Hill-Rom Holdings, Inc. - Shareholder/Analyst Call

| About: Hill-Rom Holdings, (HRC)
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Hill-Rom Holdings, Inc. (NYSE:HRC) May 7, 2013 8:30 AM ET


Blair A. Rieth - Vice President of Investor Relations

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

Mark J. Guinan - Chief Financial Officer and Senior Vice President

Alton Shader - President of Hill-Rom North America

Edward Gregory Pritchard - Senior Vice President And President of Surgical and Respiratory Care

Alejandro Infante Saracho - Senior Vice President and President of International

Brian Lawrence - Chief Technology Officer and Senior Vice President

Alejandro Infante

Greg Pritchard


Matthew S. Miksic - Piper Jaffray Companies, Research Division

Jonathan Demchick - Morgan Stanley, Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

Robert M. Goldman - CL King & Associates, Inc., Research Division

Lennox Ketner - BofA Merrill Lynch, Research Division

Paul Bornstein

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

Blair A. Rieth

Good morning, everybody. Welcome. We're glad to have you here. We've got a great group here in New York and we've got a ton of people on the website, so thank you very much for coming. I'm Andy Reith, Vice President and Investor Relations Officer for Hill-Rom. Thank you very much for joining us here in New York or on the webcast.

A couple of reminders. This conference is being recorded and will be archived on the Investor Relations section of Hill-Rom's website at www.hill-rom.com. If you choose to ask a question today, it will be included in any future use of this recording. And please also note that any recording, transcript or other transmission of the text or audio is not permitted without the written consent of Hill-Rom.

Now before I begin, I'd like to provide our usual caution that this morning's conference may contain 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 vary -- excuse me, 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 our forward-looking statements made during today's conference, please see the risk factors in our annual report on Form 10-K and subsequent quarterly annual reports -- excuse me, quarterly reports on Form 10-Q.

Also certain financial figures discussed during today's conference will include non-GAAP or adjusted financial measures. Reconciliations to comparable GAAP financial measures can be found in the appendix to the presentation materials posted on our website.

Now with that introduction, please let me introduce John Greisch, President and CEO.

John J. Greisch

Thanks, Andy. Good morning, everybody. I think we're going to have some strivers in this morning. I know there's another conference call underway and couple of things going on, so I apologize in advance for any distractions that we're going to have with people coming and going.

We're thrilled to welcome everybody here this morning live in the room, as well as on the webcast through our 2013 Investor Conference. We've got a lot to talk about this morning. We're really excited to share with you our perspectives on our end markets, the opportunities and the challenges that those markets present for us today, as well as the plans that we really want to spend most of the morning, talking about relative to our strategies and our initiatives as we look forward over our LRP period to continue to create shareholder value.

We believe the plans that we've got and the initiatives that we have in place will allow us to do a number of things between now and 2017: deliver revenue growth in a low single digits, expand operating margins by 300 to 400 basis points, grow earnings per share at a CAGR in the low teens between 2013 and 2017 and deliver nearly $1.5 billion in operating cash flow. I think as you've seen over the last several years, we've demonstrated that we will continue to follow a disciplined approach to our capital allocation strategy. Balancing investments in our organic portfolio, which returns to shareholders and selective M&A growth opportunities.

Let me start this morning by introducing who's with us here from Hill-Rom. On my left, you all know Mark Guinan, our Chief Financial Officer. Mark joined Hill-Rom about 2.5 years ago from J&J.

With us down in the audience, Alton Shader, you'll hear from later. Alton runs our North American Core Patient Support System and other related businesses.

Alejandro Infante. You met him a couple of years ago. Alejandro joined us about 3 years ago. He runs our International Business. Alejandro joined us from Hospira and spent most of his career at Abbott.

Greg Pritchard, the newest member of our team, joined us when we acquired Aspen. Greg was the CEO of Aspen when we acquired that business and he's now got responsibility for our Surgical Portfolio and our Respiratory Care business.

And lastly, Brian Lawrence, who you'll hear from this morning, is our Chief Technology Officer. You've met him a couple of years ago at our last investor conference.

Also with us in the audience this morning is Susan Lichtenstein, here in my right, our Senior VP of Corporate Affairs and Chief Legal Officer; and Andreas Frank joined us a little over a year ago from Danaher. Andreas runs our Business Development and Corporate Strategy function. So you'll hear from many of them -- that team later this morning.

Here's a quick look at the agenda for the morning. Mark and I will kick it off with some comments around our strategy and specific long-range plan financial objectives. You'll hear from the rest of the team as well. Alton with respect to our North American Patient Support Systems business, Greg for Surgical and Respiratory Care and Alejandro for international, and then Brian will wrap it up with an overview of our R&D activities. And we'll have a couple of Q&A sessions following Mark and my presentations, we'll have one; and then at the end of the presentations, we'll bring the team up for Q&A for the entire team.

So what is it we'd like to accomplish today? Mark and I will open up, as I've said, with a review of our key strategic initiatives and our specific long-range financial targets. We'll also spend some time talking about the external environment and the specific factors affecting our businesses. As you guys all know, not only do we live in turbulent economic times, but our core business is in one of the more volatile portions of the health care industry. Our long-range goal that you'll hear about this morning reflect what we believe we can accomplish in a relatively stable economic and capital spending environment. And although volatility clearly does impact our end markets and our portfolio, we remain committed to our long-range goals that you'll be hearing about this morning.

I'll focus my initial comments on our strategy, I will highlight our accomplishments since we held our last investor conference in 2011 and review the key initiatives that we'll be focusing on over the next several years to drive value creation, and you'll hear more about those from some of our individual speakers. And after Mark reviews our recent financial performance and our specific long-range goals and strategy for capital allocation, we'll take Q&A followed by the presentations from the rest of the team and then, as I mentioned, a second Q&A session after that.

So with those objectives in mind for the morning, let's get started. Why should we all be excited about Hill-Rom and our value-creating prospects? Many of you in this room and on the webcast view our company as a North American bed company. I hope you'll leave this morning recognizing we're a lot more than that. Our focus on patient safety and patient outcomes, as well as caregiver efficiency places us in a perfect position to provide clinical and economic solutions to help our customers solve their most critical problems of the day.

A lot of companies say that, but if you look at our presence in the acute care hospital space, we have the brand equity, the channel strength and the products and solutions to actually do it every single day. Our Patient Support Systems business has allowed us to really build that brand equity over many years. I think as you saw with the Aspen acquisition, we plan to build around that brand and channel strength with complementary businesses that not only leverage our strengths, but also diversify our portfolio away from today's dependency on our lower growth bed business.

We've got a portfolio today of solutions that address specific customer needs, from reduced pressure ulcers and patient falls, to workflow improvements, all of which lower costs and improve outcomes, the 2 main objectives that all of our customers want to hear from us about every day. Our strong cash flow, as well as our healthy balance sheet will enable us to provide our shareholders with an appropriate level of cash returns, while at the same time, allow us to invest in higher growth, less cyclical businesses with which we can leverage our brand equity and our strong channel presence.

Last week, this experienced team is highly committed to delivering on our long-range objectives. You've all heard me use the term lumpy when describing our business, and I note to many of view, this is a frustrating issue as you look at our company. But I think this team has shown we know how to manage through the cycle and deliver long-term improvements regardless of how lumpy we may find our business to be on a short-term basis. So if you can take away one nugget from today it's that this team will generate significant cash flows, which we will invest in a disciplined manner to continue to drive increases in shareholder value.

Let me take a minute and touch on our mission statement, which really defines who we are and what we do. Every day, our products touch in excess of 1 million patients and their caregivers around the world. From our Patient Support System frames and surfaces to our patient lift products and surgical and respiratory care portfolio, we provide products and services to patients around the world that enhance patient safety and caregiver efficiency. The strength of our market positions and our channel presence, together with our market-leading products and services are the true hallmarks of our company. These strengths are what will enable us to leverage the power of our brand in the years ahead. And as we bring new and innovative solutions through our strong sales channels, we're confident that we can continue to help our customers address the critical issues they've got, how do they bring increased clinical outcomes and address the economic challenges that they face every single day.

Many of you here today are familiar with Hill-Rom. But for those of you who are not, let me take a minute to provide an overview. Our products and services span the entire care continuum, from the acute care hospital space to extended care, to home care settings. And whether it's our disposable surgical products, our patient-handling portfolio, our nurse call communication systems, respiratory care products or surgical positioning technology, our company has been a technology leader across our portfolio with leading brands enhancing outcomes for over 80 years.

You've all heard me talk about our solid international footprint with sales approximately 35% of our global revenues being outside the United States. We've seen some good growth internationally in the last several years, particularly in the Middle East and Asia on the back of some investments that we've made in those regions. You'll hear more about this from Alejandro. And while we made progress growing our international business and in improving our international profitability, this remains a key priority for us, particularly in Europe. We're not satisfied with where we are with respect to our international profitability, and as you'll hear later from Alejandro, we'll continue to take the necessary actions to drive improvements across our international portfolio.

On a global basis, our revenues are about $1.7 billion. And since this team arrived in early 2010, we've expanded our adjusted operating margins over 400 basis points, excluding the impact of our intangible amortization from our 2012 acquisitions. In addition, as you'll hear in Mark's presentation, we've generated significantly improving cash flows throughout the ups and downs of the capital cycles over the past 2 years. And across-the-board, this team is committed to continue to build upon the success that we've achieved over the past several years.

As you see on this slide, our portfolio is comprised of products that hold a strong #1 or #2 position in all of our major product categories. Our Patient Support Systems business is probably the category for which we are best known and where we have a strong #1 position, particularly here in the States. With the recent acquisition of Aspen, we're also the global leader in surgical scalpels with our leading Bard-Parker brand. And as you'll hear from Greg, our Aspen portfolio also includes a wide variety of wound care, fluid management, surgical markers, needles and other surgical disposables. Our therapy rental, patient handling and our lift business, together with our nurse call communications platform and surgical positioning businesses all hold #2 positions in their global categories. You'll hear more about each of these business opportunities for us from our business leaders here later this morning.

One of the real strengths of our portfolio is the diversity that we enjoy. In terms of revenue, today, about 59% of our revenue is capital in nature. You guys are well aware that serves for the vast majority of the source of the volatility and the lumpiness that we see in our revenue stream. Our longer-term objective is to drive down that volatility and dependency on our capital business. Our rental business today accounts for about 1/4 of our global sales, while consumables and service represent the remaining 16%. As you see on the right-hand side of this slide, as I mentioned, international represents about 35% of our sales today. So the diversity that we enjoy, both from a business portfolio perspective as well as the geographic perspective, really allows us to weather the volatility of either capital spending cycles or economic cycles, and as you'll see shortly, continue to deliver consistently strong cash flows regardless of the cycles that we're dealing with.

Turning to the macro environment for a few minutes. I don't need to tell anybody in this room or on the call about the increasingly challenging landscape. The changing dynamics that we're all experiencing are putting pressures on providers, payers and suppliers in unprecedented ways. Obviously, on a positive side of the coin, demand for health care is going to continue to grow in all regions due to the changing demographics in the developed markets and a focus on increased access to health care in most of the developing and emerging markets around the world. For suppliers like Hill-Rom, our focus on providing solutions that solve our providers and our customers' problems rather than just selling products will continue to inure to our benefit.

In addition, here in the States, I think you guys are all familiar with the consolidation that's underway, particularly among the provider universe. That, together with more centralized buying decisions, although a bit of a 2-edged sword, we believe it will certainly help us mitigate the effects of many of the down arrows on this slide that we'll be facing in the years ahead, largely due to the strong position that we enjoy with the large IDNs and the consolidators within the industry. That's really where our brand equity and our channel presence is going to come to our benefit in the years ahead.

On the flip side, changes in the United States with Health Care Reform together with the austerity measures that we're all too familiar with in Europe that are being implemented currently, will continue to be headwinds that we and everybody else in the industry are facing. This will continue clearly to put pressure on all suppliers to provide more value to help lower cost and enhance patient outcomes, things that we at our company do as well as anybody else.

In addition to customer pressures and economic pressures that we're all facing, the regulatory environment has clearly become more challenging over the past several years, not just for us but for the industry as a whole. And here at Hill-Rom, we've brought in a senior team of strong QARA leaders across the company over the past couple of years to ensure that we have the appropriate experience in this critically important area going forward. So I believe we're very well positioned to manage the challenges that the entire industry is encountering, and to continue to provide our customers the solutions that they require.

When I spoke to you at our last investor conference in 2011, I discussed 6 specific focus areas from a strategic perspective that outlined where we plan to invest our resources to drive shareholder value. As you can see on this slide, our focus has not changed. I'll take a few moments to discuss some of the accomplishments that we've made in these areas and where we go from here over the LRP period.

First thing I'll comment on is people. You're going to have a chance to meet some of our new leaders here this morning. And one of the things that I'm most proud of since I've been here since early 2010 is really the team that we've assembled over the past 3 years. This is a highly experienced group of executives who bring a diverse set of experiences, many with global experience from leading device companies, such as GE Healthcare, Abbott, J&J, Cardinal and Baxter. In addition to our executive leadership team, in effect, my staff, we've also strengthened our senior leadership team, which is comprised of about the top 100 executives across the company. We brought in people with similar global relevant experience from same types of companies to strengthen that top leadership team across the company. Of those top 100 leaders, over 75% of them today are new in their positions, and over 60% of them are new to the company since I got here in 2010. So very pleased with the development that we've made with the leadership team at Hill-Rom over the past 3 years.

As I mentioned earlier, another of our great strengths and, certainly, a key focus area is our sales and customer channel. Leveraging that power that we've got here in the United States, as well as in Europe, is a huge opportunity for us. The opportunity we have to capitalize on our brand equity and market position as we add products and services to this channel that strengthen our value proposition as we did with Liko, as we did with Aspen, as we did with Volker, is enormous. We'll continue to leverage this channel strength with new value-added products and services as we did with those businesses.

As you'll hear later this morning from each of our leaders, as well as Brian, we're also very excited about the new products that we'll be introducing over the next several months. Progressa is our new ICU Patient Support System product that we'll commercialize globally later this year. You'll hear more about that from Alton, Alejandro, as well as Brian. We'll also be upgrading and adding exciting new capabilities for voice and data communications, as well as compliance and safety management to our NaviCare platform. And the new Allen Advance surgical table that you'll hear from Greg about, represents what we believe is a game-changing product entry for us into a new area. Brian will also describe some of our longer-term technology areas that he's focused on, as well as process improvements that are underway across our R&D organization.

I think we started talking a couple of years ago about the importance of international expansion. As I mentioned earlier, our international regions, particularly Europe, continue to represent a significant opportunity for us for margin expansion. In addition to expanding margins, we have expanded our international operations with the Volker and the Aspen acquisitions last year. And under Alejandro's leadership, we've also invested marketing and sales channel resources in the key regions, such as the Middle East, as well as Asia Pacific. Much of the success that we achieved in 2012 in terms of growing our international business with the direct result of these channel investments that we made over the past several years.

We've also added a much-needed management structure into our European operations, which I'm confident will bring us the margin improvement in Europe that we are targeting. Specifically, in our European business, we have opportunities for further portfolio rationalization, as well as additional facility consolidation, each of which are part of our plans to expand our margins over the next several years.

You saw us embark on a couple of acquisitions last year. We'll continue to pursue selective acquisitions to expand our portfolio and to leverage our channel by strengthening the offering that we bring to our customers. Our portfolio management, however, is not limited to acquisitions alone. As you all know, we've made changes to our existing portfolio, and we will continue to do so to get out of or improve lower margin products or businesses to improve their overall profit contributions.

I think you've heard us talk about exiting certain home care product categories over the past year, as well as international rental products that we deemphasized in order to improve our overall margin structure. Conversely, we are able to turn around our health care IT business here in the States during 2012 from a loss maker to one that is now nicely contributing on the bottom line. We'll continue to bring this discipline our businesses, across the entire portfolio that will continue to make necessary changes as appropriate.

As I mentioned, we significantly improved the underlying profitability and cash flow generation of our company over the past 3 years. Last year alone, we generated a record level of cash flow, with EBITDA of nearly $325 million, despite slightly lower earnings than the prior year due to the downturn in our North America capital business.

