Hill-Rom Holdings, Inc.
Q2 2018 Earnings Call Transcript

Published: 27 Apr 2018

[Operator:]

Good morning, and welcome to Hill-Rom’s Fiscal Second Quarter 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 would 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:]

Thanks, and good morning, everyone. Thanks for joining us for our fiscal second quarter 2018 earnings conference call. Joining me today are John Greisch, 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 hill-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 details 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 Greisch:]

Thanks, Mary Kay. Good morning, everyone, thank you for joining us today. Before we discuss our second quarter operational and financial results, I want to take a few minutes to talk about the exciting leadership announcement we made earlier today. As you all know, in January, I announced my plans to retire from Hill-Rom. Since that time our Board has been engaged in a robust search process to identify the right leader to take the reins. And I’m delighted that we’ve announced that leader today. Effective May 14, John Groetelaars will become President and CEO of Hill-Rom. John is an industry veteran with more than 25 years of experience in medical devices, most recently serving as Executive VP and President of the Interventional Segment at Becton Dickinson. Prior to that, he served in a variety of roles at CR Bard during his 10-year career there, including as a Group Vice President and Group President from 2013 to 2018. John brings exceptional industry knowledge, global operations experience and a strong track record of successfully leading and growing medical device businesses. Perhaps most importantly, he has a unique appreciation for our culture and our customer first focus. And John looks forward to meeting with all of you in the future. With that, let’s turn to our results. As you saw in our earnings release issued this morning, Hill-Rom delivered another solid quarter and we’re pleased to be raising the low end of our full year adjusted earnings per share range by $0.03 to $4.60 to $4.65 per diluted share. Second quarter adjusted earnings of $1.05 per diluted share exceeded our guidance range and increased 19%, our 11th consecutive quarter of double-digit earnings growth. Core revenue growth combined with benefits from our diversification and operational efficiency initiatives resulted in operating margin expansion of 120 basis points. Strong operational performance and a lower tax rate afforded us flexibility to reinvest in key strategic initiatives, while delivering upside to our earnings guidance. Ongoing international momentum and contributions from new products were key drivers of core revenue growth, which once again increased 2% in line with our guidance. Benefits of our portfolio diversification initiatives helps to offset a decline in our Patient Support Systems revenue where we face a very challenging comparison. In our International business, sustained momentum and solid execution resulted in 6% core revenue growth. Our One Hill-Rom approach, strong leadership team and disciplined focus on higher-margin growth opportunities have resulted in five straight quarters of international core growth of at least 5%. With all three businesses contributing to this performance, we are encouraged with our progress and expect this positive trend to continue throughout 2018 and over our long range plan. Innovation remains a key strategy for our company. As you may recall, new products contributed approximately $150 million in revenue in 2017. With revenues of more than $100 million in the first half of 2018, we’re well on our way to achieving new product revenue at approximately $200 million for the full year. Let me take a moment to comment on some recent commercial, portfolio optimization and innovation achievements. First, in Patient Support Systems, we continue to optimize our product portfolio. We recently announced an agreement to divest the vast majority of our third-party rental business, which consists of OEM movable medical equipment rented to customers. This portion of our rental business along with the third-party surfaces business, we’re in the process of winding down our both lower growth and margin non-strategic assets. And our actions will allow us to redirect resources and investment towards innovation, enhance commercial capabilities and other attractive growth prospects across the company. Within our core PSS business, clinical workflow solutions revenue has advanced 10% so far this year with significant demand from several large hospital systems, while core revenue – core net revenue has been flat. Not only we did have a difficult