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Hill-Rom Holdings, Inc. (NYSE:HRC)

30th Annual JP Morgan Healthcare Conference

January 12, 2012 10:30 am ET

Executives

John J. Greisch – President and Chief Executive Officer

Operator

Good morning and welcome to day four of the JP Morgan Healthcare Conference. I’m Kim Galen with the Medtech team. Presenting next, we have Hill-Rom, and it’s my pleasure to introduce CEO John Greisch. Before I turn it over to John, though, I want to mention two things. (Operator Instructions) Thanks. John.

John Greisch

Thanks, Kim. Good morning, everybody. I appreciate you joining us bright and early here on the last day of the conference. Before I get into the presentation, just to remind everybody, we may be covering non-GAAP information and I’d like to refer you to our SEC filings for any reconciliation required.

Let me just start with a quick run-through of the preannouncement we made a couple days ago, which I’m sure many of you saw. Our first quarter results expect to be reported in about a week and a half with revenue of approximately $381 million, a constant currency growth of 2%. This compares to four to five of our original guidance, and I’ll talk to our updated guidance here in a minute.

You may recall on our fourth quarter earnings call, we did comment that the comps would be tougher in the first half and get more favorable in the second half, so revenue growth was disappointing in the first quarter slightly, but not too far off of our expectation. As you can see here, our largest business unit—our North American Acute Care business—had 7% growth. The core business of that segment for us, our patient support systems, which is our core bedframe and surface product category, grew 13%.

Many of you know over the last couple of years that business has been growing quite strongly. In fiscal 2011, we saw a growth in excess of 20% for the year. We did signal that the rate of growth was expected to slow down, so this is pretty much in line with some of our expectations here for the first quarter, and our capital business within the North American Acute Care segment, which includes software and other products in addition to bedframes and services, grew about 11% for the quarter, so strong quarter for that business.

A decline in revenue in our international segment, as expected. We had some tough comps in that segment. I think you’ll see some accelerated growth rates in that business for the rest of the year, and a little disappointment in our North American Post-Acute business, where we saw some declines in our home care business for the quarter.

With respect to EPS, we’re expected to report $0.52 to $0.53 for the first quarter. This compares to $0.55 last year, and just to remind everybody, last year’s reported results included about $0.03 for catch-up for the R&D tax credit for fiscal 2010. So, on an apples-to-apples basis, we should show some slight improvement over the prior year.

For the full year, just to run through our previous guidance, we came out in October with 4% to 5% expected constant currency growth for the full year, adjusted earnings in the range of $2.45 to $2.55, and adjusted cash flows about $290 million to $300 million.

We’ve taken that down in terms of the top line expectation now for a couple reasons. One, the slightly weaker first quarter revenue results, and we did see a bit of a slowdown in our North American Acute Care order rate during the first quarter, relative to what we had been seeing in fiscal 2011, so we’ve adjusted our revenue guidance down a point to 3% to 4%.

Earnings, we’ve lowered the top end of the range a nickel reflecting two things. One, the impact of the slightly lower revenues, and secondly, we had anticipated in our original guidance the reinstatement of the R&D tax credit for calendar 2012. That has not been reinstated yet by Congress, and as a result, we’ve taken that out of our guidance now and that was worth $0.03 to us in fiscal year 2012.

Cash flow remains the same. So, earnings, despite the revenue shortfall, and I think you’ll see in the first quarter, similar results. We’re managing our cost structure very aggressively to mitigate any revenue shortfall that we experience here for fiscal 2012.

Just for those of you not familiar with the company, let me give you a quick overview of Hill-Rom. As many of you know, we are a global leader in medical technology across the care continuum. Our core business, obviously, is focused on patient handling, patient mobility, and environmental systems within the acute care hospital segment, particularly. Also, very focused on improving outcomes through therapeutic surfaces and various other products, our respiratory care business a good example of that. And again, many of our products span the care continuum from the acute care segment all the way through to the home.

Health IT is an increasingly important area for us, particularly around connectivity of our devices with hospitals, EMR systems and other IT systems within hospitals. Getting patient data to the caregivers as quickly as possible, meaningful data off of our devices, is becoming an increasing demand from our customers, and I think we’re leading the charge in that area, certainly within our segment.