In 2012, we also reduced our SG&A structure to below 30% of revenues for the first time to our continued focus on reducing our cost structure where appropriate. We recently announced the elimination of about 100 more positions from our organizations, and we'll continue to prune our work force and consolidate functions and facilities in order to improve the leverage of our cost structure as we grow our top line. At the same time, we've returned over $200 million to shareholders in the form of dividends and share repurchases over the last 2 years, and this was at a time when we also deployed roughly $500 million in acquisitions to add businesses to our portfolio, in line with our stated strategy. So we will continue to return cash to shareholders, in line with our capital allocation framework. And as we've done, again, here in 2013, we'll return even more cash to shareholders in the absence of any meaningful acquisition activity.

I mentioned earlier, this team has demonstrated the ability to consistently manage this company through the ups and downs of the capital cycle. This graph shows that demonstrated ability with the consistency of our cash flow over the last 4 years. I think you guys are all painfully aware of the volatility that we've had in our core revenues during this period. And as you can see here, despite the volatility that we experience in our top line revenue, our ability to generate consistent cash flows is something we're very, very proud of.

This also reflects why my answer often is, it doesn't matter, when I'm asked where we are in the bed cycle. That's probably the top question I get from investors. And the way we look at it is -- I'm not being flippant, it doesn't really matter. We're going to manage this portfolio and manage this business to continue to drive consistency and sustainably increasing cash flow. So again, if you leave here today with one takeaway, it's the strength of the cash flow that we can generate and the commitment of this management team to take whatever actions are necessary to continue to drive improvements in cash flow in the years ahead.

Let me shift gears for a moment and make a few comments on our long-range plan outlook before I hand over to Mark. And let me start with a couple of comparisons to what we discussed 2 years ago in our 2011 LRP Conference -- industrial conference, excuse me. Two major changes from 2 years ago. One is our outlook and expectations internationally due to the changing environment in Europe; and secondly, the overall impact that Health Care Reform and the related uncertainty has had here in the United States.

If you look at Europe, our outlook today clearly is different than it was 2 years ago. I don't think that's any different from anybody else in the industry. We've experienced relative stability in our European business over the past year. But as we look forward, we're not expecting our European business to return to any great source of strength for us over the next several years.

Given that and given that, for us, Europe represents about 65% of our international revenues, today, our outlook for international and our top line growth has been reduced from high single digits a couple of years ago, down to, what you'll hear from Alejandro, a low to mid single-digit outlook as we look ahead between now and 2017.

Similarly, here in the states, back in May of '11, our expectation at the time was that capital spending would continue to grow at a relatively steady pace in the low single digits. In fact, for our product categories, many of you are aware, we saw a double-digit decline in 2012 in our core bed market and we, in the industry, have experienced further declines in 2013 in our core capital raised businesses.

So it's clarity on certainty cloud from the Health Care Reform has had a negative impact on our markets over the past 18 months, different from what we had expected when we stood up in front of you guys 2 years ago. Again, I don't have to tell anybody in this room this, but our customers, the acute care hospital facilities and the larger systems, they're all focused on reducing capital spending where they can, deploying capital spending into more revenue-generating areas and reducing their operating expenses in anticipation of the more challenging reimbursement environment that's coming out of more the next couple of years.

This clearly has negatively impacted our capital and rental businesses relative to our expectations of a couple of years ago. And as you'll hear from Alton, we now expect a relatively flat growth environment for our core frame and surface business in the States and, overall, top line revenue growth in Alton's business in the low single digits over the LRP period.

So despite a more challenging outlook for the industry that we had a couple of years ago, our focus areas remain unchanged. And listed on the right-hand side of this slide are the 5 critical business priorities that we're going to spend most of the morning talking to you guys about. These are things we need to execute in order to achieve the financial goals that Mark will cover in a little more detail with you over the 2013, 2017 period.

So for the remainder of the morning, we'll provide greater detail on these initiatives; Alton will discuss some of the changes we'll be making to solidify the commercial effectiveness and performance of our North American business; Greg's comments will focus on the important new product development that will continue to contribute profitable growth to our Surgical and Respiratory Care business; Alejandro will cover plans for improved European profitability; and then Mark will get into some of the specific operational improvement objectives that we have across the company, including product cost reductions, facility consolidations, as well as new product introductions to improve our overall margin profile.

And lastly, as I mentioned earlier, you'll hear from Brian in terms of our plans to transform our R&D efforts to become more productive, while balancing his team's focus on the near-term pipeline with some of the early innovation efforts that we're also focused on.

Let me take a minute just to talk about our M&A focus and some of our inorganic growth objectives. Many of you guys ask us all the time, what kind of assets are we specifically interested in, and what are the general areas of interest that we might pursue? I think if you look back at last year, as we did with Volker and Aspen, our primary focus will continue to be on products and services that either expand our footprint or leverage the strength of our sales and customer channels, with the primary focus on the acute care hospital channel where, clearly, our presence and our brand equity is the strongest.

Specific areas of interest as we look forward will include patient handling and mobility, as we did with Liko and Volker; patient safety-oriented products as Aspen was; inspection control, which is clearly a critical area of focus for our customers; wound care and respiratory health, 2 areas that we're in with many of our product categories today; and also lastly, workflow and clinical operations productivity enhancements. Our IT business here in the States, our healthcare IT nurse call business and related products that we have in that business really address the opportunities in that area.

I mentioned a couple of times, one of the objectives that we had with the Aspen acquisition was to expand our surgical platform with a profitable portfolio of products that also enable us to reduce the dependency we have on the capital-intensive nature of our portfolio. And I'll put small -- excuse me, in terms of revenue, Aspen represented a very attractive addition to our portfolio, where we've now added strong brands and a disposable revenue stream in an adjacent space to our existing surgical business that we have with Allen Medical. We've now got a meaningful surgical franchise, you'll hear more about this from Greg, comprised of both capital and disposable products upon which we will build.

Respiratory care, again a relatively small business for us, but we are expanding this through in-licensing activities as well as new product introductions. You may have seen the press release we put out yesterday. We received late last week, 510k approval for a new product called MetaNeb 4.0. This is our newest airway clearance device that's added to our portfolio, Greg will touch on this later. We're going to continue to look for product additions to that franchise, as well as inorganic activities to build upon a very profitable respiratory business that we have today.

Internationally, if and when we identify profitable opportunities to either accelerate market entry or add products to the portfolio, we'll continue to be interested in those as well. And from a financial perspective, you can count on us to remain highly disciplined as we look at inorganic opportunities.

We've now got under Andreas' leadership a very proactive funnel process, ROIC. We'll continue to drive our efforts in any inorganic activities that we have that we are committed to double-digit ROIC returns in our M&A activities.

So I know you'd all like for me to be a lot more specific with respect to our inorganic growth strategy, but hopefully, these 4 or 5 focus areas show you where our focus is going to be and where our interests lie going forward, again, all zeroed in on providing products and services to help our customers address their most critical needs as we go forward.

And I hope you see that we've demonstrated patience and financial discipline in what we've done in this area over the past 3 years and you can certainly count on us continuing to do so as we go forward. And again, as we've demonstrated over the past year, we will continue to return cash to shareholders at an accelerated rate in the absence of any attractive M&A activities. We're not desperate to do M&A and we're going to continue to remain disciplined and in the absence of that, you can count on us, as you've seen here in 2013, to continue to return cash to shareholders in excess of our framework that Mark will talk to.

So in closing, we've got an incredibly powerful brand. We've got an incredibly valuable market presence and channel strength with our businesses. Our focus on patient safety and improved outcomes, along with caregiver efficiency, all put us in a great position to help solve the most critical needs of our customers clinically and economically. Our strategy is to build upon those strengths, build upon the brand and market presence that we've got with additional products and services in the areas that I just touched on.

We will also be looking to continue to reduce the capital intensity of our existing portfolio. So as much as we've accomplished over the past 3 years, we've got a lot more ahead of us. Since this team got here 3 years ago, we've expanded our operating margins, we've generated significant improvements in adjusted earnings and cash flows and we've seen over a 50% increase in our share price since the beginning of 2010. We're not done. We will continue to focus on new product introductions, operational improvement through productivity enhancements and improved commercial effectiveness, as well as the portfolio optimization actions that we've taken in the past that we'll continue to take going forward.

I'm confident we have a solid plan to execute and that we have the leadership team in place that is committed and capable of achieving our long-range goals.

So with that, let me turn the floor over to Mark and after he concludes, he and I will hold a Q&A session before you hear from the remainder of the team. Mark?

Mark J. Guinan

Thank you, John and good morning to everyone. Thank you for joining us today.

I'm pleased to be here this morning to update you on our long-range plan and hopefully, provide you with some deeper insight into our company. Since joining Hill-Rom in December of 2010, I've had the opportunity to get to know many of you through various investor conferences or calls. We also conducted a formal Investor Day in May of 2011, at which time, John and I first provided our view toward longer-term prospects for growth at Hill-Rom, as well as rolling out our capital allocation strategy.

While the market certainly has changed since that time, with Europe continuing to suffer through the post-debt crisis, economic malaise and the North American capital market slowing markedly in 2012, you will see that we have successfully managed our business through these difficult times. Our business has generated strong, consistent cash flows in excess of earnings and we have deployed that cash flow in value-creating ways for our shareholders. You will also see that we believe our broad, diverse portfolio will deliver moderate revenue growth through 2017, with a much stronger CAGR and EPS as we improve our operating margin by several hundred basis points. Despite some of the market challenge we faced and may face in the future, we are firmly committed to continuing our path of improving our operating margins and we'll take the necessary actions to do so. So with that brief introduction, let's get started.

As we've discussed in our recent earnings calls, the external environment remains challenging, particularly in North America and Western Europe. While reported revenues have increased about 7% due to our 2012 acquisitions, on a constant currency basis, year-to-date 2013 organic revenues decreased approximately 4%. This has been driven by a number of factors including a decline in our North American acute capital and respiratory businesses, an exit from certain unprofitable segments of home care, as well as declines in our European capital sales and global therapy rental businesses. We are pleased with gross margins during the fast first half of the year, which are in line with our full-year guidance of 47% on the strength of our improved performance in Q2.

Our second quarter 2013 adjusted gross margins were up 10 basis points versus the prior year and represented the highest level we've seen since the first quarter of fiscal 2012. We've maintained our aggressive management of SG&A and R&D expenses, as adjusted operating margins during the first half of 2013 declined approximately 250 basis points, in line with guidance, as a result of the medical device tax, incremental acquisition amortization expense and higher level of R&D investments. Our strong operational management led to an adjusted diluted earnings per share for the year-to-date period of approximately $0.96 per share, again, in line with our previously provided guidance.

Year-to-date 2013 operating cash flow and EBITDA were down 9% and 5% respectively versus the prior year. But this was despite the 14% decline in adjusted EPS over the same period. In spite of the organic revenue pressure, I am pleased with how we have managed the business through a challenging external environment, continuing to generate strong cash flows and achieve adjusted EPS during the first half of 2013, again, in line with our guidance.

We reduced our full-year revenue outlook during our last earnings call and we also narrowed but largely maintained our adjusted earnings guidance for 2013. We are projecting operating cash flow to be unchanged from our previous guidance as we continue to focus on what we can control to improve margins and deliver strong, sustainable cash flows.

For the last several years, we have discussed our strategic objective of enhancing our cash flows and diversifying our portfolio through M&A. M&A has also been a key plank of our expressed capital allocation strategy. And we have indicated that we expect to invest approximately 45% to 60% of our operating cash flow over a 5-year period in M&A, m&A which would leverage our channel, provide geographical expansion or diversify our portfolio away from our current heavy weighting in capital sales.

In February 2012, we executed the acquisition of the Germany-based Völker bed and furniture business. Not only did this allow us to leverage our channel by complementing our clinical approach expertise with their leadership position and platform-based designs, but it also strengthened our competitiveness in a key country where we were underperforming compared to the rest of Europe. Then, in July of 2012, we further strengthened our company's position in our patient safety and caregiver efficiency categories by acquiring a portfolio of businesses under the Aspen Surgical name. This portfolio of surgical consumable and specialty medical products runs from the Bard-Parker surgical blades and scalpels to Richard-Allan needles to all our accessories and expands our presence in the hospital OR suite beyond our Allen Medical surgical positioning business. As you can see from the slide, Aspen was attractive on many fronts, including accretive margins and a less cyclical revenue stream.

One of the commitments we made back at our 2011 investor conference was to continue improving our operating leverage. At that time, I talked about getting our SG&A under 30% threshold before 2015, the end of the long-range planning period. And that commitment included the impact of the anticipated implementation of the medical device tax. As you can see from this slide, we accelerated that plan by a few years and actually got our SG&A just under 30% in the second half of fiscal 2012. With the January implementation of the device tax and the incremental annualized impact of the intangible amortization expense related to the Völker and Aspen acquisitions, we are deleveraging our P&L in 2013. But that is a temporary impact and we will certainly continue to drive down our SG&A as a percent of sales and still expect to get it under 30%, but now with about 100 basis points of new amortization to absorb.

Going forward, we will continue to drive greater efficiencies in our back office operations, our indirect out-of-pocket spending, which largely falls into SG&A, and even in our field sales structure. But before I get too far into the quantification of our long-range plan, let me take a minute to ground you in some key assumptions.

We expect U.S. Healthcare Reform to be implemented as planned. As we have expressed publicly in response to how we expect the ACA to impact our business, it is not our expectation that the influx of patients into the system will result in a significant uptick in demand for beds, services, lifts or health IT products. However, we are counting on the stability in the system to allow our customers to maintain or improve their financial health and to have enough predictability in their patient reimbursement that they will continue to invest in our products.

Next, we are assuming that the European economies continue to be stable with tight budget controls but no greater level of austerity than we've seen over the past several years. As we've mentioned on our last several earnings calls, our European business has been fairly stable with low single digit declines from the peak period prior to the debt-driven financial struggles. Finally, this plan does not consider the impact of any future acquisitions or portfolio divestitures. And any changes could, and of course, materially impact some of our -- or all of our plan.

The projected revenues, earnings and cash flow are all based on the products we market today, incremental iterations or products which are well advanced within our R&D pipeline. On this next slide, I will quantify our expectations through 2017, side by side with our performance over the last 4 years. We felt it would be instructive to lay out our performance on each of our key, historical metrics, including guidance for the current year. You'll see that our long-range plan projections over the next 4 years closely mirror what we have delivered in the past. We hope this provides a greater degree of confidence in our plan.

Now to the numbers. Starting with revenue. We expect organic growth rate to be in low single digits. That is based on an expectation that volume in our developed markets will be fairly flat and we'll see annual low single-digit price erosion, which will be offset by modest share gains. We still expect significant growth in the emerging markets. We are projecting an improvement in our adjusted operating margin of 300 to 400 basis points. This is a reversal of our 2013 trend where we are guiding to a 200-basis-point decline driven by the previously mentioned SG&A impacts on the device tax and incremental acquisition-related amortization. A little less than half of the OI improvement will be driven by further leveraging of our SG&A, with the balance coming from gross margin.

And speaking of gross margin, we are projecting a 100- to 200-basis-point improvement over the long-range plan horizon. This is expected to come from significant cost savings in our supply chain, as well as a slight improvement in our portfolio mix of products. As I mentioned previously, we will continue to aggressively manage our SG&A with our recent downsizing being one example of how we'll manage our costs. Our expectation is that we will get our SG&A back below 30% by the end of this planning period.

For the period of 2013 through 2017, we are projecting a compound annual growth rate for our adjusted EPS to be in the low teens. Consistent with our last Investor Day presentation, we have not built any incremental revenue or earnings from unidentified M&A. We expect to generate nearly $1.5 billion in operating cash flow over the LRP time horizon.

Rather than assume that none of that cash is utilized, I have assumed that we deploy approximately half of our operating cash flow towards share repurchases, with the remainder for internal capital needs or modest increases in our dividend. Well, this is certainly only one scenario. It gives you a baseline on which to operate. Any use of cash for M&A would supplant some degree of share repurchases but would only be executed if it was deemed to create superior earnings accretion to share repurchases over some period of time.