growth comparison in the second quarter as Frames and Surfaces grew in mid-teens last year, we have many large Centrella orders pending as customers complete their clinical evaluations and capital approval processes. Just five months into the launch, feedback from clinicians on Centrella continues to be positive and our backlog is exceeding our early expectations. With Centrella revenue accounting for more than 40% of our U.S. Med Surg revenue in the second quarter, we’re confident in our ability to accelerate growth as we capitalize on Centrella’s differentiated features, aimed at transforming chair with increased patient safety, satisfaction and caregiver efficiency. Within Front Line Care, strong overall performance at Welch Allyn and new products contributing to accelerated revenue growth. Our higher margin respiratory care business is leading the way with double-digit growth. Our product offering helps address patients’ airway clearance needs in both the acute care setting and at home. This includes our best products used by patients with cystic fibrosis and other chronic respiratory conditions, as well as the MetaNeb System, a device which combines lung expansion, secretion clearance and aerosol delivery into a single efficient therapy. Earlier this year, we presented new data from a robust multicenter study demonstrating that our MetaNeb System reduces the incidence of post-operative pulmonary complications in high-risk patients. It lowers time spent on a ventilator, decreases length of stay, as well as total cost of care. With strategic investments in our vision for all campaign, we continue to promote the early detections of vision issues in both children and adults. Recently we announced enhancements to this Spot Vision Screener, enabling the device to quickly and effectively screen for vision issues not only in patients as young as six months of age but now also in adult patients with pupil sizes as small as 3 millimeters, a first of its kind application in the vision screening device sector. And with the Welch Allyn RetinaVue network, we are making diabolic – diabetic retinopathy screening simple and affordable for the primary care setting. We have successfully expanded our specialty vision sales force, and it has now screened more than 200,000 patients since the launch of the device in 2016. Our investments to expand our commercial team are already having success as we focus on the largest IV-ends and Independent Physician Association in the United States, but we have large implementations planned within three of the major physician practice groups in the country. With the amounting incidence of diabetes and more than 30 million Americans with the disease today, RetinaVue continues to be one of our most exciting long-term growth opportunities. Finally, our surgical business continues to outperform our expectations. We are enhancing our surgical instruments and patient positioning portfolios with the introduction of new products and enhancements. This includes the new Bard Parker Plus Blade with Loader designed to enhance safety and reduce sharp injuries in the operating room, as well as the latest safety and ease-of-use upgrade to our Allen Advance Surgical Table used in complex surgical procedures. Surgical equipment growth continues to be robust driven by our iLED 7 surgical lights and surgical tables including the TruSystem 3000 mobile operating room table for International markets, as well as the Integrated Table Motion. Integrated Table Motion placements are very strong and we are driving a very high attachment rate with new da Vinci Xi robots. These are great opportunities to increase our penetration in the U.S. and we are also optimistic about the future acceleration of placements in select international markets like Japan. Overall, our key strategic focus in our surgical business is to drive sustainable growth by focusing on safety, efficiency and partnerships. We are investing in the hybrid OR opportunity and robotics and we’ll partner with other medical technology companies to improve the breadth of our offerings around the world. So to summarize, I’m very pleased with our strong financial results for the first half of 2018, and solid progress on meeting our long range strategic objectives. Up 2% core revenue growth was better than expected and adjusted earnings advanced more than 20%. This performance reflects our team’s success in building a more diversified and stable business, investing in innovation and improving our operational execution to generate enhanced value for patients, caregivers and shareholders. Now let me turn the call over Steve for a review of our second quarter financial results and outlook for 2018. Steve?

