Hill-Rom Holdings, Inc.
Q1 2015 Earnings Call Transcript

Published: 3 Feb 2015

[Operator:]

Good morning, and welcome to the Hill-Rom conference call. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for telephonic replay through February 10, 2015, see Hill-Rom's website for access information. The webcast will also be archived in the Investor Relations section of Hill-Rom's website, www.hill-rom.com. If you choose to ask a question today, it will be included in any future use of this recording. Also note that any recording, transcript or other transmission of the text or audio is not permitted without the written consent of Hill-Rom. [Operator Instructions] Now, I'd like to turn the call over to Mr. Andy Rieth, Vice President, Investor Relations.

[Blair Rieth:]

Well, thank you, Candice. Good morning, and thanks for joining us for our first quarter fiscal year 2015 earnings call. Before we begin, I'd like to provide our usual caution that this morning's call contains forward-looking statements, such as forecast of business performance and company results, as well as expectations about the company's plans and future initiatives. Actual results may differ materially from those projected. For an in-depth discussion of risk factors that could cause actual results to differ from those contained in forward-looking statements made on today's call, please see the risk factors in our Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q. Also, we will discuss certain non-GAAP or adjusted financial measures on today's call. Reconciliations to comparable GAAP financial measures can be found in our earnings press release, the associated Form 8-K, and are also available as part of the presentation materials posted on our website. Joining me on the call today will be John Greisch, President and CEO of Hill-Rom; Steve Strobel, CFO and our Chief Financial Officer; and Chief Operating Officer, Carlyn Solomon. The usual ground rules will apply to make the call more efficient. We've scheduled an hour in order to accommodate our prepared remarks and leave plenty of time for Q&A. During Q&A, please limit your inquiries to one question, plus a follow-up per person. If you have additional questions, you may rejoin the queue. As you listen to our remarks, we are also displaying slides that amplify our disclosure. I would encourage you to follow along with us. The slides were posted on our website and will also be a part of the archive. With that, I'll turn the call over to John.

[John Greisch:]

Thanks, Andy. Good morning, everybody. Thanks for joining us today. We are pleased to report our first quarter results with revenue and adjusted earnings ahead of our expectations. On a constant currency basis, revenues grew 21%, including Trumpf Medical, and 5% organically. This is our strongest organic performance in three years. In addition to the Trumpf acquisition, our strong revenue performance was driven by North America capital and continued solid organic growth in Surgical and Respiratory Care. International performance was disappointing, with a decline on a constant currency basis, but overall we are pleased with our revenue growth this quarter. Adjusted earnings per share of $0.49 were ahead of our guidance and up year-over-year for the fourth consecutive quarter. This was driven by strong revenue growth, offset in part by increased investment in R&D and accelerated spending in our service organization to prepare for second half volume growth in our rental business. Despite these investments, we delivered improved adjusted organic operating margin compared to last year, up about 100 basis points. So overall, we're off to a solid start for the year. We again increased investment for innovation and growth, but nonetheless delivered on our commitments with higher than forecasted adjusted earnings. Before I turn the call over to Steve, let me add some additional commentary on the quarter. As mentioned, North America led the strength in the quarter with capital revenue increasing 19%. More importantly, capital orders were up 23% compared to last year. Orders also increased sequentially, excluding the large HCA orders received last quarter. Our quarter-end backlog increased 57% year-over-year and 8% sequentially to the highest level since the second quarter of fiscal 2011. The sequential increase occurred despite a reduction in the backlog related to several of the major contracts previously discussed, most notably HCA. Looking forward, we expect our North America capital business to continue to benefit from the improved hospital CapEx environment we have seen over the past several quarters. North America rental revenue was down as anticipated, but we expect to see growth in this business in the second half of the year. In Surgical and Respiratory Care, we're very pleased with 6% organic growth led by solid performance at Allen Medical and Respirator Care, where we are benefiting from new product introductions. Trumpf results are performing well, up about 6% with good orders and backlog, as we head into the reminder of 2015. With the addition of Trumpf, we remain very optimistic about our ability to leverage our channel strength to accelerate the growth of our surgical franchise. After five months, we are very pleased with Trumpf's performance. Our International business was down 3% on a constant currency basis. The decline was primarily driven by revenue reductions in France, offset in part by strength in our Asia-Pacific business and the successful launch of our new ICU frame product Progressa. In addition to increased R&D spending, we recently acquired two new technology products, as mentioned in our earnings release, to strengthen our Surgical and Respiratory Care businesses. We're excited by the growth prospects that both of these technologies bring to our portfolio as well as the pace of new product introductions over the past year. Our M&A pipeline remains robust and we continue to aggressively pursue acquisitions to accelerate growth in our five key clinical focus areas. Those are