For operating cash flow, we are looking to increase it from our current guidance level of $270 million to $280 million by approximately $50 million. And finally, our adjusted EBITDA is expected to increase by more than $50 million from its current guidance of $315 million to $320 million to greater than $375 million by 2017.

Now, let's look into revenue in a bit more detail.

As you look at our expectations for each of our segments, you can see that there is some deviation but it isn't substantial, running from low single digit in our North America segment to mid single-digit growth in our Surgical and Respiratory segment. In North America, we are expecting that continued efforts by payors to reduce health care expenditures will put downward pressure on volume and price.

We will offset much of that by continued innovation in our new product development, as well as continuing to focus on outcomes in our clinical spending and customer interactions. Our projected mid single-digit growth in Surgical and Respiratory is going to come from healthy growth across the board in Aspen, Allen and our respiratory business. Being more procedure-based, these businesses may benefit slightly from a volume perspective due to the Affordable Care Act, unlike our core Patient Support Systems business.

And finally, our international segment, which is heavily weighted toward Western Europe, is expected to grow at low to mid-single digits. Fairly flat volume in Western Europe will be bolstered by higher rates of growth in other international regions. In many cases, double-digit growth. As I mentioned upfront, we are projecting a 300- to 400-basis-point operating margin improvement over the LRP time horizon, a little more than half of that coming from improvement in gross margin and the balance coming from improved SG&A leverage. Material cost reductions, improved direct procurement leverage, further rationalization of our service infrastructure, which is in our rental cost of goods, and footprint consolidation are the major drivers for COGS improvements.

And our SG&A leverage will be driven by back-office efficiencies, indirect spend leverage and further commercial efficiencies. All of these cost improvements are deliverable within a range of growth scenarios, but obviously will be adjusted down the road as necessary in response to any changing market conditions, just as we accelerated our plans for SG&A leverage in response to a softening in the North America acute-care capital market over the last 2 years.

On the EPS front, we are projecting a compound annual growth rate in the low teens. As I mentioned earlier, in order to reflect some value creation from our operating cash for modeling purposes, we have assumed that a little over half of it will be used for share repurchases. We're expecting to leverage our P&L through both improving gross margin and further SG&A efficiencies so that low single-digit revenue growth can be translated into a much higher growth rate of EPS.

A combination of the device tax, incremental amortization expense and a portfolio mix shift through 2012 and into 2013 has slowed our recent growth in EPS and is actually projected to drive a decline in 2013, as per our guidance. But on a go-forward basis, we expect our rebase business will return to attractive earnings growth.

We also expect to significantly increase our operating cash flow over the LRP time horizon. Strong growth in earnings combined with continued improvement in the management of our working capital will add approximately $50 million of annual cash flow generation to our business. The working capital improvements will include a continued decline in our DSOs from the high 70s today into the high 60s and another full turn in our inventory.

As you have seen over the last 2 years, we have demonstrated an ability to improve both, taking DSOs from the mid-80s to the high 70s and improving our inventory turns by one turn. EBITDA is projected to grow similarly by over $50 million during the LRP time horizon. From our 2013 guidance of $315 million to $320 million to over $375 million in fiscal year 2017.

I'm sure you have noticed that we have given EBITDA a greater focus in our last several earnings calls, as well as our investor conference remarks. This is in recognition of both the importance of highlighting the strong and consistent cash-generating ability of this business, as well as the value of highlighting the degree of depreciation and amortization impacting our EPS.

As you will see on the next slide, we have a favorable trend in our capital spending as a percent of depreciation and have been delivering free cash flow in excess of our net income. Given this opportunity to speak with you and give you some visibility to our long range plan, I also would like to take a minute to highlight some recent performance by the company. If you look at this slide, you will see that each in each of the past 3 years, we have translated either 100% or well over 100% of our earnings into free cash flow. And in each of the past 3 years, our capital investment has been well below our depreciation.

The major drivers include a greater efficiency in the utilization of our rental fleet assets as well as a slight decline in our rental business over the past few years, each of which has reduced our need for fleet investment. This 3-year historical performance represents a trend for our business, not a temporary state, and should give you further confidence in our ability to generate strong, consistent cash flows.

Before I close with my key takeaways, I want to take a moment to revisit and affirm our capital allocation strategy. As you recall, we rolled this model out at our conference in May of 2011. We suggested that our use for operating cash flow would fall into 3 buckets, internal capital investment consisting primarily of fleet and IT, and with some level of PP&E mostly for new products, returns to shareholders and finally, M&A. The proportion I laid out was that 25% to 35% of our operating cash would be needed for internal capital, that 15% to 20% of our cash would be returned to shareholders either via dividends or share repurchases. And that would leave 45% to 60% available for M&A.

Let me remind you that in the EPS-based model, I assume that 50% of our operating cash flow will be utilized for share repurchases. That assumption which we used to create a baseline of EPS growth and should not be construed to be a deviation from the model I just described. I've also discussed the fact that this ratio would be over a 4 to 5-year period of the LRP and that in any given year, the ratio could be materially different, largely dependent on our ability to identify and execute value creating M&A transactions in any given time frame.

In the absence of meaningful M&A, we would allocate a greater proportion to share repurchases. If you look at the right-hand column of this slide, you can see that we have held true to our strategy over the last 3 years. In fact, we have exceeded our targeted returns to shareholders, returning 30% of our operating cash flow or nearly 50% more than the high-end of our range, while spending on internal capital falls squarely within our range. And this was during a time when we spent nearly $500 million on acquisitions, funded through a combination of operating cash flow and debt.

So in closing, let me summarize the key highlights of our plan. Our long-range plan anticipates a low single-digit compound organic revenue growth reflecting a very challenging environment, an environment where we expect that North America and Western Europe markets will both experience small declines. Despite those challenges, we are projecting a 300 to 400-basis-point improvement in our operating margin to reductions in cost of goods, improved product mix driven by new product introductions and a management of our portfolio combined with supply chain consolidation and further SG&A leverage. We look for strong, consistent cash flow and EBITDA with EBITDA growing to over $375 million by 2017 and a cumulative operating cash flow of nearly $1.5 billion over the LRP.

And finally, we will continue with our disciplined capital allocation strategy to increase shareholder value, a strategy which we clearly have followed over these past 3 years.

At this time, John will join me for our first Q&A session. John?

John J. Greisch

Thanks, Mark. We had not build a break into the agenda. So as you've been doing, please feel free to excuse yourself as necessary, and we're going to keep rolling with Q&A and then more questions. Let's start with Matt.

Question-and-Answer Session

Matthew S. Miksic - Piper Jaffray Companies, Research Division

This is Matt Miksic from Piper Jaffray. So one question. You sort of -- it seems like in the capital allocation strategies you're laying out, you've sort of swung maybe some flexibility into the M&A column from the repurchases column. And I'm wondering, if you were to execute on that 45% to 60%, John, you outlined earlier in the presentation this percentage of capital, what's that revenue map look like at the end of your LRP if you're successful in executing on that. And then I have one follow-up.

John J. Greisch

We really haven't looked at that, Matt, to try to build any acquisition growth. The framework that Mark laid out is consistent with what we set up 2 years ago. And you're right, we've built in flexibility as we've done this year where we're -- I think we returned over 50% of our operating cash flow to shareholders in the first half of 2013. We didn't do any acquisitions. But I'd rather not speculate if we spent within the M&A range of our framework over the 5 years, how much revenue would we acquire. It's all going to be a function of what kinds of assets that we would acquire and what we've tried to build into the model, as Mark articulated, was if we do know M&A, we will deploy more cash to share repurchases and reflected the benefit of that. We did not attempt to try to quantify what might acquired revenue look like because it would be a crapshoot at this point in time.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Sure. I mean, more specifically, maybe, given the volatility in the capital side of your business and I think you mentioned you'd like to see that reduced over time, maybe some color, does that get to that flip-flop, does it get to be 50-50 for you?

John J. Greisch

I'd love it to be less than half. Absolutely. That's the goal. I'd like our capital intensity to be less than half of our business and as we said a couple of years ago, if we can grow internationally, profitably, I'd like to see that move up from 35% to more than the norm that you guys see in the universe of companies you cover, closer to the 50%. But we're only going to do that if it makes sense from a profit perspective.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

That's great, and then to follow up on, I was just asking the stock question, where are we in the bed cycle. But I would like to understand -- you've talked a little bit about it, understanding there's going to come -- reimbursement pressure coming, as you've talked about, with Healthcare Reform in the U.S. Maybe if you could talk a little bit more about how we get to downward pressure in U.S. revenues in the capital side, what's really driving that?

John J. Greisch

Well, I think what we've seen in the last 18 months, is part of the answer to that question. We clearly enjoyed a pent-up demand benefit in late 2010 and through most of 2011. And as capital got squeezed or redeployed towards other uses, our product category has seen a decline. It will stabilize and then go up and down again as it has, to those of you who had followed Hill-Rom for more than the last 2 years, this is a cycle that we've seen for the last 10, 15 years. I think as you'll hear from Alton, our expectation is that the baseline number of beds in the system in the United States, we do not expect to change, that's been relatively flat for the last 5 to 10 years. We expect that to continue going forward with some upward benefit from healthcare reform and some downward pressure from reduced length of stays and the desire to get patients in and out of the hospital faster. However, we expect the installed base to be relatively flat and the replacement cycle over a period of time to be relatively consistent. But as we've seen, as capital dollars get squeezed, as life cycles get extended or as capital values get redeployed, we're going to have some volatility in the 60,000 beds a year that are replaced every year in the North American market.

Jonathan Demchick - Morgan Stanley, Research Division

Jon Demchick, Morgan Stanley. I just had a I guess quick question thinking about where we are today versus the last time we all talked, which sounds like the main adjustment was the downward revision and the revenue growth expectation, but the expectation for margin expansion is kind of still there, just as strong, and I'm just kind of wondering the ranges of margin expansion that we can expect given the new outlined -- outlook versus maybe if we would have a flat to slightly down organic growth outlook, which has been kind of what we've been over the last couple of years and we talked about a stable environment.

John J. Greisch

Yes. If you look at the last 3.5 years, the biggest margin pressures that we've had are really the amortization from the acquisitions and the device tax. Other than that, through some pretty choppy revenue cycles, we've expanded our operating margin close to 500 basis points. So I think we've demonstrated we will do what it takes in whatever the revenue environment is to continue to drive margins. This year is obviously an exception with the amortization and the device tax. We don't adjust out the amortization. We'd leave it in. Everybody doesn't take our approach but we think it's the right thing to do. So I think as Mark said, facility closures, continued SG&A reductions, portfolio mix enhancements, we still have some parts of the portfolio that are not up to where we want them to be. Those are all opportunities and leverage that we're going to continue to pull. If revenue environment is more challenging, that margin expansion is clearly going to become more difficult. But we'll address the actions as necessary, as we've done in the last 3 or 4 years. If I stand up here today relative to 2 years ago, revenue is not as strong as we'd hoped for. We got margin expansion faster than we thought we would, to be honest with you, if I go back to 2010, 2011. As Mark said, we got our SG&A under control in advance of what we thought we're going to do and sort of what we committed to The Street to do, and we've generated more cash flow than I think we had expect. So I've got a lot of confidence in this team and in our ability to continue to do what we've done, recognizing the external environment is no easier today than it certainly was 2 years ago, but we still got actions and leverage that we can pull to achieve the 300 to 400 basis point improvement that we've laid out there.

David H. Roman - Goldman Sachs Group Inc., Research Division

David Roman from Goldman Sachs. I was hoping you could talk a little bit more about the cost side of the equation. It sounds like from your presentation what you've identified here on the margin side are areas over which you think have a decent amount of control and are maybe divorced from the top line. And so maybe just talk us through specifically how you're getting to this margin targets with a sort of a tepid top line growth outlook. And then maybe to follow that, as you look more broadly your cost structure, what type of revenue growth is your current cost structure fitted to, is that really where the opportunity is?

John J. Greisch

I'll take the first question. And you'll hear some of this, David, in the remaining presentations. On the SG&A front, I'll speak to North America. We've got a structure in place that is going to change in terms of the focus areas of our North American sales force from a lot of feet on the street chasing the individual revenue opportunities and more towards, as you'll hear from Alton, a strategic selling, leading IDN-focused sales and marketing structure. That will result in some changes in our cost structure. Mark mentioned further G&A reductions as we either consolidate what we've got or put in place in Europe some shared services functions. All of those are going to contribute to continuing to drive our SG&A rates down. The 100 people that we took out in March was just the next step along the way to do that. There's not going to be one big bang where we get everything done at one time. So it's going to continue to be chipping away really across the organization while we're investing in areas that we need to continue to sure up. I mentioned our QARA organization as one of them. So it's going to be across-the-board and then together, not specific to SG&A, but together with SG&A, as Mark said, supply chain reductions, both on the procurement side as well as footprint consolidation opportunities.

What is our current cost structure directed towards in terms of revenue growth? We can support certainly more than single-digit revenue growth with our existing cost structure. And I'm confident that the leverage that we saw up until last year -- up until this year with the device tax and amortization penalties that we're incurring, the leverage that we saw in our SG&A structure over the last 2.5 years, we're going to continue to be able to get. So revenue growth, we can certainly support faster growth. If revenues, again, do not meet our expectations, we're going to have to take the knife out and go deeper.

David H. Roman - Goldman Sachs Group Inc., Research Division

And then one of the things that you alluded to in your prepared remarks about the top line was both trends in hospital capital spending as well as allocation of that spending towards other items and I assume you're referencing healthcare IT and maybe other high-end revenue-generating technologies. You talking about they're not being a bed cycle, but do you think at some point, as HAT get's further implemented and hospitals start to see some of the stimulus dollars come back, is there any reason for reallocation or you think they'll just use that as an offset to declining reimbursement?

John J. Greisch

Yes. I didn't say there's not a bed cycle. There clearly is a bed cycle. My comment was more regardless where we are in the cycle over the long term, we're going to generate what we've committed to generate. Yes, I think there's a chance we may see some rebound. We haven't seen it now. And as I've said in the earnings call, I'd love to stand up here and say we expect the big snapback in spending on beds. I think clearly, IT consumes some portion of hospital CapEx the last couple of years and as you mentioned, David, revenue-generating capital is priority number 1 for our customers. That said, on average, there are going to be 60,000 beds a year replaced and that will come back over time to a steady state for sure.

Robert M. Goldman - CL King & Associates, Inc., Research Division

Bob Goldman at CL King. I know we're going to hear more about technology later on today, but I didn't hear about trends in R&D expense plans or R&D to sales ratios, perhaps you could speak to that. And second question relates to compensation programs for these 100-plus senior managers who are relatively new. Given the new long-range plan, which is a bit more modest growth expectations from the last and sort of a renewed focus or greater focus on cash flow compared to the last, how the compensation plans of these 100-plus folks been altered to get them to sync?

John J. Greisch

Okay. Let me take the second one and I'll let Mark address the first one. Our compensation plan, I think, is very shareholder friendly, for one thing. And it applies to that team. Half of our long-term incentive is performance share units, which only pay out if we perform from at TSR perspective against our peer group. So it is a high-risk, high-reward plan and at least for my money, as shareholder friendly as it can get. It's purely based on TSR performance against the peer group. That's half of the plan. A quarter of the plan is stock option based and a quarter of the plan is restricted stock based. But it's 100% equity based for that top hundred executive team. And when our stock does well, the team will get rewarded. When the stock doesn't do well compared to the peer group, the team doesn't get rewarded. So there's no layups for the team relative to the long-term incentive. The annual bonus that we have has, over the last couple of years, it's either based on operating income, earnings per share for this team and ROIC in terms of how we're managing our balance sheet. This year 2013, it's based on revenue and EBITDA. So it's purely cash flow based, which again, I think relatively shareholder friendly since, as you guys well know, cash flow is what matters and that's how we get paid. So I think incentive plans, we've got very much focus on our long-range objectives and certainly on a high degree of equity performance, particularly with the TSR-based performance share plan. On R&D spending?