[Steve Strobel:]

Thanks, John, and good morning, everyone. As mentioned in the press release, we reported GAAP earnings of $0.42 per diluted share in the second quarter compared to $0.51 in the prior year. These results reflect after-tax special items related to recent tax reform legislation, intangible amortization, business optimization and other special charges. Adjusted earnings of $1.05 per diluted share increased 19% exceeding our guidance range of $1 to $1.02 per share. Now let me briefly walk through the P&L before turning to our 2018 financial outlook. Starting with revenue, for the fiscal second quarter, revenue of $711 million grew 5%. On a constant currency basis revenue increased 2%. Domestic revenue increased 1%, while international revenue advanced 4%. Continued strength in our International business was the result of double-digit growth in Canada and the Middle East, and positive trends in Europe and Latin America. Core revenue increased 2% in line with our expectations. As a reminder, Q2 core revenue growth adjusts for the impact of foreign currency divestitures, non-strategic assets we plan to exit and Mortara prior to the anniversary date of the acquisition. Before moving on, keep in mind that as I discussed each business segment I will address revenue growth on a constant currency basis only. Starting with Patient Support Systems, revenue of $355 million was down 5%, while core revenue declined 1%. Domestic core revenue declined 5%, as accelerated growth in clinical workflow solutions, patient handling and services was offset by decline in bed systems. As John mentioned, we had a very challenging comparison particularly in our Frames and Surfaces business, with growth of mid-teens last year. Adjusting for large orders from two major customers last year, our core U.S. PSS business was flat similar to Q1, and Med Surg was up double digits. With anticipated momentum in bed system growth in the second half of the year, we are encouraged by our building backlog and the growing number of large pending orders as customers complete their clinical evaluations and obtain capital approvals. Outside the U.S., core Patient Support Systems revenue increased 7% driven by strength in core bed systems, patient handling, and service revenue particularly in Canada, Latin America, and the Middle East. Now moving to Front Line Care, revenue increased 11% to $238 million. Core revenue growth which adjusts for Mortara prior to the acquisition anniversary date, accelerated to 6%. Core U.S. performance of 6% was driven by contribution from new products, solid growth in thermometry, blood pressure and physical assessment tools, and another quarter of double-digit growth in our respiratory care business. International revenue was again strong with core revenue of 7%. Europe was particularly strong as we continue to focus on increasing penetration with our Welch Allyn portfolio, and leveraging Hill-Rom’s geographic presence, brand and infrastructure. Lastly, Surgical Solutions revenue increased 6% and totaled $118 million. Growth was balanced with solid performance in the U.S. and strong momentum in the Middle East and Europe. Integrated Table Motion revenue grew in double digits, and other innovative products like the iLED 7, and the TruSystem 3000 mobile operating table also contributed to our new product momentum. Now turning to the rest of the P&L. Adjusted gross margin of 49.3% improved sequentially by 160 basis points, and 130 basis points versus last year, reflecting positive contribution from mix, primarily related to our portfolio optimization initiatives and new products, as well as benefits from our manufacturing cost and sourcing efficiencies. R&D spending of $35 million declined 2%, while R&D as a percentage of revenue was 4.9% in line with our long-term objectives. Adjusted SG&A of $201 million increased 6%, which includes the incremental impact of Mortara. Disciplined cost management partially offset other selling and marketing investments, supporting new products and initiatives to enhance our global commercial capabilities. Our adjusted operating margin in the second quarter was 16.2%, an improvement of 120 basis points compared to prior year. The adjusted tax rate of 21.4% benefited from the impact of U.S. tax reform and stock-based compensation. So, again, bottom line, second quarter adjusted earnings were strong, advancing 19% to $1.05 per diluted share. On a year-to-date basis, adjusted earnings of $1.97 per diluted share are up 21%. Excluding the benefit of tax reform, adjusted earnings increased 13% for the first half of 2018. Turning to cash flow, on a year-to-date basis cash flow from operations of $126 million was in line with last year. Growth in cash flow has been impacted by higher inventory levels to support our manufacturing consolidation initiatives and new product launches. We expect inventory levels to decline by the end of the year. Capital Expenditures in the first half of 2018 were $51 million, $4 million higher than the prior year period. As a result, year-to-date free cash flow of $74 million is slightly below 2017. In terms of the balance sheet and financial leverage, we have reduced debt levels this year by $60 million and at the end of March, our debt to EBITDA ratio was 3.8. Now let me conclude this portion of the call by providing our fiscal third quarter and full year 2018 outlook. For the full year, we continue to expect reported revenue growth of 3% to 4%, and constant currency growth of 2% to 3%. Core revenue which is expected to increase approximately 3%, excludes foreign currency divestitures, non-strategic assets we plan to exit and Mortara prior to the anniversary date of the acquisition. As you may recall, collectively divestitures and non-strategic revenue in 2017 totaled approximately $100 million, with the divestiture of the third-party rental business in the third quarter, non-strategic revenue is now expected to contribute approximately $40 million in revenue in 2018. By business segment, we now expect Patient Support Systems revenue to decline in the low-single digits reflecting the impact of the third-party rental divestiture. Core PSS revenue is expected to increase in low-single digits, reflecting second half momentum, and continuation of a stable capital spending environment, consistent with our prior guidance. For Front Line Care, reported growth is expected to be in the high-single digits with core growth of low- to mid-single digits, and we expect low- to mid-single digit growth for surgical solutions. From a profitability standpoint, we now expect adjusted gross margin to expand 75 basis points and exceed 49%. This is higher than our original guidance reflecting strong first half performance. We expect R&D spending of approximately 5% of sales and adjusted SG&A of 27% of sales reflecting further investments behind our growth initiatives. We continue to expect adjusted operating margin expansion of approximately 100 basis points. Other expenses including interest of $90 million and a tax rate of approximately 23%. Recall that the benefit from U.S. tax reform legislation of $0.30 per diluted share was reflected in our updated guidance last quarter. Lastly, we expect a share count of approximately 68 billion shares. So to summarize, this guidance translates into adjusted earnings of $4.60 to $4.65 per diluted share. We are raising the low-end of our previous guidance range with this $4.57 to $4.65 per diluted share by $0.03. From a cash flow perspective we continue to project operating cash flow of approximately $350 million with capital expenditures of around $110 million. We project free cash flow of $240 million for the full year. For the third quarter, we expect reported revenue growth of approximately 3% and constant currency growth of approximately only 1%. On a core basis, we expect revenue to increase 3% to 4% and our provided guidance for adjusted earnings of $1.12 to $1.14 per diluted share. And now, I will turn the call back over to John.

