Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Hill-Rom Holdings Inc  (NYSE:HRC)
Q4 2018 Earnings Conference Call
Nov. 02, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Hill-Rom's Fiscal Fourth Quarter 2018 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. At the end of Management's prepared remarks, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded by Hill-Rom and is copyrighted material. It cannot be recorded, rebroadcast or transmitted without Hill-Rom's written consent. If you have any objections, please disconnect at this time.

I'd now like to turn the call over to Ms. Mary Kay Ladone, Vice President, Investor Relations at Hill-Rom. Ms. Ladone, you may begin.

Mary Kay Ladone -- Vice President, Investor Relations

Good morning, and thanks for joining us for our fiscal fourth quarter 2018 earnings conference call. Joining me today are John Groetelaars, President and Chief Executive Officer of Hill-Rom; and Steve Strobel, Chief Financial Officer. Before we get started, I'd like to mention that in addition to the press release issued this morning, we have posted a supplemental presentation, which can be accessed on the Investor Relations page of our website at hil-rom.com under Events and Presentations.

So with that introduction, let me begin our prepared remarks this morning by reminding you that certain statements contained in this presentation are forward-looking statements, and are subject to risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those described. Please refer to today's press release and our SEC filings for more detail concerning risk factors that could cause actual results to differ materially.

In addition on today's call, non-GAAP financial measures will be used. Reconciliations between GAAP and non-GAAP financial measures are included in our earnings release issued this morning.

Now, I'd like to turn the call over to John.

John P. Groetelaars -- President and Chief Executive Officer

Thanks, Mary Kay, and good morning, everyone, and thanks for joining us today.

As you saw in our earnings release issued this morning, 2018 was a very successful year for Hill-Rom. We concluded our fiscal year with strong momentum in the core business and financial results that operationally exceeded expectations. This performance reflects the value of our diversified portfolio and our ongoing commitment to our strategic priorities, to drive sustainable growth and to deliver on our long-range financial commitments with disciplined execution. Looking forward, we will build on this success by advancing our category leadership strategy with differentiated innovative healthcare solutions, expanding our geographic presence in emerging markets and transforming the portfolio to enhance outcomes and value for patients, caregivers and shareholders.

For the fourth quarter, adjusted earnings of a $1.63 per diluted share increased 23%, our 13th conservative quarter of double-digit earnings growth. For the year, adjusted earnings also increased 23% to $4.75 per diluted share, reflecting core revenue growth in line with guidance, strong new product momentum, margin expansion and a lower tax rate. Notably, during 2018, we successfully transitioned the leadership of the Company, achieved important new product milestones and delivered on both revenue and earnings guidance each quarter.

We completed 2018 with an operating margin of 17.3%, representing a new record for the Company. Margin expansion of a 100 basis points was driven by multiple factors, including favorable mix from new products, our portfolio optimization efforts, efficiencies from manufacturing and supply chain initiatives and disciplined leverage of SG&A. Importantly, this performance is in line with the goals we established in our three-year plan, setting a solid foundation for achievement of our long-term objectives.

From a revenue perspective, core growth accelerated from 2% in the first half of the year to 4% in the second half, reflecting progress and establishing a more durable and diversified business. For the full year, including Mortara, revenue increased 4%, directly aligned with our three-year objective of generating compound annual growth in the 4% to 5% range. On a core basis, which excludes Mortara before the anniversary date, we delivered 3% core revenue growth in line with our guidance. Our top strategic priority remains driving accelerated top-line growth in 2019 and beyond.

Also, we sustained positive core growth in our international business for the second consecutive year, an important achievement for a business representing more than 30% of Hill-Rom's annual revenue. Core international growth was 2%, but excluding the large Middle East order in 2017, core growth was 4%. Europe, Canada and the Middle East collectively grew in high single-digits, while Latin America and Asia-Pacific represented headwinds. Emerging markets today only account for 9% of Hill-Rom's total revenue, representing an encouraging growth opportunity. We are in the early stages of reinvigorating our commercial operations in these markets, having added experienced senior leadership in Asia-Pac during Q4. We are now conducting a robust assessment of the product categories and go-to-market plans to support meaningful growth into the future.

One of the most exciting highlights of the year was the impact of innovation on our top-line, with new products generating more than $300 million in revenue. With this ramp, we are making significant headway. In fact, in 2019, we expect to generate more than $400 million in new product revenue, exceeding our 2020 objective one year early and above our goal. This is a key metric in measuring the success of our category leadership strategy and meeting our objective of driving core growth 200 to 300 basis points above our weighted average market growth rate. Supporting this performance were several innovative products, including Centrella, Integrated Table Motion, the Connex Vital Signs -- Spot Monitor, the Monarch Airway Clearance System and our Vision portfolio, which consist of the Spot Vision Screener and RetinaVue.

Turning to the businesses, US core Patient Support Systems revenue advanced 4% for the year. We are making significant progress in shaping the portfolio to support higher-margin platforms by divesting non-strategic assets related to the third-party rental business and winding down the third-party surfaces business. These actions allow Hill-Rom to focus resources and strategic investments on new products and emerging market expansion.

We are very pleased with the second half core revenue growth acceleration in US PSS from 8% to 10%. Contributing to this performance was Centrella and double-digit growth of Clinical Workflow Solutions and safe patient handling equipment. Centrella is exceeding our expectations, achieving nearly a $100 million in revenue since its launch a year ago. Looking forward with a stable hospital capital spending environment, we're confident in our ability to accelerate US med-surg growth over a multi-year period.

We have just scratched the surface on penetrating an aging US installed base of approximately 500,000 beds. And with upcoming commercial releases of WatchCare, our integrated incontinence detection device and EarlySense, a contact-free continuous heart rate and respiratory rate monitor, we have a unique opportunity to set a new standard of care and reduce costly complications in the acute care setting. We are also expanding our global reach with the launch of Centrella in the Middle East and Australia in 2019.

Last quarter, we discussed an exciting new opportunity within our Clinical Workflow Solutions business to expand our digital communications portfolio. And we are now pleased to announce the full commercial availability of LINQ mobile in the US. LINQ mobile is our unique smartphone application that securely connects members of the care team to each other, to their patients and to patient information in real-time.