Mark J. Guinan

Hi, Bob. Thanks for the question on R&D. The last conference, we had talked about increasing our investment in R&D from where it had been, and I guess several years back, where it was below 3%. We have targeted a 4% to 5% range. We've now reached the 4% level, a little bit up above that depending on the quarter, and that's probably where we're going to settle out. So we're expecting to grow R&D in line with revenues going forward.

Lennox Ketner - BofA Merrill Lynch, Research Division

Lennox Ketner from Bank of America. First one on the margin expansion, sorry if I missed this. But I think in your previous plan, you expected most of the margin expansion to come from the international segment, kind of bringing those margins in line with the gross margin. It sounds like now the margin expansion, you expect to from more of a mix of U.S. and International. Is that a fair characterization? And if so, where are you now expecting International margins can get to over time?

Mark J. Guinan

Actually, most of the margin expansion wasn't coming from International. Given the size and scale of the profitability of the North American business, there was substantial margin coming from North America as well in our last long-range plan. It really have to come from both. I guess, proportionally, we're expecting a greater degree of improvement in International. So that's correct, Lennox. In the current plan, to get to 300 to 400, we're looking for, let's say, proportional expansion in all the regions with a little higher -- on the high end of that range coming from International. So about 1/3 of our margin expansion we're expecting to come from increased profitability in the International business, which is a little bit higher than Alejandro's segment. You may have seen in John's presentation, he had a geographical layout, which included Canada, which Alton has and some of the surgical business that Greg has. So geographically, we've got a little over 1/3 of our business internationally. From a segment perspective, which is what you all look at in our results, it's about 30%. And we're expecting about the third of the profitability improvement to come from International. So a little higher than its fair share.

Lennox Ketner - BofA Merrill Lynch, Research Division

Okay. But I guess the next question is do you still feel that International margins can look similar to U.S. margins over time or does that plan no longer assume that?

Mark J. Guinan

No. And certainly I would not have wanted to imply that previously. We've talked about closing the gap, as there are differences in the businesses fundamentally in those markets that would suggest you're never going to get our International business and its portfolio up to level of North America. So we're going to close the gap a little bit, but given the fact that we have, at the high-end of the 300, 400 coming from International and obviously somewhere in the midrange coming from the other businesses, there's not going to be substantial closing of that gap. International improved, but so are the other places, so the differential will still be somewhat substantial.

Lennox Ketner - BofA Merrill Lynch, Research Division

Very helpful. And then just one more. I think in your guidance, you assumed for the surgical and respiratory division, which is expected to be a good growth driver for you [indiscernible] low- to mid-single digits. But that business is under some pressure right now. I think that business, you said, is facing some issue from higher copays potentially. And then my impression of Aspen is the revenues have been flat to down the past few quarters. I'm just wondering if you can [indiscernible] what turns that business around and get it to that low- to mid-single digit growth range.

John J. Greisch

Yes. Revenues for Aspen in the first half of the year -- reported revenues are relatively flat as you've noted. On a sales per billing day were up modestly. There's been a, I think, 3 fewer billing days in the first half of the year and this is one of those businesses where billing days matter. Surgical procedures is, I think, everyone in this room knows, are down as we're starting 2013. That's having an impact on this business. I think if you look over time, we and most folks in the industry believe surgical procedures are going to continue to be in the low-single digit growth area. That, plus some of the product features that you'll hear from Greg, focus on patient safety and some price uplifts, we're going to get in the back of that. We're still very confident about the Aspen revenue growth, but you're right, the surgical procedure reduction right now has impacted that business.

Mark J. Guinan

Actually if I can just add on the respiratory because you referenced respiratory. Respiratory is largely a rental business and it's really -- the rental revenue in any given period of time is really an accumulation of patients that have enrolled over more than 1 year. So what we were seeing early in the year, where the impacts of the slowdown of patient referrals and enrollment that happened 6, 9, 12 months prior, now, as we were ported on last earnings call, we've actually seen an uptick and we're encouraged by more patients enrolling, but it's going to take a while for that to catch-up because there is a delay. I mean obviously, new patients in any quarter are only a small subsegment of the total revenue, you've got most of it coming from patients that are continuing on with us.

Paul Bornstein

Paul Bornstein, Black Diamond. You spoke a little about headwinds and cutting cost, but I'm curious on new products. How much margin improvement will you be getting out of your new products as they come on board to help offset that?

John J. Greisch

It's going to vary by product, obviously, but --

Paul Bornstein

Yes, obviously. I'm just looking at kind of a ballpark range.

John J. Greisch

I'd rather not quantify it specifically, but rest assured that as we're looking at our pipeline margin expansion from new products, is really a focus of our prioritization going forward. This isn't a pipeline-based company, but if you look at even some of our existing products, VersaCare, which is our biggest selling product in the portfolio today, we've continued to make enhancements to that product over the last several years, driving margins up by taking cost down, Progressa is going to be a product that's going to be a very attractive product for us. The Allen surgical table, Allen has done a great job -- or Allen Medical business expanding margins largely on the back of new product introduction. So I don't mean to dodge your question, but I'd rather not throw a number out there specifically, but as we bring new products out, margin expansion is a critical priority for us going forward.

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

I guess 2 financial questions, for Mark first. In looking at your LRP and the margin expansion that you've talked about from '13 to '17, how should we think about the linearity of that margin expansion? Or are there discrete items that we should be thinking about over the course of the next several years that may step it up at specific times. And also DSOs, again, you mentioned that you expect to get that down. So in terms of working capital, what mechanisms are you putting in place to actually continue to move those DSOs lower, and then I have one strategic one for John.

Mark J. Guinan

Thanks for the question, Larry. Let me address the DSOs first because that's pretty simple and straightforward. It's really tighter management around cash collections, having greater discipline to really drive consistent processes and implementing some tools. So it's a lot of doing more of what we've already been doing. Some of it, quite frankly, is as we look at the mix of the business, we're going to have less business in some of the more difficult collections areas, especially the southern cone of Europe. So not all of it is operational improvement, some of it is just an outcome of where our revenues are going to be. But majority of it is really by driving improved processes and continuing to do what we've been doing, really, over the last several years. On the linearity question, I think we've been cautious to say, don't assume, given the lumpiness of this business, that it's going to be linear. But there is nothing, I would say, that is monumental like a device tax or something like that. You should anticipate it's going to make one year dramatically different than another year. So I'd say within a somewhat tight range, depending on where we are, we hate to say this, but on the capital bed cycle for North America, other things, you're going to see a little variability, but it's certainly not going to be linear and you would expect that low teens every single year for the next 4 years through 2017.

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Okay. And then John, just on the international markets, you obviously mentioned your desire to continue to push the percentage of sales up that you generate out of the o U.S. market. I guess a 2-part question. What's the value proposition that you bring to those markets. I think we understand that in the U.S. it's more technology, it's reduction of patients falling out of bed, all the things that we talked about, IT connectivity. But what's the value proposition in the o U.S. market? And also, how much of it is sort of the geographic fill-in opportunity like Volker, where you're really just weren't present in the geography?

John J. Greisch

The value proposition isn't a lot different, to be honest with you, Larry. Whether it's patient falls, pressure ulcers, patient mobility, all of the things that mobilize patients and get them in and out of hospitals are the same objectives that our international customers have. So the value prop in total, very similar. The desire to buy up the technology chain is obviously less. Our average ASP in the VersaCare, TotalCare, soon to be Progressa, demand is less internationally than it is here. But I would say, generally, the value proposition with the portfolio that we bring to the marketplace is pretty comparable. In terms of geographic fill-in opportunities, nothing quite as glaring of a whole as we had in Germany. We spent a lot of time looking at expansion opportunities in the China's, in the Brazil's, Alejandro will talk a little bit about this. We've grown our business in those markets strong double-digit the last year's without any inorganic activity. And the acquisition opportunities for us in those markets in our space are fairly limited. So I think it's going to be continued planting of the flag, if you will, with more sales and marketing investments in those markets. I don't want to chase a big bed company in China, that's not going to be any margins to the bottom line. As Lennox's question was directed and as my comments were hopefully clearly focused, we need to improve the profitability internationally in chasing revenue at low margins. We did that with Volker for a purpose and long term, I'd do it again. I think it's the right thing to do for that market, but in other markets, not terribly interesting. So no big gaps that we see at immediate opportunity to fill. Any more before we get into the rest?

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Gary Lieberman from Wells Fargo. I guess the assumption is, at least by investors, that the Affordable Care Act is going to be materially beneficial for hospitals. So bad debts are going to come down. And so from a financial perspective, they're probably going to in the best shape that they've been in, in a number of years. There's going to be, in terms of what happens to utilization, but not many people thinking it goes down, people only thinking that it potentially goes up. So I guess I just want to question your assumption in terms of the conservativism of the relatively flat growth for the domestic business, because it would seem like if we were to pick up at any time over the past 5 or even 10 years, this will kind of be the time that it would.

John J. Greisch

I guess you just share with you not only our perspectives, but what I'm hearing and you'll hear from Alton here in a few minutes, what we are hearing across-the-board, which is the pressure that hospital chains are under, and again, you're assuming this is anybody, because of the change in reimbursement, which is certainly mitigating some of the increased volume expectations, nobody is looking at adding capacity from what we can see or from anybody else in the industry that we've been able to talk to. You're going to hear from Alton, virtually every single customer we have and that I and that he and the team interact with, are looking to take operating cost out of the system in big numbers, 15%, 20% reductions in their operating expenses because of what's happening to the reimbursement environment. I think for the most part, systems are expecting reimbursement over time to migrate closer to Medicare rates than private payor rates and that's going to put a squeeze on their margins like they've never seen before. So financially, I think hospitals are very worried about what their outlook is going forward and from a bed capacity perspective, I think the shorter length of stays, the movement of care to alternate sites, whether it's home care or other facilities outside of the acute care space, is what most people are planning for and I can't see today how that's going to drive the number of beds up going forward. I hope I'm wrong, but that's really the set of factors that have come in to our and I think other validated perspectives on the bed population.

Blair A. Rieth

I think that's it, John, for now. Okay. With that, let me turn the floor over to Alton Shader who runs our North American business. Thanks a lot.

Alton Shader

Great. Thanks, John. Good morning. Very pleased to be here today to describe the opportunities that we have in our North America business segment. But before I begin and because I've never addressed you all as a member of Hill-Rom's leadership team, let me provide you some details on my background.

I joined Hill-Rom in July of 2011 as the leader of our Post-Acute Care business. I then added the Acute Care business to my responsibilities about 1 year later when we combined the 2 groups into the current North America business segment. Previously, I was at Baxter in a variety of leadership roles, including General Manager of Baxter's U.S. Renal business, General Manager of Baxter Ireland and a number of senior marketing positions in Baxter's European operations in Zürich and in California. Prior to Baxter, most of my career was in the consulting world with Bain & Company. So with that brief introduction, let's get started.

My presentation along with Greg's and Alejandro's will follow the same general outline. I'll start with a brief overview of our markets, followed by a discussion of key trends and business drivers. I'll then describe the North America portfolio and highlight a number of recent accomplishments. Looking forward, I'll discuss our top business priorities and conclude with some key takeaways. Since over 90% of the revenue from North America comes from our acute care customers, I'm going to focus my remarks today on the acute care business and save the rest of the remarks on home care and extended care for another day.

We estimate that our addressable opportunity in North America acute care is approximately $2.2 billion annually. This represents both capital sales, as well as rental revenue, with rental revenue resulting from our customer's episodic use of specialized products. We also include revenue from Nurse Call communications technology, patient handling or lifting product, and our patient environment products, which include architectural products and healthcare furniture.

Our primary customers are the 5,000 acute care hospitals in the U.S. and 750 in Canada. We've also got a broad range of call points. These have historically required a large direct sales channel, and Hill-Rom has been recognized as having one of the top sales organizations in the industry. The sales effort is supported by a network of over 150 service centers from which our technician support, both our capital and our rental offerings. Later in my presentation, I'll discuss how these call points are evolving in light of the growing influence of integrated delivery networks or IDNs, and the growing need to adjust out channel to address this trend. And as you can see from the slide, with almost $1 billion in revenue, we have a significant presence in the North America market.

I'll now address a number of key trends that drive our business. Since 2005, the installed base of acute care bed has remained relatively constant at approximately 800,000. And we expect this stability to continue for the foreseeable future. As John mentioned in the Q&A, we estimate that the annual number of units replaced will be approximately 60,000. However, this number can vary considerably. This variability is what creates the lumpiness to which we sometimes refer.

Despite this annual fluctuation of bed replacements, we've been able to sustain consistent cash flow generation, as John and Mark described earlier. Furthermore, after several years of share loss in our core bed business, we've stabilized our share position over the past several years and grown share in several categories.

As many of you know, our acute care customers are consolidating and we estimate that the top 100 IDNs now account for approximately 45% of the U.S. bed market and if you include the VA as one system, it's considerably more. Over the next 5 years, we expect this concentration to increase. Also, based on our research, we believe that many IDNs will seek to reduce their supply chain costs by over 15% by 2015, also referenced by John in the Q&A. These trends have significant implications for the way we structure our sales channel and develop our selling capabilities. The need for more robust clinical and health economics data also becomes even more important. In other words, we must continue to develop solutions selling approach that addresses both clinical, as well as financial outcomes.

While this approach may be well accepted for other technologies, this is a relatively new concept in our categories and Hill-Rom is leading this effort. The implementation of the Affordable Care Act our ACA is changing the customer landscape. While much of the ACA has yet to be fully implemented, it is clear that both the ACA, as well as other pressure on reimbursement, will drive the need for providers to control costs, all the while improving the quality of care. Patient and caregiver safety, avoiding readmissions, reducing length of stay, shifting patients to lower acuity settings faster and the growing importance of patient satisfaction will all be focus areas for hospitals.

This refined focus of providers will have significant implications for Hill-Rom. Obvious questions include, will the impact of the newly insured entering the system be positive for Hill-Rom? Also, will this translate to more healthcare services being delivered and therefore, potentially more beds? If the increase of insured patients was occurring in a vacuum, then the answer would be, yes. However, due to other points listed on the slide, including hospital's focus on decreasing length of stay and increasing their bed utilization rates, we do not see the number of licensed beds increasing due to the Affordable Care Act. Therefore, our early assessment is that the puts and takes of these dynamics will be neutral for Hill-Rom.

New reimbursement schemes resulting from the ACA and other programs implemented by the Center for Medicare and Medicaid Services are driving customer behavior, and this provides a great opportunity for us. For instance, the total performance score can account for between 1% to 2% of hospital reimbursement. While this may not sound significant, it absolutely is. Operating margins for most hospitals are in the single digits and can oftentimes be negative.

Within the total performance score, patient satisfaction metrics, measured by the HCUPs contribute heavily. And Hill-Rom's products can play a critical role in improving these scores. Note that the incidence of hospital acquired conditions can result in a 1% penalty as well. These conditions include severe pressure ulcers, fall-related industry and hospital-acquired infections. Hill-Rom technologies provide significant solutions for a hospital focused on avoiding or reducing these events. As you'll see from our product portfolio, these are primary areas of focus for Hill-Rom.

I'll now briefly review our diverse product portfolio. As you probably know, we are the North American market leader in patient support systems, which includes med-surg, ICU and maternal bed frames, integrated and replacement surfaces and stretchers. All of our med-surg's and ICU products include the ability to connect into the digital network of the hospital. We believe this is a clear differentiator in the marketplace. The patient support system is the focal point for care in the acute environment and as the leader in the space, we leverage our position to provide clinical and economic solutions throughout the acute setting.

We entered the patient handling space through our Liko acquisition in 2008. These products are becoming standard equipment in hospital construction and renovations, as greater concern is placed on avoiding patient fall and caregiver injuries. An increasing number of states are mandating the use of lifts to avoid injuries and improve patient care. Our connectivity in Nurse Call communications technology provides the gateway for both voice communication and the transfer of device data into the digital environment of the hospital. Data can be streamed to a nurse station or to the patient's electronic medical record. And we've continued to advance our connectivity offering to enable hospitals to better utilize this critical data.

