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Executives

Mark Guinan – CFO and SVP

Analyst

Matt Miksic – Piper Jaffray

Hill-Rom Holdings, Inc. (HRC) Citi Global Health Care Conference February 28, 2012 1:30 PM ET

Matt Miksic – Piper Jaffray

Pleased to introduce Hill-Rom Holdings, we are going to do a hybrid of few slides and a fire side chat and we have got Mark on in, who is Senior Vice President and Chief Financial Officer and Andy Reith who is Vice President of Investor Relation, so Mark thank you and it's up to you.

Mark Guinan

Thanks Matt and thank you for joining us today. Welcome to the Hill-Rom presentation. First off I want to start out with some of the comments about forward-looking statements and the cautions about such statements, also that some of the figures, like you can see in the slides that I am going to refer to are on an ad adjusted basis. We do have reconciliations to the gap figures into the appendix of our decks.

So little bit about Hill-Rom Holdings, I know some of you are quite familiar with our story and some of you less off, so I will try to touch on both for those of you are very familiar and those who maybe and not so much.

We are a global leader in Medtech, across the care continue and what we mean by that is from the acute setting into the post-acute setting including extended care and home care. We have therapeutic products that are available both for sale, our capital business as well as for rent and we also have a service business as well. We have everything from our patient support systems which is more commonly to as our frames and surfaces, our beds and mattresses; you are probably familiar with, the patient lifts, architectural products and furniture.

We also have some nice, niche (inaudible) in surgical positioning and in the respiratory care space. We have done a pretty good job of improving our financial position, if you thought over the last couple of years. You have seen that we have had significant improvements in our operating margin as well as our earnings per share and you can see that we have been generating a healthy cash flow.

So, in addition to the revenue growth that we have seen in 2010 and 2011 we have also improved the financial metric as well.

As I mentioned we have had businesses that generate revenue through sales, through rental and through service and on the rental just to provide some description of that, that’s not a financing decision, the rental business is for episodic use of our products whether that’s in the acute setting in the hospital or whether that’s in the extended care facility or home care, it is truly a different decision for short term use versus a financing decision.

Also we have a solid international called solid international footprint from which to grow and we believe that’s been enhanced significantly by our recently announced Volker acquisition which I will talk about in a little more detail in some subsequent slides.

If you look at the segments in which we operate, we have very strong positions in those segments and in fact if you look at the nine areas that are described on this slide here you can see that each of your businesses it will be really the number one, or number two position. So, we are very well positioned within these segments.

And for those of you who might be a less familiar to our modeling, to our business, to look at our business across a couple of different ways. You can see that we are diversified by segment, by business model and by geography. So if you look at first slide how we are organized you can see that little over 60% of our business is in our North American acute capital segment.

You can see that a little over 10% is in the post-acute business, and about a quarter of our business is in international and again this was prior to the Volker acquisition. If you move to the business model you can see that we are about 70% capital and 30% rental and then if you move to the geographic diversity you can see that about three quarters of our business is in North America, so that’s the U.S., Canada and then about 17% in Europe and then the reminder in the rest of the world.

I am sure you all are familiar with the challenges that our customers are facing, that healthcare providers are facing. Then looking really for improved outcomes and then looking for operational efficiencies from us as a provider. And we believe that we are in a position to help them with both.

So when you look at some of these challenges whether it's providing more care with fewer resources, whether it's the rising acuities as the population is aging you get more complex core morbidities, greater incidents of obesity all these things making more challenging for them whether it's providing care giver safety and satisfaction to reduce turnover.

Certainly, keeping the most valuable asset, their nursing staff, whether it's emerging population so for those of the rest of the world regions or some of the other areas in international business or for that better with healthcare reform in the U.S. providing more care to greater amount of patients and then finally with the increased, moving out of the acute setting and into the Post-Acute setting whether that’s in an extended care facility or in the home care.

These are all challenge for our customers and we believe that we have solutions for those. So whether it's through our therapeutic frames and surfaces, our lifts or our connectivity tools, we feel we can impact both new operating cost and their outcomes in a positive way.

