Hill-Rom Holdings, Inc.
Q2 2017 Earnings Call Transcript

Published: 28 Apr 2017

[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 of Investor Relations at Hill-Rom. Ms. Ladone, you may begin.

[Mary Kay Ladone:]

Good morning, everyone, and thank you for joining us for our fiscal second quarter 2017 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 would 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 & 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 rather than historical facts and are subject to risk and uncertainties 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, in today's call, non-GAAP financial measures will be used to help investors understand Hill-Rom's ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available as part of the presentation on our website. Now, I would like to turn the call over to John.

[John Greisch:]

Thanks, Mary Kay. Good morning, everyone. Thanks for joining us today to discuss our second quarter financial results and outlook for the third quarter and full-year 2017. I'll begin with some brief comments on our performance before turning the call over to Steve for additional details. After that we will open the call up for Q&A. As you saw on our press release issued this morning we exceeded guidance in the second quarter with accelerated revenue growth across our diversified portfolio and strong operational performance. Momentum in our core business, improving international growth trends, value from new product introductions, and the recent acquisition of Mortara were significant contributors to our second quarter results. We continue to successfully execute on key strategic priorities while enhancing outcomes and generating attractive returns for our shareholders. Worldwide revenue of $679 million increased 8% on a constant currency basis, including Mortara revenue of approximately $13 million. Core revenue which excludes Mortara as well as completed or potential divestitures advanced 7% on a constant currency basis and exceeded our guidance of growth in the 4% to 5% range. Core growth acceleration is the result of several factors. First, we've established a strong foundation as we are now realizing benefits from our portfolio optimization and diversification efforts with solid growth across all three of our global businesses. Clearly the value of our more diverse portfolio is yielding strong results. Second, as expected international performance contributed to our total revenue growth with core revenue advancing on a constant currency basis by 13% year-over-year and 10% sequentially reflecting improvement in Europe, the Middle East and Latin America. With strong execution from our international team and the organizational realignment largely behind us we're making headway internationally despite continued economic challenges. We expect this positive momentum to continue for the remainder of the year. Lastly, we are creating value with new products which contributed several points of growth to our topline. We are pleased with the initial adoption of these products like the Connex, Spot Monitor, Spot Vision Screener, RetinaVue and Integrated Table Motion. Our financial performance this quarter also reflects continued execution on our margin expansion initiatives. Disciplined cost management resulting in SG&A leverage and continued investment in R&D to support future growth. With strong revenue and adjusted operating margin expansion of 110 basis points we delivered adjusted earnings of $0.88 per diluted share and increased of 24% versus the prior year. As mentioned in the press release adjusted earnings include a $0.06 tax benefit related to stock-based compensation which we expect to reinvest in our business over the remainder of the year. We're also announced this morning that we are raising our full-year revenue and earnings guidance, which now includes Mortara and reflects our confidence in our ability to drive sustainable revenue growth and margin expansion in the second half of the year. Before turning the call over to Steve, I would like to take a moment to highlight recent progress in expanding our capabilities, capitalizing on new product introductions and partnering with customers to enhance outcomes for patients and their caregivers. As you may recall, a key element of our strategy is to diversify our portfolio and enhanced performance with sustainable and profitable growth through M&A initiatives. To that end in the quarter, we were pleased to complete the acquisition of Mortara, a leader in diagnostic cardiology and patient monitoring technology. The strategic transaction expands Hill-Rom's diagnostic cardiology franchise and compliments and enhances Welch Allyn's presence in vital signs monitoring. The transaction has compelling financial benefits as it accelerates revenue growth is accretive to adjusted gross and operating margin and is expected to generate approximately $10 million in annualized cost synergies over the next two years. Our integration efforts are underway and we look forward to successfully incorporating Mortara into our Front Line Care business. In addition, we continue to invest in R&D and develop innovative product and service solutions to drive accelerated future growth. We are pleased with the elevated pace of new product launches as our R&D pipeline continues to deliver clear value for both caregivers and patients around the world. For example, during the second quarter, we launched the TruSystem 3000 Mobile Operating Table which enhances our surgical portfolio by providing a cost effective reliable and flexible operating table for international markets. In addition, we expanded our Patient Support Systems portfolio with the international launch of the new Hill-Rom 900 Accella bed system for higher acuity intensive and acute care settings. This product offers caregivers a number of features that make caring for patients easier and safer, and enhances patient outcomes by supporting early mobilization. Lastly, we will soon introduce a new innovation in respiratory care with the recent 510k approval of the Monarch Airway Clearance System. The Monarch system provides high frequency chest wall oscillation therapy into a mobile vest with a customizable personalized fit, allowing a patient to be active and productive while receiving therapy. We are also capitalizing on a number of new products have been introduced over the last year or two. We continue to be excited about the Welch Allyn RetinaVue Imager, a breakthrough handheld technology for primary care settings, which makes diabetic retinopathy screening simple and affordable. In addition to providing enhanced care for diabetic patients, the screening also provides Hill-Rom could with an ongoing recurring revenue stream. Since the product was launched last year, physicians have screened nearly 90,000 patients and have identified more than 13,000 patients with potential vision complications thereby improving patient outcomes through early detection and treatment. With Integrated Table Motion for the da Vinci Xi Surgical System, we achieved a record number of placements this quarter which again contributed to the strong momentum in our Surgical Solutions business. The Surgical System and Table seamlessly integrate allowing surgeons and anesthesiologists to make a comprehensive range of table adjustments easily and efficiently during surgery. We also continue to leverage are strong brand, equity, and Hill-Rom's acute care relationships with well challenged differentiated vital signs portfolio including the Connex Spot Monitor and easy-to-use vital signs monitor that provides comprehensive and accurate blood pressure measurement, pulse oximetry and temperature using a single device which improves patient satisfaction and delivers enhanced connectivity to the EMR. So to summarize, we continue to be pleased with our team's execution against our strategic priorities that will position us well for future success. We will continue to focus on enhancing our portfolio, delivering solid financial performance, advancing innovative solutions with continued investment in R&D and pursuing business development initiatives that deliver enhanced returns in the near and long-term. With that let me turn the call over to Steve.