[Steven Strobel:]

Thank you, John, and good morning, everyone. To start, first quarter reported revenue increased 18.2% to $465 million or 21.5% on a constant currency basis. This increase was driven by both our recent acquisition of Trumpf and constant currency organic sales growth of 5%, the strongest quarterly organic growth in three years. This organic growth was driven by higher revenue in North America and Surgical and Respiratory Care, partially offset by decreases in our International segment. Capital sales increased 26.4% to $373 million or 30% constant currency. On an organic basis, capital sales increased 6.3% or approximately 9% constant currency. Rental revenue decreased 6.4% to $92 million or approximately 5% constant currency. Domestic revenue increased 14% to $284 million. Revenue outside the United States increased 34% on a constant currency basis to $181 million, both benefited from the Trumpf acquisition. Now, looking at revenue by segment. North America increased 9.6% to $225 million or 12.7%, when excluding the impact of the third-party reimbursed home care rental business, which we exited last year. North American capital sales increased 19% to $162 million. As John previously mentioned, our first quarter capital orders increased 23% versus the prior year. Our quarter-end backlog increased 57% year-over-year and 8% sequentially, even with the decline in large deal backlog. While North America rental revenue declined 8.9%, the decline was less than 1% when the impact of the third-party reimbursed home care rental business is excluded. Moving on to our Surgical and Respiratory Care segment, revenue doubled to $126 million, largely driven by the revenue contribution from Trumpf. Organic constant currency growth for the period was 6.2%, which represents the sixth straight quarter of 5% or higher organic growth for our Surgical and Respiratory Care business. Moving to International, revenue declined 8.9% to $114 million or 2.5% on a constant currency basis. This decrease was driven by declines in both capital and rental revenue in Europe, partially offset by increases in Asia-Pacific. The European weakness was primarily driven by lower revenue in France. In addition, we have seen further project delays in the Middle East, which will place additional revenue pressure on international. Adjusted gross margin was 44.3% for the quarter, a decrease of 90 basis points compared to prior year. Excluding Trumpf, however, adjusted gross margin improved approximately 50 basis points. Year-over-year adjusted capital margin was flat at 42.5%. Organic improvement was approximately 160 basis points, although 160 basis points was offset by lower Trumpf margins. As expected, rental margins were down for the quarter, decreasing 230 basis points to 51.3%, driven by pricing pressures and the investment we are making in anticipation of higher volume later in 2015. Moving on to operating expenses. We increased our R&D investment 32.9% year-over-year. This was driven by the addition of Trumpf as well as a 10% increase in organic R&D. As John noted, we are making considerable investments in innovation to drive growth in the future. Adjusted selling and administrate expenses increased 11% year-over-year. That increase is entirely due to Trumpf. Adjusted operating profit for the quarter was $42 million, representing an 8.9% operating margin. In comparison to the prior year, adjusted operating margin increased 40 basis points or 100 basis points excluding Trumpf. The adjusted tax rate for the quarter was 27.5% compared to 32.6% in the prior year. This improvement was driven primarily by favorable geographic mix and the reinstatement of the R&D tax credit, which added approximately $0.02 to adjusted EPS. So to summarize the income statement, adjusted earnings per diluted share was $0.49, an increase of 36.1% over the prior year. Operating cash flow for the quarter was $31 million compared to $42 million last year, down primarily due to outflows from restructuring and acquisition integration. Capital expenditures increased by $28 million, due primarily to increased investment in our rental fleet. And finally, we repurchased approximately 1.2 million shares for $57 million, consistent with our long-term capital allocation guidelines. Now, let's move on to guidance. For fiscal 2015, we expect reported revenue growth of 11% to 12% compared to our prior range of 11% to 13%. This reflects slightly stronger constant currency revenue growth, driven by North America capital, offset by the negative impact of the stronger dollar. Our forecast is underpinned by the following assumptions, low single-digit constant currency organic revenue growth and a negative currency impact of approximately 4% compared to the 1% to 2% expectations in our prior guidance. We expect fiscal 2015 adjusted earnings per diluted share of between $2.44 and $2.50 compared to our previous guidance of $2.42 to $2.48. More specifically, this outlook reflects the following