Our leadership in hospital beds, vital signs measurement, patient monitoring and clinical communications uniquely positions Hill-Rom to enable the digital environment with a synchronized communication platform to improve patient outcomes across the care continuum. We continue to pursue investments in technology to access and analyze critical information at the bedside. We are excited by the number of digital technologies and investment opportunities, which will support a transformative new growth vector for the Company. We believe that connected bed acts as an increasingly vital digital hub of our acute care ecosystem.

Turning to Front Line Care, revenue increased 7% on a constant-currency basis with the benefit of Mortara and 4% on a core basis, including a strong fourth quarter in the US. This business is capitalizing on innovative new products as well as expansion into new markets and channels. Our Respiratory Care business grew in double-digits with the successful introduction of the Monarch Airway Clearance System and we are advancing our Vision for All campaign with the success of the Spot Vision Screener for both children and adults. Our investments in the dedicated sales team for RetinaVue are beginning to yield results. Device placements increased in double-digits for the year and the recurring revenue stream has been steadily accelerating. With the launch of the next-generation easier-to-use device later in 2019, RetinaVue represents one of our more exciting long-term growth opportunities.

Lastly, Surgical Solutions grew 2% on a constant-currency basis for the year. New products and partnerships led the way, offsetting a difficult comparison related to a large order in the Middle East and lower international OEM revenue. Excluding those two factors, Surgical Solutions increased in mid single-digits, a continuation of the growth we've seen in this business for the last two years. Momentum continued with Integrated Table Motion throughout the year, including record placements and strong revenue growth of more than 20%. We are sustaining a very high attachment rate to the Da Vinci XI Robot and we will focus on increasing penetration in 2019, not only in the US but also in select international markets like Europe and Japan.

In summary, we are exiting 2018 from a position of strength, allocating capital efficiently across our business, generating significant operating cash flow, paying down debt, reducing our leverage and returning value to shareholders. We are energized by our progress and look forward to 2019, another year of improved revenue growth, margin expansion and profitability. And we will deliver innovative healthcare solutions to our customers and their patients. I'm extremely proud of our team's accomplishments and the dedication demonstrated by Hill-Rom's 10,000 employees, who are focused on our mission of enhancing outcomes for patients and their caregivers.

Before turning the call over to Steve, I'd like to take a moment to comment on the 8-K we issued this morning regarding Alton Shader's position to leave Hill-Rom for an exciting new CEO opportunity. Alton has led our Front Line Care business for the past three years. I'd like to thank Alton for his contributions to Hill-Rom's success and wish him well on his new endeavor. We have already initiated a search for Alton's successor, which will include a review of both internal and external candidates, and we anticipate naming his successor during the fiscal first quarter.

Thank you for that. And now, let me turn it over to Steve.

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

Thanks, John, and good morning, everyone.

As mentioned in the press release, we reported GAAP earnings of a $1.33 per diluted share in the fourth quarter compared to a $1.03 in the prior year. These results include after-tax special items related to recent tax reform legislation, intangible amortization, business optimization and other special charges. Adjusted earnings of a $1.63 per diluted share increased 23%, exceeding our guidance range of a $1.50 to a $1.53 per diluted share. These results reflect solid core revenue growth, 120 basis points of operating margin expansion and the lower tax rate, which includes an incremental tax benefit of $0.10 per diluted share related to stock-based compensation as well as the benefit from tax reform.

Now, let me briefly walk through the P&L before turning to our 2019 financial outlook. Starting with revenue. For the fiscal fourth quarter, revenue of $759 million grew 3% on both a reported and a constant-currency basis. Core revenue increased more than 4% at the top end of our guidance range. As a reminder, core revenue growth adjusts for the impact of foreign currency, divestitures and non-strategic assets we have exited.

Domestic revenue on a core basis increased 8% in the fourth quarter, driven by outstanding performance in Patient Support Systems and Front Line Care. International core revenue declined 3% in the quarter, reflecting the headwind in Asia-Pacific we've discussed and timing of a few capital projects, primarily in Europe, following a very strong first half of the year. Sequentially, core international revenue was up more than 2%. Before moving on keep in mind that as I discuss each business segment, I will address revenue growth on a constant-currency basis only.

Starting with Patient Support Systems. Revenue of $380 million increased 3% and core revenue advanced 6%. Domestic core growth was the strongest of the year and accelerated to 10%, reflecting healthy performance across all key capital product categories. This is the second consecutive quarter with double-digit growth in med-surg bed systems, Clinical Workflow Solutions and safe patient handling equipment. This quarter, Centrella accounted for nearly 70% of our total US med-surg revenue, reflecting not only replacements from existing Hill-Rom customers, but also a contribution from competitive conversions. We continue to be very pleased with the Centrella launch and strong backlog that's growing at an accelerated pace. Outside of the US, core Patient Support Systems revenue declined 6%, primarily due to timing of capital orders in Europe, as previously mentioned.

Now moving to Front Line Care. Revenue increased 6% to $259 million. US growth of 9% was driven by the contribution from new products, including the Connex Spot Monitor, the Monarch Mobile Vest and our Vision Care portfolio. International revenue declined 1%, driven primarily by decline in Asia-Pacific, where we continue to enhance our commercial presence and position the business for future growth. Performance was solid across Europe, Canada and the Middle East, which collectively grew 5%, as we are increasing penetration of our Welch Allyn portfolio by leveraging Hill-Rom's geographic presence, brand and infrastructure.

Lastly, Surgical Solutions revenue declined 1% and totaled $120 million. Strong placements of the Integrated Table Motion, Surgical Table and revenue growth of nearly 20% versus the prior year was not sufficient to overcome lower international OEM revenue and headwinds in Asia-Pacific. Excluding these factors, Surgical Solutions revenue increased in low single-digits on a global basis.