[John Greisch:]

Thanks, Steve. Let me wrap up our prepared comments with a few perspectives First, we’re very pleased with our financial performance for the first half of the year, as our team continues to execute successfully on our key strategic priorities. Solid core revenue growth, building momentum with new products and execution on a number of margin expansion opportunities have allowed us to deliver adjusted earnings growth above our first half expectations. As this is my last earnings call, I’d like to take a moment and thank you for your support. I’m extremely proud that I have lead Hill-Rom for the last eight years through a significant transformation, consistently delivering on our strategic and our long-term financial objectives, while achieving the top-tier shareholder returns. We are fortunate to have a strong leadership team that is passionate about helping people get better care, both inside and outside the hospital as well as creating enhanced value for shareholders. We have great momentum as we wrap up the first half of 2018, and I know John is excited about leading the team during our next phase of exciting growth. I would like to thank our employees around the world for their dedication and hard work to position Hill-Rom for sustained success. I have the utmost confidence in the strength and long-term potential of our business and I look forward to watching Hill-Rom succeed well into the future. With that, let’s open the call for Q&A.

[Operator:]

Thank you. We will now begin the question-and answer-session. [Operator Instructions] Our first question comes from Bob Hopkins of Bank of America. Your question, please.

[Bob Hopkins:]

Thanks and good morning. And, John, again, congratulations on all the success.

[John Greisch:]

Thanks, Bob.

[Bob Hopkins:]

Yes, absolutely. I just wanted to start out actually asking about the big announcement today in terms of bringing on John to be CEO of the company. I think you made some comments in the prepared remarks, but, John, I was running if you could talk a little bit more specifically about why John is the right guy for this job and maybe a little more about the process, and just some specifics on why this was the right choice for Hill-Rom at this time.

[John Greisch:]

Yes, I’ll be happy to, Bob. The process was a very thorough one, as I mentioned in our prepared comments. We scanned the landscape outside of the company, we looked at people inside the company, we had a number of great choices to choose from, and John was selected for really a number of reasons. One, he’s got a great background, global experience, managing multibillion dollar businesses both at Bard, obviously most recently BD part of that Boston Scientific and Guidan and Lilly. And his experience with highly successful companies, you know Bard well, Bob, it’s a successful as any device company out there in terms of its long-term performance, and John had a huge hand in that under Tim and John Wylan’s guidance. I think also, culturally he’s an outstanding fit. Our Board spent a lot of time him. I have spoken to him. And I think his appreciation of what we’ve done, and our appreciation of the culture that we have here, which in many ways is very comparable the Bard, I mean, that’s been one of the role models that I tired to pattern our growth and financial performance after I think makes him an outstanding fit. And with the global experience he’s got, and like as I mentioned, multibillion dollar P&L management, I think, he is as prepared as anybody that we spoke to come in and take the reins here.

[Bob Hopkins:]

Terrific, thanks for that. And I just – as my follow-up, I want to ask kind of big picture question on revenue growth. I know you’re on the first half year you’ve hit your core guidance. Obviously, things need to accelerate in the back half day to hit the guidance for the year. And again, I know you’re getting your guidance, I think there’s a hope though that here we can start to really see some true acceleration here in the revenue growth profile of this company. So maybe, John, talk about your confidence in your back half revenue growth, and the achievability of your targets. And then maybe within that one specific comment on PSS, especially in the U.S., like if you keep growing Med Surg double digits, will you exceed the low-single digit target for the year for the whole division? Thank you.

[John Greisch:]

Sure, Bob. So a couple of perspectives on that. If you look at what we’ve done over the years with the portfolio, with the diversification that we’ve made by building the surgical business, building FLC, those diversification moves have enabled us to deliver not only positive revenue growth at a time when PSS lumpiness were that you all are very familiar with, continues to hit us on a quarterly basis and we’ve overcome that here in the first half of the year, not only delivered revenue guidance overall in line with our – revenue performance in line with our guidance overall, but more importantly deliver the double-digit earnings that we’re looking for. As we look forward, particularly in the second half of this year, our confidence in delivering the accelerated revenue performance, which is very much in line with our expectation as we came into the year, is driven by – a turnaround with PSS as you rightly point out, Centrella, we expect a strong second half. We’re very pleased with the first half of the year with Centrella. As Steve mentioned, excluding a couple of large orders last year Med Surg did grow double digits here in Q2. And Centrella is going to contribute even more here in the second half of the year. In addition to Centrella and PSS having a stronger second half of the year, which is not unusual for us, it tends to be a stronger second half and first half. The new product contributions from the rest of the portfolio will continue to contribute to accelerated revenue growth, very much in line with our expectations as we came into the – I think, the year, six months ago. I’d rather not comment on what’s the likelihood of over delivering on our second half revenue performance. But as PSS overall delivers positive growth, as International continues to perform outstanding lead across the regions, I think I’ve been saying for the last several quarters, that continues to be probably the most underappreciated part of our turnaround here in terms of accelerating our revenue performance, and you’ve seen that now with five straight quarters of 5-plus-percent growth, that surgical consistently performing and obviously FLC. I think we’re on the cost of really delivering the revenue growth that not only we expect, but as you said that investors are looking for. And as we do that, the gross margin and the operating margin performance that we’ve had here in the first half of the year, we’re extremely pleased with as well.