Revenues, approximately $1.6 billion. We’ve had significant improvement in our financial performance over the past couple of years. 2010, we saw about a 50% improvement in our earnings per share. 2011, EPS was up about 29%. Cash flows have strengthened significantly, as you saw in the previous slide. We still expect cash flows in the range of $290 million to $300 million this year, so very pleased with the financial performance improvement that we’ve seen in the last couple years, despite a lot of headwinds, obviously, in the markets, which I’ll talk to here shortly.

One of the real core strengths of the company is clearly our channel presence. Hill-Rom brand in the acute care hospital is as well recognized as any brand in that channel. I think we’ve got a tremendous opportunity to leverage that channel and leverage the brand equity and channel presence that we’ve got. In addition, we’ve got a significant service infrastructure, which gives us great ability to provide services, responsiveness and capabilities to our customers, again, across the care continuum, and is a strategic asset for the company that we look to significantly leverage going forward.

Internationally, for those of you who have heard me speak over the last couple years, I think when I got here a couple years ago, I looked at our international footprint as a decent one. It’s an area that you’re going to see us invest in to grow organically and inorganically, as I’ll comment here in a few minutes, represents a good growth vehicle for us going forward.

Most of our businesses, as you see here, are either number one or number two in our market positions. Obviously, our largest business, patient support systems, we have approximately a market share in the 70% range here in North America. Less than that in Europe, but a very strong position in Europe, which we’re about to enhance with an acquisition that I’ll speak to in several minutes.

As you see on this slide, and I won’t run through each of these, but our respiratory care business, patient support systems, our surgical business—which is one of our smaller businesses, but one of our better growing and higher margin business—all command a very, very strong market position in the markets in which we operate.

Just to give you a quick snapshot of the profile of the company, good diversification here, both across business lines and geographies. Obviously, we’ve got varying headwinds that we’re facing, be it in Europe, in the acute care hospital space here in the states with respect to capital spending, home care and extended care, some challenges as well, but the diverse portfolio that we do have and we do enjoy has enabled us to weather some of those challenges over the past couple years and put up some impressive financial results as a result.

I don’t have to tell anybody in this room or on the webcast about some of the challenges that our customers are facing. Obviously, whether it’s here in the United States or internationally, the need to provide better outcomes at a lower cost with fewer resources invested by our customers is what they’re all looking for us and every other supplier to help them achieve. I think we’ve got a portfolio and a set of products and services that helps them improve outcomes, helps them improve patient safety, patient mobility, caregiver productivity, and I think a lot of those factors are what has been driving the growth that we have seen, particularly in the acute care hospital space.

Going forward, the things on this slide, aging population, complex morbidities, obviously obesity, here in this country, at least, along with international markets, the desire by governments around the world to provide increased access to more patients around the world, I think plays right into our sweet spot and our capabilities in terms of providing products and services, which, again, enhance outcomes, reduce cost and improve patient care and caregiver productivity.

I think the opportunities for us to leverage a lot of the strengths that I talked to on one of the earlier slides, with the portfolio we have and the portfolio as we continue to invest to expand it, provide us with a lot of optimism going forward.

This is really a list of some of the strategic focus areas that we’ve set up as a management team. I think most of you know I’ve assembled a new team over the past couple of years from some very successful companies. Mark Guinan, who’s in the room here with us, from J&J, our business leaders from Medtronic, GE Healthcare, Hospira, Abbott—a brand new team. We’ve identified these areas as really the core strategic focus areas that we’re focusing on as we go forward.

I’ve commented on some of these here this morning. Obviously, the channel presence and the channel strength that we’ve got, how do we leverage that? By putting more products or more services through that channel. The Liko acquisition of a couple years ago, the Völker acquisition that’s in progress right now—great examples of how we intend to invest, to leverage the channel strength that we do enjoy.

We’re also putting a lot more money into R&D. We’ve been increasing R&D at a rate of about 10%. We’re committed in the LRP to continue to increase R&D at double-digit rates, not only to enhance our current product portfolio, but, again, to bring new products through the channel going forward.

