much.

Mark Guinan

Okay.

Operator

Our next question comes from Larry Keusch of Morgan Keegan. Please go ahead.

Larry Keusch – Morgan Keegan

Yes, I guess that two questions. John, I guess you certainly optimizing your infrastructure for return to economic environment and I think we probably all appreciate the conservative elements of your guidance for the coming year. But where do you think you are getting your costs to make sure that you are again as optimized as you can be for this volatile environment and may be you can even talk about in a baseball analogy just helping us understand where you think you are with those efforts.

John Greisch

Yes, we’re not where we need to be Larry, short answer to your question. We’ve tried to batten down the hatches while at the same time making investments internationally as well as in some other needed areas here in the United States. But if I look out over the next three to five years, two to five years, there is some more cost tax we’re going to have to take in the company to get our cost structure down to where I’m comfortable to where it will enable us to whether the cyclical storms that this business is going to have over time and to help us get down into the area that we talked about, getting our SG&A rates down below 30%.

There is not one magic bullet that’s going to make that happen. I think we’re going to do it thoughtfully and prudently and look at the things as Mike and I have talked about over the past several months whether its consolidation to back office activities or leveraging some of our other administrative or support functions but we’ve still got some work to do there. So I think the opportunity to continue to drive margin improvement through cost leverage over the next several years exists quite strongly still.

Larry Keusch – Morgan Keegan

Okay. And then, I guess the other part of the question is first, could we see any of those actions in this year and then the second part of the question, I think what everybody try to get their arm around is, how conservative, how realistic is the guidance going into 2012. And maybe you or Mark can talk a little bit about just sort of the financial planning process and perhaps assumptions that were made for ‘12 versus where you were going into 2011?

John Greisch

Sure, let me take that first Larry. In terms of cost actions, we have built into 2012 any significant benefits from any actions that maybe taken during the year. That’s not to say there won’t be any actions during 2012 but our guidance does not assume any big change in our cost structure from where we are today. But as I said, as we look forward there is no one magic bullet, there is going to be a number of actions that we’ll take, some of which very well may occur during 2012 but it’s not been built into anything here today.

Relative to our guidance let me make a couple of comments and Mark can add to it. I think it’s a realistic prudent view of our outlook for our businesses across the geographies in which we operate today everybody on this call is well aware of the environment in Europe. I know there is some news coming out of Europe today relative to some of the debt settlements, but that’s not going to cure the economic or government fiscal woes immediately. So I think our international business, as Mark said, we’re looking at a mid single digit growth with slight declines in Europe and good growth in other regions, reasonably in line with what we achieved in 2011.

The biggest change in growth rates 2011 to 2012 is really in our North American Acute Care business where we posted low double-digit growth in 2011 and as everybody on the call recalls we’ve been obviously performing quite well in that business coming off of some lower comps in early 2010 which strengthens as the year went on, but our low double-digit growth in that business today we’re projecting to be mid single digit in 2012. And that’s not to say that the business is slowing down at all, we still expect the business to continue to be strong on an absolute basis, but the percentage growth year-over-year is expected to decline. So I think given the environments that we’re in, I think we have got a realistic expectations for 2012 across the board.

Mark Guinan

Yes, I don’t have a lot to add, John captured it. The biggest change in our revenue guidance from last year really is – actually our performance in 2011 is really a slight slowing but continued healthy growth in North America business especially in our capital business. And we continued as I mentioned to look for some S&GA leverage without any significant actions or restructuring. We feel we can continue to move the needle there and continue to invest in R&D which will offset some of the productivity gains that we’re going to have in gross margin and SG&A, but still netting to the 100 basis point improvement we see on the year.

Larry Keusch – Morgan Keegan

Okay.

Mark Guinan

On the margin front, which I know is a high interest topic for everybody, not to least of whom is ourselves. If you look back on 2011 we increased about 100 basis points year-over-year. As Mark said in his prepared comments, most of that was in the first half of the year when compared to 2010, our margins in first half of 2010 were down in the 10% range. So we've achieved improvement over the past couple of years and now we’re into the low teens and our commitment to get that up consistently over the LRP remains where it was when we came out with the LRP commitments back in May. So, another 100 basis point improvement in 2012 is a commitment, that’s going to come from a number of actions, productivity improvement and the plans, continued focus on purchasing on cost reductions throughout our supply chain as well as leveraging some of the investments that we have made in particularly some of our international growth regions.

Larry Keusch – Morgan Keegan

Okay, terrific. Thank you for the thoughts.

Operator

Our next question comes from Lennox Ketner, Bank of America. Please go ahead.