Our therapeutic products help with mobility and getting patients up, getting them moving around faster, has been demonstrated to drive improved outcomes, get patients out of the hospital faster, reduce the amount of complications, we also help with the reduction in skin and pressure ulcers through our therapeutic surfaces by easing the pressure around patients who are in a bed for extended period of time and also increasing the mobility of those patients and helping to turn those patients to help them with the health of their skin.

And then also benefits with a reduced incidents of Ventilator Associated Pneumonia. So our products are certainly therapeutic and help them with those patient outcomes. We also reduce the amount of patient falls, so large cost to hospitals is the cost of the patient falling out of that and our products through some of our monitoring and also through some of our safety systems including our side rails et cetera, help can reduce patient falls. In addition, our list equipment’s also helps with that and as the population continues to get larger it becomes more challenging for caregivers to move those patients and our products certainly help with that.

And in addition to the improved outcomes, it's also better safety both to the patient by reducing the falls and for the caregiver. So one of the greatest drivers of early retirement and nursing staff of that injuries and between our lift products and our frames some of which either move up into a chair position or in some cases actually do a standing position or our therapeutic surfaces would actually help to turn patients, we assist with caregiver safety and patient safety.

So, what are we focusing on as a company? I am not going to touch on every one of these areas but certainly one of the key things is leveraging our channel. We have an excellent brand position and reputation, within that channel. Through our service network in North America, we are in most hospitals just about every week, they are familiar with the Hill-Rom brand, they are familiar with a sort of tax. We certainly we see an opportunity to continue to leverage to occur in the future.

We understand that innovation is a necessity, there is an increasingly raised bar in terms of getting people to pay for our products and getting reimbursement and that’s going to require increased innovation both to differentiate ourselves from our competitors but also ensure that we are getting reimbursed for our products in the case where there is directly imbursement on a case where it's indirect like the hospital setting where we are demonstrating the value of proposition for those customers.

International expansion certainly while we have a solid position it's not where we would like it to be, the Volker acquisition certainly will help with that but certainly there is something that we see for continued opportunity moving forward.

I already touched on the financial excellence piece; I will talk a little bit about our capital allocation strategy in a minute but also wanted to focus on people excellence because we know that’s critically important. So whether it's some of our new performance development systems that we brought in to make sure that everyone is focused on our line of set of objective or whether it's our short term incentive plan which is focused around a handful of metrics to ensure that everybody is driving the business towards our outcomes that we committed to.

We have really done a lot of in this area to ensure that we are driving people excellence. I mentioned the capital allocation strategy; this is what we shared at our investor day last May. We haven’t deviated from this, this continues to be a strategy and if you haven’t seen it before as we talk about operating cash flow there is going to be a portion 25% to 35% or so of that that if we needed to find our continued internal capital needs, a large proportion of that is for a rental fleet.

So the assets that we place out into our service organizations for rent need to be financed and then we certainly need to continue to return to our shareholders what we have historically, so if we look at what we did for the last several years it was in the 15% or so range so we are committed to continuing to do that whether it's through our dividend or through share repurchases and then the remaining cash flow will be available for value creating opportunities such as the Volker acquisition.

Now we are not (inaudible) way it and I don’t want you to think that we are webbed through these exact proportions within a given year for example in 2011, we did not have a significant acquisition, we so absolutely ended up retuning more cash to our shareholders and in fact it was over 40% of our operating cash flow in 2011 was turned back through the dividend or through share repurchases.

So again this is a strategy that’s not going to vary for quarter-to-quarter, it's something that we committed to in the long term but given that it's more over a period of time versus any specific year or any given quarter.

Turning to Volker, which as I mentioned we closed a couple of weeks ago some people might be acting, why would you do an acquisition in Europe at this point in time. Well of course in the long run we expect Europe to continue to be a very important market for us. The other thing is that Volker is a very strong presence in Germany and we were relatively underdeveloped on a fair share basis in Germany. So this is an important acquisition for us and then of course you are all familiar relative to some of the other European economies that Germany found the utility strong.

Now Volker has a strong presence in Germany but it's a Pan European business and absolutely has several distributors since outside of Europe as well. So it's not just a German company but it has a very strong presence in Germany and in revenues of about $100 million as we announced previously, it has direct sales in those EU markets and as I mentioned distributors is around the world.