International expansion, I’ve talked about. We’ve invested a lot over the last couple years in management infrastructure in Europe and in other regions around the world. We’re going to continue to do that. We’re putting sales reps in markets like Brazil, like China, other markets around the world, and as I’ll talk to here in a few minutes, I think you’ll see some M&A activity to assist us with our expansion plans internationally, as well.

Clearly, we’ve been focused on improving the financial results. We’ve had a couple of hiccups in terms of surprises to the straight first quarter this year being one of them, but we’re on a track to continue to deliver improved financial performance, as we have over the past couple of years, and the management team here is certainly committed to do that going forward.

In terms of our LRP, we took this out about a year ago. Let me just run through a couple highlights here. As you see in the 2011 column, that’s what we delivered last year, fiscal year 2011. I think our constant currency growth rate 2011 was about 8%. Margins improved. We saw about 100 basis point improvement in our operating margin in fiscal 2011. That was on top of about a 350 basis point improvement in 2010, so the past couple of years we’ve seen nearly a 500 basis point improvement in our operating margin. Clearly focused on continuing that trend going forward. Our guidance for 2012 anticipates 100 basis point improvement again in fiscal 2012, and as you can see here, continue to drive towards further improvement towards high teens by 2015.

I’ve been asked quite often over the past couple of quarters, given the headwinds that we’ve got in some of our markets, “Are we committed to the LRP?” and I can assure you we are. We recognized some of the challenges that existed in the market when we pulled this together, but we’re still confident that in the context of the environment that we’re in today, we can deliver these improvements, both in terms of operating margin, cash flow and consistent earnings growth going forward. It may not be linear on a quarterly basis, but over time, we’re confident we’ve got the opportunities to continue to drive improvement in the key metrics that we’ve got listed up here.

Business by business, clearly, the last couple of years, our North American acute care business, which represents about $1 billion of the portfolio, has been performing exceptionally well. Hospital capital spending here in the United States has been strong. The outcome improvements that I mentioned earlier and the value propositions that our portfolio brings to our customers, I think has been well recognized and we’ve seen significant growth in this business.

We’ve got a good diversified portfolio of both products and services, capital sales and rental products, along with our IT capabilities, and we’ve seen significant growth here. As you can see here, we do expect that growth rate to slow down. I think the challenges that our customers are facing, again, are well known to everybody in this room, and we don’t expect to continue to see the 20%-plus growth that we saw in our patient support systems business, but we’re confident that, as we saw in the first quarter with revenue growth of about 7%, we’ll continue to see solid, mid-single digit growth in this business.

Post-Acute Care, a little more challenging. The reimbursement environment for the extended care facilities is clearly a tough one. Home care, as most of you know, equally a challenging market, but our expectations between those businesses and the most attractive business within that segment for us, our respiratory care business, which last year saw a double-digit top line growth, very high margin business for us. We’re committed to low- to mid-single digit growth in that business.

International, as I mentioned, particularly driven by growth in regions like the Middle East, eastern Europe, Asia, obviously, and some new investment in Latin America.

On an organic basis, we’re expecting to see high-single digit revenue growth going forward in those markets, and I think despite the growth that you saw in the first quarter, I think you’ll see some attractive growth for the rest of the year in our international segment going forward.

In terms of capital allocation, I think Mark laid this out at the investor conference last year. I’ll just run through it quickly. Obviously, this is a portfolio that generates significant cash flow. Last year, excluding the one-time litigation payment that we had, we generated about $270 million of operating cash flow. Again, the guidance this year is about $290 million to $300 million.

This shows you over time our capital deployment strategy about 25% to 35% of our operating cash flow dedicated to capital spending, 15% to 20% return to shareholders in the form of dividends or buybacks. Last year, we bought back a little over $100 million of our shares, and the rest discretionary spending to fund either inorganic investments, or in the absence of inorganic investments, such as last year, we’d increase return to shareholders as appropriate. So, very disciplined, very focused on using our capital intelligently and driving as much value as we can for our shareholders with a high degree of focus on return on invested capital.