[Steven Strobel:]

Thanks John and good morning everyone. As mentioned in the press release, we've reported GAAP earnings of $0.51 per diluted share in the second quarter, compared to $0.33 in the prior year. Adjustments to reported earnings primarily include intangible asset amortization, acquisition integration and other special charges, not reflective of ongoing performance. On an adjusted basis, earnings up $0.88 per share increased 24%, exceeding our guidance of $0.77 to $0.79 per diluted share. This performance reflects strong revenue growth, disciplined cost management, continued margin expansion and a tax benefit of approximately $0.06 per diluted share related to stock-based compensation. The Mortara acquisition, which closed mid quarter was immaterial to adjusted earnings per diluted share. Now let me briefly walk through the P&L before turning to our financial outlook for the third quarter and fiscal year 2017. Starting with revenue, for our fiscal second quarter revenue up $679 million, grew 7% and includes $13 million of revenue from Mortara. On a constant currency basis, revenue increased 8%. Domestic revenue increased 6%, while international revenue grew - gross rebounded after several challenging quarters in advanced 14%. Core revenue growth was 7% on a constant currency basis and exceeded our guidance of 4% to 5% growth. As a reminder, core revenue excludes the impact of businesses that we divested or made divest in both the current and prior year. It also excludes revenue from Mortara. Before moving on, keep in mind that as I discussed each business segment, I will address revenue growth on a constant currency basis only, which we believe provides investors the best assessment of underlying operational performance. Starting with Patient Support Systems, second quarter revenue on a global basis of $363 million increased 4%. On a core basis Patient Support Systems revenue increased 6%. We were very pleased to see accelerated international revenue growth of 9% versus a decline of 11% in the first quarter. We achieved solid growth across all regions except Asia-Pacific where we continue to face some difficult comparisons to the prior year. Domestic revenue in Patient Support Systems business grew 2% with U.S. core revenue increasing 4% driven by mid single-digit growth of our bed systems. This growth was partially offset by a decline in rental revenue. Now moving to Front Line Care, global revenue for the quarter was $211 million and increased 15%, excluding Mortara Front Line Care grew as expected to 7%. This performance can be attributed to gains in thermometry business and vital signs portfolio, the contribution from new products and accelerated international growth across all regions as we are leveraging Hill-Rom's international channel and expertise. Lastly, the Surgical Solutions business delivered the strong quarter with revenue of $105 million, an increasing of 12%. Growth was driven by continued strength of our surgical positioning products in the Integrated Table Motion system. Growth as well balanced geographically with U.S. revenue up 13% and international revenue up 12% driven by double-digit growth in Europe, Latin America and the Middle East. Now turning to the rest of the P&L. Adjusted gross margin in the quarter improved sequentially by 50 basis points to 48% compared to last year adjusted gross margin expanded 10 basis points, supported by our continued focus on portfolio diversification and ongoing benefits from cost and sourcing efficiencies. Favorable mix and improved international margins were partially offset by lower margins in our Rental and Surgical Solutions business. The R&D spending of $35 million increased 3% versus prior year and as a percentage of revenue, the ratio of 5.2% is consistent with our long-term objectives. Adjusted SG&A of $189 million increased 4%. Disciplined cost management more than offset investments in our