With this acquisition we get two manufacturing facilities in Germany, in addition with some of the other value on the product lines itself, Volker has some very good innovative technology, we are going to be looking to leverage across some of the other product lines. They have a certain structure that we are going to be able to combine with ours and be even stronger and they were more developed or are more developed within the Post-Acute setting, our business in Germany was primarily in the acute setting. So this is a good compliment for us.

Get in terms of the transactional details, we found it to be a fast and it was (inaudible) on February 13th. We mentioned previously in and it will be updated in revenue at our earnings call, our second quarter earnings call but it's a (inaudible) at this point is where EPS is in 2012 and well accretive they are after and we are not going to speak to the specific amounts until we talk about 2013 which won't be for the end of this fiscal year but in terms of revenue we will give you an update at our next earnings call.

So, finally what should your key takeaways be about Hill-Rom it's absolutely a challenging environment. We see all those precious customers, but we do feel that we are part of the solution not contributing to the issues that they are struggling and because of that we still feel very strongly and very confident that we are going to be able to draw earnings, our margins and our cash flow going forward.

We have a diversified portfolio, that we believe will enable us to at the state of both, we have the critical expertise and patient safety focus and these are becoming increasingly important as I mentioned earlier that in fact you are expanding a portion of our R&D money not just in new products but on generating that clinical data to support our outcomes and to support our ability to differentiate ourselves.

Certainly, we have significant opportunity to improve our international profits, especially in Europe and we believe that Volker will help us to do that even further. As I mentioned before we will make some on earnings and cash flow is very strong and with that cash at this point how we allocate that cash for shareholder value placing and finally we have a management team that John Greisch who has significant experience in global healthcare environment and really believe that it was a proven track record of success but we will continue to drive success going forward. So, thank you. That’s the end of my prepared remarks. We will then fill questions with Matt as our facilitator.

Question-and-Answer Session

Matt Miksic – Piper Jaffray

OK so I have been trying to do my homework, during the last earnings call so I have targeting questions that I don’t think were asked in the call for the past I checked. So, North American acute care is a lot of the focus in the last quarter. When you came up with the low single digit growth rate, what are you looking for in terms of overall CapEx spending and CapEx spending in your area to come up with that type of number and was just roughly what’s the company to get there?

Mark Guinan

We are expecting that in North America, that capital expenditures will be in the low single digits, we have -- I am sure lot of the same reports that you read and seen projections 1% – 2% kind of growth and our projections are aligned with that.

Matt Miksic – Piper Jaffray

OK and then when you looked at the North America acute care at the borders, was it mostly in patient support systems where you saw this slow down, that’s the biggest part of it or was any other component far off the difference.

Mark Guinan

I think there is probably different questions there Matt, one is the slowdown relative to what it has been in prior quarters and then the second question might be in what actually surprised us; it was different than our expectations. So we have talked about a slow down on in the weight of growth in 2012. As we went out with our initial guidance we had our patient support systems that grew along 25% in 2011 really as we think a lot of that been driven by recovery to a more normalized level replacement from the lows that we experience in late 08 and 09 during the capital crunch.

So we knew those kind of growth rates were not sustainable and we have projected a slowdown in the rate of growth in our guidance for 2012. As we finish the first quarter that slowdown happened a little more severely than we had expected in terms of how quickly it ramped down and so that’s why we brought down our guidance for the year and why we explained on the call that we were disappointed with the orders for the first quarter. Now what that pertains for the rest of the year, we can only speak at this point to the end of the first quarter but we are definitely anticipating the slowdown but we were also surprised that how quickly that happened but it was concentrated in the patient support system. Although couple of other business were disappointing from revenue standpoint as well including Post-Acute.

Matt Miksic – Piper Jaffray

Okay and then if you look at international you said in the call couple of times stable, I think stable, slowly decline when you look at western Europe, it's western is that fair way to access the international component.

Mark Guinan

Yes I am going to separate orders from shipments, because they are -- we go into a quarter with a back log which is the purchase orders we have in hand and then you generate orders within that corner that are ship back corner and then you have some orders that are shipped to subsequent quarters which end up in your backlog at the end of the quarter.

So when we talked about stable we talked about the order rates and so the order rates over the last five quarters even in western Europe have been fairly stable just down slightly now when you talk about revenues or shipments the first half of 2011 benefited from a very strong backlog entering the year, now it's based on strong orders at the end of 2010.