I can assure you, for Mark and I and the rest of the team, this is a high degree of focus for us. One of the great opportunities we have with Hill-Rom is the cash flow generation capabilities that we’ve demonstrated and we expect to have going forward, and, obviously, how we deploy that cash is going to be critical going forward and we are disciplined on the return requirements for doing so appropriately.

Speaking of which, let me just touch on an acquisition that we announced, I think late November, early December. This is a company in Europe, a company called Völker, one of the leading bedframe suppliers in the European market. Very strong presence in Germany, as you can see here, private company, entrepreneurially-owned. A significant presence in Germany and most of the key markets in Europe, as well as presence in Asia, some of the Middle East markets, small presence here in the states and in Latin America.

Primarily, this was attractive to us for its presence in the German and European market. Our presence in Germany, which most of you know is the largest healthcare in Europe, has been relatively small. This acquisition gave us an opportunity to significantly enhance our presence, not only in the German market, but across Europe, and add to our portfolio a very attractive both acute care and extended care product portfolio.

I think we’ve got a great opportunity to leverage Völker’s presence and our presence, not only in Germany, but in other European markets, with a very complementary product line. We’re stronger in the ICU and the higher-end Med-Surg end of the markets and Völker’s got a very strong presence in extended care and lower end of the acute care markets, so the complementary nature of the portfolio, the market share that they give us in Germany, is a great combination for us to really strengthen our presence in Europe.

Those of you may know our European business today is about a $300 million business, so adding this business, which has an annual turnover of about $100 million, most of which is in Europe—over three-quarters of it is in Europe—significantly strengthens and improves our European presence. Acquisition price, about $85 million cash on hand and short-term borrowings easily allow us to fund this. I think, as we communicated at the time of the acquisition, should be neutral to earnings in 2012, accretive thereafter.

We’re hoping to close this here in the first quarter after the completion of regulatory and anti-trust approval in Europe, so very excited about this acquisition for us. I think it’s right in line with what we said we were going to be doing in terms of international expansion, acquisition as a growth opportunity for us of businesses right up our power alley in markets and businesses that we know and can integrate effectively into the existing portfolio.

This is a great example, as was Liko a couple years ago, of where our inorganic focus is on businesses that we know well that are going to enhance our channel presence and enable us to grow profitably, and acquire profitably, significant brands and significant businesses such as this one. So, hopefully, as we close this, we’ll come out with more details in terms of the impact on the company margins and what have you, but we’re very excited about adding this business to our European profile.

So, just a few takeaways. Obviously, we’ve had a speed bump here with the first quarter. We’re committed to deliver our guidance for the full year. We fully recognize the challenges that we’ve got in the markets in which we operate, but we’re confident that the guidance we have out there is achievable and deliverable, and I think you’ll see that going forward as we progress through the rest of this year.

Again, just to reiterate, a couple of the key strengths that attracted me and the management team here to Hill-Rom—great brand, great channel presence, diversified portfolio, an increasing focus, through our innovation efforts and through some of our clinical marketing, on really enhancing the outcomes of our customers through some clinical value that a lot of our products are able to bring them to help them reduce cost and improve outcomes for their patients.

So, again, the international opportunities that you’ve seen over the past couple of years, both in terms of profit improvements-- I think when I got here, I spoke fairly openly about some of the opportunities to improve our international profitability. We’ve seen good progress there over the past couple years. I think you’ll continue to see that, and the Völker acquisition, again, strengthens our position in Europe.

I have been asked a couple times, “Why invest in Europe today?” Obviously, there’s a lot of concerns and uncertainty around the European market, for good reason, but I think if you look at our presence in Europe and the long-term value that Völker will bring us, as well as the short-term value, I think it was a great opportunity and a good-timed opportunity for us to improve our international presence.

Again, we, as a team, are committed to continue to deliver the performance that you’ve seen over the past couple years and, more importantly, recognize our obligation and our commitment to deploy our capital profitably and value-creating ways for our shareholders.

With that, I thank you for your time. I appreciate the early morning attendance and happy to take any questions across the hall. I think we’re moving down the hall for Q&A. The Sussex Room is where we’re moving. Thanks for your time.

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