international infrastructure expansion of our U.S. specialty sales force, new product launches in the addition of Mortara. This resulted in the SG&A ratio of 27.8% of revenue an improvement of 80 basis points versus last year. As a result adjusted operating profit for the quarter totaled $102 million. Given strong revenue growth continued gross margin expansion and SG&A leverage adjusted operating margin improved 110 basis points over last year to 15% this is our seventh consecutive quarter of triple digit basis point operating margin expansion. Other expense of $22 million was slightly higher than last year as interest related to the Mortara financing was partially offset by savings generated from the refinancing of our credit facilities late last year. The adjusted tax rate was 26.1% compared to 28.9% in the prior year as previously mentioned our tax rate benefited had a change in accounting for stock-based compensation. Surrounding after P&L on the strength of robust revenue growth continued focus on margin expansion and a tax benefit adjusted earnings advanced 24% to $0.88 per diluted share. Turning to cash flow, on a year-to-date basis cash flow from operations of $126 million improved $39 million versus the prior year while capital expenditures totaled $47 million. Free cash flow year-to-date of $79 million almost doubled versus last year and we've returned $53 million to shareholders through dividends and $30 million share repurchase. Finally, let me conclude my comments this morning by providing our third quarter and updated full-year 2017 financial outlook, which includes the impact of Mortara. For the year we now expect reported revenue growth of 3.5% to 4%. Given current rates we estimate a negative impact from foreign currency of approximately one percentage point. So revenue on a constant currency basis is expected to increase 4.5% to 5%. And this includes revenue from Mortara of approximately $70 million. We expect core revenue which excludes Mortara and the impact of completed and potential divestitures from both periods to increase 3.5% to 4% on a constant currency basis. Now by business segment. For patient support systems we continue to project low single-digit revenue growth on a constant currency basis in line with our year-to-date performance. For frontline care we continue to expect mid single-digit constant currency growth for the base business and as previously mentioned approximately $70 million in revenue for Mortara. Lastly, we continue to expect mid single-digit growth on a constant currency basis for our surgical solutions business. From a profitability standpoint, we expect adjusted gross margin to be approximately 49%, R&D spending of approximately 5% of sales, adjusted SG&A of approximately 27.5% of sales, interest expense of approximately $92 million which is an increase from our previous guidance due to the Mortara financing. Project a tax rate of approximately 29% to 29.5%. And finally, we expect approximately 67 million shares outstanding for the year. To summarize, this guidance translates into adjusted earnings of $3.82 to $3.88 per deluded share reflecting growth of approximately 13% to 15%. This represents an increase from a previous guidance range of $3.74 to $3.82 per share. From a cash flow perspective, we continue to project 2017 operating cash flow of $330 million to $340 million in capital expenditures of approximately $120 million to $130 million. For the third quarter 2017, including Mortara revenue of approximately $30 million we expect reported revenue growth of 5% to 6%. On a constant currency basis we expect revenue to increase 6% to 7%. In our core revenue is expected to increase 4% to 5% on a constant currency basis. Finally, for the third quarter we expect adjusted earnings of $0.89 to $0.91 per diluted share reflecting growth of 10% to 12%. And with that, I will turn the call back over to John for closing comments.