Now turning to the rest of the P&L. Adjusted gross margin of 49.6% improved 30 basis points versus last year's record result, reflecting positive contribution from mix, primarily related to our portfolio optimization initiatives and new products as well as benefits from manufacturing, productivity and procurement efforts. Despite a modest tariff impact in the fourth quarter and transitional costs associated with our non-core exits, we delivered gross margin expansion of 70 basis points for the year, exceeding our original guidance of 50 basis points.

R&D spending of $35 million increased 11% versus the prior year, reflecting our ongoing commitment to innovation and investments in key programs to drive future growth. Adjusted SG&A of a $185 million declined 3%, as disciplined cost management more than offset marketing investments supporting new products and initiatives to enhance our global commercial capabilities.

Our adjusted operating margin in the fourth quarter was 20.5%, an improvement of 120 basis points compared to the prior year. For the year, we achieved a new record operating margin of 17.3%, an improvement of 100 basis points versus last year. This marks our third consecutive year of driving operating margin expansion of at least a 100 basis points.

The adjusted tax rate in the fourth quarter of 17% includes an unplanned incremental benefit of $0.10 per diluted share from stock-based compensation associated with the transition of executive leadership as well as the favorable impact from US Tax Reform. So again, bottom-line, fourth quarter adjusted EPS advanced 23% to a $1. 63 per diluted share.

Adjusted EPS for the -- for fiscal 2018 of $4.75 per diluted share increased 23% and included benefits from stock-based compensation, which totaled $0.24 per diluted share for the year and new tax reform legislation. Excluding the incremental impact of these tax benefits, adjusted EPS increased 13%. As John mentioned, we achieved both our gross and operating margin expansion targets in 2018, the first year of our three-year plan positioning us well for 2019 and beyond.

Now turning to cash flow. Cash flow from operations was very strong in 2018, advancing 27% to $395 million, a record level for the Company. Higher net income and strong working capital management contributed to this performance. Capital expenditures for the year were $89 million, $8 million lower than the prior year. As a result, key -- free cash flow of $306 million is 43% higher than last year. We are very pleased with this performance, as free cash flow is now 3 times higher than the level generated just a few years ago. In terms of the balance sheet and financial leverage, we have reduced debt levels this year by $337 million, and at the end of September, our debt-to-EBITDA ratio was 3.2, as we expected.

Now, let me conclude this portion of the call by providing our guidance for fiscal 2019. For the full year, we expect reported revenue growth of 1% to 2% and constant currency growth of 2% to 3%. Core revenue growth is expected to accelerate to 4% to 5%. As a result of our ongoing portfolio optimization review and assessment, the composition of non-core revenue in 2019 now reflects our decision to accelerate the exit of lower-margin product lines, primarily in the Surgical Solutions segment.

Please refer to page 22 in our supplemental presentation for the 2018 quarterly non-core revenue breakup. Collectively, non-core revenue totaled approximately $110 million in 2018 and is expected to decline to approximately $50 million in 2019. This headwind is incorporated in our reported revenue guidance, while core growth guidance is calculated by excluding the non-core components in both the current and prior year periods.

By business segment on a core basis, we expect all three businesses to grow in the 4% to 5% range in 2019. On a reported basis, given the decline in non-core revenue, we expect Patient Support Systems revenue to increase 1% to 2% and Surgical Solutions revenue to be flat to up 1%. From a profitability standpoint, we expect adjusted gross margin to expand approximately 50 basis points, reflecting mix benefits, incremental costs associated with tariffs and offsetting mitigation actions.

We expect R&D spending to increase in mid single-digits, representing approximately 5% of sales. We expect adjusted SG&A of 26% to 26.5% of sales, including savings related to our business optimization program and incremental investments in key growth initiatives. Once again, we expect operating margin expansion of approximately 100 basis points. We expect other expense, including interest, of approximately $90 million and a tax rate of 21% to 22%, which does not include any tax benefit for stock-based compensation. Lastly, we expect a share count of approximately 67.5 million shares.

So to summarize, we expect double-digit growth in pre-tax income and expect adjusted earnings of $5.08 to $5.16 per diluted share. After adjusting for the tax benefit related to stock-based compensation in 2018 of $0.24 per diluted share, our guidance range implies strong EPS growth of 12% to 14% aligned with our three-year long-range plan. From a cash flow perspective, we project operating cash flow of approximately $430 million, and with capital expenditures of approximately $100 million, we expect free cash flow to total $330 million for the full year.

For the first quarter, we expect revenue growth of approximately 1% on a reported basis and 2% on a constant-currency basis. We expect core revenue to increase approximately 4% and are providing guidance for adjusted earnings per diluted share of $0.97 to $0.99. After adjusting for the tax benefit related to stock-based compensation in the first quarter of 2018 of $0.05 per diluted share, our first quarter 2019 EPS range implies growth of 12% to 14% consistent with our full year guidance.

Before turning the call back to John for his closing comments, as we mentioned in the press release this morning, our guidance for fiscal 2019 and the first quarter does not reflect the impact of the new revenue recognition accounting standard, ASC 606. This allows for consistency and comparability of guidance against historical results. But beginning in the fiscal first quarter of 2019, we will adopt ASC 606 on a modified retrospective basis. Our 2018 restated financial schedules will be made available in January when we report our financial results for the fiscal first quarter.

At that time, we will also provide a supplemental reconciliation of results under the new standard and will update our fiscal full year guidance for the impact of ASC 606, while it's important to note that the adoption of the new accounting standard is not expected to have a material impact on the Company's 2019 revenue growth, margin expansion or adjusted EPS growth. The preliminary assessment of the impact to 2018 results includes a reduction in revenue of up to $20 million and a reduction in adjusted earnings of up to $0.10 per diluted share.

Thanks. And with that, I'll turn the call back over to John.

John P. Groetelaars -- President and Chief Executive Officer

Thanks, Steve. In summary, we're very pleased with the strong financial performance in 2018, which establishes a strong foundation for our future. We are making progress in strengthening the durability of our revenue growth with our portfolio diversification efforts and contribution from new products of more than $400 million in 2019. We will continue to innovate, increasing our R&D spend at a higher rate than revenue growth to meet challenges confronted by patients, caregivers and our customers with unique differentiated healthcare solutions to reduce complications and costs.