Our patient environment business includes our head walls and articulating booms, which coordinate the gas and electrical connections required at the bedside. This category also includes our patient room furniture.

Finally, our medical equipment rental business allows us to service customers with specialized equipment for episodic use or to help hospitals meet peak demand needs. I'd also like to mention our service center network and team because it's absolutely unique in the industry. It provides unmatched service and support, both for our rental portfolio as well as our installed base of capital equipment.

Our service center technicians are the face of Hill-Rom to many customers and they allow us to further differentiate ourselves in the marketplace. Recent accomplishments highlighted here are aligned with the strategic focus areas that John discussed. I just mentioned the value of our service network. Over the last 12 to 18 months, we've also spent a great deal of effort to optimize our service center footprint. This infrastructure is one of the important differentiators for Hill-Rom and we've been able to reduce our footprint by over 25% while keeping the same high level of service we've always offered our customers.

Over 1 year ago, we identified approximately $100 million of revenue in our portfolio that was marginally profitable. Our Home Care Group 2 surface rental business was one of those areas as was our IT or nurse communications business. As announced 2 quarters ago, we exited the unprofitable Group 2 business. In contrast, we pursued extensive reengineering to improve profitability of our IT business and it has been successful. We are very pleased with the results to date and future prospects of this business are exciting.

We've also established new clinical and health economics capabilities. Recognizing the importance of cost effectiveness and other clinical outcomes data for our customers, we begin investing in both people and resources to produce meaningful clinical data. We are currently developing rigorous studies that support the application of our technologies to some of the most challenging problems faced by our hospital customers.

In North America, we expect our current revenue to grow annually in the low-single digits over the next 5 years. As Mark mentioned earlier, this will reflect share gains from new products and a more effective channel presence, partially offset by headwinds from the environment and cost-containment pressures. The 3 business priorities we will pursue to support this growth include: Commercial excellence, operations improvement and new product development. Over the next few slides, I'll provide more details on each. Also these initiatives support our focus areas of leveraging the channel, people excellence, innovation and financial excellence.

The first aspect of achieving greater commercial excellence is recognizing the changes to our customer base. Specifically, the top 100 IDNs will continue to consolidate, ensuring an even greater proportion of our business will come from fewer customers. How these IDNs make decisions is also evolving. We expect hospitals to increasingly coordinate and centralize purchasing decisions to optimize clinical outcomes, all the while attempting to lower their costs. In response, we began to restructure our North American sales channel. We've created a strategic partnership team to coordinate with IDNs to determine their needs and then work closely with them to develop optimal solutions from our diverse portfolio of products and services.

Continuing with commercial excellence, we believe we are uniquely qualified to provide differentiated solutions for our customers. In addition to the most diverse product portfolio in our segment, we support the portfolio with a best-in-class sales and service infrastructure. IDNs and other customers also seek clinical support from suppliers to help improve outcomes and reduce costs. Hill-Rom has over 80 clinical directors in the field, many of whom are nurses, to consult with customers about protocol and other cutting-edge solutions. A critical component to improving our commercial effectiveness is providing these clinical leaders with evidence that our products improve care. We must provide evidence that our products work as intended and further supplement this evidence with active support from our clinical team.

Moving forward, we will also increase our investment in producing evidence-based support for solutions related to progressive mobility, pressure ulcers, falls reduction and improved infection control. Operations improvement directly supports our effort to expand margins to increase efficiency and productivity. While we've already made improvements in this area, there's still much work to be done. We've introduced systems designed to provide better visibility in the utilization and profitability. And as we've shown in the past, we are willing to exit businesses or product lines that are not contributing.

We are taking pages out of the UPS and FedEx playbooks to improve our logistics efficiency, including installing a sophisticated GPS-locating system in our fleet to optimize routing and delivery schedules. We also continued to evaluate our service center footprint to determine the optimal number and location. We have piloted and continued to expand warehousing high-volume high rental items on-site at our customer's locations. This reduces delivery and pick up activities, thus leading to reduced costs, and oftentimes, higher customer service metrics. 2 years ago, we disclosed our plans to develop a brand-new patient support system designed for use in the ICU. And I'm very excited to introduce to you Progressa. This is a global platform and will be launched first outside of the United States. So I don't steal Alejandro or Brian's thunder, I'll let them tell you more about Progressa later this morning. But I will tell you that my entire team and I are extremely excited about launching this product in North America over the next year.

We're also launching a new hand hygiene system later this quarter. Customers are looking to reduce hospital-acquired infections, both through improve clinical outcomes and to avoid reimbursement penalties. Many studies support the notion that hand hygiene is the most effective way to reduce hospital-acquired infections. Our system utilizes locating technology to track hand hygiene events and record every instance a caregiver visits a hand hygiene station across the hospital. The system monitors compliance provides reporting tools and can even send a reminder to an individual caregiver when they enter a patient area without practicing proper hand hygiene.

Further, we plan to launch the next-generation NaviCare Nurse Call system in the coming months. This version automates a variety of protocols related to patient safety, as well as to provide improved tracking of nurse rounding and real-time locating systems.

Finally, as previously mentioned, we will support our solutions to the development of clinical cost effectiveness data and other health economic studies. We have increased our investment in clinical resources including experts in protocol development and clinical trial administration, and we are excited to see the results from these efforts in the future.

In closing, we believe the customer landscape in North America will continue to change dramatically over the next several years. IDNs will become much more influential on our space, with more centralized structures focused on clinical and financial outcomes. In response, Hill-Rom will continue to develop solutions that reflect this evolving customer. We must become problem solvers and craft solutions that allow customers to provide better and more affordable health care. And while we will continue to face considerable headwinds in this marketplace, I could not be more excited to lead a best-in-class organization that is ready to execute on our business priorities of commercial excellence, operations improvement and new product development, all of which will support our organic revenue goals through 2017.

Thank you very much for your attention. At this time, I'd like to introduce Greg, who will take you through our Surgical and Respiratory Care business.

Edward Gregory Pritchard

Thank you, Alton. Good morning, everyone. It's a pleasure to represent the newest and fastest-growing segment of Hill-Rom. Also, as the newest member of John's management team, let me take a moment to tell you little bit about my history in the medical device industry. I joined Hill-Rom about 10 months ago as part of the Aspen acquisition, where I served as President and Chief Executive Officer. I've spent over 32 years in the health care industry, serving in management positions at American Hospital Supply, Baxter, Allegiance Healthcare and Cardinal Health. I served as President of the Midwest region for U.S. distribution at Allegiance, and led the respiratory care business at Cardinal Health. So with that brief introduction, let's get started.

As I would detail later, Hill-Rom Surgical and Respiratory Care segments include a diverse array of product categories covering consumables and disposables in the operating room, wound care products, surgical positioning technology, respiratory health and infection control. Collectively, these categories represent a large opportunity for Hill-Rom, totaling approximately $20 billion.

While my remarks will focus on our organic business, we believe this is a segment that we can best serve as a platform for future bolt-on acquisitions. In the fiscal year 2012, Surgical and Respiratory Care segment accounted for $153 million in revenue. This represents only a few months of Aspen contribution since the acquisition was completed in July. On a pro forma, full year basis, this segment would amount to approximately $245 million, which gives you a little bit better idea of the size relative to market opportunity.

So what drives demand for our products? I've highlighted several of the drivers and associated U.S. statistics here. But keep in mind, these dynamics exist globally. Medical errors drive the need for proper patient and surgical site identification. These so-called never events also factor in the outcome based reimbursement, as Alton described earlier. Patient and caregiver safety includes everything from sharps injuries to falls involving both patients and health care workers.

For instance, sharps injuries may involve scalpels, hypodermic needles and suture needles. Legislation has been passed to mandate sharps injury prevention, yet sharps injuries in the operating room continued to increase 6.5% annually. Our portfolio includes products that can effectively prevent sharps injuries. All hospitals are focused on readmissions. As you saw earlier, there's already a 1% penalty moving to future of no payment for 30-day readmissions associated with certain cardiac conditions and pneumonia.

Hill-Rom's Airway Clearance technology, such as The Vest and MetaNeb, may reduce the chance of readmission for pneumonia patients just charged with pulmonary dysfunction. Demand for our respiratory therapies may also be expanded through the additional indications and reimbursement for several underpenetrated at-risk populations. So we believe these trends will support market demand that will continue to grow at a healthy rate. As you will see, we believe we can grow at a rate that exceeds segment growth as a result of increased penetration and adoption of our existing and new technology.

Now let's turn to more a in-depth description of the portfolio. As you can see here, last year, the annualized revenue of the portfolio was about $245 million. We don't regularly report revenue breakout at this level of detail, but as you can see here, Aspen is about $120 million, our Respiratory Care revenue is roughly $80 million, and the Allen Surgical Positioning business is about $50 million in size. Aspen products are ultimately used in the hospital setting, but call points include the end user and the surgical suite, and also custom kit manufacturers and distributors.

Part of the secret sauce that has made Aspen successful is the ability to combine the pull created by a small direct sales channel calling on the OR, and the push driven by the inclusion of our products in a private label kit channel and via distributors. This kit manufacturers and private label partners are looking for a reliable, high-quality and cost-competitive suppliers. Aspen excels at that.

As you can see, the primary focus is on products keeping patients and caregivers safe. Products to avoid sharps injuries; slips, trips and falls; products to enhance ergonomics; products to avoid wrong site and wrong patient surgeries. The leading product in this portfolio is the Bard-Parker scalpel family. These are the most widely used scalpels in the world and typically, a surgeon preference item. Recently, Bard-Parker has pioneered a line of safety scalpels that has accelerated segment growth, as surgeons convert to safety scalpels to avoid sharps injuries.

Colby is a leader in providing fluid waste management. Colby provides a family of suction and vacuum-based products, along with absorbent maps, to remove and contain surgical fluids. The WriteSite+ Surgical Marking Pen is a key tool for surgeons to identify patients and mark surgical sites, pre and perioperatively. Aspen's pen is formulated to be used with the core prep product, which makes it possible for surgeons to mark patients well in advance. These markings will even withstand the rigors of an intense preoperative scrub.

Another family of branded products is the Richard-Allan Surgical Needles, the leader in this category. These products are manufactured at our U.K. facility using high-quality stainless steel, and are used not only for routine suturing but can penetrate bone and cartilage. As I mentioned before, we also have a wide variety of private label operating room accessory products we supply to surgical kit manufacturers. Providing high-quality, consumable or disposable low-cost products, focused on safety of the patient and caregiver in the surgical setting, is the common thread that connects all of these products. These types of products are used in every surgical procedure.

Hill-Rom has been in the surgical positioning business since our acquisition of Allen Medical in 1999. Our Allen Surgical Positioning business is focused in the OR suite as well. This legacy Hill-Rom business also is an OEM supplier of certain products. Allen has a direct sales channel calling on surgeons and/or managers. Allen's products are use to position patients in a variety of intricate, neurologic, spine, gynecologic, arthroscopic, general and orthopedic surgical procedures. Allen first become widely known for its lithotomy positioning supports and has since expanded into many other specialty procedures.

All of these products bring both safety and efficiency value to the surgical team and patient. Allen's Hug-U-Vac is shown here in the upper right side of the slide. It's a great example of innovative engineering. The Allen Hug-U-Vac Steep Trend Positioner is used for positioning patients in the steep Trendelenburg position for surgical procedures.

An exciting development is unfolding as we speak with the launch of Allen's new Advance Table shown in the upper left. This innovative product provides an advanced surgical platform for complex neurologic and spine procedures, an important differentiator that Allen's new Advance Table brings to the market is the ease of providing both posterior and anterior surgical access, while the patient is either in the supine or prone position. It challenges the long-standing incumbent and creates the most comprehensive neurospine portfolio in the category, joining the Allen Flex Frame and the Allen Bow Frame offerings.

Allen's success over the years has resulted from an intimate immersion with customers to understand their needs and shortcomings of current offerings. This process of lengthy surgical observation is being expanded into other product development programs within Hill-Rom. Brian will speak more to the customer immersion later this morning.

Finally, our Respiratory Care business is focused on approximately 1.6 million patients in the U.S. who have chronic respiratory diseases. The most highly penetrated population of our technology is cystic fibrosis patients. Other populations include neuromuscular disease patients with compromised pulmonary function. Our Airway Clearance products are ordered by pulmonologists and respiratory therapists usually for chronic use in the home. However, this is growing acute care used in many hospitals.

Today, this is primarily a U.S. business with a direct sales force calling on prescribers and assisting patients. Unique to this business is Hill-Rom's extensive third-party payment infrastructure to enable proper patient qualification and insurance payment.

The 2 primary products that comprise our current offering are focused on Airway Clearance for patients who have compromised pulmonary function. The goal, primarily, is to loosen pulmonary secretions, such as mucus, so that it can be evacuated. The Vest is the flagship product of this portfolio. It delivers automated, high frequency chest wall oscillation via compression, percussion and vibration. This therapy is tailored to the individual plot patient and eliminates the need for manual respiratory therapy, which is usually delivered by a respiratory therapist.

For the patient and other family members, this therapy can be more convenient, comfortable and effective compared to other therapies. This product is usually rented for chronic use and a doctor's prescription is required. The Vest is covered by most third-party insurance programs. Along with The Vest, Hill-Rom offers the MetaNeb system. MetaNeb is a therapeutic device that helps enhance normal mucus clearance, and resolves and prevents incomplete long expansion. Patients who may benefit include those with asthma, COPD or cystic fibrosis. MetaNeb offers 3 therapies in 1: lung expansion, secretion, clearance and aerosol delivery. It can also provide supplemental oxygen when used with compressed oxygen.

So now that you're more familiar with our markets and our product portfolio, I'd like to cover some of our recent accomplishments. Perhaps the most significant accomplishment was the acquisition of Aspen completed in July of 2012. With Aspen, Hill-Rom was able to complement our Allen Surgical business. The acquisition added a portfolio of well-established surgical consumables and specialty medical products, focused on improving patient and caregiver safety.

As John stated at the time of the announcement, Aspen further expands our global portfolio beyond our core franchise with a business that is immediately accretive to earnings per share and adds recurring revenue to our existing surgical platform. We see Aspen as a platform, which we can continue to add complementary products and further diversify Hill-Rom's portfolio.

Other notable accomplishments include the establishment of a new Aspen direct sales channel. In the launch of several new products across Aspen, Allen, and Respiratory Care portfolios, some of which are shown here. Overall, Hill-Rom has established a platform of faster-growing, high-margin businesses that are less influenced by capital cycles. We expect to build on this platform going forward.

Now I'd like to highlight a few of the business priorities that we plan to pursue going forward. For Surgical and Respiratory Care, the priorities include continuing new product development, driving commercial excellence and efficiency, and improving operations. I'll drill down in each of these in a moment.

As I mentioned, the Surgical and Respiratory Care businesses represent higher growth and margin opportunities for Hill-Rom. These initiatives should help us grow organic revenue at a mid-single-digit rate over the LRP period. We see these initiatives supporting our strategic focus areas of innovation, leveraging the channel and financial excellence.

As John pointed out, new product development is important across the entire Hill-Rom enterprise, but this is especially true in Surgical and Respiratory Care, where it will be a significant contributor to our success. Aspen will continue to supplement its portfolio for our direct private label and OEM offerings. We plan to capitalize on the growing focus of safety and leverage the leading brand recognition of Bard-Parker and Colby. For Allen, the new Advanced Table represents an important product addition over this period. We also expect to expand offerings into adjacent positioning segments, such as orthopedics.

As John mentioned, we got some exciting news regarding 510k clearance of our MetaNeb 4.0 product. This allows for further expansion of our Airway Clearance technologies into adjacent pulmonary disease states. The natural synergies and common call points between Allen and Aspen, along with Hill-Rom's global presence, will allow us to expand international direct and distributor channels. We also plan to expand business with OEM and private label customers. Further, we expect to leverage our call point by coordinating certain activities between Allen and Aspen. In other words, we want to make sure we have the right product in the right bag.