[John Greisch:]

Thanks, Steve. In closing, we are pleased with accelerated revenue growth across our core business, improved international performance, and continued focus on margin expansion which allowed us to deliver strong adjusted earnings growth in the second quarter. As a result, we are raising our full-year guidance. Our improved outlook reflects the benefit of Mortara, accelerated investments behind several of our key strategic growth initiatives, and a conservative view on U.S. capital spending given uncertainty surrounding healthcare reform, but we continue to closely monitor the healthcare landscape. Our Hill-Rom team remains committed to diversifying the portfolio, leveraging our strong global brands and geographic footprint, and launching new innovations to enhance growth and profitability in the years ahead. While we are very pleased with our performance and execution, we remained focused on the growth and margin opportunities ahead of us as we deliver on our mission and create long-term value for patients, customers, and shareholders. We look forward to updating you on our continued progress. With that, operator let's open the call for Q&A.

[Operator:]

Thank you. We will begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of David Lewis from Morgan Stanley. Your question please.

[David Lewis:]

Good morning and congrats on a nice quarter.

[John Greisch:]

Hey, David. Thanks.

[David Lewis:]

John, I want to start with you and then talk about revenue trends and then move on to earnings and maybe reconcile some of the numbers there, but John I just wonder square performance and guidance year-to-date, the way we see it is it kind of combined first half results is sort of low single-digit performance and you have acceleration in the back half of the year to 45 or better, which is sort of basically the way you described the year and the initial guidance. So the question is, is the year playing out largely as expected and can you talk about the sustainability momentum in key U.S. franchises and international markets? And then I had a quick follow-up.

[John Greisch:]

Sure. David, I'll touch on a few things there. You're right, year-to-date our core revenue is up about 3%. The first quarter was tougher for the reasons that we went through last quarter, most notably international was negative and Welch Allyn came off of a tough comp from Q1 in fiscal 2016. We are playing out along the lines and what we expected. I think Q2 was a little stronger than what we expected. We guided to 4% to 5% core growth. We achieved 7%. We saw a really strong performance across the board. The biggest swing factors from Q1 to Q2 as well as relative to our guidance we are really in our international market. We posted low double-digit growth internationally. It's the first strong quarter growth in international for several years. And as you heard in my comments, we expect that to continue - your momentum to continue here in the second half of the year. Other momentum across the portfolio, surgical had a great quarter with low double-digit growth. Front Line Care was up about 7 points and that was with a flattish respiratory care business, so Welch Allyn was the head of that number, so slightly ahead of where we expected. The new product introductions across the portfolio are taken hold nicely. Our outlook for the second half of the year remains largely consistent with what we projected three months ago at 4% to 5% core growth in constant currency terms. With reasonably consistent growth rates across the portfolio from what you saw here in the second quarter. As I mentioned in my comments, we're keeping our eye on U.S. CapEx, but low single-digit growth for PSS is what we expected to deliver for the year and no major changes. So reasonably well in line with expectations, a bit stronger here in Q2, which were thrilled with, up and down the P&L, I think we delivered what we said we're going to do and then some and feel confident in the second half of the year as well.

[David Lewis:]

Okay. John, it's very clear. And then just to kind of a similar question on earnings. You beat by $0.10, when you get Mortara, only rising by $0.08. So how much of this is kind of prudent conservatism mid-year? Where these 3Q investments being directed? Can you help us think about Mortara accretion in 2017 and more importantly 2018? Thanks so much.

[John Greisch:]

Yes, I'll take the first crack of that and then Steven can clean up. As you said, we beat high-end of our guidance by about $0.09, $0.06 of that was the stock comp accounting change, which we've chosen to reinvest really behind some of the new product introductions, largely RetinaVue, which we're seeing good traction on and with accelerated investments on the street. We think we can accelerate the revenue growth even further. Our new Med-Surg product is coming out later this year and we're going to put some muscle behind that. And then you saw the 510(k) approval for our mobile respiratory product Monarch, which we announced earlier this week. Those plus continued invest in international, where we're really beginning to see the benefits of our diverse portfolio and focus put on a higher growth, higher margin products that benefit is really kick-in now. And I said that last quarter and we clearly delivered and even over delivered on that. Turnaround performance internationally and I feel great about what's happening outside the United States. So we've chosen to reinvest that into those growth areas. So if you look at the operational improvements in Q2 of called it $0.03, $0.03, $0.04 plus the Mortara accretion that that drove the guidance left for the full-year.

[Steven Strobel:]

Yes, David if you look at the midpoint to midpoint, we're going up about $0.07. So as John said, after we reinvest behind our growth initiatives that through kind of the operational improvement from the second quarter and the minus accretion from Mortara.

