Hill-Rom Holdings, Inc.
Q2 2015 Earnings Call Transcript

Published: 5 May 2015

[Operator:]

Good morning, and welcome to Hill-Rom Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded and will be available for telephonic replay through May 11, 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. Now, I'd like to turn the call over to Mr. Andy Rieth, Vice President, Investor Relations.

[Blair A. Rieth:]

Thank you, Stephanie. Good morning, and thanks for joining us for our second 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 forecasts 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 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 J. Greisch:]

Thanks, Andy. Good morning, everybody, and thanks for joining us. We are pleased to report strong second quarter results with adjusted earnings ahead of our expectations, and up 12% over last year. This is the fifth consecutive quarter that adjusted earnings per share increased year-over-year. In addition, for the second quarter in a row, revenue increased 21% on a constant currency basis. Organically, constant currency revenue increased 6%, our strongest performance in over three years. Sequentially, adjusted gross margin improved, while adjusted operating margin was up 270 basis points, reflecting solid operating leverage due to stronger revenue and continued cost discipline. In addition to the benefit of the Trumpf acquisition, revenue growth was driven by another strong North America capital performance, as well as growth from our other Surgical and Respiratory Care businesses. Our international business improved sequentially on a constant currency basis and was flat year-over-year. Europe and Asia increased, offset by the Middle East and Latin America. So at the halfway point of 2015, we are very pleased with our results. Our strong revenue growth reflects outstanding execution by our commercial teams. Despite substantial currency headwinds, we delivered adjusted earnings ahead of last year and above our expectations for the first half of the year. Our expense management and restructuring initiatives are contributing to our improved adjusted earnings. At the same time, we continued to invest aggressively for growth as evidenced by our increased R&D spending and recent new product launches. Before I turn the call over to Steve, let me add some additional commentary on the quarter. North America had another strong quarter, primarily due to 16% capital sales growth. While capital orders were down slightly compared with the prior year, our backlog at the end of the quarter was up 17% year-over-year. The growth we are seeing this year reflects both the improved hospital CapEx environment and strong execution by our sales teams. We expect both to continue. Our North America rental business grew about 5%, excluding the home care business we exited last year, driven by improved volumes and a more severe flu season. In Surgical and Respiratory Care, we experienced our seventh straight quarter of organic growth, albeit at a lower rate than we have seen in previous quarters. I am pleased with the consistent growth in this business, which has been driven by new product introductions and improved commercial execution. That said, we expect to have tougher comparables in the second half of the year versus recent quarters. Trumpf continues to perform in line with our expectations, and we remain very optimistic about our ability to leverage our channel strength and accelerate the growth of our overall surgical franchise. Turning to international, our business in Europe saw modest growth in revenue and capital orders during the quarter. And we are optimistic that our improved execution is somewhat mitigating the impact of ongoing market weakness. Asia Pacific continues to be a strong performer for us, while the Middle East and Latin America remain lumpy and were down due to tough comps from last year. Overall, we expect international to improve in the second half of the year and to show better year-over-year growth on a constant currency basis. As mentioned in our earnings release, we launched two important bariatric products during the quarter. We are very excited about both of these products and how they strengthen our offering to improve care for bariatric patients. The Compella Bed is the first bariatric bed to combine innovative technologies such as powered width expansion and contraction along with the design intended to maintain patient dignity in the care setting. LikoGuard is an overhead lift designed for a safe working load of up to 800 pounds. Increasingly, leading hospitals are utilizing overhead lifts to facilitate safe patient handling and to reduce caregiver injuries. And we are confident that this product will provide strong benefits in both of these important areas. These products are just the latest examples of recent launches from our innovation efforts that we expect will continue to provide future growth across our portfolio. On the M&A front, we continue to aggressively pursue acquisitions to accelerate growth in the five clinical focus areas we have described

[Steven J. Strobel:]