In Respiratory Care, we are planning several health economic studies to support the therapy and expansion in the targeted disease states. Also, we believe we can improve our sales force effectiveness via targeted skill development. An expanded focus on addressing Airway Clearance issues in the outpatient setting in order to reduce hospital admissions will also come. With the advent of accountable care organizations and reimbursement penalties for readmissions, we will pilot programs to target prescribers and therapy influencers outside of the hospital.

Operations improvement directly support our effort to expand margin through increased efficiency and productivity. At Aspen, there is still significant opportunity to leverage Hill-Rom's manufacturing expertise to improve manufacturing operations. We will improve efficiencies regarding materials, labor and inventories. Further, vertical integration and in sourcing, the manufacturing of select products, will also improve operations and profitability.

In Respiratory Care, we have identified and targeted several opportunities to streamline third-party claims processing. Improving the efficiency of converting a patient referral to an approval for therapy, should allow us to consolidate back-office operations and speed payment.

To wrap things up, we expect our Surgical and Respiratory Care portfolio to be driven by factors that play to our strengths, patient and caregiver safety, reducing medical errors, lowering readmissions and improving productivity. Additionally, we plan to drive Airway Clearance therapy for other chronic disease states. The end markets of our products appear willing to support both higher growth and margins. For many hospitals, the operating room is still a primary revenue generator and profit center that supports the use of high-value added products.

For respiratory care, our Airway Clearance products have the potential to reduce readmission caused by pulmonary complications and drive expanded use of our therapies over time. We have a robust development engine that Brian will detail later, that will continue to introduce new and differentiated products in many categories to drive organic growth. And finally, and perhaps most importantly, this segment is where we have the greatest opportunity for diversification into product categories with reoccurring revenue streams.

Thank you for your attention. At this time, I'd like to introduce Alejandro, who will take us through the international business.

Alejandro Infante Saracho

Thank you, Greg. Good morning. I'm very pleased to be here today to describe Hill-Rom's growing international segment in more detail. My presentation will follow the same form as in the North American and the Surgical and Respiratory Care section, focused on the international opportunity, portfolio and recent accomplishments, before concluding with our business priorities over the LRP.

We estimate that our total addressable international opportunity is approximately $2.3 billion. This figure expands in geographies we currently serve, either directly or indirectly in Western Europe, Asia Pacific, Eastern Europe, Middle East and Africa and Latin America. Similar to North America, we market acute care products in target hospitals as our primary customers. In addition, through the Volker acquisition, we also market specific portfolio of products to long-term care facilities, primarily in Europe. Both segments, whether clinicians, procurement officers, administrators and contractors or packagers. Contractors, packagers and turnkey operators are especially important in the growing markets of the Middle East and Asia-Pacific, where early interaction and our broad portfolio are a critical to our success.

Our addressable opportunity compares to international Hill-Rom revenues of approximately $500 million during our last fiscal year, which have grown at an organic growth rate of approximately 6% over the last 3 years. The $2.3 billion total opportunity, obviously, indicate Hill-Rom to continue our recent path of growth and expansion. However, it is important to note that each region is significantly different and we face both puts and takes in each geography.

As you're well aware, recent austerity measures in Western Europe have adversely affected health care spending. While a surgery cost can reduce in severity, several factors including the limited European GDP growth anticipated over our LRP period and permanent changes in procurement dynamics will limit increases in public health care spending. But at the same time, Western Europe's population continues to age. While limited economic growth certainly restricts health care expansion, the demographic challenges and increasing patient activity will have to be addressed by the various national health care systems, and will ultimately create opportunities in both acute and long-term care in these markets.

Eastern Europe has not been immune either to global economic challenges and it has reduced, what was until very recently, a robust growth rate attached to public health care investment. As I'll discuss a little later, because of Hill-Rom's leading global position, we have been able to benefit from the robust growth in this part of the world.

On the other hand, while the reduced investment in Europe create challenges, we continue to see robust health care investments in the Middle East, particularly Saudi Arabia and the Gulf states, as these governments build out new facilities to increase health care access for their growing population.

We face a strong local competition in the Asia/Pacific region and Latin America, particularly in China and Brazil. These countries tend to favor national manufacturers and impose high entry barriers. While local competition certainly receives preferential government treatment, the markets remain highly fragmented.

Further, the upgrades and expansions happening in Level III and few hospitals in major cities, and the appreciation for globally recognized Western brands afford Hill-Rom an opportunity to capitalize on its broad global reach.

As you can see from the map, our global reach includes direct sales forces in 18 countries across the globe. Additionally, we have distributor partners in nearly every major market supported by a growing local infrastructure. Furthermore, we have 13 manufacturing facilities located across North America and Europe. It's worth noting that 7 of these facilities were acquired in the last 5 years.

As I'll discuss a little later, though our reach is broad, we believe we can further optimize our footprint to drive profitability and increase shareholder value. While we face different primary competitors across geographies, Hill-Rom maintains a leading global presence in the acute care patient room. We operate in highly fragmented markets with multiple local and regional competitors, where a global brand and depth of experience are critical in breaking through these fragmented markets.

We have identified 4 countries or regions for priority investments going forward, which you'll see here dark blue: Mexico, Brazil, China and Saudi Arabia and the Gulf states. You may recall, these were the same 4 focus countries identified 3 years ago, and in a few moments I'll discuss some of the successes we have already experienced in these geographies.

Since 2009, these 4 geographies kept growing at a compound annual growth rate of nearly 24%. We have made substantial progress growing our local presence and building customer relationships in each of these regions, where further opportunities exceed for continued growth.

Similar to North America, we have an extensive portfolio spend in the acute care patient room. We have a full line of stretchers, an array of furnitures to address patient environment needs, including overbed table, from bedside cabinets, a full line of med-surg, ICU and bariatric frames, therapeutic services for both capital sales and rental, ranging from low- to high-risk pressure ulcer patients, as well as a complete line of patient handling products including overhead and mobile lift under the Liko brand name. We enjoy a strong competitive positions across Western Europe and various other countries and regions, including the #1 position in med-surg frames, #1 position in ICU frames and the #2 position in patient handling.

Additionally, via our acquisition of Volker last year, we commercialized a full line of products to both the acute care and the long-term growth segments. This include an assortment of frames and surfaces, as well as complementary furniture to enhance the patient environment. The acquisition of Germany-based Volker in February 2012 has given us taxes to a premium line of platform frames and surfaces with innovative technology, such as the vis-à-vis bed depicted in this slide, which facilitates patient's mobilization and direction with the caregiver.

While many of our product categories are similar to North America, it is important to note that the products can be very different, not only from North America but also within the international portfolio. While we have a leading global presence within the acute-care patient room at Hill-Rom, our portfolio is not a one size fits all and our global offering often varies by region. Hospitals in various countries may have different needs resulting from diverse patient populations with a wide range of acuity levels and length of stay, different funding or reimbursement systems or public versus private ownership, to name just a few.

The breadth and reach of our portfolio is intended to address the completeness of our global customers. On this slide, you can see the H-R 900 with the split side rails, our frame which we successfully launched in fiscal year 2011. The H-R 900 is marketed across Europe and the rest of the world to acute-care customers and it has been enthusiastically accepted by clinicians due to its simplicity of use and its benefits in patient fall prevention through innovative features such as the proprietary nightlight that allows the nurse to verify at a glance that the bed is in the safest position at night.

We also offer the Volker S962, a frame sold in acute-care patient room on Berlin, Germany and now in Europe and the rest of the world. The Volker S962 bed is particularly attractive to acute-care facilities catering to elective surgery patients and VIP rooms.

While both beds are marketed to similar customers, they appear very different and have very different needs. As we continue our expansion into emerging markets, we're focused on developing specific solutions to address the needs of this fast-growing segment. As Bryan will talk about shortly, our R&D group remains committed to developing affordable solutions aimed at the high volume value segment in various product lines. We're excited about the opportunity this program represent and believe this will only further entrench our leading global position across the acute-care patient room.

Since our last Investor Day, our leading global position has increased in strength. The chief component of this has been the acquisition of Volker. Volker represented an opportunity for Hill-Rom to solidify our position in Western Europe, particularly in Germany, the largest European market health care market while also accessing the growing long-term care segment with a specific portfolio of products.

As I discussed earlier, the change in demographics of Europe will continue to fuel growth in the long-term care segment. Since its acquisition, we have successfully leveraged our channel, commercializing Volker's portfolio in Europe and the rest of the world. We have successfully consolidated our legacy Hill-Rom German business into the Volker facilities and expect to realize further benefits from the acquisition as we finalize its integration more fully into our European business.

Our International business has been further strengthened by establishing our international headquarters in Amsterdam, consolidating the leadership team in one location. This has allowed for increased coordination and efficiency across the international organization. In addition to investing in our new headquarters, we've made investments in our regional management teams in our regional offices in Dubai, Singapore and Miami. We have strengthened our local emerging market presence by expanding our team of sales managers, clinical advisors, technical and services specialists to complement our strong, existing distributor partners.

These investments have yielded considerable success including large vendor wins in Saudi Arabia and the Gulf states during 2011 and 2012 and a significant hospital modernization contract in Russia in 2012. At the same time, we have seen strong growth in countries like China and Brazil.

Emerging markets have generated a compound annual growth rate of 28% over the last 3 years. These wins were due to our local infrastructure investments in collaboration with our distributors and Hill-Rom's leading global position and broad portfolio in the acute-care patient room.

Moving forward, we hope to continue our recent success by executing on 3 business priorities during the LRP period. These initiatives are aimed at improving our financial excellence and profitability, specifically in Europe, continuing the investments of previously as discussed in emerging markets to fuel international expansion and leveraging our global reach end channels more effectively. These actions will continue to drive international growth in the low to mid-single digits.

The majority of this growth will come from our continued investments in emerging markets with double-digit growth in our focus countries and limited growth from Western Europe given the market conditions previously discussed. The majority of International segment is concentrated today in Western Europe, we expect a combined low to mid single-digit growth rate.

John discussed earlier our main international priorities to improve European profitability. European margins continue to lag behind corporate average. We're confident we can decrease this gap through a number of actions including leveraging existing infrastructure and continuously redeploying resources to higher growth, higher margin segments.

We currently have 36 service centers or hubs across the continent and similar to North America, we're constantly evaluating their utility and profitability. As I mentioned earlier, we have 13 manufacturing facilities across the globe. Of those 13, 7 are concentrated in Western Europe. We are committed to simplifying our supply chain footprint and removing overhead cost to further optimization. Finally, we continue to evaluate our business on a segment-by-segment and country-by-country basis. Similar to our service centers, we constantly monitor profitability and actively assess alternative go to market and back office support models to increase profitability.

While improved profitability is our top priority, our second priority is expanding operations in emerging markets and specifically, our four focus growth countries of China, Saudi Arabia, Mexico and Brazil. We will do this by first, investing in local resources to complement our strong distributor partners in these countries. Having a local infrastructure allows us to better assist the market needs, improve customer intimacy and build long-term relationships.

Second, we will continue to promote the clinical value of our products and our clinical research via educational programs and targeted marketing campaigns aimed at communicating our value proposition and helping our customers improve patient care in a cost-effective way. We believe this serves as a significant differentiator to our competitors. And while we continue our early customer engagement programs, specifically with contractors, packagers and operators, to stay ahead of the curve on the new construction opportunities and provide a competitive advantage through our broad portfolio and consultative sales approach.

Last, we'd like to further leverage our global channel as well as global portfolio. We will continue to shift additional resources to sales in clinical specialists dedicated to selling some of our higher-margin products, including our lift portfolio, as well as the recently introduced ICU patient support system, Progressa. As Alton mentioned earlier, we introduced Progressa at Arab Health in January and we'll begin commercial shipments later this summer. Progressa is an important platform for profitable growth for Hill-Rom and its launch in Dubai highlights the significance of international market.

Progressa represents a significant R&D achievement and Brian will describe its innovative features in more details in a few moments. In addition to shifting resources across products we will launch continue to shift resources across geographies. We continue to evaluate the profitability of our individual countries not just in Europe, but around the world, and we'll actively assess alternatives to maximize profitability.

Throughout our discussion, I will again highlight Hill-Rom's leading global position in the acute-care patient room. Our opportunities vary widely by geography with a mix of drivers from government authority and healthcare investment to aging population and increasing patient acuity levels. We see strong potential for growth in our focus countries and emerging markets but limited growth in Europe during the LRP period. That growth potential is driven by Hill-Rom's strong global brand equity, channel reach and broad product portfolio to address the complete needs of our global customers.

Improving profitability in Europe remains a high priority for us and is key to our success and shareholder value creation. We plan to further leverage our existing infrastructure both service and manufacturing and reduce our supply chain complexity in ways that yield tangible increases to shareholder value.

Thank you for your attention and I will be happy to take your questions during the upcoming Q&A panel. And at this time, I like introduce Brian who will take you through our research and development plans.

Brian Lawrence

Thank you, Alejandro, and good morning. I'm excited to be here today to provide greater insight into Hill-Rom's research and development strategy and how our efforts to develop new and innovative solutions will enable us to further enhance outcomes for patients and caregivers everyday.

Now as you have frequently heard this morning, the breadth of our portfolio and the solutions that it enables remain a key differentiating factor for our customers. Creating new and innovative products is essential to not only maintain but to expand our strong competitive positions that you have heard described throughout the day.

During the last 3 fiscal years, we have introduced over 70 new products across our portfolio, including key products in our frames and surfaces, patient handling devices and surgical positioning solutions. Now, new products and product enhancements had contributed roughly 1/5 of Hill-Rom's revenue in 2012. And as you can see, we are focusing our R&D efforts on key programs with fewer new product launches, but with average new product revenue that has more than doubled over the last 3 years. Ultimately, this positions us to grow through continued investment.

Simply put, innovation has been critical to Hill-Rom's growth and success in the marketplace. And our ability to address unmet customer needs through innovation will continue to be a key driver of our success. Given the importance of research and development as the key element of our growth strategy, we will continue to invest in our R&D capabilities across the globe. Today, we have 7 major R&D centers spanning North America, Europe, and Asia with over 500 staff working together as one global team.

Over the LRP period, we expect R&D spending to grow in line with revenue, resulting in low single-digit R&D growth as we continue our focus on innovation. Going forward, we plan to leverage our global R&D footprint to access broader talent pools in major technology hubs such as Boston, Singapore and the Research Triangle. Our goal must be to evolve our R&D capability by attracting critical talent, refining and improving our processes and investing in advanced technologies to address critical, unmet customer needs and drive our growth in the future.

Now as you've been hearing about all morning, our customers are facing the difficult challenge of delivering better care with fewer resources in an extremely cost-conscious environment. We can help them do this but more importantly, we must help them do this. It is with this challenge in mind that we see 3 significant factors that drive our approach to innovation. Along with our customers, we are committed to improving patient safety. In our 2012 international pressure ulcer prevalence study involving nearly 1,000 hospitals, we observed approximately 15,000 pressure ulcers in a sample population of 100,000 patients, 35% of which represented hospital-acquired conditions. And these are not reimbursable if classified as stage 3 or stage 4 pressure ulcers.

Our goal is to continue to develop products that not only address these wounds when they occur, but actually reduce the factors causing these conditions and ultimately, create better outcomes. In an environment of constrained resources, caregivers increasingly have to do more with less, potentially impacting not only efficiency but caregiver safety as well. In fact, according to a 2011 study by the Department of Labor, there was a 10% increase in the incidence of musculoskeletal disorders impacting nursing aides, orderlies and attendants adding burdens and costs to our customers in the form of Worker Compensation claims and decreased caregiver efficiency.

We must continue to focus on the design of products that improve caregiver safety, that increase caregiver efficiency and that ultimately result in a better environment for caregivers and lower costs for our customers.

We also recognize the challenging economic environment that our customers face around the world. And we are focused on providing real solutions that can deliver measurable value. As a result of the Affordable Care Act, over the next 10 years, hospitals will be forced to face over $300 billion in Medicare fee-for-service cuts and reduced funding, forcing providers to look for more economic solutions.