[David Lewis:]

Can you help us think about 2018, I want to make sure the street is sort of reconciled and understand sort of net accretion financing costs and we get kind of the right number in 2018 before we get to the guide?

[Steven Strobel:]

Yes, rather I'm going to talk specifically about 2018 Dave. I'll show what we shared at the time we announced. We expect EBITDA roughly $25 million in year one from Mortara, and again their business was about $115 million in revenue, growing roughly 4% a year. Once we get fully integrated with our regions, like we've done with Welch Allyn and Trumpf. We're certainly hopeful we're going to accelerate that. And then we got $10 million of synergies over the next two years on top of that with the financing costs offsetting that.

[David Lewis:]

Right.

[Steven Strobel:]

So I'd probably say the specifics though we get into 2018 guidance, but hopefully that gives you a framework for peace in that together.

[John Greisch:]

Yes, I think the message is not a lot to change when we discuss the Mortara kind of financial profile when we purchased them and closed in February.

[David Lewis:]

Okay. Thanks so much.

[Steven Strobel:]

Thanks David.

[Operator:]

Thank you. Bob Hopkins of Bank of America is on the line for the question. Please state your question.

[Robert Hopkins:]

Great, thank you and good morning.

[Steven Strobel:]

Hey, Bob.

[Robert Hopkins:]

So a couple things, just - first of all just to finish that thought. You gave us plenty of numbers there to do the math, but could you just be a specific in terms of the EPS contribution from Mortara in this fiscal year?

[Steven Strobel:]

In this fiscal year, Bob it should be a couple pennies and it was immaterial as we said in the quarter.

[Robert Hopkins:]

Okay. So on to my questions, first congrats especially on the OUS performance, we've been waiting to see that for a while and it's great to see it come through. A couple questions I want to ask on to start on revenues. First just a sort of check these boxes and the performance of this particular quarter on the revenue side, was there kind of anything one time about these results? And then also on the revenue side, you mentioned U.S. capital turns couple of times. Our U.S. capital turns stable right now are you seeing scientists offing? Thank you.

[John Greisch:]

Yes, there is nothing unusual in the quarter Bob, it really was particularly internationally and you haven't been loan waiting for the turnaround I can assure you. But our team led by Carlos Alonso they've now been in place for a little bit over a year. We've gotten the realignment of the organization behind us as I mentioned in my comments and the focus on the higher growth higher gross margin products across the world. We're beginning to see the benefits of that and it's really exciting to see that because as you well know that's been the biggest drag on our overall performance for the last several years, so nothing unusual in the quarter at all. U.S. capital environment you know the delay of the legislation repeal and replace whatever is going to happen. As probably introduce the little more caution among customers more on small deferrable spending from what we can see as opposed to larger strategic projects. But I would say there's been any major change in the environment. I think as we look forward to the rest of the year whatever short-term disruption there may be if the delay continues and uncertainty grows. We think with some of the new products we're bringing out were hopeful we're going to be able to accelerate some replacement demand particularly on our capital products with our new Med-Surg beds as we go into Q4 of 2018. And if you look at our U.S. capital revenue that was up Steve mentioned the bed systems were up mid single-digits, our U.S. capital was up about 7% here in Q2. So a pretty strong performance you know for the first half of the year here. But the longer the uncertainty goes on an issue, but so far I think no major change environment.

[Robert Hopkins:]

Okay and then just one quick last one. Can you just highlight in the near-term. What are the most important new product launches for you guys? And then also Steve for you just - and just I was wondering if you could breakdown the increase in the EPS guidance for the year and you know I think you said you know obviously $0.02 of it is Mortara, but after question because you said that the benefit from tax rate this quarter is being offset by our suspending. So $0.02 comes from Mortara what's the - is the other increasing guidance the other pennies just coming from the better revenue growth trends in the recent guidance there? That's all I have. Thank you.

[John Greisch:]

Let me take that one first. Yes, I think what we said was in the second quarter or beat in the second quarter was operational and tax. And I think we're flowing through to the full-year guidance. Some of that operational improvements plus Mortara accretion and then spending back the benefit from the tax change. Is that make sense?

[Robert Hopkins:]

Yes.