[John Greisch:]

Thanks, Steve. First, I want to welcome Steve and Carlyn to Hill-Rom. In a short time I have seen the value that each of them brings to the team, and I'm excited to partner with them, as we pursue our aggressive growth and value creating strategies. As I mentioned in my earlier comments, we are pleased to have delivered a strong first quarter, with 18% reported and 5% organic topline growth. Our outlook of 11% to 12% growth for the full year reflects the stability in North America and Surgical and Respiratory Care, offset by $40 million to $50 million of additional FX headwinds. Despite a lower full year revenue outlook, we are raising our full year adjusted earnings and maintaining our operating cash flow objectives, as a result of our disciplined operational focus. On the acquisition front, Trumpf and Aspen are both performing well, and we are excited by our ability to accelerate growth in our surgical franchise. The enhanced value proposition for our customers is compelling. Carlyn and I have seen this with customers in Asia, North America, Europe and the Middle East in recent weeks. We are well-positioned to execute the strategy that we have been discussing with you, driving growth by leveraging our channel strength through portfolio diversification, geographic expansion and innovation. On the margin front, we have short-term headwinds from both FX and Trumpf, as well as pricing pressures in certain segments. Despite this, excluding Trumpf, we expect adjusted operating margins in our organic business to improve in 2015 by approximately 50 basis points. As I mentioned earlier, however, we are not at all satisfied with our current margin profile. Going forward, our strategy to improve our longer-term margins will include margin accretive acquisitions and additional operational initiatives. At the same time, we remain committed to deploying our cash flow in a disciplined manner, consistent with our capital allocation strategy and in line with our strategic focus on growth. We look forward to discussing our longer-term objectives at an Investor conference that we will hold later this year. With that, operator, please open the call to questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of David Roman of Goldman Sachs.

[David Roman:]

I wanted just to kind of start with the revenue outlook for the balance of the year, and I guess what I'm struggling with is trying to put all the pieces together here. It looks like your constant currency organic guidance for the whole company is unchanged relative to what you provided back in November. Yet, at the same time, you had a good first quarter and then the backlog and order growth rates also look to be improving. So maybe you just sort of walk us through, why there is not more of a flow-through from what we're seeing now to the balance of the year?

[John Greisch:]