We have finalized and are now executing on our business optimization plans focused on driving operating efficiencies, improving our cost structure and generating an incremental $50 million in pre-tax savings over the next several years. As you know, these savings were not included in our long-range plan. This provides us financial flexibility to reinvest in 2019 and beyond to align resources in key priority growth areas, like emerging market penetration and new product innovation. And finally, we continue to actively assess new M&A opportunities that leverage and build upon our current position. As we continue with Hill-Rom's transformation, we enter this year with confidence in our ability to deliver core revenue growth acceleration, margin expansion, enhance profitability as we remain focused on our overall mission, while creating value for our shareholders.

That concludes my prepared remarks. So I'd like to open it up now for Q&A.

Questions and Answers:

Operator

Thank you. And we will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Bob Hopkins, Bank of America. Your question, please.

Robert Hopkins -- Bank of America -- Analyst

Thank you and good morning.

John P. Groetelaars -- President and Chief Executive Officer

Good morning.

Robert Hopkins -- Bank of America -- Analyst

Just to clarify to start out on -- Steven, the accounting stuff with 606. So the message is that that won't impact the $5.08 to $5.16 earnings guidance that you provided today?

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

What I said was it's not going to impact the growth rate and either revenue margins or profitability or the growth rate in EPS. There could be an impact in the actual EPS number itself, like I mentioned in 2018 because of the way that we're -- we need to handle this from an accounting standpoint. Revenue is going to be impacted negatively to the tune of about $20 million and earnings per share to the tune of up to a $0.10. That impact will likely, in that order of magnitude, take place in 2019 as well.

I think you need to keep in mind that the impact of ASC, this rev-rec standard, affects a fairly small piece of our business, over 90% of our revenue base isn't affected by rev-rec, but we have two businesses, CWS and Respiratory Care, where we're going to need to accelerate revenue in fact in Respiratory Care, but defer revenue in CWS. The net impact of those two things will have, like I said, in 2018 a negative impact on the top-line of up to $20 million and EPS of $0.10 and similar impact order magnitude in 2019. So the growth rates are going to be good. The actual numbers will come down just a little bit.

Robert Hopkins -- Bank of America -- Analyst

On earnings in '19 as well, so --

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

Yeah.

Robert Hopkins -- Bank of America -- Analyst

Do you have a preliminary estimate of -- I know it's preliminary, but where that 2019 earnings might shake out?

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

Well, like I said, I don't think the growth rate is going to change. So if you look at what it's going to come off of in 2018, I gave you those numbers up to $20 million on the top-line and a $0.10 on the bottom-line. The growth rates off of those new EPS numbers aren't going to be different.

Robert Hopkins -- Bank of America -- Analyst

Okay. And then kind of more fundamentally -- I mean, congrats on a good year. My question John for you is, the last couple years, the Company has grown top-line in the 3% range on a core basis. For 2019 for the first time in a while you guys are predicting an acceleration in the core growth of the business up to 4% to 5%. Can you just talk for a minute about the drivers of that acceleration, either by product or geography or both? Thank you.

John P. Groetelaars -- President and Chief Executive Officer

Yeah. Thanks, Bob. Yeah, let me maybe address that by how we accelerated through the year and then address it by business unit. Like you said, over the last couple of years, our core growth rate has been 3% and we started this year, the first half of the year at 3%. As we exit Q4, just to recap, our PSS business grew at 6% core growth globally, Front Line Care grew at 6% globally and then our Surgery business grew at minus 1%. But if you adjust for the OEM business, which we're now putting into the non-core and the large business in the US last year from some unusually large orders, that business was really mid single-digit on an adjusted basis. So we exited the year, Bob, in Q4 at 6%, 6%, and on an adjusted basis mid single-digit with Surgery.

So that -- as we look at our guidance for next year, each of the businesses is in the range of 4% to 5%, so it's a nice balance across all three business units. And given our exit -- kind of launching point in Q4 and for that matter not that much different in Q3, we feel confident about our ability to sustain organic growth rates in that 4% to 5% range because we're really -- second half of the year had no acquisitions in it. We're obviously not forecasting with any acquisitions or giving guidance with any acquisitions. So we're exiting at a good rate at a 4% to 5% -- well, 4% range on core in Q4 and feel very confident about our ability to sustain a 4% to 5% organic growth rate as we get into 2019.

Mary Kay Ladone -- Vice President, Investor Relations

Hey, Bob. It's Mary Kay too. I would just emphasize that geographically the growth in 2019 will be pretty balanced between the US and international as well. So not only are we expecting 4% to 5% across each business, it's also between the US and international being in the 4% to 5% range. And I think John also mentioned in his opening comments the new product momentum has been -- we're very pleased with that. $300 million this year. We exceeded our goal. If you recall, our original goal was about $200 million. So great performance in 2018 and now we're expecting $400 million in 2019. So not all of that is incremental. As you know, we're cannibalizing some of our products, but about half of it will be incremental. And so that's contributing to the acceleration in core revenue growth.

Robert Hopkins -- Bank of America -- Analyst

Great. Thanks for the color.

Operator

David Lewis of Morgan Stanley is on the line with a question. Please state your question.

David Lewis -- Morgan Stanley -- Analyst

Good morning. A few questions from me, if you'll indulge me. Just John, I'll start with you on kind of a compound question. First of all for the guidance, if I adjust for non-core, my sense is it's 3.5 to 4.5 for '19. But my sense is listen to your qualitative commentary, you're much more comfortable with the upper half of that range. And then related to that, just thinking about the base of the business now, given the OEM non-surgical divestiture, do you think you now have the base Hill-Rom that you can build from i.e., no more divestitures and how you're thinking about strategic M&A in '19? And I've got a quick follow-up.

John P. Groetelaars -- President and Chief Executive Officer

Yeah. Thanks, David. Yeah. The reclassification of -- or the constitution of what's in non-core, that's worth about 50 basis points of benefit in '19. So it certainly provides additional confidence around the guidance we're providing of 4% to 5%. And to your question about, are we done with our optimization efforts? As we did this planning cycle, we rigorously looked at everything in our portfolio and we feel we've captured everything as we see it today in our portfolio. Of course, we'll continue to look at this over time, but we feel we've captured everything with these reclassifications into non-core at this point in time.