Lennox Ketner – Bank of America

Hi guys. Thanks so much for taking the question. As John said obviously the margin side is of high interest, so I just want to follow-up a little bit on that? I’m just confuse because it looks like on your guidance for next year, the growth margin guidance is 49% to 50%, or most probably say 100 basis point range, but then for total operating margin improvement, you said you’re expecting a 100 basis point of improvement, so should we take to mean that if gross margins come in at the low end of the range you will be more aggressive on cost cutting, but if they come at the high end of the range maybe you’ll take the opportunity to invest more. Kind of how should we think about that discrepancy between the 100 basis point range in gross margin guidance versus 100 basis points of operating improvement?

Mark Guinan

Good morning, Ketner, it’s Mark. I appreciate the question. I think that’s a fair assumption to make, obviously we have running the business we made a set of assumptions and some of those will play out exactly as we assume and some maybe a little more positive and some maybe a little more challenging, we’ll adjust accordingly. So I think your assumption is fair.

Lennox Ketner – Bank of America

Okay. And then maybe just a question for John on cash use, I think you’ve spoken about the main priority being M&A, but then obviously this quarter we saw some significant buybacks, do you think investors will appreciate, but maybe just how you think about that going forward. Has the market weakness created opportunities for M&A in your view or should investors expect more buybacks going forward?

John Greisch

I think you should expect the capital allocation to be in line with what we laid out in May which is going to a combination of M&A buybacks and reinvesting it in the business. As you will know we haven’t aggressively gone after M&A over the past year and a half since I’ve been here for reasons that I’ve mentioned before I wanted the team in place, I wanted to make sure that we got our performance in line with where we wanted it to be despite all of the challenges that we’re dealing with in our various markets. As I mentioned in my compared comments we just hired Andreas Frank from Danaher who’s got significant experience in M&A in healthcare as well as background in consulting with the McKinsey, and we’re going to put more focus on that going forward.

So the environment, I think it’s a bit of a too absurd. With some weakness in the U.S. and European markets, I think the opportunity to look at companies at different valuations and maybe in a different financial position than maybe over a few years ago is more attractive and at the same time we want to deploy our capital prudently and profitably and then focus on the ROIC improvements that we would committed to. So I think the environment is receptive to M&A. I think I’ve got a team now in place that I’m comfortable with and we certainly have a strong financial position, strong balance sheet to go after more aggressively than we certainly have here in the past year or two.

Lennox Ketner – Bank of America

Great. Thanks very much.

Operator

Our next question comes from Matt Miksic of Piper Jaffray. Please go ahead.

Matt Miksic – Piper Jaffray

Hi. Thanks for taking my question. One clarifying question around one of the earlier answers on guidance, just to look at the acquisition of Liko Distributors, by my math that equates to something like a percent global growth, is that about right, so may be look at your worldwide guidance organically in the range of I guess 3% to 4% number, is that fair bottle mark?

Mark Guinan

Yes, Matt. It’s Mark. That’s accurate.

Matt Miksic – Piper Jaffray

Okay. Then I wanted to run by you, John, one of the questions that I get all the time which is how do we explain the strength in your core U.S. number into Europe in a minute but the U.S. number and the order rates that you’re talking about here heading into the end of the year. How do we reconcile that with just the utilization trends, the volume trends, what some folks would say sort of like a bed population in U.S. that’s maybe flat or some folks would even say it declining. Where are you seeing the investment, how are you tied in with maybe with some of the strategic initiatives of the hospital groups that you speak to, something that’ll help us understand and reconcile the growth that you’ve seen so far and are looking for in the coming year and I have a follow-up.

John Greisch

That’s a good question Matt. Firstly as you know the capital spending environment in the hospital sector generally has been strengthening over the past 18 months and I think we’re obviously benefiting from that. I think a number of other factors were coming in on. We’ve introduced some new products both on the frame side with Advanta 2, which is everybody aware of, as well as on the Surfaces side.

The strength we’re seeing is really across the board. I mean there is no one single product category that jumps out in terms of driving the strength that we’ve got. Mark mentioned in his comments this was the strongest quarter in terms of order intake for the year and the fourth quarter. We’re going into 2012 with the healthy backlog. I think our team is executing as effectively as they ever have in the context of a strong capital environment.

As I mentioned in my comments, our core Bed Frame and Surfaces product category here in the fourth quarter saw a 30% growth for the year. That category was up 27% year-over-year which I think is pretty strong relative to what the market has been doing. I think in talking to hospital CEOs and chief nursing officers, what they really focused on are, our products helping drive both cost reductions and outcome improvements. And I think with some of the technologies that our products have, some of the technology upgrades that are available today in the market relative to the 7, 8, 9 year old beds that are being taken out, I think that’s what’s driving the investment growth as much as anything. Improving care, reducing patient’s safety issues, improving CAGR and productivity and ultimately improving outcomes for patients, that’s what customers are looking. And I think our product across the portfolio, across the portfolio, across the board brings all of that to our customers at a time when that’s increasing important to them all.