Thank you, John, and good morning everyone. Second quarter reported revenue was $475 million, up 14.3% from last year or 21.3% on a constant currency basis. This increase was driven by both our recent acquisition of Trumpf, and constant currency organic sales growth of 6%, primarily in North America. Capital sales increased 19.8% to $376 million, or 28.3% constant currency. On an organic basis, capital sales increased 2.4%, or approximately 8% constant currency. Rental revenue decreased 2.6% to $99 million and was flat on a constant currency basis. Domestic revenue increased 13% to $297 million, while revenue outside the United States was $178 million, up 36% on a constant currency basis; both benefited from the Trumpf acquisition. Turning to revenue by segment, North America increased 10% to $247 million, or 12.4% when excluding the impact of the third-party home care rental business which we exited last year. North America capital revenue increased 15.7% to $175 million on improved sales execution and strong first half capital orders. While second quarter capital orders decreased 2% versus the prior year, our first half orders were up 9%, and our quarter-end backlog increased 17%. North America rental revenue declined 1.8% overall, but increased 5.2% excluding the third-party home care rental business. Moving to our Surgical and Respiratory Care segment. Revenue increased 82.9% to $120 million, driven by the contribution from Trumpf. Organic constant currency growth for the period was approximately 1%. Growth was lower than prior quarters as we began to experience tougher comps resulting from last year's successful new product introductions, particularly MetaNeb and the Allen Advance Spine Table. Moving to International, revenue declined 13.8% to $108 million, but was approximately flat on a constant currency basis. Constant currency increases in Europe and Asia Pacific were offset by decreases in the Middle East and Latin America. Adjusted gross margin was 45.4%, in line with expectations, and a decrease of 170 basis points compared to the prior year. Excluding Trumpf, adjusted gross margin declined approximately 60 basis points. Sequentially, adjusted gross margin improved 110 basis points. Year-over-year, adjusted capital margin decreased 110 basis points to 43.4%; a slight organic improvement was offset by lower Trumpf margins. As expected, adjusted rental margin was down for the quarter, decreasing 220 basis points to 52.9%, driven by pricing pressures and the rental investments we discussed last quarter. Moving on to operating expenses. Adjusted R&D investment increased 26.9% year-over-year, driven primarily by the addition of Trumpf. Adjusted selling and administrative expenses increased 9.1% year-over-year, also largely driven by Trumpf. And overall, SG&A decreased 140 basis points as a percentage of revenue. Adjusted operating profit for the quarter was $55 million, representing an 11.6% operating margin. In comparison to the prior year, adjusted operating margin decreased 80 basis points, but was up slightly excluding Trumpf, and ahead of our expectations. The adjusted tax rate for the quarter was 30.4% compared to 32.2% in the prior year. This improvement was driven primarily by a more favorable geographic mix and the benefit of the R&D tax credit. So to summarize the income statement, we achieved adjusted earnings per diluted share of $0.64, an increase of 12.3% over the prior year, that brings our year-to-date adjusted EPS to $1.13, a 21.5% increase over the first half of 2014. Year-to-date operating cash flow of $87 million compares to $78 million last year, up primarily due to higher earnings. Year-to-date capital expenditures increased by approximately $49 million due mostly to the incremental investment in our rental fleet we've described previously. Also of note, we recently renewed and increased our credit facility, taking advantage of favorable market conditions. The new agreement extends our existing facility to the year 2020 and increases the revolver from $500 million to $900 million. Now, let's move on to guidance. For fiscal 2015, we expect reported revenue growth of 10% to 11%. Compared to our prior range of 11% to 12%, this change reflects slightly stronger constant currency revenue growth driven primarily by North America capital, offset by the incremental impact of the stronger dollar. Our forecast is underpinned by the following assumptions

[John J. Greisch:]