[Steven Strobel:]

In terms of new products Bob, a couple comments internationally I commented on a new operating room table the two systems 3000 and then we've got a new bed frame the Hill-Rom 900 Accella which is an advanced featured Med-Surg bad for international markets were really excited about both of those products. Domestically the two biggies to come the Monarch Vest System, the Mobile Vest System for respiratory care patients which we're launching as we speak following 510(k) approval and then our new Med-Surg product will come out later this year. And as I mentioned I'm confident as that product is in the market I expect just as we did with our ICU launch a few years ago to see accelerated demand and accelerated replacements cycles. The only other two I'd mention because they're having the impact that we expected RetinaVue and Integrated Table Motion I think we launched Integrated Table Motion we commented that's going to be a one point accretive to our growth rate new product launch and we're tracking right in line with that expectation and RetinaVue isn't quite at that level yet, but it's getting there quickly and that's one where we're going to put a lot more investment behind as we go through the rest the 2017 and into 2018.

[Robert Hopkins:]

Great. Thanks very much.

[Operator:]

Thank you. Matt Taylor is on the line with the question. Please state your question.

[Unidentified Analyst:]

Hi, good morning. Thanks for the question. And I guess first question I had was I wanted to know did you get the overall growth in the backlog numbers or could you give us that, I didn't see that anywhere in the materials that were released?

[John Greisch:]

Matt as that business has become a smaller and smaller part of the portfolio; we've elected not to disclose those more for competitive reasons. Nobody else in that space is given out this specific numbers that we have been giving out and given the declining importance of our U.S. bad business. We've elected for competitive reasons to not report those numbers anymore. I think with the product sales and service and rental breakdown in GBU breakdown hopefully you guys get enough detail behind the product categories we've got without really breaching any competitive disclosures that we don't need to give. And with U.S. capital revenue up 7% here in Q2 that should give you a pretty good flavor of how that business performed.

[Unidentified Analyst:]

Okay, great. Thanks for that. And I guess I just wanted to understand philosophically how you are thinking about kind of the upside that you're getting from the growth here because you still get significant upside on the quarter and sort of chose to reinvest some of that rather than just drop it all through. I think you haven't give an update on your kind of longer plan NOL, but you are clearly sort of a head of pace. And I'm just wondering as we move forward if you see better growth in the core business and from some of these acquisitions are you going to choose to reinvest some of that or drop it through and how you think about that?

[John Greisch:]

Yes. It's a really good question. Let me take it in a couple doses if I may. So why reinvest the unanticipated tax accounting change benefit. We've got some pretty exciting growth opportunities in front of us and we've been balancing the investments and those opportunities with delivering strong double-digit earnings growth which we committed to two and a half years ago or one and a half year ago now. So given the opportunity to reinvest and accelerate some of the demand behind the growth products. We chose to do that. Obviously, the biggest challenge we've been dealing with has been topline revenue growth and I think the more muscle we can put behind the growth opportunities we have the better and hence the decision to do that behind the areas that I mentioned, RetinaVue, Next-Gen, Med-Surg, Monarch and International specifically. And still by the way deliver double-digit earnings growth here in the second half of the year and Q3 double-digit growth if you look at our guidance. So we're committed to delivering on the LRP goals that we set out in September 15, you're right, we're probably ahead of that. As Steve mentioned, we had seven quarters in a row of triple-digit operating margin improvement. That's a performance we are incredibly proud off and committed to continue driving operating margin expansion. While at the same time, the goal that has been maybe a little more lose, it has been topline revenue growth which is why we're putting some more investment behind the opportunities that are in front of us and driving growth in international markets at the same time. So what come out later this year with the refresh of our LRP goals for the coming three years, but certainly committed and right in line with what we laid out nearly two years ago now.

[Unidentified Analyst:]

Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Rick Wise of Stifel.

[Rick Wise:]

Good morning, John.

[John Greisch:]

Hi, Rick.

[Rick Wise:]

Let me start off with the gross margin. Obviously your raised guidance for revenues and EPS, but your gross margin guidance is basically at the same place and just help me think through it, I mean you truly have ongoing cost reduction initiatives and maybe you can talk about that. You said yourself are seeing an accelerated pace of new product launches. If my understanding is correct Mortara has a - and above current rate maybe I'm wrong, gross margin relative to Hill-Rom. What [if am I] not understanding about gross margin and maybe just help us think through that outlook a little more carefully?