We're one quarter into the year, obviously, and you know as well as anybody, the shorter-term volatility that can be experienced, particularly in our North American capital business. So we're taking a bit of a prudent view on what the short-term lumpiness may do to us over the rest of the year. I think as you pointed out, we're certainly benefiting from not only an improved external environment, but I think an improved internal execution environment with our sales teams. And that's reflected itself in good order rates here in the first quarter, which I think, as I mentioned, it was the second strongest order intake on a quarterly basis; second only to last quarter over the last two or three years. So the momentum in the tailwinds that we're enjoying, certainly have carried us here through the first quarter. The strength of the backlog up again 8% is encouraging. But I don't want to get too far out in front of ourselves too early. I think we'll obviously revisit our overall guidance at the end of the second quarter and take a fresh look at it at that point in time. So I think the biggest cautiousness is probably attached to our North American capital business. And the sustainability is unpredictable there. But the momentum that we're enjoying is certainly encouraging relative to our outlook. But one quarter end to the year, I think we've prudently chosen to stick with our topline guidance, manage the heck out of the business in the light of the FX headwinds that we've got, and at the same time I think unlike many companies in our sector, commit to maintaining and even slightly improving our earnings guidance, despite that FX headwind. Just couple of comments. I apologize for the long-winded question, but this is clearly -- long waited answer, pardon me, but clearly an important topic. International, we're disappointed with how we started the year. We're down 3%. Our guidance calls for that to be flat, which clearly calls for some improvement as we go through the rest of the year. I think most of that's going to come out of Europe. The Middle-East is probably our most tenuous region right now. Carlyn and I were both over there a week ago, and not just because of the oil price pressure, but obviously with the political and economic instability over there, what has been a strong region for us, it gives us a little pause for concern as we look forward for the rest of the year.

[David Roman:]

And maybe just a second question on cash flow. Steve, can you just walk though in a little bit more detail the increase in the CapEx spend for 2015? And I know in your prepared remarks you talked about some rental contracts, is that revenue from those rental contracts that we see in 2015? And is that investment one-time or is it sort of a structural step-up in your CapEx spend? And I guess just a follow-on on cash flow, so you did repurchase $57 million of stock in the quarter, which I think is the highest level of repurchase in quite some time. So any commentary you could provide there would be helpful as well?

[Steven Strobel:]

On the capital spending increase, the increase is entirely due to additional investment in our rental business, primarily due to the large contract wins we had at the end of last year. It is one time. It's a one-time increase, so it's not a structural kind of ongoing reinvestment in the business, but it's in response to some terrific contract wins and the need to put on more equipment to satisfy that contract. As to the buyback, I think its part of our ongoing longer term capital allocation guidelines and capital allocation strategy. It's part of the ongoing current authorization. We had an authorization a couple of years ago that totaled about $190 million, this is part of that. As we look into the future, I think we've got the flexibility based on the good cash flow generation in the business and relatively clean balance sheet to be able to, on an opportunistic basis, go in, repurchase shares, but also keep our capability intact for the acquisitions that we have, that we're assessing and want to pursue in our clinical areas of focus. So I think its part of our ongoing strategy around capital allocation. And in this particular quarter our capital is allocated to our share buybacks.

[John Greisch:]

Just to add a couple of things to Steve's comments. Remember our rental business is our highest margin business within the portfolio. So deploying capital into that business is obviously an attractive opportunity for us. I did mention in my prepared comments we do expect rental growth in the second half of the year. That's largely on the back of primarily the HealthTrust contract that we signed in the fourth quarter that will be rolling in over time here throughout 2015, but we do expect that revenue to grow second half over the first half of the year. And just to add to Steve's comments on the buyback. Obviously it reflects confidence in our ongoing cash flow. I think we guided to outstanding share count, if I remember correctly, $58 million for the year. That's pretty much where we are today. So near term expectations would be deploy our free cash flow going forward more towards acquisitions and less towards share buybacks at least in the near term here.

[David Roman:]

Got it. Thank you very much. We look forward to the analyst meeting for more details on all those topics.

[Operator:]

And our next question comes from the line of Bob Hopkins of Bank of America Merrill Lynch.

[Bob Hopkins:]

So just, John, wanted to ask about the M&A pipeline a little bit and I'd love you to touch on a couple of things. First of all, on the buyback comment, does that suggest that the pipeline is little less robust than it was three months ago, just generally, where you're seeing? Could you talk about kind of your willingness to look at larger deal and the degree to which larger deals are in the pipeline? And then one other comment I'd love you to make is that some of your previous deals have been initially dilutive to margins, but I think some of your comments here on this call are suggesting that on a go-forward basis that might be likely to change, that you'd be looking at some higher margin targets. So sorry for the long-winded question, but I was wondering if you could touch on those things as it relates to the M&A pipeline?