And then your question about M&A, if I can indulge on that a little bit, we're certainly -- since last call, I would say, we've really ramped up our efforts. As we've talked about last time, we added resources in the business units. We're quickly beginning to see a nice pipeline developing of M&A opportunities. Many of them are more in the tuck-in or bolt-on category and they're certainly going to be accretive to top-line growth and accretive to margin and financially compelling. But most importantly strategically, a great fit and supportive of our category leadership strategy. So that's a quick update on M&A. Nothing to share at this point in time, but we're pleased with the development of the pipeline of activity going on there.

David Lewis -- Morgan Stanley -- Analyst

Thanks John. Just two more. One for you one for Steve, maybe. So John, it really stuck out for me that this quarter was, I think you said over $300 million of pipeline revenue in '18. I mean, that's above the $200 million expectation you set for '18. And I think above the $180 million run rate or expectation around in the third quarter. So pretty massive inflection in the pipeline. I'm assuming a lot of that was Centrella sequentially, which improved about $50 million. But what were the key drivers of that big inflection from sort of $200 million to $300 million or $180 million to $300 million sequentially? And then for Steve, just tariff impact sounds like around 2.5% hit to '19 numbers. Have you locked in your material costs so that $0.10 to $0.15 number is a firm de-risk number? Thanks so much. I'll jump back in queue.

John P. Groetelaars -- President and Chief Executive Officer

Yeah. Thanks, David. Certainly on the new product launch, we're very pleased with the momentum building there in the quarter, finishing the year at $300 million. Our projection is now that will be a $400 million number in '19. Centrella is one of the contributors, no question about it. But there are, in that bucket or basket of new products, about a dozen products. So our Spot Vital Signs measurement equipment, our Spot Vision Screener is in that category. Our Integrated Table Motion is a big contributor.

So it's not just Centrella, it's about a half dozen of significant products that are the major contributors, I mentioned a few of them, but we feel good about that momentum. And that certainly allows us to punch above our weight on our weighted average market growth rate. It adds about 60% or constitutes about 60% of our top-line growth in Q4. And as we look at the outlook for '19, it's about that same ratio of about 60% of the contribution of revenue growth. So again, it gives us that confidence that we could sustain an organic mid single-digit growth rate.

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

David, on the question you raised with respect to tariffs. The $10 million to $15 million that we have in our plan is fully baked into our plan. That's at a -- that's at the 25% tariff rate. If the rates were to go higher than that, then that would obviously be an additional exposure to us, but we think that that's the state of the government stance right now with respect to the imports we have from China and we've got it fully baked into our plan.

Operator

Larry Kirsch of Raymond James is on the line with a question. Please go ahead with your question.

Larry Keusch -- Raymond James -- Analyst

Yeah. Hi. Just a couple here. And Steve maybe just a follow-up quickly on the tariffs. You did indicate that you were looking at mitigation efforts in 2019 to offset some of that. So what levers are you pulling to help offset that?

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

Yeah. We're looking at obviously additional productivity efforts within the -- within operations. In total, we're looking at some pricing actions, we're looking at alternative suppliers. I think a fairly usual list of actions that a lot of companies are having to take right now, but those are probably the major ones that we have in place, the actions that we have in place right now to offset the overall impact. And then the mix?

John P. Groetelaars -- President and Chief Executive Officer

The new product performance here really helps drive an improved mix, which helps offset that too.

Larry Keusch -- Raymond James -- Analyst

And -- thank you. And just to be clear on that, so is that in your guidance assumptions? Is that offset or are those items that can help offset and therefore would help --?

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

No, no. The tariffs and the offsetting actions are fully baked into our guidance.

Larry Keusch -- Raymond James -- Analyst

Okay. Perfect.

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

Yeah.

Larry Keusch -- Raymond James -- Analyst

Okay, great. And then just a couple of other ones quickly here. So I guess one question on the SBC tax benefit that you got, which was certainly large in 2018. What drove such a large tax benefit there? And did I hear correctly that you're actually assuming nothing in 2019?

John P. Groetelaars -- President and Chief Executive Officer

Right. That's exactly right. So I'll start with that, Larry. There's no stock-based comp tax benefit assumed in the 2019 guidance. We had $0.24 of benefit in 2018. We had the benefit in 2017 as well. The genesis of the benefit is really the ability of financial statements to deduct the appreciation in value of stock when it's actually vested or when it's actually exercised. And so between our RSUs, our long-term incentive comp, all of those with the stock price increase over the last couple of years have really appreciated in value. And as those are exercised, that tax benefit accrues to the Company through the financial statements.

The biggest impact in 2018 had to do with the executive transition. So with John Greisch leaving, Ralph leaving as Chairman, a lot of stock-based compensation that they had accumulated over time ended up either vesting and/or being exercised via options and restricted shares. So a significant amount -- obviously, $0.24 is a big number, but a significant amount of benefit hitting our financial statements in 2018.

Mary Kay Ladone -- Vice President, Investor Relations

And Larry, I would just mention from a calendarization perspective, the majority of that benefit in '18 occurred in Q4. We also, as we outlined, had a $0.05 impact in Q1 of this year, but very minimal in Q2 and Q3.

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

Which I outlined, obviously. That's one of the reasons we feel, despite the look -- on the face of it, the percentage increase in our earnings per share when you take away the stock-based compensation is right in line with where we wanted to be in our long-range plan.

Larry Keusch -- Raymond James -- Analyst

Okay. So the point there is that the executive leadership change drove a vast majority of that and obviously that doesn't repeat in 2019?

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

Exactly. And it's hardly -- I can't forecast it. It's hard to forecast what that's going to be. So that's why it's not in the '19 --

John P. Groetelaars -- President and Chief Executive Officer

Guidance.

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

-- guidance.