As you'll hear in a few moments, we recognize that differentiation alone will not drive our success and that our products must be designed to deliver the right value at the right cost. Now consistent with our continued focus on innovation, we have recently introduced several notable products. Our new ICU patient support system called Progressa that both Alton and Alejandro discussed earlier today, represents our critical step in the next generation of patient care. It includes patented stay-in-place technology to significantly reduce patient movement and surface migration during articulation. This technology can dramatically reduce both patient skin shear or friction, as well as the need for caregiver-assisted patient adjustments, thereby improving patient outcomes and reducing the risk of caregiver injury.

Progressa includes our next-generation data connectivity, which supports bidirectional data communication and can both send important information to a hospital EMR, as well as bring decision-critical data directly to the point of care. Progressa also incorporates a fully integrated and customizable surface, including advanced wound and pulmonary features as well as support for enhanced patient comfort.

Our recently introduced Allen Advanced table is a standalone surgical table specifically designed for complex neurological and spine procedures. It includes the ability to rotate patient in situ during surgical procedures to allow for both posterior and anterior surgical access without the need for time-consuming undressing and redressing of the patient. The Advanced table also includes advanced interchangeable tabletop attachments and electrically locking casters to improve patient safety during surgery and reduce potential for caregiver injuries and improved efficiency in the OR.

We also recently launched the latest version of NaviCare Nurse Call Offering. NNC 3.2 includes a platform reporting function, our next-generation remote audio device, enhanced wireless capability and inbound alerting with specific staff assignments. We have also added design capability to streamline customer installation, all of these features were created to enhance caregiver patient communication, improve workflow and caregiver efficiency and reduce setup time and cost.

Now these new products represent a sample of the recent innovations that we have introduced over the last year. And successful new product development is a highly collaborative effort encompassing our R&D, supply chain, marketing and quality and regulatory teams. However, even within R&D, we must augment the traditional engineering-driven approach with additional capabilities. As customer needs change and evolve, we are leveraging global design to rebuild our intimacy with customer environment and establish a vision for how we can drive value today and in the future.

We also incorporate early innovation efforts to maintain a robust pipeline of new, advanced technologies that can enable critical new capabilities or existing functionality at breakthrough cost or simplicity. We combined global design and early innovation with our product engineering efforts to create a triad capable of delivering differentiated products to drive value in the changing healthcare environment.

Now product development has always started with an understanding of the customer, and nearly all of us have been there, either as a patient ourselves or with loved ones. We have all experienced the confusion, the fear, the grief, the frustration, the joy and even the relief that a hospital stay can generate. It is these very emotions that we must capture and understand by going beyond focus groups and surveys and questionnaires and embedding our teams directly in the customer environment.

Now customer immersion has always been a part of Hill-Rom's culture. In fact, our founder, Bill Hillenbrand, spent 2 years understanding the hospital environment before launching the first hospital bed over 80 years ago. And while we still spend time with our customers today, our approach, given the rapidly changing environment, must also change.

Our nursing teams observe all users, from nurses to doctors, to service technicians, as well as patients as they try to understand why certain practices are followed, how they are conducted, who is involved, where the bottlenecks are, what works and what does not. These results directly in an increased focus on both patient centered and caregiver centered design.

In addition, we actually share our results with our customers to help them redesign and improve their own processes and workflows. To that end, we have built collaborative partnerships with customers in North America and are looking to expand in Europe and Asia. And while our initial focus has been in the ICU, the med-surg and OR, we are excited to ultimately extend into all segments of the hospital facility and other patient care settings, such as home, post-acute and long-term care.

So the customer immersion efforts help us determine what products we'd develop and the critical unmet needs that these products will address. As we turn our attention to product engineering efforts, our teams approach new product development with 3 distinct design skills, quality, manufacturability and cost. We combine these 3 critical skills with our traditional engineering disciplines to provide the highest quality, most reliable products that deliver the right value at the right cost.

Design for quality is our approach to leveraging the tools and processes necessary to increase robust and reliable performance. Our development teams utilize model-based design, simulation and advanced statistical tools to identify and address quality issues early to ensure that we have the most robust and highest quality product designs. Design for manufacturability is a collaborative approach between our product engineers and our supply chain teams to incorporate approved standard parts, to leverage preferred suppliers, and to simplify fabrication and assembly, to minimize supply chain complexity, drive simplification and allow for greater leverage of increased volumes.

Finally, design for cost is a standardized approach to product families and even product portfolios. We leverage platform based design and optimize product configurations to efficiently address the broadest set of customer needs resulting in dramatically reduced costs as we introduce future products into our portfolio.

Now, as we think about the development and engineering of new products, we focus on 4 key areas that define the value that we deliver to our customers. As a medical device company, quality is absolutely crucial. Our goal must be to launch products that work every time, all the time. From the day our product is delivered to service to years into its life, and from the hot humid summers of Miami, to the cold dry winters of Sweden, our customers expect our products to function and we must deliver.

We also strive to develop an integrated portfolio of complementary solutions. No other company has a comparable footprint in the patient room and no one has the opportunity to drive value by connecting their portfolio more than Hill-Rom. We believe that interoperability is critical and that every relevant product must be designed to be compatible with its counterparts or even with non-Hill-Rom products to provide the greatest benefit to both patients and caregivers.

Additionally, as regulatory demands on the quality of care increase, we must focus on ensuring that all of our products deliver clear, demonstrable, clinical value. Whether in the reduction of pressure ulcers, patient falls, infections or caregiver injuries, we must continue to develop products to address these needs and the evidence to demonstrate their clinical efficacy and economic benefit to our customers.

Now finally, we realize that clinically differentiated offerings alone will not distinguish our products unless the outcome justifies the cost. We are constantly considering cost from design to commercialization. And we strive to produce products at a lower cost while maintaining the highest quality. Our customers are facing unprecedented challenges across the globe and they're looking for help.

Our intent is to meet this challenge by delivering the right value to our customers at the right cost. Now leveraging these skills and focus areas, we are very excited about the strong portfolio of projects that we plan to launch in the coming year. As Alejandro mentioned, we're focused on developing value segment solutions for our emerging-market customers and we plan to introduce a low-cost, entry-level electric bed designed to Hill-Rom standards for product safety and quality.

We recognize that emerging markets are a critical opportunity for Hill-Rom. And this emerging market bed will allow us to access a much larger portion of that market than our current portfolio. We are committed to delivering a solution that provides the right value at the right cost for these key customers. In addition, we're working to develop the next generation of our internal airway clearance solution, the MetaNeb 4.0 for which we just recently received our 510k clearance.

Our current system combines nebulization with continuous high-frequency oscillation, as well as continuous positive expiratory pressure to patients suffering from cystic fibrosis, bronchiectasis or severe asthma. The next-generation product will improve therapy performance, enhance operation when used with mechanical ventilation and enhance therapy delivery by incorporating several nebulizer options.

Now we also plan to introduce our next generation of the NaviCare Nurse Call system later this year, NNC 3.5. This solution represents a true breakthrough in the use of bed data and communications to enhance caregiver efficiency. The new solution will automate a number of protocols around patient safety, including automatic bed exit alarm shutoff when caregivers enter the patient room, automatic enabling of the bed exit alarm when the patient is detected lying in bed and electronic delivery of nurse reminders to turn patients based on hospital protocols. In addition, hospital administrators will benefit from improved tracking of nurse rounding and automated documentation with real-time locating systems.

In each case, we are leveraging established platforms combined with new capabilities and reduced costs to deliver valuable, differentiated solutions to the marketplace.

Now, let me change gears a bit and talk about some of the exciting new technologies that we are looking at. Hill-Rom has a long, successful history of innovation. And to grow that legacy, we must maintain a strong pipeline of advanced technology development. Our early innovation team is focused on identifying, developing and acquiring new technologies that will provide new advanced capabilities or existing functionality at breakthrough cost or simplicity. We develop these new technologies internally through strategic partnerships, relationships with university teams and inorganically through acquisitions. The portfolio of advanced technologies must strike a balance between near-term opportunities to impact ongoing new product development and long-term efforts to develop breakthrough capabilities.

Some of our near-term projects are focused on new innovations for our surfaces portfolio, including new sensing technologies to measure patient moisture, pressure and temperature; sophisticated monitoring of patient exit from the surface; and automated protocols to protect skin integrity. Combined, these capabilities will continue to drive industry-leading performance in our surfaces portfolio.

Now, longer term, we are looking at new technologies for the early detection of pressure ulcers and deep tissue injuries. This enables early intervention and the ability to minimize the impact to the patient while reducing the cost of care. But beyond detection, we're also developing advanced capabilities to predict adverse conditions that could lead to skin breakdown and adapted systems to eliminate them. Ultimately, all of these are part of our overarching, early innovation themes centered on early wound detection and skin defense to develop solutions across the continuum from treating wounds to detecting them earlier, to preventing them altogether.

In summary, I would like to again stress the importance of innovation to Hill-Rom's success, both historically and in the future. Recognizing this importance, we will continue to invest in R&D over the LRP period consistent with revenue growth. Our R&D focus continues to be defined by global trends and a rapidly changing customer environment, as well as the critical needs that we identify through customer immersion and increased customer intimacy.

To address these needs, we must develop solutions that are designed to be manufacturable, cost effective and of the highest quality. Our goal is to deliver differentiated solutions to our customers that provide the right value at the right cost. And we will continue to augment our product development pipeline by developing and acquiring new advanced technologies that will further increase our value proposition to customers.

Thank you. At this time, I'd like to turn things back over to John to lead us through our last Q&A.

John J. Greisch

As the rest of the team comes on up here, hopefully that gave everybody a feel not only for the members of the team, but also the key areas of focus that each of them is working on and some of the accomplishments that we've achieved over the past couple of years. So with that, as we grab our seats I'd like to open the floor up again for Q&A for any of us on any topics.

David H. Roman - Goldman Sachs Group Inc., Research Division

David Roman from Goldman Sachs. John, I was hoping, and maybe for others on the panel, so I looked at your slides and you gave your sort of geographic footprint with respect to R&D and some of the manufacturing you've talked about. The obvious thing that seems to be missing is some presence in the emerging markets. You've touched about that, that being a priority. I'm sort of -- our experience going to visit some of those regions, it seems like if you're not a suitable local player, it's really hard to compete there. So maybe just sort of elaborate a little bit on your strategy and your plan to attack those markets?

John J. Greisch

Yes, I'll talk first on R&D. The closest we come, obviously, to the emerging markets is the presence that we established in Singapore several years ago. And that's really where our emerging-market development activities today reside. We're certainly evaluating -- continued to evaluate whether it's China or India or other locations to tap into some resources. I can let Brian address that here in a second, David. On manufacturing, you're absolutely right. If I had my druthers, we would have local manufacturing in some of the emerging market opportunities. As I mentioned earlier, we have looked at a number of opportunities, particularly in China and Brazil, and have yet to identify either the right partner or the right opportunity for us. But long term, it's really an objective to be closer to our markets. We do have some relationships, not formal joint ventures, but we do have manufacturing partners in the China, Taiwan region for some of our bed products, particularly that go into emerging markets. But that's very different than the kind of presence that you're talking about, which is certainly an objective for us going forward. And again, given some of the margin profiles for our existing portfolio, core business being bed frames, it's been a knot that we've yet to solve in terms of finding, again, an attractive enough investment opportunity. Continue to look and as we diversify the portfolio, I think those opportunities may become more interesting and more attractive financially to us. Brian, do you want to add anything on R&D?

Brian Lawrence

Sure. So as John said, we are -- we have and we will continue to look at opportunities to expand in the emerging markets, leveraging this -- the unique skills that exist there and as a way to -- as you pointed out, to create a vocal opportunity. So that's something that is ongoing today and we continue to look at on a regular basis. Jon?

Jonathan Demchick - Morgan Stanley, Research Division

Jon Demchick from Morgan Stanley. So this question I got is for Greg, John and Mark. But -- so in the first few sections today, you all talked about like the substantial cash flow that was going to be used for M&A or a lot of it could be used for M&A, and then also the need to diversify away from the like core bed business. And I mean I was just wondering how much growth maybe you can plan on in, I guess, more of the Surgical and Respiratory area that can come from more inorganic means. I mean as a reference point, maybe what sort of deals are you guys maybe thinking about doing on a size basis, using like Aspen as a point of reference?

John J. Greisch

Yes, I think when Greg came onboard for that specific franchise that we've got, so his area of responsibility, he came onboard and we have the clear objective of at least doubling that business for us as. As he mentioned in his presentation, surgical products, instruments and other adjacencies, large area for us to be looking at opportunities to grow. So if we don't double that franchise in the coming years, I think we'll all be disappointed, most of which would come through M&A activities. Again, though, just to reiterate what Mark said, we're going to pursue M&A, as I think we have over the last couple of years, only if it's accretive to what a share repurchase use of our cash is going to generate for us in terms of earnings growth. But that specific franchise is certainly one that we have desires to more than double as we go forward.

Size-wise, I think Aspen is probably a good proxy for the kinds of things that we're interested in. I think I've said publicly many times in the past, we don't have any great desire to lever up the balance sheet and go out and do a bet-the-ranch kind of acquisition. So I think, again, from a disciplined and prudent use of our capital, we should expect us to be focused on the kinds of things that we've done up until now. Bob?

Robert M. Goldman - CL King & Associates, Inc., Research Division

Bob Goldman again, CL King, John. I thought it was an excellent day and then laid off the things very persuasively. I do have a question though on the regulatory front.

John J. Greisch

You've disappointed me if you didn't.

Robert M. Goldman - CL King & Associates, Inc., Research Division

I'm sure you're prepared. But could you give us an update in Day 2, and in particular, my observation is that there wasn't a whole lot of change in the FDA observations from a Form 483 to the warning letter to the next Form 483. So what data points can you provide to us that would give us a sense of comfort that this isn't cascading, that the regulatory situation is improving or rather than the FDA getting perhaps more interested in additional plans going on?

John J. Greisch

Sure. Yes, there's not any real new updates to what I said on the earnings call in terms of where we are with respect to our remediation commitments to the agency. We met the commitments that we made to them relative to the corrective actions being implemented by March 31, which was a commitment date that we made to them. We've completed all of those corrective actions. We're now in the process of ensuring that they're taking hold and are effective through the verification work that we're doing. And they're going to come back and reinspect as a follow-up to last fall's inspection to ensure that what we said we're going to do has in fact been done. So no real update from my comments at the end of the quarter other than we did exactly what we said we're going to do, which I think I commented on the call, along those lines. Your comment on the observations appeared to be fairly similar. Obviously, the warning letter was a follow-up to the 483. So all that was a repeat, if you will, of the observations in the 483 from the end of 2012. The timing of our implementation of corrective actions took us into March. So when they came back in September or October of 2012 -- excuse me, the first 483 was in 2011. But when they came back, we knew we weren't complete with what we had committed to complete by the end of March. So not surprising that the observations had some repeats in them because we have not gotten through everything that we committed to get through by March of 2013. We're in a good spot now. We've completed what we committed to, and they'll be back, I'm sure at some point in time for a follow-up inspection. I think the fact that we've got a 510-K approved, which, as you know, is a higher bar than it's ever been for our industry, is a reflection of the fact that we do have a good relationship with the agency and are making progress. And certainly for that product, we're in a good position to get the 510-K approval --

Brian Lawrence

Okay. But, Bob, just -- I'll add one other thing. You asked about sites. We have another site inspected in the last years, in fact, Charleston, South Carolina within the last years with no observation. So it's not as if Batesville is the only site the FDA has been to. But that's -- it's unrelated. It's just part of their normal course. So it's not as if Batesville should be representative of our other sites. They have been to other places with good results.

Robert M. Goldman - CL King & Associates, Inc., Research Division

And just as a final follow-up on that, Mark. Has there been any FDA inspections at any Hill-Rom facilities within the last, say, 6 months? And if so, what's been the nature of the -- or the number of the observations, if any?

Mark J. Guinan

There have been inspections in Germany at Volker and at Aspen, with very minor observations coming out of both of those inspections.

Unknown Analyst

[indiscernible] Capital Management. I was just wondering why are you not expanding into the dental space?

John J. Greisch

The dental space?