Thanks, Steve. In wrapping up, our second quarter reflected another strong performance with our best organic top-line growth in three years. We're also pleased to deliver 12% adjusted earnings growth for the quarter and 22% for the first half. We are particularly pleased to raise our adjusted earnings outlook for the full year despite the incremental currency headwinds on our top-line. We now expect our 2015 adjusted operating margin to improve year-over-year despite the dilutive impact of the Trumpf acquisition. As you have seen, our team is committed to delivering improved earnings and cash flows despite currency and other margin pressures. Looking forward, I'm confident that we have opportunities to improve our margins even further in the coming years. This will include margin-accretive acquisitions, additional operational initiatives, and the benefit of new product introductions. Carlyn has now been onboard nearly six months, and he is playing an instrumental role in driving improvement across our operations. He's upgrading his leadership team and providing strong leadership to ensure our operational execution continues to improve. With him onboard, our confidence in our growth strategy has strengthened, and we look forward to aggressively expanding our portfolio in the future. While we drive operational improvement, we remain committed to executing the growth strategy that we have been discussing with you in the past, driving growth by leveraging our channel strength through portfolio diversification, geographic expansion, and innovation. This will be achieved by deploying our cash flow in a disciplined manner consistent with our capital allocation strategy. We look forward to discussing our longer-term objectives at an Investor Conference that we will hold on September 25 in New York. We will provide additional details on this in the coming months. With that, operator, please open the call to questions.

[Operator:]

Thank you. Our first question comes from Bob Hopkins with BoA. Your line is open.

[Robert Adam Hopkins:]

Hey. Thanks very much. Can you hear me okay?

[John J. Greisch:]

Hey, Bob. Good morning. Yes.

[Robert Adam Hopkins:]

Good morning. So, one question on the guidance and then a question on M&A. First, on the guidance, you're raising your full-year guidance by about $0.05. Can you just walk through what's changed since the end of the last quarter? In other words, what's the incremental negative EPS headwind from FX? And then what are the positives offsetting, and maybe you could comment on the Q3 variable comp and just remind us of why that manifests in the third quarter?

[John J. Greisch:]

Sure. I'll take part of that, Bob, and Steve can jump in also. Guidance was raised for a couple of reasons. One, we obviously had a stronger second quarter than expected, which is good news. So that flowed through to improvement for the full year. As I mentioned in my prepared comments, we now expect our full-year operating margin to be up despite the Trumpf dilutive effect as well as the FX headwind. So, we're feeling better about the margin flow-through. You saw a little bit of that here in Q2. And for the full year, we're confident we're going to drive improvement in our overall margin despite what we thought was going to be 50 basis point to 100 basis point dilution from Trumpf here in 2015. So, confidence across the board on our margin improvement and steady performance really in most of our businesses, as you saw in North America. First half, our orders were up about 9%. We're going into the second half with the 17% higher backlog. So, we're feeling good about that business. The incentive comp in Q3, last year, you may recall we started the year pretty poorly, and we adjusted our full-year expected payout in Q3. And so, the year-over-year delta between incentive comp expense last year versus this year is about $0.10, not insignificant, hence our operating margin year-over-year in Q3 is not as favorable as the full-year operating margin year-over-year comparison. But obviously, if you look to the fourth quarter, we're expecting a pretty strong improvement in operating margin, despite the fact that we've got a full quarter this year of Trumpf and basically flat revenue expectations for the quarter. And, Bob, a lot of question on incentive comp, maybe how does that play out in Q4. The delta in Q4 incentive comp is less than $0.02, so it's pretty immaterial in Q4. But Q3, it's a significant delta year-over-year.

[Steven J. Strobel:]

As far as FX, Bob, this is Steve, we think the incremental headwinds we've got there, it's probably worth another $0.01 or $0.02 to their full year. And so, in addition to – a $0.01 or $0.02 negative to the full year. So, in addition to the margin improvement John referred to, that's actually covering another little bit of headwind for us on the earnings line.

[Robert Adam Hopkins:]

Great. Thank you for that. And then to follow-up on M&A. Can you just give me a sense, John, as to the – how much flexibility and liquidity you have now with the new financing in place? And then you mentioned in the past, John, that respiratory is an area where you might have interest. Can you just help us understand, specifically within respiratory, (25

[John J. Greisch:]

Sure. On the liquidity front, we raised a revolver $400 million.

[Steven J. Strobel:]

$400 million. Yeah.