Larry Keusch -- Raymond James -- Analyst

Okay, perfect. And then last two. John, maybe can you just touch on the Asia-Pacific leadership change that you discussed, kind of what's changing out? And where are you getting these people? And then for either of you guys, the LRP, which you just completed year one, I'm assuming there was nothing in the deck that I saw, but I'm assuming no changes there.

John P. Groetelaars -- President and Chief Executive Officer

Yeah. So I'll pick the last one first. Yeah. No changes to the LRP at all, this just gives us further confidence of where we stand today and our ability to execute on that. On the Asia-Pac changes, we have a new leader for the whole region. His name is Mark Wallwork. He's coming to us from Vyaire and prior to that, we worked together at BD/Bard, primarily at Bard over that tenure. And then a new leader in China, Jay Wang. He's also joining us from Bard. And a new finance leader.

So we're -- I have a tremendous amount of confidence in those individuals and their leadership skills and their ability to attract a really high-caliber team in the region and run the business in a sustainable growing way in the future. It's going to take us a little bit of time to get there. And our current guidance would contemplate that in the second half of the year, we'll see Asia-Pac coming back around and being a tailwind and not a headwind. But we're -- I'm very confident about that team's ability to execute on our strategy.

Larry Keusch -- Raymond James -- Analyst

Okay. Great. Thanks guys. Appreciate it.

John P. Groetelaars -- President and Chief Executive Officer

Thank you.

Operator

Rick Wise of Stifel is on the line with a question. Please state your question.

Rick Wise -- Stifel -- Analyst

Good morning, everybody. Maybe to go back to the balance sheet, and congratulations on all the progress there. You mentioned John in passing that you had a full pipeline that you're starting to look at. Maybe help us understand, just a little more color there. Are these tuck-in or bolt-on? Is there one area of business that you're -- if you can wave a magic wand you'd like to see built out, expanded? Is it more geographic? And now with new leadership in emerging markets, there's work to be done there from an M&A perspective, et cetera?

John P. Groetelaars -- President and Chief Executive Officer

Yeah, sure. Rick the -- I think the environment of the pipeline around M&A is largely bolt-on and tuck-in. Those, from our point of view, represent better financial metrics, better strategic fit opportunities and really help support our overall strategy of category leadership. So when you think about, are they kind of product companies or are they geographic integrations where we're buying a distributor? It's primarily technology, almost exclusively technology companies that we're looking at and building out the portfolio, filling in product gaps or really finding new growth vectors for the Company to supplement and support our category leadership.

Is there one business that favors over the other? Not really. We want to drive and we have business development resources now in each of our businesses as well as at corporate. So we're looking to fill the pipeline in all three business categories. And we're -- I'm optimistic that we'll have some transactions to talk about later in the fiscal year. But we like the way the pipeline is developing. We have certainly the balance sheet to take on several tuck-in deals throughout the year.

Our organizational structure, because it's so decentralized, would allow us to do that without any disruption. So we're -- I'm bullish and hopeful that we can find the right deals that fit strategically, first and foremost, drive accretive top-line growth and gross margin expansion and contribute to EPS, if not immediately, certainly by their second year. And given the transform -- given our optimization efforts in the P&L, if we did have some dilution in the first year, we would aim to offset that with our flexibility that we have within our optimization program.

Rick Wise -- Stifel -- Analyst

Great. And obviously with R&D still at 5% of sales and ever larger sales base, two things on the R&D front. One, where are you spending your money now? I mean, in the supplementary tables, we can see some of the new products that are ahead. But maybe again sort of a two-part question. Which of those products should we be paying most attention to from a -- five of them are single, but one could be a triple or a homerun? Just that kind of -- what's the most impactful? And where are you prioritizing or maybe you're there six months, where are you reprioritizing R&D?

John P. Groetelaars -- President and Chief Executive Officer

Yeah. Good question, Rick. I think on the last call, we talked about doing R&D reviews and going around the Company and doing a thorough kicking of the tires and assessing all of our programs and developments and making sure we were optimizing across the enterprise, optimizing our R&D spend. So as we enter the new fiscal year, we have done some reallocation within our portfolio to maximize our investment, rack and stack our priorities and really ultimately end up with a increased value of our pipeline. So I think that's number one prudent on our part to make sure we're allocating existing resources the best way possible.

And then the incremental ones, there were some really high-value projects that are not on our disclosed list of new products on this chart you see in the appendix, but our new platforms for growth in the future that go beyond our current LRP. So we're pretty excited about those as well and we want to make sure we have an ongoing robust pipeline of high-value programs.

To answer your specific question, I think some of the products we just launched that I mentioned in the prepared remarks are LINQ mobile, certainly our vest product which just got launched in the second half of the year, our next-generation RetinaVue which is planned for the second half of '19 should be a real breakthrough product on ease-of-use and simplicity. Our WatchCare incontinence device, which is now in the early phase of its launch as we enter the new fiscal year and our -- the -- our Vital Signs Monitoring -- EarlySense, sorry, for the stumble here. The EarlySense product line, which we are now adding as part of our portfolio in PSS for respiratory rate and heart rate detection on a non-invasive platform, I think are all pretty exciting programs that we're going to look to to really punch the top-line with growth.

In summary, it's probably not one single product that is the big contributor and I think that's a good thing. You want to have a diversified set of new products that contribute to that new product basket.

Rick Wise -- Stifel -- Analyst

Thank you very much.

Operator

Kristen Stewart of Barclays is on the line with a question. Please state your question.

Kristen Stewart -- Barclays -- Analyst

Hi. Good morning. Thanks for taking my question. Just to clarify, for the guidance for 2019 taking into account the ASC, so we should basically think about a recalibrated base of fiscal '18 at around $465 million -- or down to, I guess, as low as $465 million and then growing 7% to 9% off of that, so more of an implied range closer to, call it $498 million to $507 million. Is that the right way to think about it?

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

Yeah. The -- I think it's just recalibrated 2018 like we said with the reductions in the top-line and EPS up to $20 million on the top-line and a $0.10 on the bottom-line and then grow at the guidance levels that we've given in our guidance for 2019 of that recalibrated base, you'll get to a revised output or outcome for 2019. We'll obviously update that specifically at the end of our first quarter when we do our earnings call then.