Andy Rieth

Matt, this is Andy. I'll add one thing to that and that is certainly the reimbursement environment is favoring this focus on increased productivity and better outcomes. I mean, whether it’s the never event situation that they are not getting reimbursed for or whether it’s the degree to which their clinical quality metrics are impacting their overall DRG rates. That certainly bodes well for the technologies and the benefits we can offer.

Matt Miksic – Piper Jaffray

That’s helpful. And then a follow-up on your guidance and I guess, what it reflect in terms of what you are seeing, actually seeing happening in your business indicating the trajectory in Q1 and Q2 as we head into the next fiscal year and the difference between that and maybe what you are planning for with sequential improvement in Europe and surprising kind of resilient in Europe given all the headlines we hear. You know, are you seeing something there yet that indicates that it will be say down year-over-year next year or something that you’re planning for and you’re sort of low single digit organic or U.S. guidance, or is that just good prudent planning and then the same kind of question in the U.S. you talked about a very significant deceleration double digit to mid single in the U.S. Is that based on what you’re seeing, is it based on comps or again is it just sort of prudent planning given the strength that you’ve seen?

John Greisch

Let me take that first, Matt. I think at high level our guidance for 2012 reflects as well as we can reflect what we have currently been seeing over the recent months and that’s a couple of things. North America, as we talked about, has gone from strength to strength. Again the growth rate for 2012, we’re expecting to slowdown; however, we’re continuing to expect to see strong performance in that business, which we’ve seen certainly in the fourth quarter and really throughout the year. We didn’t have any major lumpiness, if you will, in that business and all during 2011, and we’re assuming a stable environment going forward albeit at a slower growth rate than what we achieve in 11 versus 10.

Post-Acute has been relatively stable. We’ve got some challenges as I mentioned in the reimbursement environment particularly with business getting cut 11% here into the third and fourth quarter this year, but relatively stable for that business as we look into 2012 and is pretty much been the picture throughout the year.

Just to clarify on international, you’re absolutely right the Liko distributors added about a 1 point globally and about 4% to the mid single digit growth that Mark mentioned for international that we’re guiding next year that does assume Europe again has a revenue decline year-over-year. I think I mentioned in my comments we’ve seen stability in European orders during the second half of the year, but it’s still an environment that I am not ready to declare stabilization and improving trends are going to be the order of the day for 2012. So, if there’s any element of our guidance looking a little different than what we’ve seen in the last couple of quarters we’re prudently assuming Europe is going to continue to be soft. We’d love to be proven wrong on that and start seeing some growth, but I think that would be more aggressive than we certainly want to be for the outlook for Europe in 2012. And the other regions, I think Mark mentioned we’re seeing improving trends in the other regions here in the second half of the year we’re expecting that to continue.

So, all-in-all growth rest of world will decline in Europe and stability in Post-Acute and again continued strength in North America pretty much in line with that we have been seeing. There is not any hope built into the guidance or budgeting process. I think Larry asked earlier, how is it feel compared to last year, I think it’s fair to us for us and probably everybody else in the industry, this is the toughest year to look out in the next 12 months and be comfortable with the outlook, because of all the volatility that exists whether it’s reimbursement driven or European economy driven. So we’re not anticipating any hope in our planning process and certainly not in our guidance.

Matt Miksic – Piper Jaffray

Great, very helpful. Thank you, John.

John Greisch

One way I did answer but I think it’s important you guys understand the thesis here.

Mark Guinan

One thing I will add is that stability would suggest the slight decline in Europe. We entered 2011 with an extremely strong backlog in European orders which I guess inflated the first half of the year shipment performance. We’re not entering 2012 with that kind of backlog it’s more of a kind of steady state back down.

John Greisch

Certainly.

Matt Miksic – Piper Jaffray

Thank you, Mark.

Operator

Our next question comes from David Roman of Goldman Sachs. Please go ahead.

Topher Orr – Goldman Sachs

Hi guys. It’s actually Topher in for David.

John Greisch

Hey Topher.

Topher Orr – Goldman Sachs

How are you?

John Greisch

Great. How are you doing?

Topher Orr – Goldman Sachs

Pretty good. Just kind of following on what you’re just talking about in terms of the different pieces of the international segment next year. I was hoping you could spend a little more time on actually Asia, Middle East, other regions aside from Europe. It seems like Europe in the quarter was actually pretty decent on the constant currency basis. I understood the headwinds heading into ‘12 but obviously there was some offset in the quarter from other regions, when I said Middle East, Asia. I was hoping you could talk to that first in the quarter and then kind of where you see the trends going forward into ‘12 in those regions.