[Bob Hopkins:]

Great. Well, thank you for that, and best of luck.

[John Greisch:]

Okay. Thanks a lot, Bob.

[Operator:]

David Lewis with Morgan Stanley is online with the question. Please state your question.

[David Lewis:]

Good morning. And John, congrats again on the retirement, as I said last quarter, we obviously can’t argue with the value you and the team created, and I’ll try to pretend that maintaining the John G legacy is just a coincidence.

[John Greisch:]

JG 2.0, David.

[David Lewis:]

That’s right. So just a couple of quick questions for me. On PSS, I think Steve said it’s a flat U.S., we had down ex-U.S. and that maybe wrong. But just in terms of the European debt hold, one of your competitors talked about implications of some European slowdown. Was that an issue at all in the quarter because that would be an issue in the back half of the year? And just two related questions on that on Centrella. It sounds that the pipeline is exactly where you thought it would be this time of the year. And the Table Motion in Japan, have you already started to see demand build kind of post expanded Japanese reimbursement for intuitive, and then I have a quick follow-up for Steve.

[John Greisch:]

Yes, I’ll take a couple of those and I’ll let Steve address the PSS mix. So we’re having a heck of a year in Europe across the board including PSS. I think a lot of it is execution of our team and the power of the diversified portfolio that we’ve talked about. But within PSS we’re also having a strong year in Europe. So we’re not seeing a lot of weakness in Europe and in any of our businesses. Integrated Table Motion, we’re just beginning with our potential in Japan and as you all know it’s a highly reimbursed market and technology demand in Japan is as strong as anywhere else in the world, and we’ve got our relationships now established in Japan for us to capitalize on that opportunity there going forward, so that’s still ahead of us. Steve, you want to take the mix U.S. versus International?

[Steve Strobel:]

I think PSS – actually PSS International in the second quarter was good. We were – we grew internationally PSS.

[Mary Kay Ladone:]

Yes, David, it’s Mary Kay. I’d just add, we were down 2% on a reported basis, but core revenue was up 7% because we have bulk of the divestiture in international that created a difficult comp on a reported basis.

[David Lewis:]

Okay. That’s helpful, thank you, Mary Kay. And then, Steve, just I think you talked about this, but your gross margin is up, operating margins not. You talked about some slight reinvestment. Can you just give us a sense of where every investment is going? Thanks so much.

[Steve Strobel:]

Sure. I think it’s against the innovation that we’ve got in the business right now, particularly in the higher margin, higher growth areas of our vision care business, as well as our respiratory care business, and obviously we’re going to be spending against the Centrella new product innovation and in PSS. So the areas that we’re – that we want to grow, the higher growth, higher margin elements of our business are where we want to put our money.

[John Greisch:]

The only thing I’d add to that David, where you’re seeing the growth accelerate particularly in international and surgical or adding channel investors behind both of those areas in addition to the vision business as Steve mentioned, and in addition to our enterprise accounts team here in the United States to capitalize on the leverage of the portfolio that we enjoy now. So we’ve been fortunate here in the first half of the year with stronger gross margin performance. And as Steve mentioned, we raised our full year outlook. And as we did in the first quarter we’re reinvesting that behind the growth opportunities we’ve got and still delivering strong double-digit earnings at 100 basis point operating margin for the full year.

[David Lewis:]

Okay, very clear. Thanks so much.

[John Greisch:]

Thanks, Dave.

[Operator:]

We have Rick Wise with Stifel on the line with the question. Please state your question.

[Rick Wise:]

Good morning, everybody. Good morning, John and thanks – excellent quarter.

[John Greisch:]

Good morning, Rick.

[Rick Wise:]

As you exit, thanks for another good quarter. Let me start off on some comments Steve that you made, the cash flow commentary on inventory supporting your consolidation initiatives, can you – it’s the first time I’ve really heard you talk I think so plainly for me about plant consolidation initiatives. I knew you had some excess facilities. Is this a new initiative? Maybe help us understand a couple of questions, how big – if you hadn’t had that inventory investments what would free cash flow or operating capital and how we want to discuss it? And what’s the scope of this plant consolidation and implications for long-term margin? A lot of questions in there.