[John J. Greisch:]

Don't read into that that our appetite has shrunk and that we're only interested in small things. It gives us more flexibility near term than we had. And as Steve mentioned in his prepared comments, it gave us an opportunity to extend the facility at very competitive rates given current market conditions. So near term, we've got $500 million, $600 million of available dry powder, if you will. Obviously, if we do a bigger deal, we'd look for other financing sources which clearly, as everybody on this call knows, are readily available, given current market conditions and the fact that we've got a fairly unlevered balance sheet to begin with. In terms of specific assets, Bob, I's probably rather not answer that directly. Clearly, there may be some assets in the respiratory world coming out of some of the recent acquisitions across the device space, and some of those will certainly be interesting to us as well as others. So it's an area that we certainly would like to grow. Today, it's a $80 million to $90 million business for us, so relatively small, and one that we would like to grow, in addition to what we've been doing with the new product introductions over the past year or so. And M&A can certainly play a part of that, if attractive assets become available at reasonable values.

[Robert Adam Hopkins:]

Great. Fair enough. Thanks for taking the question.

[John J. Greisch:]

Okay. Thanks, Bob.

[Operator:]

Our next question comes from David Lewis with Morgan Stanley. Your line is open.

[David Ryan Lewis:]

Good morning.

[John J. Greisch:]

Hi, David.

[David Ryan Lewis:]

John, you talked about – just a couple of questions this morning. You talked about Surgical and Respiratory being a little weaker, and it was a little weaker than our model (27

[John J. Greisch:]

No. There's nothing in the underlying business that concerns us, David. We had some difficult comparables as we move into the latter part of this year, largely on the back of new product introductions that we launched in the non-Trumpf businesses in late fiscal 2013 and fiscal 2014 as well. You're correct, we did not change our full-year outlook, so we were not surprised with the performance here in Q3. The phasing is a result of the anniversarying of some new product introductions. Looking forward, this business is one that we're very excited about in terms of the growth potential, particularly with Trumpf in the portfolio now. And I think you'll see us redeploy more R&D dollars into this business as we go forward, to accelerate the growth above what you might expect the normal market growth to be.

[David Ryan Lewis:]

Okay. And maybe just two more quick ones. The first is just a follow-up on M&A, John. I know we're not going to get you to talk about specific assets. But can you just talk about the level of leverage you would be comfortable in taking? We're seeing 2.5 times to 3.5 times net-debt-to-EBITDA as a common large cap level of leverage, some have gone higher. But could you just talk whether 3 times or 4 times net-debt-to-EBITDA would be a level of leverage you think this company and management could stomach, or would be palatable?

[John J. Greisch:]

Yes, on both fronts.

[David Ryan Lewis:]

Okay. Very helpful. And just lastly on the variable comp, John, was this – obviously, the weaker variable comp last year, and obviously, you knew the momentum in your business off the first quarter. Was this variable comp – just given the magnitude of North American capital orders, was it a surprise, or was it already really in your guidance at the beginning of the year? And I'll jump back in queue. Thank you.

[John J. Greisch:]

There were no surprises. Again, it's an issue from last year, David, just to clarify. So, last year, we had very low variable comp in Q3 because of the expectations for the full year payout, which ended up being substantially below our target payout. So, it's not an issue this year at all. Our operating margins in Q3 are right on track with where we thought they would be, but the comparison year-over-year is not as favorable, because we had a benefit last year. And so, it's more the benefit that we had last year and not a higher expense level that we're paying out this year. We're basically going to pay out at target or thereabouts, here in fiscal 2015. And last year, the catch-up adjustment for a lower payout was basically impacting our third quarter's earnings last year.

[David Ryan Lewis:]

Great. Thank you very much.

[John J. Greisch:]

Okay. I think, just to add one thing to that, in my comments earlier – I think this is a really important point. The operating margin for our company here in 2015 over 2014 is up, including the Trumpf dilution, as I said earlier, including the headwinds from FX, and there's about a $0.15 year-over-year higher incentive comp expense compared to last year. So the underlying momentum we have in our operational performance is more than offsetting those three factors, which obviously gives us confidence as we look forward. And Carlyn and I will talk a lot about that in September at our Investor Conference.