John P. Groetelaars -- President and Chief Executive Officer

Yeah. We've had the adjusted EPS of 7% to 9% and excluding the stock-based comp, then you get to 12% to 14%.

Kristen Stewart -- Barclays -- Analyst

All right. Okay, great. And then, can you comment just on the tax rate because the tax rate that you talked about of 21% to 22% is a bit lower than what I was thinking and lower than the LRP? Has the LRP changed from a tax rate perspective? How should we just think about that?

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

Just a little bit, I suppose. Here's a -- one way to think about it. As we ended this 2018 at a 19.5% rate, about 4 point benefit comes from stock-based comp, which gets you up to about 23.5%. We've also though got the reduction in the overall tax rate. We have a full four quarters now of tax reform impact, which gets us around 2 points. And then we have an ongoing -- every year, we're looking at opportunities for us to become more tax efficient.

And as we look at 2019, some of the things that we have on-board get us comfort to that 21% to 22%. We -- I think the essence of your question is, can we continue to do that on an ongoing basis? And that's certainly our objective. I'm not at this point going to call down necessarily our LRP number. But clearly, as you can see, we feel confident in our ability to beat that 24% rate in 2019.

Kristen Stewart -- Barclays -- Analyst

Okay. And then I guess to the extent that you are able to keep to this sort of rate over the LRP, how should we just think about the potential of the bottom-line impact and the growth of EPS? Would you be more inclined to reinvest some of that upside from a tax perspective? And how do I think about that? And then also considering you have, I think it was $50 million in potential optimization savings. How should I just think about that potential, I guess, balancing all these things together?

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

Yeah. I think great question and I think you used the right word there, which is reinvest. We're looking for every opportunity we can across the entirety of what we manage all the way down through tax to figure out how we can become more tax efficient, more efficient in our operations through our optimization -- business optimization program to free up funds, free up fuel to reinvest back in the business and grow the top-line.

So I think you should think about any benefits we can get on top of earnings. The earnings per share guidance that we've already laid out for the long-range plan, the 12% to 14% growth, you should think about that being kind of the constant and anything we can generate on top of that in any element of our P&L that we're going to use that to figure out ways to reinvest and grow the top-line.

John P. Groetelaars -- President and Chief Executive Officer

Yeah. And Kristen I think you know -- and I think you know Kristen here is we want to reinvest in, right, our innovation pipeline and our emerging markets are the top two priorities.

Kristen Stewart -- Barclays -- Analyst

Thanks very much guys.

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

Yeah.

John P. Groetelaars -- President and Chief Executive Officer

Thank you.

Operator

Matthew Mishan of KeyBanc is on the line with a question. Please state your question.

Matthew Mishan -- KeyBanc -- Analyst

Yeah. Thank you very much. John, you know the international market very well with your history. This was a tough quarter. What's -- what were the headwinds there? You've already made a ton of changes. Middle East and Latin America a couple of years ago already bottomed up pretty significantly, it wasn't a tough comp. What's going on internationally? Is this a Hill-Rom-specific issue or a market issue with your portfolio?

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

I think what's going on there is -- if you take a step back first of all, we -- two years in a row, we're getting 2% core growth on a full year basis. We're definitely -- we have seen movement from quarter-to-quarter of -- as an example last year Q1, 8% growth rate internationally. This year, it's a head -- this -- and as we exit the year, it's a headwind. So the movement quarter-to-quarter is something we are looking to manage more effectively on a go-forward basis and deploy management process where we have better visibility and understand what's coming in and can forecast more accurately and put that into our guidance.

So we feel good as we enter 2019 that we've got that captured in the right way. As we enter this year, we have a strong first quarter and second quarter internationally to overcome. So a lot of our international growth in '19 will once again be a little bit push toward to the second half. However, as we enter the year, we're feeling confident about the guidance we have issued here.

So a long answer to your question perhaps, but I think the management systems we're putting in place to get better visibility and better month-to-month and quarter-to-quarter traction in international will help with that movement in the growth rates from the international market. We had an unusually robust first half of the year in Europe in 2018. We're -- and we don't necessarily expect that to repeat itself. So we're looking to have our emerging markets of Asia-Pacific and Latin America really contribute in the second half of this year as we rebuild that organization.

Matthew Mishan -- KeyBanc -- Analyst

That's helpful. And then, could you walk through the rationale of why surgical OEM has been moved from core to non-core? Kind of why now? And then help us with the quarterly cadence of the non-core run-offs for our modes in '19. And then into -- and I guess into 2020 as well, it looks like there's going to be about $50 million of business, it's going to be continuing to be run-off?

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

Yeah. I'll turn over that second part of the question over to Mary Kay. But on the first part of the question, the rationale for surgical or international OEM in the surgery business to going to non-core, it's pretty straight-forward. One, it's a lower margin business. Two, we don't have control of our end market destiny there. We're making equipment for our two other -- in this case, two other large equipment manufacturers and there was -- they've planned to integrate this product into their manufacturing. So they're doing vertical integration.

They've had a timeframe that wasn't clear to us. So we want to take control of our own destiny here and make sure we can wind this business down in a rapid as fashion as possible. We hope to get that done largely in 2019 and there's something -- there might be some small tail that comes into 2020. But our objective, as we talk here today, is to exit those businesses. They represent low-margin businesses. Obviously, a headwind on growth on the top-line. It's not strategic or supportive of our category leadership strategy, so we're exiting as quickly as we can.

And from a scheduled point of view, Mary Kay, do you have any comments you can add?

Mary Kay Ladone -- Vice President, Investor Relations

Sure. So Matt, I would refer you to page 22 in the supplemental presentation, where we give a quarterly breakout of PSS and surgical non-core. As we said in the prepared remarks, non-core revenue in 2018 was a $110 million for the full year and that's going down to $50 million for 2019. In PSS, we've completely exited those businesses. So it's -- call it $45 million of revenue going down to zero in 2019. The surgical piece will decelerate in revenue as we go throughout the year. So the way you should look at it is about a, call it $15 million to $20 million, headwind in Q1 and then that headwind will be reduced in each of the quarters through Q4.