So, stable in terms of orders but as we saw the first quarter results that meant declining revenue year-over-year in the first quarter.

Matt Miksic – Piper Jaffray

And then when you look at the other part of your middle-east as well and you kind of get to the 5% overall rate, roughly what is the rest of the international business excluding Western Europe expected to grow then. Is it 15%, how strong are some of these in the market growing in ’12.

Mark Guinan

I won't give you a number that precise but it's a double digit growth, so it's a strong growth.

Matt Miksic – Piper Jaffray

Okay and then on the rental sales, some of these has been short stays and some of the procedural volumes. Is there any if you have was one much more severe than the other in terms of the impact or is it pretty even?

Mark Guinan

Well our rental business cuts across both our acute or therapy rental and our Post-Acute business so procedural volumes would really be more related to the therapy rentals, so first of in terms of the short life of stay, I think it's the most significant in the therapy rental and I think it's a major contributor. It's hard for us to connect it directly to more procedural volumes.

Lot of our products, are rented for things that are not really elective, so for severe skin conditions and for our pediatric patient showing up and emergency setting and the acute setting. So I am not going to suggest the reduction in procedural has not impacted that but I think it's more of the efficiency of the length of stays is tightening up some protocols around what patients are eligible for what type of products, those kind of things are in the driver. On the Post-Acute side as it's been a combination of factors obviously probably not as much the first two things, at pricing as we have been under a lot of price pressure, we have talked about that in the Post-Acute setting especially in home care but also in an extended worth of reduction in the Smith (ph) reimbursement et cetera, it is just a lot of price pressure in there.

Matt Miksic – Piper Jaffray

And then if you look at the margins on the rental side that it was down a 150 basis points year-over-year, few of the comments were gas prices hurt. The sales under pressure, I don’t get the impression, those are going away in the very near term. How do you reduce the expense structure of that business in one quarter, two quarters, three quarters, how long does it take to really kind of try to right size that some of the cost?

Mark Guinan

So the cost structure on the cost of goods that were rental really based on the amortization of the assets and it's the service tax that we have, over 170 service centers, so it's the cost of those service centers and I believe the work that and then it's the fleet of trucks that you know going back and forth to do other customers.

If you look at that we had over 200 some service centers couple of years ago and a 180 some about a year ago at 170. So what we are consistently looking at ways to insure the efficiency of our organization is optimized. So, certainly fuel in the short term were subject to but when you look at some of the other cost drivers we are looking at the, returns on our assets to make sure that we have the right products in our fleets, the right amount of those products, et cetera, we are very focused on what we call average news which is the amount of time that those are generating revenues to make sure that we are optimizing our margin and then of course we are constantly looking at the ways we operate. The number of service centers we have, the staffing recently we put out some tools to the field, enhances our abilities to track such things as the fuel efficiency when they are driving the time and route, the time for various delivery activities.

So we are constantly doing that kind of stuff, so from that I would say we have an ability in the short term to make adjustments but we also want to make sure we don’t overreact in these sort of short term impact to revenue because we also, the biggest risk is that we impact revenue.

Matt Miksic – Piper Jaffray

Okay then last one on Volker, while Germany has been tougher for you, you say your presence is well over there. What is in that market and then generally in Germany I give a lot the profitability is a little lower and Germany and some of the other Western European markets, is one of that a pride to your business as well?

Mark Guinan

So a couple of questions there, let me start with why have we, we have a decent business in Germany. It's just as I said kind of about a fair share basis if you look at the market in Germany and the population, our business working is big as which kind of relatively underdeveloped, it's probably a lot of reasons for that.

One of them might be that the styling of our products maybe word as met (ph) didn’t meet as well as our German customers’ expectations and Volker is a more dramatic style product. I think that’s some of the factors. We also didn’t have as much to offer in the first acute setting and that certainly a very important part of that market.

So it's probably number of factors. In terms of profitability we don’t comment on specific country profitability but in terms of Europe what we have said is that there is an opportunity of improvement and then Volker is kind of similar in operating margins and rest of our European business.

Matt Miksic – Piper Jaffray

Thank you Mark. Thank you Andy.

Mark Guinan

You’re welcome.

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