[Steve Strobel:]

Yes, got it. Thanks, Rick. This is our ongoing plant consolidation program. We’re consolidating some of our services business. We’re consolidating our plants – a couple of surgical plants. So the inventory preparation for that hits us here in the second quarter. And so I guess the other elements of our inventory build here in the second quarter as I mentioned is that in preparation for the Centrella launch. So all of those things combined not for the inventory build, our free cash flow in the first half would have been probably in the double digits. It’s a good $20 million plus inventory build combined across the plant consolidation, preparation – inventory preparation, as well as the preparation for the Centrella launch. And I expect as I said in the prepared comments that inventory will decrease over time. When we laid out our long range plan several years ago, we talked about a plant optimization program. And we’re at the final stages of that effort. And these couple of plant consolidations that we have here are toward the end of that.

[John Greisch:]

Yes, Rick. We’ve closed and are in the process of closing approximately seven facilities. We closed couple this year, as Steve mentioned, in conjunction with our surface manufacturing consolidation and we closed about five over the last two years or three years. So we’re going after the ones that lend the opportunity to, as you said, accelerate our margin opportunities. And I think we’ve talked pretty openly over the last year about the surgical consolidation that cost us a margin last year, and I think it was about 50 basis points if I remember correctly. That’s turning around nicely and contributing to the margin performance that we are seeing here in 2018 as well as some of the smaller plants that are being closed as we see.

[Rick Wise:]

Great, another question, the flu, can you quantify whether flu had much of an impact on second quarter or not so material, just wondered to what extent that contributed to the good results?

[John Greisch:]

Not a material impact, Rick.

[Rick Wise:]

Okay, good. And then just last from me. Obviously, John, innovation is key to the Hill-Rom story. You said it, you’ve been investing for several years and you’ve increased R&D spending. There are certain products we know, I think – one, what is the most excited – what you are most excited about as you look over the next six months or the next couple of years in terms of potentially being serious incremental growth driver? And how do we think about the – I’ll call it, the hidden pipeline. You’ve investing a lot. It’s got to be a lot more there than we know. I’d be curious, whether you could give us some thoughts there as well?

[John Greisch:]

Yes, couple of comments. As you know, Rick, we invested pretty heavily behind our PSS bed portfolio over the last five years. And that’s largely behind us now. As we look forward, I think, we’ve talked fairly openly about our non-hidden pipeline. And surgical is an area that’s really shown some growth here for us over the past year and we’ve made a couple of announcements here recently around partnerships in hybrid ORs with some of the leading hybrid OR players. Obviously, the Integrated Table Motion was a big hit for us. I think you’ll see some more coming out of our surgical portfolio as we go forward. And obviously, Front Line Care with Welch Allyn, respiratory care and Mortara, enhancing those portfolios, we’re going to continue to throw as much money, not only in the channel to capitalize on the products that we’ve already launched, but more innovation behind those. I’d rather not talk openly about anything that we haven’t spoken about previously. The reasons why some of the pipeline isn’t out there in the public domain, and we obviously, don’t want to put ourselves in a competitive disadvantage with some of the things that we’re looking at. But I think expectations investors should have going forward is very much the same in terms of what we’ve been doing over the last several years. I commented in my prepared comments that this year we’re going to see over a one-third increase in new product contributions from 2017, when we had about $115 million in revenue, we’re already over $100 million here at the halfway point of fiscal 2018 And I think, our commitment by 2020 was $350 million of new product contribution. So some of those – most of those we have talked about, some of them we obviously haven’t but continuing to enhance our portfolio, particularly in FLC and surgical, two key objectives for us. And the other thing that probably not during the LRP period integrate degree, but you have heard us talk about how do we use data and connectivity with our portfolio to provide meaningful patient data to our customers in a more efficient and concise way that connects some of the elements of our portfolio between our marketing capabilities or bed capabilities and our communications capabilities. You’ll see us put a lot of money behind that here in the next several years as well.

[Rick Wise:]

Thanks so much, best of luck, John.

[John Greisch:]

It’s all right, Rick. Likewise, thanks.

[Operator:]

Larry Keusch of Raymond James is on the line with a question. Please state your question.

[Larry Keusch:]

Good morning, every one, and again, John, best of luck in your retirement.

[John Greisch:]

Thanks, Larry.