Matthew Mishan -- KeyBanc -- Analyst

Thank you very much.

Operator

Isaac Ro of Goldman Sachs is on the line with a question. Please state your question.

Isaac Ro -- Goldman Sachs -- Analyst

Good morning. Thank you, guys. So John, appreciate all the detail you've given us on the strategic plan with regards to the pending divestitures and the plan toward higher growth. I'm curious, how you would try and characterize when we will be through the majority of this transition period as it relates to the divestitures? Could that process extend well into fiscal 2020? And I'm just kind of curious, whether or not there are potentially other areas that could come under review here? Just trying to look for a period when we'll get to more of a normalized growth on the numbers.

John P. Groetelaars -- President and Chief Executive Officer

Yeah. Good question, Isaac. Our objective is to exit these as rapidly as we can and try and get the vast majority of that done in 2019. As we sit here today, there's probably a small tail that goes into 2020 -- in the first half of 2020, but we should be done at that point. And as we look at the portfolio and as I mentioned earlier, I think we can only talk what we see today. As we thoroughly look at our portfolio, this was everything that we feel we'd need to capture in non-core and we've go it captured. This should be the final chapter of this optimization portion of our portfolio.

Isaac Ro -- Goldman Sachs -- Analyst

Okay. That's helpful. And maybe just a follow up on that. Is it possible that you guys would execute acquisitions concurrent with the divestitures? I mean, if I just think about the numbers that could get a little complicated, if you guys were in the process of acquiring companies, while you're divesting assets. So I'm curious the overlap that we might see over the next, call it 12, 18 months, however you want to frame the divestitures cycle. Thank you.

John P. Groetelaars -- President and Chief Executive Officer

Yeah. Well, we certainly wouldn't hesitate in slowing down any acquisition activity. This -- it's not -- from a Management point of view, it's very easy to manage these multiple work streams. We have the people and the resources to execute that well, we've done it in the past. So we're resourced to do it. We will strive to be as transparent and clear about what all the moving pieces are in our guidance, should those events happen. And we have some acquisitions that help offset some of this as well. So we'll do our best there, but we're not going to slow down our strategic initiatives to drive M&A as a result of some of this divestiture.

Isaac Ro -- Goldman Sachs -- Analyst

Okay. Got it. Thank you, guys.

Mary Kay Ladone -- Vice President, Investor Relations

And Casey, we have time for one last question.

Operator

Thank you. Michael Matson of Needham & Company is on the line with a question. Please state your question.

Mike Matson -- Needham & Company -- Analyst

Good morning. Thanks for squeezing me in. I guess -- I just wanted to ask, I understand the kind of rationale for not including anything for SBC in the tax rate for 2019, but it seems like there -- I guess, from my perspective that there probably will be some sort of benefit there. I mean, what would have to happen for you to not have any benefit to your tax rate from SBC in 2019? Would it have to do with, if the stock went down a lot or something like that?

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

Well, just it's hard to -- Mike, it's hard to forecast what individuals are going to be doing on their stock-based comp and whether or not people are going to exercise options or going to -- and what the stock price is going to be at any given point in time when RSUs vest. So rather than take a flyer on a very highly unpredictable item on my P&L what we've chosen to do is not put anything in and then be very transparent like we have been in the past, that's exactly how much benefit is going to flow through at any given point in time.

Mike Matson -- Needham & Company -- Analyst

Okay. I understand. So that's kind of the point I was making is that sort of a source of potential upside to the guidance that you've given.

John P. Groetelaars -- President and Chief Executive Officer

Yeah. And obviously, in this case, we didn't have -- it's very hard to predict within a quarter what that benefit might be. If we get any ability to see it coming, we will look to make some reinvestments if we can do it in the quarter. But otherwise, it's going to flow through and it's going to be a one-time benefit, but it's not -- really not really operational.

Mike Matson -- Needham & Company -- Analyst

Okay. And then --

John P. Groetelaars -- President and Chief Executive Officer

Okay. Go ahead.

Mike Matson -- Needham & Company -- Analyst

No, no. Sorry, go ahead.

John P. Groetelaars -- President and Chief Executive Officer

No, I was going to wrap up. But you got a question yourself.

Mike Matson -- Needham & Company -- Analyst

I just had one additional question, a quick one, sorry, on currency. What's the currency headwind if anything to your -- to 2019 -- the guidance? And then, can you just remind us about your general bottom-line grid of currency exposure you have there? Thank you.

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

Yeah. On the bottom-line Mike, not a lot. We've got about a 1 point on the top-line and we generally are fairly well naturally hedged and take care of other exposures as they come up, but not a material number impact on the bottom-line.

Mike Matson -- Needham & Company -- Analyst

Great. Thank you.

John P. Groetelaars -- President and Chief Executive Officer

Well, let me just wrap up and say thanks for the call everybody. We feel great about the way we finished the year. Very confident as we head into '19 on our ability to deliver mid single-digit organic growth, from where we are today without the inclusion of M&A and that's really driven off the backs of new product innovation and new product growth. And, of course, if we can -- when we get our international businesses clicking more consistently, I think there's even a nice opportunity to hit the -- the high-end of that range. So -- or beyond. But thanks very much for the call and we'll talk to you next quarter.

Operator

Ladies and gentlemen, this concludes today's conference call with Hill-Rom Holdings, Incorporated. Thank you for joining.

Duration: 66 minutes

Call participants:

Mary Kay Ladone -- Vice President, Investor Relations

John P. Groetelaars -- President and Chief Executive Officer

Steven J. Strobel -- Senior Vice President and Chief Financial Officer

Robert Hopkins -- Bank of America -- Analyst

David Lewis -- Morgan Stanley -- Analyst

Larry Keusch -- Raymond James -- Analyst

Rick Wise -- Stifel -- Analyst

Kristen Stewart -- Barclays -- Analyst

Matthew Mishan -- KeyBanc -- Analyst

Isaac Ro -- Goldman Sachs -- Analyst

Mike Matson -- Needham & Company -- Analyst

More HRC analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.