[John Greisch:]

No worries, Bob. I'll probably back probably a long-winded answer to you. First, the pipeline is certainly no less active, nor robust, than it was three months ago. So we're continuing to aggressively look at a number of things large and small. We've actually beefed-up our team over the past six months around business development. So our appetite is high. As I've mentioned in the past, we're not going to panic to do a deal, just to chase the deal, but the sense of urgency we have around rounding out and improving the portfolio is as high as it's ever been. And obviously with the hiring of Carlyn in as COO, I've got another guy around the table who can not only help look after the operating disciplines and driving the improvements we want in the core business, but can help as we bring additional businesses into the portfolio as well. On the accretion of margin question, you are right. I did specifically say that in my comments. I think I commented last quarter, the Trumpf was a unique opportunity for us. It really put us on the map in the OR. It's strengthened our operating room franchise. It gave us, and I've seen this with customers all over the worlds, a compelling presence in the operating room, which is you all know is a critical part of the hospital environment today and increasingly going forward and we want to play there. And Trumpf gave us an opportunity to do that. We've built nearly $0.5 billion surgical franchise and I think you can expect us to continue to deploy capital to build that franchise more aggressively going forward. But we want to do it in a way that accretes our margins not dilutes them. And my other comments around margin, we still have significant opportunity within the company to improve our margins organically. With the acquisitions we've made over the past several years, we've got a more complex structure and a more complex footprint in place and there is opportunity to really drive improvement in our core operating margins going forward. Lastly on size. We certainly, as I've commented over the past several quarters, will consider larger transactions. I don't view $57 million share buyback in the first quarter at all impacting our ability to either do near-term, small or large deals. We still have a very unlevered balance sheet as you know. And I think our debt capacity, and our free cash flow sustainability, and our confidence in that cash flow improving remains high, and I think we've got plenty of dry powder to go after what we want to go after.

[Bob Hopkins:]

And just one really quick follow-up. Can you just talk about HCA and what happened to the order book there?

[John Greisch:]

Yes. Just briefly, last quarter we had a very strong quarter of orders in Q4 in our North American capital business. I think it was the highest quarterly order rate for several years. I think I've spoken publicly as has HCA that they're in the midst of what they've called their Med/Surg modernization program, and upgrading over several years their 25,000-plus Med/Surg beds. We got a very large order from them in Q4, which we're shipping against here in Q1 and into Q2. So I won't say, it was a one-time order, but it's probably larger than we're going to see at least for the next several quarters, because they're going to embark in this plan over several years. So big order in taking Q4, enhanced our revenue in Q1, and we'll do so again in Q2. But as I mentioned, the backlog as of the end of December is down pretty significantly as we flushed out some shipments off of that order, which really says, the underlying capital business in North America excluding any larger deals, remains quite healthy, back to David's original question.

[Operator:]

And our next question comes from the line of David Lewis of Morgan Stanley.

[David Lewis:]

John I want to come back to two longer-term trends you talked about in this call, one is the rental business and the other is the R&D investments, so maybe a couple of questions on these. So its not just a strong quarter for R&D, I think R&D has been up the last six quarter. So I wondered, maybe give us a sense of what's driving that year-and-a-half investment in R&D, and what's the outlook for the back half of the year? And then also with the rental business, I think there's a couple of things I think important to that. It's been one of the bigger margin headwinds for the business, so if that investment is going to drive the rental business where HealthTrust is? Is the corresponding margin improvement baked into guidance? And what's going with the underlying rental business versus HealthTrust? Sorry for a few questions in there.