Unknown Analyst


John J. Greisch

It's really not a space where we have any expertise or presence, and it obviously represent a completely new life for us. So it hasn't been one that we've evaluated just because of how different it is from the rest of our business. Our focus, as I said in my comments, is really on the markets where we have a strong channel presence and where our brand is really well recognized, disproportionately recognized to some degree within the acute care space. And I think how we leverage the strength of that brand and channel presence where Hill-Rom is well known is hard enough. And for us to really get in there as where we have no history, no expertise, really isn't in our strategic focus right now.

Lennox Ketner - BofA Merrill Lynch, Research Division

Lennox Ketner, Bank Of America. A question for Brian. What is the near-term pipeline of products that you mentioned with the lower cost emerging markets you said? I'm just wondering what kind of time frame we should be thinking about in terms of that product launching, and you mentioned that it could -- would like to expand the portion of those markets that you could address. Is there any way to quantify, like in China or Brazil, how much larger the addressable market will be once you launch that bed?

Brian Lawrence

So let me answer the first part. That's something we're looking to bring to market from a product development standpoint in the current fiscal year. There are -- for different parts of the world, there are registration timelines that can extend that. So -- but from a development standpoint, current fiscal year -- end of the current fiscal year is when we plan to finish the development. As far as the address -- the market visibility, I would look to Alejandro to comment.

Alejandro Infante Saracho

Sure. Actually, within our LRP projections, when we're saying that we expect double-digit growth out of the emerging markets, we are obviously taking into consideration the impact of the new emerging markets bed. This is what I would consider an entry-level electrical bed. So it could be actually addressing several segments, not just the lower end of the med-surg segment in various markets. So this is a bed that is going to complement our presence in some markets in the higher acuity, kind of low-end ICU level. In some markets, it will be a bed that will be complementing our med-surg offer. So it's not like a one-size-fits-all. It's a bed for those customers that now have made the decision to move for the first time from a manual bed to an electrical bed. And it could potentially have even further impact than just the emerging market. Difficult to quantify exactly the market size of that gray area where the customers are upgrading from manual to electric. However, this has been, as I've said, a great contributor in our growth expectations of double-digit growth in emerging markets going forward.

Matthew J. Dodds - Citigroup Inc, Research Division

It's Matt Dodds, Citigroup. Did anyone ask about clinical evidence while I was out for a few minutes? Because that's still untouched...

Alejandro Infante Saracho

Uncharted, actually.

Matthew J. Dodds - Citigroup Inc, Research Division

Uncharted. All right, so Alton and Greg, you both mentioned clinical evidence being important to the story down the road. You didn't give a lot of color on that. Can you give us some ideas of what you're looking at? Is this trial based? What are the focus products or areas you may be looking at?

Alton Shader

Sure. First, good question. Obviously, it's a real focus for us as we go forward as we are working on and continuing to build on a solutions approach to our customers. I did mention in the presentation that we will be focused on areas such as falls prevention and preventing the pressure ulcers as well, and also as we go forward into infection control, too. So these are areas where we are focused and we have built quite a few capabilities internally, and we are looking at developing actually proactive studies and looking at some levels of clinical trials as well. Those obviously take some time, so we're looking at some crickets first and then moving into more detailed studies as we move forward and build out our capabilities.

Edward Gregory Pritchard

The 2 areas of focus for us would be on pneumonia as it contributes to readmissions. That's about 30% of hospital readmissions today, and we believe with our airway clearance products that had used those in the home can obviously curtail some of that readmission, which would be very valuable to the hospital. The other area I used the statistic of 6.5% increase in sharps injuries in the operating room when there's been legislation in place since 2000. The reason for that is they haven't really adopted the safety product in the OR. If you look at the rest of the hospital, hypodermic needles are about 95% converted to a safety product. Scalpels that are used elsewhere in the hospital are about 50% converted. And we believe that we need clinical evidence to show that by using the safety product, we can show a reduction on all the downstream costs associated with sharps injuries, which is prophylactic medicine and obviously loss time injuries.

John J. Greisch

Matt, if you look at one of the slides that Brian put up there, the reducing number of new product introductions rather than chase a lot of products with small value associated with them, you get to see an increase in the amount of our R&D spending towards development of clinical evidence. It's clear that with all of our products, we need to have data supporting not only from a regulatory perspective, obviously, but from a customer perspective, where our products are differentiated in terms of the value proposition they bring. So we're not going to become a clinical trial company by any means. But developing the kind of data that Greg and Alton just described, we think we can do with our key products, Progressa, VersaCare, Clinitron, some of our lifting products, some of our surgical products, and that's going to require a bit more of our R&D spending directed towards that and less toward some other smaller, less impactful products that we may have chased in the past.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Matt Miksic for Piper again. So along a similar line, you talked a little bit about sort of developing and educating caregivers in emerging markets, folks who administer some of these in public healthcare systems on the benefits of some of the things that have been put in place in developed markets. Can you talk a little bit about to what extent you've been already engaged in those activities, driving that double-digit growth that you've seen in emerging markets? Or to what degree is this sort of a new push into some of those markets to drive adoption of infection prevention and injury prevention and so on?

John J. Greisch

Sure. How about Alejandro?

Alejandro Infante Saracho

Sure, absolutely. We are already engaged in various regions in educating our customers through what we call our Booster Programs And then we have set up also educational programs that we call the bronze, silver and gold levels for customers. Our new hub in Dubai has been particularly useful for that, and we were able to plot customers from multiple Middle East countries to participate in those educational programs. We have also begun all -- to roll out those as well in China where we've got our first ICU Advisory Board, A number of key opinion leaders gathered there to determine what are the trends that specifically affect our products in China as well. We're beginning also to roll out those educational programs in Latin America, specifically Brazil and Mexico. So it's something that it's already started [ph]. We think it's part of our success in these regions, as we are not seen just as product providers but as well as service and solution provider.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

And these kinds of things, these efforts, should we be looking for things like regional, country initiatives to drive adoption announcements, regulatory, sort of like the sharps initiatives as they went from U.S. to Europe? Is that the kind of change we're going to see or are these just going to be gradual changes?

Alejandro Infante

It clearly depends on -- you have some major contest like China where you would see in the ICU, everything from one of our most advanced frames like the [indiscernible] or the future Progressa pulmonary bed to a fixed side, very, very basic manual bed in the ICUs. So pick a country like China, we just can't cover all of the educational needs in just one initiative. So if you go there, we'll just try to make the initials, understand that our products are actually medical devices that help in the outcome of patients and you should move at least certain levels. Now if you move to other countries, like in the Middle East where they have strong preference for American products or European products, then your focus has to be on now you have the product, how do you use them, how do you make sure that you're actually taking advantage of all the pressure ulcer reductions or falls prevention that you can get out of a product. So it's pretty regionally tailored. So I couldn't say there's going to be a one big bang initiative. But we're tailoring these to each one of the regions where we see the most potential.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Great. And then one follow-up on -- for John or Mark. I think the message of steady cash flow generation despite the volatility in the top line, is a great one. And I guess just as we look forward, I know the nature of this volatility is that it's tough to predict. But can you give us a sense of -- you talked about low-single-digit growth or flattish capital growth in North America over the next several years. I mean, just so we know what to expect, should we be looking for these kinds of swings? I mean 5%, 10%, 15% down in a given 3 or 4-quarter period and then up mid-single digits in the next? Give us some sense to what volatility we could see?

John J. Greisch

If history is any indicator, over the 5-year period, I would suspect we're going to see some more of that during that time frame for either unknown or for similar reasons as we've seen here in the past few years. You're right. I mean, it's -- I don't want to sound defensive, but it is difficult to predict and to project the revenue growth rates on a shorter term basis in this business than any I've ever been associated with. That's why we're trying to focus on the cash flow, the margin expansion regardless of what the revenue is. But as we look ahead, is there going to be some blip in the next 4 or 5-year period to our capital revenue as opposed to a nice linear progression? I would suspect there would be. I think it would be imprudent to try to predict when that's going to happen and to what level it's going to be, Matt, but I suspect we're going to see some continued volatility.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

And then the message would be, over any given 1 or 2 or 3-year period, despite that kind of volatility, you're going to continue to drive that EBITDA line up?

John J. Greisch

That's absolutely the objective. I mean, the business, let's focus on North America for a second, the bed business. As we said, 60,000 beds on average replaced. 1 or 2 large customer replacement decisions can have a major impact on whether that's 50,000, 55,000 or 60,000. So it's much a function of customer spending -- individual customer spending decisions than it is industry-wide fluctuations. That obviously occurs. But as we saw -- I think we talked -- what was it, Mark, the second quarter of 2011, I think it was. We had a $25 million order, the biggest order the company's ever had. That had a major impact on the growth that quarter, and then the subsequent decline in sequential quarters and then 4 full quarters later. We can't control that. What we can control is looking as far out as we can and, as you said, make sure we're going to manage that kind of the cost structure and the balance sheet to deliver the cash flow that we've committed to.

Mark J. Guinan

Yes, just to add on that. That was actually the fourth quarter in 2011 when we shipped it. We got the order in the second quarter. But just as I think we've tried to caution, getting that order and its impact on our growth, which you can do the math, but you got a $25 million, $30 million order and that's 5% growth. And our quarterly sales is not indicative of a super change in terms of the health of the business in that quarter. It's one single order, it's great to get it, but it's not some sort of trend the next year. The lack of having that order is not an indication of the business has turned down dramatically. So that's why we try to really stress the importance of looking over the long term and showing you the cash generation. The EBITDA generation is a lot smoother than that revenue cyclicality that you see in the earnings, which is less now, and then you finally get to the cash in the EBITDA, which was actually pretty smooth continuing -- considering how much this business has changed over a 3-year period of time. Larry?

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

First, I have 2 questions. First, I guess, for Alton. Unless I admit I didn't hear anything about the stretcher or the ambulance cot opportunity, obviously, there's a big competitor out there with a lot of share. And I felt like you guys are starting to get going to make some investments there. But if you could talk about that, that would be great.

Alton Shader

Sure. I did not mention the stretcher market in the presentation. I will say that this is an area where we do have a lot of opportunity. And frankly, we haven't made the progress there that we would have liked over the course of the last year or 2. That being said, going forward, with our focus on providing full solutions to our customers and primarily our largest IDN customers, we feel like we've got an opportunity to make some real progress in that business as we move forward.

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

And is that -- again, I don't need to dumb this down too much, but is that a resource issue that you you've not been able to push into there or is there a relationship issue that you're sort of missing with the ambulance companies? Because the products don't seem that sophisticated relative to what you put into acute care setting.

Alton Shader

Yes. No, that's a fair point. This is something that, right now, we are looking at very closely on how we can best resource this area and really put some pressure on in this area. You're right, the products are not as differentiated as you would expect based on the differential share between us and the large competitor there. But as we go forward, we are going to be evaluating how we can, again, put a little bit more effort behind that and hopefully make some -- have a seasoned growth on the share side, absolutely.

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Okay. And then for John or for Mark, I just want to be clear on messaging here relative to the capital allocation that you've talked about. I think I heard that you will modulate up and down, share repurchase versus M&A depending on what scenarios are out there in front of you, what options, opportunities there are. But I also felt like I heard, there may be more of a focus on M&A. And I just want to make sure that I'm interpreting that correctly. And if I am, is that a function of you've realized that the environment is going to be tougher for an extended period of time, and so therefore, M&A becomes more important and if you wanted the growth objectives that you're talking about, you're going to have to do it?

John J. Greisch

Yes, let me answer that first and I'll let Mark follow up. I wouldn't say, Larry, there's an increased focus on M&A. So I want to make sure that message is not either being received or poorly communicated. When we laid this out a couple of years ago, we said at the time, the same percentage of cash flow we would like to direct towards M&A if the opportunities exist. That hasn't changed. So we still have a desire to diversify the portfolio, get away from such a capital intensity, 60%-ish of our revenues. We had that 2 years ago. That hasn't changed. And I don't think I would say the environment becoming tougher has put us in a more aggressive M&A mode [ph] at all. As I said earlier, I'm not going to panic into doing deals just because I don't like the portfolio. I'd love to have passed the stretcher market to give me a smoother piece of the capital market. We don't have it, so we'll see what we can do to go after that. But we're not going to go crazy and do deals just for the sake of doing deals. And if we can't find ones that meet our criteria, we will continue to deploy more cash in share repurchases. That's probably a different message than you heard 2 years ago. I don't think we were as vocal on the use of cash for share repurchases as we have been over the last couple of years. As I said, a couple of hundred million dollars, not insignificant for a company with a $2 billion market cap. And going forward, we're going to continue to do that. So if anything, I'd say M&A focus is the same, but we're going to use our balance sheet probably a little more aggressively in our cash flow towards other value-creating opportunities than just M&A.

Mark J. Guinan

Yes. So just to confirm, we were not trying to imply a change. In fact, we were -- the message I was trying to deliver was we're going to continue. If you go back to the slide that I showed where kind of over the last 3-plus years, so about 39 months, what we've done, you saw a 30% on internal capital, you saw a 30% return to shareholders, which is obviously above the target. If I would have put M&A on there, it would have been 60% to get the 120% because we obviously took on some debt. But continuing with what we've done over the last several years is what we're looking to do. And to John's point about whether I emphasized enough or we emphasized enough than the original capital allocation model, the fact that we went to a period of time without M&A, we would go above that 15% to 20%. And we've recently been at 50%. Perhaps I didn't emphasize it enough but that was in the original model. We always say we wouldn't sit on our cash if we went for a period of time, but actually we would look to get back more to shareholder in the short term, given the fact that we really can't create any value with money in the bank.

Unknown Analyst

John, a quick clarification on Matt's question about the cyclicality of the business and then also your comments. But I just want to clarify, the EPS guidance is for low-teens CAGR, so you're not necessarily saying that in any given year, if, for some reason, the cycle happens, you'd be negative and have revenues declining that you're going to buy back enough shares to drive low-teens EPS growth this year, right, over the long-term plans?

John J. Greisch

Yes, exactly. Right.

John J. Greisch

Yes, I'd rather if you guys take the message that we're going to be consistent than be reactive to the cycles going against us. And earnings looks like it's a 5% organic growth. We're not going to go out and do a massive share repurchase just to jack it up to low teens. So I want to be consistent over time.

Unknown Analyst

Greg had mentioned the legislation in 2000 sort of mandating the use of safety sharp products from the U.S. So it's my understanding that almost 3 years ago to the day, the EU Council administers set forth a directive requiring the same in Europe by the end of this month. Maybe you can give us a window into what's happening in that regard in Europe and if, in fact, there is a legislation or regulation, what percent of Hill-Rom sales now relate to European sales of the sharp products?

John J. Greisch

You're exactly right. In fact, I think within the next week, that is supposed to be a mandate. I want to say May 11, for whatever reason that's the chosen date. Unfortunately for us -- why I say unfortunately, there is a competitor that has a lion's share in Europe comparable to what we have in the U.S. And part of our strategy moving forward is to take our safety product, which we think is very unique, and grow that into the European marketplace. So we don't have a big base today, but we do think, with our product, we can compete there.

Unknown Analyst

So this happens to you [indiscernible]?

Greg Pritchard

Yes, yes it is. I was in the U.K. about 2 or 3 months ago and visited several operating rooms and everybody is talking about it. So now keep in mind that when it took place in the U.S., part of the legislation is that they try a safety product versus having to use a safety product. So a lot of times, what happen here is some of those products are on the shelf but maybe not used all the time.

John J. Greisch

Bob, about 20% of our Aspen sales are in Europe. Small percentage of the safety scalpels or the Bard-Parker product is in Europe. But we do have a good presence, particularly in the U.K., to go after the major competitors, as Greg said, with an established presence in the European market already.

Okay. Thanks, for your time. I know it was a busy morning in -- on other fronts. But hopefully, you're going away today with a good impression of the team, the focus they've got on where their teams are putting their efforts, as well as the passion and the commitment from all of us to deliver the low-teens earnings growth, strong cash flow and to deploy in a disciplined way, balancing the diversities that we talked about. So we greatly appreciate your time and enjoyed the interaction and look forward to our next opportunity to see you at upcoming conferences. Thanks very much.

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