[John Greisch:]

Yes. Let me comment what happened in Q2 and our quick outlook Rick and then Steve can follow-up. So Q2 our margin was up 10 basis points. We had a couple of down arrows in the margin, in our gross margin. Our Rental margins as you saw were down. We got a relatively low margin third-party equipment rental business, which not only has been purposely shrinking in revenue, but the margins are increasingly under pressure. It's probably our lowest margin business that we have today. So that heard to somewhat here in the second quarter. And then we had some supply chain costs relative to one of our plant closures that were a bit of a surprise. We're able to absorb it and still deliver above the expectation quarter. But that hit our margins here temporarily in Q2. If you look ahead, we've got some significant acceleration in the second half of the year, consistent with last year and I think our full-year guidance on gross margin is up 90 bps or so over last year at 49%. So the only blemish on the quarter to be add us with you is the two things I just mentioned, which are temporary in nature and I think the full-year commitment of 90 basis points, the 49% is pretty much in line with - is exactly in line what we said three months ago and I think I'll track for other reasons that that you just mentioned.

[Steven Strobel:]

And Rick I would just add that the progression over the quarters of our gross margin this year will mimic in large respect kind of our overall progression from prior year as of third and fourth quarter margins with additional volume and additional leverage in any factoring footprint improves quarter-over-quarter.

[Rick Wise:]

Great, and just to make sure I understand John and Steve, the plant closing that's done and that's over no longer a drag in the second half and beyond and supplier issue is that resolved or just falls that up?

[John Greisch:]

Yes, it was in a supplier issue. I probably mumbled through supply chain issues. So it was the plant closure, yes.

[Rick Wise:]

Got it.

[John Greisch:]

And as Steve said, second half we expect to see good acceleration both on the gross line and the operating margin line also, I think second half operating margin is going to be up 300 basis points plus compared to the first half of the year.

[Rick Wise:]

Great and the Rental revenues down on the U.S. again I want to make sure is that tied to what you're talking about here?

[John Greisch:]

That's the biggest reason absolutely. Yes, the third-party - we rent infusion pumps, ventilators for - on demand purposes, not a great profit business for us. So that's been declining consistently here over the last several quarters as we try to optimize the portfolio.

[Rick Wise:]

Yes, two last one for me, one, Steve you mentioned that interest expense is a bit higher than you've guided. It's a bit higher than we would have model post Mortara, maybe help us understand that? Maybe John just one last bigger picture for you, the bard backed in combination, just you're thoughts on that and the consolidation the industry and just how that ties in or not or accentuates or gives you opportunities relative to your own M&A initiatives and you can update us on your thinking there? Thank you.

[Steven Strobel:]

Hey, Rick first on the interest expense. I think it's - there's nothing tricky in it with the bonds that we issued the five coupon - 5% coupon bonds added over there from February 14 on through the remainder of this year added to our prior guidance gets us to the 92. So we can walk you through it in more detail if you need to, but it's really nothing more mysterious than that.

[John Greisch:]

Rick, on the bard backed in deal - I comment on that specifically, but consolidation within our customer base within the device industry, we've been part of that in a smaller way than bard backed in there Medtronic Covidien or some of the other ones. But that's exactly we've been pursuing on our own the last few years and I think it's going to continue. And as aggressive as we have been with using our balance sheet, others are following suit obviously, but we're going to continue to do that as the opportunities avail themselves and as our financial flexibility allows us to do so. So I think the customer consolidation is the starting point for some of what we're seeing across the MedTech world and I think it's going to continue and we plan to be part of it and aggressively continue to look for opportunities to strengthen our companies this is we've done the last couple of years.

[Rick Wise:]

Thanks John.

[Operator:]

Sure. We have time for two more questions. Our next question comes from the line of Matt Mishan from KeyBanc. Your line is now open.

[Matthew Mishan:]

Hi, good morning, and thank you for taking my questions.

[John Greisch:]

Good morning, Matt.

[Matthew Mishan:]

Hey John. Could you give us an update on where you're at with the remaining divestitures. And also could you help us understand I know you have the divestitures that you've been excluding from core growth, but you've also have like - business like you talked about like equipment rental business that you've been in optimizing. Could you give us a sense of what that headwinds been and when those are likely to be done as well?