[Operator:]

Our next question comes from David Roman with Goldman Sachs. Your line is open.

[David Harrison Roman:]

Thank you, and good morning, everybody. I wanted just to start with the underlying business that, John, I believe, in your prepared remarks you made a comment that orders were down 2%, but backlog was up 17%. And if my memory serves me correctly, you had a pretty tough comp in North American orders this quarter. I believe, last year, at the same time, you grew orders at a mid-teens rate. So, could you maybe help us put all the pieces of the puzzle together here between orders in the quarter, the backlog increase, the confidence in the end market, and what you're seeing thus far in the third quarter?

[John J. Greisch:]

Yeah. I'll take that and ask Carlyn maybe to jump in too, David. Your memory is spot on. We did have a bit of a tougher comp last year certainly relative to the previous one or two quarters before Q2 of last year. Our backlog is a reflection of not only the most recent quarter, but I think I mentioned earlier North America orders for the first half were up about 9%, hence, the backlog improvement year-over-year. The underlying environment, I'd say, is healthy. You've heard me use the word stability for this business over the past couple of years. And I think that continues to be the case. What also continues to be the case is we're going to see a bit of volatility quarter-to-quarter. Last year, we had a pretty rocky first quarter and a very strong fourth quarter. This year, our first quarter was very strong. Second quarter was, I would describe it as okay, not great, but steady. So, I don't see any fundamental change in the environment. I think we're executing very well commercially with our teams in the field. And we're continuing to see improving to stable CapEx environments overall. And I think when we wrap up the year, we're going to see a relatively steady order rate year-over-year for the full year albeit with some quarterly volatility in between.

[David Harrison Roman:]

Okay.

[Carlyn D. Solomon:]

Yeah. David, it's Carlyn. This is the only thing I would add is that we're launching some new products that are doing well in the market. In 2013, we launched Progressa. That continues to do very well in the ICU segment. As John mentioned, we launched two new products this quarter with Compella, which is the world's best bariatric bed and also our new LikoGuard. So, that also is providing some help to us.

[David Harrison Roman:]

And those launches, just to clarify, Carlyn, that you're talking about having occurred in the third quarter, when you say providing some help to you, that's referencing the back half of this year on a go-forward basis, I assume?

[Carlyn D. Solomon:]

Yeah, that's correct.

[David Harrison Roman:]

Okay. And then maybe just following up to John's comments on the P&L. It sounds like one of the things that you're really trying to emphasize here is that the extent to which the underlying profitability of the business is continuing to improve. And I'm assuming we'll get more details on this in September. But could you maybe just help us understand if that improvement is a reflection of – how much of that is that coming from better revenue versus actions you're undertaking yourself to improve profit margins? And do we need to see revenue continue to grow at this type of pace for you to see continued operating margin improvement?

[John J. Greisch:]

Yeah. I think it's a little of both, David. But if you look at our SG&A, our organic SG&A, even with higher incentive comp expense, is down as a percent of sales year-over-year, so continued discipline around our cost, driving operating leverage across the portfolio. Carlyn mentioned some new products. And as I mentioned in my prepared comments, we expect new products to continue to drive margins up as we go forward. Last quarter, I referred to the fact that, at the back of the acquisitions that we've made over the past couple of years, we've got a footprint that's bigger than we want it to be. So there will be some additional facility rationalization coming down the pike, which, again, longer term, beyond 2015, certainly gives us optimism towards initiatives and opportunities to further improve our margin going forward. So it's a function of all of those, operating leverage on the back of some revenue, better mix profile, either new products or as we focus on our higher margin products, and continued cost discipline as we've done over the past several years. We've improved our organic operating margins ex the dilutive impact of a Trumpf or even a Volker pretty consistently over the last several years in some tough revenue environments. And as our revenues continue to stabilize, I think that opportunity is an even more exciting one going forward.

[David Harrison Roman:]

Okay. Thank you for all the details.

[Operator:]

Our next question comes from Larry Keusch with Raymond James. Your line is open.

[Lawrence S. Keusch:]

Thanks. Good morning, everyone.

[John J. Greisch:]

Hi, Larry.