John Greisch

Sure. Those regions we’ve got strong expectations for growth going forward. The Middle East has been a reasonably healthy region for us. You may recall, very strong second half of last year and as a result some of the comps here in the second half of 2011 were tough and we reported declines in that regions specifically in Q4 and in Q3. That said the order rates in the Middle East have been very strong and we’re expecting a good year of 2012. As much as any, I mean this is about a $40 to $50 million business for us so I’ve used the term lumpiness as attaching to our business in the Middle East, so there is a lot of healthcare investment going as you all know. In that size of the business the lumpiness gets exacerbated with a number of large tenders which we enjoyed the second half of last year and I think you’ll see some more in the 2012. So I feel very good about our position in the Middle East specifically same thing with Latin America that region is one where we’ve put some investment in and going forward I’m optimistic about the outlook there.

If there is one area of our international business where I was disappointed in 2012 – 2011 excuse me with the exception of Europe. I’d say a couple of markets in Asia where we didn’t see the growth that we should be seeing. We’re putting a lot more emphasis and focus in that region going forward. The emerging Asian markets, we had a decent year. Some of the developed markets in Asia like Australia, we did not have a great year, but again shorter term and longer term the Asia Pacific region is one that’s I think you’ll – you should expect to see some good growth coming out of and probably some more investment going into as time goes by here.

Topher Orr – Goldman Sachs

Okay. Thanks. And just one follow-up, given that some of your competitors have reported earnings thus far, you know, kind of a grip on what the overall market looks like at this point. I was hoping if you comment a little bit on the competitive environment, you know, starting I guess with capital sales in North America and then maybe talk about Europe as well.

John Greisch

Yes, I think when you look at our capital sales, David, I think it’s important to look at what we refer to is as our Patient Support Systems business. That’s really our Bed Frame and Surface business, which is probably most analogous to as you say our competitors who reported already. There’s other business in our reported North American capital segment, which includes furniture, our patient lift products, architectural products but the really comparable numbers, if you will, to Stryker’s business, that everyone is trying to compare us against is our Patient Support Systems business, which was up 30% here in the fourth quarter and 27%, sorry, Topher I referred to you as David, but it’s that product segment, which was up 30% for the quarter 27% for the year. So I think we feel pretty good about our performance relative to what we think the market has been doing here in 2011 including Q4.

On the Rental business our rental therapy business in North America was relatively flat Q4 and for the full year. I think you’ve seen some declines in some of the competitive reporting throughout the year; tough market for us as we’ve been talking about throughout the year. The pressures at (indiscernible) are under obviously to reduce their costs have been impacting our rental business and I think the industry generally puts. We feel a flat performance although not overly pleased with it, from a competitive standpoint we feel we’re in pretty good shape.

Topher Orr – Goldman Sachs

Okay, thank you.

John Greisch

Okay. Sorry Topher.

Operator

(Operator Instructions) Our next question comes from Catherine Hill, Deutsche Bank. Please go ahead.

Catherine Hill – Deutsche Bank

Hi. Thanks for taking my questions. I think last quarter you mentioned that some shipments in Europe were pushed out from the third quarter to this quarter. Can you just quantify the size of those shipments?

John Greisch

I’d rather not quantify them Catherine, but I think it explains the turnaround in the revenue performance in Europe that we talked about in a constant currency basis. Last quarter, we were down slightly this quarter, we were up a couple of points and again, in the context of the relatively stable environment, those push outs if you will from Q3 to Q4, really explains the modest turnaround in that business here in the fourth quarter.

Catherine Hill – Deutsche Bank

Okay. So, is it reasonable to say without those shipments they would have been down also this quarter?

John Greisch

Well, I think it’s probably more reasonable to look at the second half in total, which is flat year-over-year, which is what our order rates have pretty much been, the stable comments that we made earlier.

Catherine Hill – Deutsche Bank

Okay. And then in the Asian regions, you were mentioning just appointment for the past year, were those just account losses to competitors or is just overall growth in those regions were not as robust as you were hoping for?

John Greisch

It’s hard to say getting market information from Asian, from some of the Asian countries is obviously more challenging than here. But it’s probably fair to say, we haven’t maintained our share across the Board in Asia given that we haven’t seen the growth. But I think those economies are demonstrating and I think it’s a fair assumption that our segment of the business is probably growing faster as well. So as I said, that’s a bit of disappointing region for me this year.

Catherine Hill – Deutsche Bank

Okay, thank you.

John Greisch

All right. Thanks Cath.

Operator

I’m showing no further questions at this time. I would like to turn the call back over to Mr. Andy Rieth for any closing remarks.

Andy Rieth – Investor Relations

Thank you everyone for participating and we’ll look forward to speaking you further. Have a great day. Take care.

Operator

Ladies and gentlemen, this does conclude today’s conference. You may all disconnect and have a wonderful day.

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