[John Greisch:]

Let me start with R&D. It is up significantly, as you said, over the past several years. We've essentially redesigned our entire Med/Surg and ICU frame portfolio over the last several years. Currently, we've got a Bariatric frame offering that's going to come out here very shortly. We've got our high margin Air Fluidized Bed frame product -- Air Fluidized Therapy frame, Clinitron, in the process of being enhanced. We've talked about our next-gen Med/Surge product, which is a big piece of our R&D spending. So those three products, plus the launch of Progressa, plus the new product introductions that have come out of our Surgical and Respiratory franchise over the past 12 to 18 months; the Allen Advance Spine table in our surgical business and then MetaNeb and our VitalCough product in Respiratory Care has consumed a fair bit of our spending. And I think the pace of new product introductions has clearly accelerated over the past 12 months. And I think you will see more of that as we go forward. So that's where most of the spending has gone into. As you look out for the rest of this year, I would expect R&D spending to be relatively consistent with what you saw here in the first quarter, the 4% to 5% of sales, both as a percentage of revenue and in absolute dollar terms, the same thing. Trumpf also brought a fairly high R&D spending on the back of that acquisition. As you know, they've been a highly innovative company around not only lighting, but some of the booms and pendants and tables that they've got. And we've got a pretty healthy R&D pipeline in the Trumpf portfolio as well. So accelerating the clock speed of our R&D has been an important priority for us. And I think with Carlyn here and his background, he is bringing an even more disciplined and clear focus on R&D as we go forward. But long-term, I think for now, I keep certainly relative to 2015, the guidance that we've got 4% to 5% of sales as the target. Rental margins, couple of comments on that. You're right, that business has been under pressure over the past several years. I think we've mitigated those pricing pressures fairly effectively with some pretty aggressive cost management initiatives across our service network as well as portfolio rationalizations, but pricing has continued to be pretty tough in that business. The HealthTrust deal gave us additional volume and additional opportunity to leverage the service infrastructure that we have here in the short-term. That's clearly impacted our margins with some advance spending we've had to make, as well as with the higher CapEx that we've had to make. Question why it's higher today than it was three months ago? We've had a little challenge getting access to the information that we needed to know exactly what products and where they needed to be, so we've now got better visibility on that. But the returns on the investments we're making and the margin profile, as I mentioned, for our rental business continues to remain quite attractive. And longer-term, we're going to continue to manage the cost structure as aggressively as possible to mitigate the margin pressure that we've certainly seen in the last few years. And then lastly, again, I apologize for the long-winded answer here, but just want to get at all your questions. Is the margin profile baked into our guidance? Absolutely. I think we said last quarter that our rental margins would be down year-over-year, but relatively consistent with what we saw in the fourth quarter of 2014. Q1 is actually higher than what we saw in Q4 of 2014. So a lot of the measures that I've mentioned are taking hold, but the rental margins will be down year-over-year, which is one of the headwinds that led to some of my comments about our longer-term margin actions that we clearly recognized need to be taken.

[David Lewis:]

And John just to finish up on leverage, I mean the underlying momentum of the business appears very strong. The only surprise probably this quarter was the lack of drop through to the bottomline that you gave, a lot of reasons for that. Is it safe to assume that the only reason that maybe we didn't talk about that is preventing more leverage to drop to the bottomline? Is it simply just potential pricing considerations on HealthTrust as well as the pricing considerations in your capital business on some of these large contracts? Is that really the only piece of equation that we're not considering? And it seems to me that even with that you still should see better drop through to the bottomline as you progress through the balance of the year?

[John Greisch:]

Two comments there, David. The two major headwinds from an operating leverage perspective for the full year, because I think the first quarter is a little misleading only because of the weakness of our first quarter last year. But the two major headwinds, originally baked into our guidance and continue to be baked in our guidance are rental margins overall. I don't want to attach those to HealthTrust at all. It's really the rental market overall, where we've seen pricing pressure and where we're going to see margin erosion this year, and then Trumpf. Our organic margins are going to up 50 basis points roughly year-over-year. Not as strong of an operating leverage drop through as we saw over the last few years, when we saw 200 basis points to 300 basis points improvement from 2009-2010 through 2014, but going in the right direction. Our capital margins are actually going to be up year-over-year, so we're really pleased with our capital margin profile in the light of all of the pressures we got. Throughout the rest of the year, you should expect our operating margins to sequentially improve from what you saw here in the first quarter.