[Steven Strobel:]

Yes, on the $75 million of divestures, $75 million of 2016 revenue. Just remind everybody half of that was pretty much out of the portfolio by early fiscal 2017. The remaining have I suspect to see some activity on here in the second half of the year. So I am hopeful by the time we get together in three months. We'll have some news on the remaining piece and then it's one separable revenue source. So more to come on that probably three months from now. Some of the other things Matt, like the third-party equipment rental that's something we do constantly where we have either lower growth or margin opportunities. We called out $75 million largely because of the significance and they're in three separable chunks of business for us. The impact of other portfolio optimization relatively small not completely immaterial, but like the third-party rental business that I mentioned. That's going to be our probably 20% this year on a basis of roughly $40 million to $45 million. So that's what 30 basis points on our growth. There's a couple of those around that the company, but there always will be. So I think for our reporting purposes as anything material gets our attention will continue to talk about that to make sure and is got a clearer picture what's going on. But things of that size it's kind of normal daily business that we attend just to tried out the portfolio.

[Matthew Mishan:]

Okay. That's very helpful. And then on the new products you had a really great run with a RetinaVue, Table Motion, Connex, Spot Monitor, but most of those are about to lap like an or anniversary, how do you compare to the new products you have coming out this year compared to the strength that you saw from the products last year and on a Monarch you call that one of the biggest in domestically I just was hoping you could elaborate a little bit as to why?

[John Greisch:]

Sure. I think we're really excited about some of the things coming out of the portfolio. I mentioned a few if I'm here today between our next 10 Med-Surg bed in Monarch. RetinaVue is got a lot of runway ahead of it as does our Spot Vision Screener product and Connex by those Monitor also. So you're right the launch date anniversaries but the growth we're seeing from those products some of which were launched over a year-ago we're continuously some good strength on so I think that portfolio in the pace of new product introduction that we've seen over the past two or three years we certainly expect to continue going forward across the three businesses. Monarch itself, it really is I think a life changer for our Respiratory Care patients and again this is about a $90 million to $100 million business, our Respiratory Care business. And the real benefit of this product relative to both our current product and competitor products is it allows a patient to do their therapy with our products without being tethered to a device. So the mobility and the ability to walk around the house, walk around the yard, walk around the park and actually have a life as opposed to sitting in a chair tethered to a device is a massive life improvement for customers and we think it's going to be a really attractive addition to our portfolio, particularly for patients in our Respiratory Care business obviously.

[Matthew Mishan:]

All right, that's really great. Thank you very much John.

[Operator:]

Our last question comes from the line of Lawrence Keusch from Raymond James. Your line is now open.

[John Hsu:]

Thanks. This is John in for Lawrence. Thank you for squeezing me in here. John, I just had a couple quick strategic questions for you. I believe the product you're just talking about in some of the other Welch Allyn products you had. You've been selling it at a home care channel. So just broadly speaking, can you talk about the opportunity within home care? And then maybe as part of that would you look for potentially looking for a distributor to accelerate expansion within that vertical? And then similarly within surgical, you diversified to capital offerings with Trumpf, showing lights, booms, tables into OR. What are your thoughts about expanding into HD video with an integrated OR offering? Is that seems like that could be in natural adjacency as well? Thank you.

[John Greisch:]

Sure John, home care, yes that is an exciting opportunity for us. You're right the respiratory business is largely on home care business with our best product. We have other products that go into the acute care setting and there's some use of the vast in acute care settings, but most of it's in the home. That business is largely a direct business, which I expect to continue with our direct sales force here in the U.S. and in select markets around the world. Welch Allyn products, we've got a few products in the home. We expect to have more products in the home going forward. It's part of our pipeline that I alluded to earlier. And you will see a step in the new channels going after the consumer home care market with some of our Welch Allyn products. We use distributors today as you well know for a lot our Welch Allyn products into the physician practices. But as we look at our home blood pressure monitor for example and other opportunities to bring some of the Welch Allyn technologies into the home, we will be tapping other channels going forward and I'll talk about those as we get those relationships in place.

[John Hsu:]

Great, thank you.

[John Greisch:]

Okay, thanks very much.

[Operator:]

There are no further questions.

[John Greisch:]

Okay, wrap it up Charlotte. So appreciate everybody joining us this morning and look forward to catching up over the coming days and weeks.

[Operator:]

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