[Larry Keusch:]

So just couple of questions here. So on your comments, John, around Centrella, I believe that you said that the backlog is actually above expectations. So maybe just spend a moment on really what’s resonating on the product with the customer base. And I think in the past you talked about some optimism that there could be an upgrade cycle that could come into play as well. So maybe share some thoughts there as well on that?

[John Greisch:]

Yes, I think the future is, we’ve talked about Larry on Centrella around patient safety, communications with caregivers, the enhanced surface that we brought out with the product, which helped reduce pressure alters and other skin deterioration issues have resonated with caregivers. And the enthusiasm, I’ve personally seen as well as our team has seen from customers is really universal across the Board. I’ve commented previously on your second question around a hope for acceleration of replacement investments. There’s a lot of beds out there obviously that were invested back in the hay day of 2005 to 2007 on the back of new product introductions from both us and one of our competitors. And we saw that accelerated investment there. We saw with our ICU portfolio with Progressa, I think it’s still early days on Centrella. The clinical evaluations of the product with capital investments around the bed replacement program don’t happen overnight. So I think we’re going through that with a lot of our customers and we’ve seen good success, both with Hill-Rom accounts and competitive accounts, and the improved backlog against our expectations is part of it. And I think the acceleration in our PSS bed business in the second half is directly correlated with those expectations. So I think I said last quarter, we probably won’t know until the second half of this year really how that acceleration is going to play out. And I think I’ll stick with those comments sitting here today, but the quoting activity, the customer response has been incredibly positive and we’re very excited about the contributions that Centrella is going to make, not only in the second half of the year, but as we move forward also.

[Larry Keusch:]

Okay, terrific. And then just two others, you’ve obviously spoken about the strength of the overseas business and specifically around Europe. Maybe just touch on Asia. You certainly had some self-inflected issues last year and so, again, sort of an update on kind of where you stand in Asia? And then lastly, for Steve, I was just, again thinking about your tax rate for this year, which you have obviously outlined. But I know there are some dynamics that change with U.S. tax reform given that you are a fiscal year company, and how do we sort of think about maybe just in broad brush strokes about next year’s tax rate? Thank you.

[John Greisch:]

Yes. So let me tackle international first and Steve can address taxes. There is couple of things going on in International. I’ll come to Asia in a second. But as I mentioned, this is the fifth quarter where we’ve seen 5-plus-percent growth out of International, which, as you all know, was not a real growth contributor for a number of years here. And in this particular quarter, 6% core growth against a very difficult comp that we had coming out of our Middle East business, where we tend to see a fair bit of revenue volatility out of that region because of the new construction going there. I feel great about the overall performance internationally against that tough comp. I think a lot of the investors were worried about our second half revenue expectations, because we had a tough comp in U.S. PSS, which we talked about, we also had a tough comp internationally. So again the strength in Europe, Canada, Latin America and in the Middle East will refine to that. Asia is still a bit of a work in process for us. And you rightly said, we have some self-inflicted wounds there. I think we choked on some of the integration of the businesses, starting early last year and we’ve got a new Asia-Pac leader in place, who is similar to John Groetelaars, brings significant experience in Asia as well as managing much larger businesses and much more complex businesses than we have. And he is in the process of rebuilding a couple of spots on his team. So I think as we come out of 2018, where we’re still going to have a flat to slightly down performance in Asia for the full year. That’s a tailwind, as we go into 2019, which I think, Carlos Alonso, our International leader and the whole team here feels very, very good about. So it’s the one area this year that I would say, we’ve been under performing against our expectations. We knew we came into the year with some weakness in Asia. We’re hoping to get it turned around a little quicker than we have. But fortunately, we have been able to compensate that with stronger performance. And I think it remains a pretty good tailwind as we look into fiscal 2019.

[Steve Strobel:]

Larry, on the 2019 tax rate, I guess, this is your question. I don’t want to get into guidance for 2019 yet, but I’ll talk to – just remind you what we had in the LRP, which was approximately 24% tax rate over the LRP period. This year, obviously, a little bit lower than that, and we’re benefiting from stock comp benefit this year. But I think you would expect actually in the out years for the tax rate to be down a little bit. And you recall that, when we talked about the U.S. tax reform last time, I mentioned that there were some clawbacks that come into play in the out years of our LRP that actually drive up our tax rate slightly. So over the LRP period, our tax rate is in that – as I said, that 24% range.

[Larry Keusch:]

Okay, thank you very much. And again, John, good luck. Take care.

[John Greisch:]

Thanks, Larry, same to you.

[Mary Kay Ladone:]

Carol, we have time for two more questions.