[Operator:]

And our next question comes from the line of Larry Keusch of Raymond James.

[Larry Keusch:]

John, I want to just pick up from that last answer that that you just gave relative to the margins. So obviously you've articulated that you do expect to be able to drive margins up over the longer term and you gave variety of reasons for that. But when you step back and you look at Trumpf, and it's obviously a lower margin business, and you had talked about the rental margins, which seem to be under continued pressure. Your organic margins are up 50 basis points, which is great, but when you're starting with a high single-digit operating margin, there's a long way to go to get to double-digit. So what do we really need to look for to really start to drive those margins higher? Is it really predicated on M&A and a real change in the composition of the business?

[John Greisch:]

Not to split hairs here, Larry, but we're not really starting with a high-single digit margin profile. Obviously, Q1 was high-single digit, but last year was I think about 11.5%, 12% operating margin. And we expect to land roughly in that ballpark, even with the dilution of Trumpf. So not to sound defensive, but at least our starting point is low-double digits not high-single digits. What are we going to do to get it up? There are still restructuring actions to be taken over the longer term. As I mentioned, we spend $700 million plus in acquisitions over the last several years. With that came more cost, more footprint, and that's something that we will tackle as we go forward just as we did the first couple of years that I got here. So we've got that. We are seeing organic growth in some of our newer businesses. Surgical and Respiratory, the last the six quarters we've seen 6% organic growth. We've got to drive that harder. New product introductions are going to be part of that. And with that will come operating leverage dropped at the bottomline as that business has a very attractive margin profile associated with it. And then accretive acquisitions, I think I commented earlier, I think it was Bob's question, we're going to be focused on going down that path as opposed to Trumpf, which as I mentioned was a very unique opportunity for us to build a platform from which grow to going forward. So without getting into this specifics, and again we'll do that at our investor conference later in the summer, early fall, we haven't locked in on a date yet, but you will see exactly how we plan to drive the kind of operating margin improvement that we've talked about in the past from here forward.

[Larry Keusch:]

And then just a question on the sort of second half of the year, I think its two parts. Number one, if you could help us think about again the international business, you called out France specifically as a bit of a challenge here in the first quarter. And you also indicated, I think I got this right, that you expect Europe to kind of be the driver of the improvement in the international business, as you drive to that flat growth for the year. So perhaps help us think through what specifically is going on with France and what gets better Europe to offset the Middle East, and then also, the comments around the North America capital and the thoughts about the sustainability of that business. It sounded like you were trying to be prudent, just given that it's the first quarter of the year. But is there anything that you're seeing that gives you some pause that the business may back off some?

[John Greisch:]

The improvement we expect internationally is largely going to be driven by Europe just because of the size. And I think we've commented over the last couple of quarters, France, we've seen some declines on the back of some delayed public tenders. The French public hospital system effectively buys though a government GPO, and the government has delayed opening the new contracts under which they can purchase. That changed in December for at least the largest tender contract, which is for Med/Surg products, for which we're the exclusive provider. So that has been a headwind in the last couple of quarters that will turn around for us, as we go through the rest of the year. The other impact in Europe has been in Germany. I think I commented on the last quarter, we did struggle somewhat with the business in Germany in the back of Volker integration. We've got a new team in place, have had that for several months and several quarters actually, and we expect that business to improve throughout 2015. So the rest of year it was actually performing quite well, despite the European economic challenges that we all read about. But turning around, those two markets, which were our two biggest markets gives us confidence that we're going to see some growth coming out of Europe for the rest of the year. That, plus Asia-Pacific, which has been our strongest growing region over the past couple of years is what we expect to drive international growth, as we go forward. And again, turning around from 3% organic decline here in the first quarter to flat expectation for the rest of the year. North America, no, I am not seeing anything that is changing momentum in that business. As I mentioned, if anything, we're very encouraged by the momentum we're seeing there. I think our backlog is up for the fifth consecutive quarter here in North America in our capital business. And as I mentioned in my comment earlier, that's not all. The HCA benefit that we got in the fourth quarter would actually offset a decline in that specific business. So we're continuing to see strength there. I've been around this business long enough, Larry, as have you now, to know that a quarterly hiccup is life in the North America capital business. So as I mentioned, the sustainability is unpredictable, but the momentum is encouraging. And I'm not trying to be cute, but it's a lumpy business and I don't want to get caught out and get out over my ski tips, again with declaring after one quarter here that '15 is going to be markedly better.

[Operator:]

And our next question comes from the line of Matt Mishan of KeyBanc.

[Matt Mishan:]

It seems that you're expecting a bit of a turnaround internationally, as you kind of go through the rest of the year. Can you just talk about the pace of some of the international savings you may get from some of the restructuring you did last year? And should we be thinking like as additional volume comes through in the back half and potentially you're also getting some savings that you could see some margin improvement internationally, as we go through the back half?

[John Greisch:]

Yes, the bulk of the savings on the European restructuring, it will be next year, Matt, and beyond. So what we expect to have this year, we've already built into our guidance. But it's a pretty small part of overall $10 million benefit we expect, which is now probably worth $8 million in today's exchange rates, but that's going to be '16 and beyond.

[Matt Mishan:]

And can you also talk about the impact of the R&D tax credit in the quarter. Was the $0.02 just from the quarter impact or did you kind of pull-forward some of the impact from last year? And what's implied in your guidance for this year?

[Steven Strobel:]

Because of our fiscal being [ph] 9.30 and the reinstatement being after that, it's basically a catch-up for the calendar year 2014. Basically all falling into the first quarter, we could take and spread a quarter's worth of that over the remainder of this year. But think of it basically all in this quarter, where we said it's a $0.02 impact in EPS. This quarter it will be $0.03 for the full year.

[Matt Mishan:]

Is the $0.03 is baked in for your guidance this year?

[Steven Strobel:]

Yes.

[Matt Mishan:]

So an additional $0.01 for rest of the year.

[Steven Strobel:]

From our first quarter results. Yes.

[Operator:]

And our next question comes from the line of Gary Lieberman of Wells Fargo.

[Gary Lieberman:]

Just maybe some more detail on the domestic rental business. It seems like most, if not all, the weakness was pricing. Could you make any comments on how the volumes looked in the quarter?

[John Greisch:]

I think your comment is fair. The pressure is largely pricing in the North American rental business, which again is not a new phenomenon here in Q1. Volumes are going to increase, as we go through the rest of the year on the back of, again, some of the competitive wins that we got last year.

[Gary Lieberman:]

And then maybe on the pricing, is there one particular place that it's coming from? Is it generated by the customer or competitors sort of out there willing to compete on price?

[John Greisch:]

It's really I think consistent with what I said over the last couple of years. It's an increased management by the provider networks around the country of their supply chain and what may have been rented for an extra day or two in the past. They're tightening up their operating expenses everywhere. I mean I hear that from every hospital I go to. And part of that is how can they reduce their rental expense and manage their supply chain cost more efficiently. So I'd say, it's really an across the board trend that we've seen for the past couple of years.

[Gary Lieberman:]

And then maybe just on the currency variation in the business. Steve, I guess maybe this question would be for you. Just in terms of thoughts about potential hedging of it with the variability going on, what would be your thoughts there?

[Steven Strobel:]

We have a lot of natural hedges. The biggest impact for us are in currencies are euro, pound sterling and Canadian. We do a little bit of hedging, but not a lot of cash flow hedging available to us. So we've got a little bit of impact that flows through, as we said, to our earnings.

[Operator:]

And I am showing no further questions at this time. I'd like to turn the conference back over to Mr. Andy Rieth for any closing remarks. End of Q&A

[Blair Rieth:]

Thanks everybody for tuning into the call. We look forward to speaking with you. Have a good day. Thank you.

[Operator:]

Ladies and gentleman, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Have a great day everyone.