[Operator:]

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

[Isaac Ro:]

Good morning, thank you. Just getting back to the appointment of John Groetelaars. If you could, maybe, now the search is complete frame for us some of the key criteria that you and the Board looked for in a candidate, and to the extent that John matches those criteria. And maybe brings other things, i.e. experience sort of three or four most important trades that you think we should keep in mind if he takes over. Thank you.

[John Greisch:]

Yes, I may repeat what I said here, Isaac, but a record of performance in a company that was a high performer like Bard as well as his previous experiences was certainly at the top of the list. I think diverse global experience also a critical capability we are looking for. As you’ve seen and as you’ve heard this morning, our growth continues to be strong internationally. John has run Asia-Pac businesses. He has run European businesses. He has got a lot of global expertise that really has driven growth in the businesses that he has been leading. I mentioned the cultural fit, that’s incredibly important. And the time that we have spent with John gives us a high confidence, he’s going to come in here and leverage his experiences that fits with the culture of what we have built over the last eight years. It’s not something we talk a lot about, but the evolution of our culture here and his cool in many other companies, he’s directly correlated to the performance evolution that we have seen over the last several years. And I think John is going to fit in well with what we got here. His growth performance, his global experience, and again, having run multibillion dollar businesses at Bard positions him perfectly to come in here and hit the ground running and keep our momentum going.

[Isaac Ro:]

Understood, thanks. And then just a follow-up on the guidance for the rest of the year. Just trying to reconcile the full year outlook on SG&A. And if I look at the numbers, it seems like the guidance implies a bit of a decline in back half in terms of dollar SG&A, even though the percent of revenue goes up. I just want to make sure I had that directionally right on the expense side. Thank you.

[Steve Strobel:]

Yes, I think that’s directionally correct. We’re going to spend a little bit more, as I said, the previous guidance was around 26.5%, now gone up to 27%, so we’re going to be investing a little bit more, but directionally correct.

[Isaac Ro:]

Okay, thank you.

[John Greisch:]

Thanks, Isaac.

[Operator:]

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

[Matthew Mishan:]

Great, thank you. And congratulations, John, on the job you’ve done in Hill-Rom, and best of luck in the future industries.

[John Greisch:]

Thanks, Matt.

[Matthew Mishan:]

On Front Line Care, I mean, it was a really nice quarter. That area has been a little bit more up and down than I would have expected over last year or two. How sustainable are these trends especially with vision becoming more material and you’re building out the international channel?

[John Greisch:]

Yes, we think it is very sustainable. We’ve – you may recall in the first quarter, we had a tough comp there with a very large order that we won on the back of our relationship with one of our larger customers. Here in Q2 I think our core growth was 6%. And our expectation for the full year and for the LRP period is strong mid-single digit growth. So I think the international performance has been very strong. The new product contributions have been very strong and expectations for both of those continue to contribute, along with Mortara as that hits its stride here as we move into the second half of the year. I think this sustainability that positions us, we all feel good about.

[Matthew Mishan:]

Okay. And then you talked about the impact of tax reform on your outlook on the long range plan last quarter. Just wondering, do you have an outlook on – an update on how tax reform has impacted some of your customers and their capital expenditures?

[John Greisch:]

Yes. I think so far we haven’t seen anybody start spending more aggressively. A few of the for-profits have certainly commented that they are raising their CapEx expectations, and it really only as you all know affects the for-profits chains. So we have seen certainly comments about increased CapEx going forward, which, again, looking forward is another tailwind behind us particularly around some of our more capital intensive portfolio components. But over the last three months, which is really the timeframe, we’ve been dealing with. We haven’t seen any huge increases specifically, but I think, expectation is going forward is that will certainly benefit us particularly around things like Centrella, it’s in line with my commentary earlier.

[Matthew Mishan:]

All right, thank you very much.

[Operator:]

There are no further questions at this time. I would like to turn the call back over to John Greisch for a few closing remarks.

[John Greisch:]

I just want to wrap up, but again, thank you to all of you for your support. It’s been a great eight years, a few speed bumps along the way that we’ve all dealt with and to support investment community has been fantastic. I’ve enjoyed our interactions, I’ve enjoyed getting to know a lot of you guys, a few out sitting experiences along the way, even more enjoyable and I feel highly confident that the company is in a great position with momentum across the business and across the world. And I know John is incredibly excited about coming in and building up on the momentum we’re got. And I look forward to our paths crossing in the future in different ways. So I’d also want to wish all of you the best of luck, and again, thanks for the support over the years.

[Operator:]

Ladies and gentlemen, this concludes today’s conference with Hill-Rom Holdings Incorporated. Thank you for participating.