[Lawrence S. Keusch:]

So, I guess I want to make sure I have this correctly. But I think you guys were initially guiding to rental margins for the year being in that – I think you specifically said, it would be similar to the fourth quarter, so let's call it roughly 50%. But the first half has done just over 52%. So, that would obviously imply a back-half deceleration. So, I mean, just help us think about that. And as part of that question, the CapEx that you referenced to build the rental fleet, how much of that has, in essence, been spent already and how much, kind of, falls into the back half of the year?

[Steven J. Strobel:]

Larry, this is Steve. A couple of things on that. I think from a margin standpoint on the rental business, we obviously had a very, very good volume quarter in the second quarter, which drove a lot of leverage. We're going to have less volume, and that's a little bit less leverage as we go through the rest of this year, which is a normal kind of sequence for us in the rental business. But we still, obviously, for the full year, are going to see margins in excess of 50% and above where we were last year, slightly above where we were last year in the fourth quarter. As far as the capital goes, we have spent the majority of the capital so far. We've got some left to go, but a good chunk of the incremental capital that we had identified for the – to meet the contract requirements has already been spent.

[John J. Greisch:]

And Larry, your perspective on rental margins is an accurate one. As you recall, as we came in to the year, we had some upfront investments to support the higher volume. Despite those investments and despite the higher CapEx, you're right, our margins here in the first half, we're very pleased within the rental business. And, yes, there were pricing pressures in the rental business, but we don't see anything fundamentally in the market that leads us to think our margins are going to be deteriorating to any significant degree as we look forward.

[Lawrence S. Keusch:]

Okay. Perfect. And then, I guess, John, just a big picture. Obviously, the businesses had seen improvements. You guys have executed well. The environment, as you stated, had stabilized. But what do you think, as you look forward here, outside of 2015, is this a catch-up period for hospitals and then maybe the environment recedes a little bit here or how are you thinking over the next a couple of years how this kind of moves forward?

[John J. Greisch:]

That's a good question. My view on our core – what I call our patient-handling business, which includes our bed frames, our services, our lifting products, and other products within that. My view on that business hasn't changed over the long-term. It's going to be a tough business. It's going to be challenging to get meaningful growth in that business at the level that we would all like, just given the fundamental volume issues within hospital systems here in the States and elsewhere. As I've said many times, the number of beds in the system is not going to be increasing over time. So, that business, I don't think our view has changed. We're enjoying certainly some recovery in hospital CapEx and specifically redirecting some capital towards our product categories. And I think we're executing exceptionally well to take advantage of that. The rest of our portfolio and how we leverage the position we have with our customers on the back of the strength of our bed franchise is what excites us as we look forward. Carlyn mentioned new products in our bariatric portfolio, our lift portfolio. We've launched new products in our surgical portfolio. We've obviously added businesses through acquisitions to our portfolio, and we have high ambitions and a high appetite to continue to do so going forward to really leverage the position we've got in the hospital systems here in the States and around the world. So, I think we've got a very strong and improving core business. And I think our comments around operational improvements and margin improvements around that business – we're going to focus on to provide the capital to redeploy into other businesses as we go forward. And we'll make the most of that with new product introductions as well. And I think as I look forward, Larry, the growth opportunity for us and I think the value-creating opportunity for us is really around adding like we did with Trumpf and like we did with Aspen, other businesses with higher-margin, higher-growth profiles that can leverage the position that we enjoy with our customers.

[Lawrence S. Keusch:]

Great. Very clear. Thank you.

[Operator:]

Our next question comes from Matt Mishan with KeyBanc. Your line is open.

[Matt Mishan:]

Great. Thank you for taking my questions.

[John J. Greisch:]

Hi, Matt.

[Matt Mishan:]

Hi. Much of mine were already asked, but just a follow-up on the capital spending environment in your hospital customers. I think last year, you saw a good amount of strength and a good amount of orders come through from large GPOs and hospital systems. I was just curious, do you consider those to be kind of unusual in size and timing, or is there a decent pipeline of potential large GPO or hospital system orders coming through, over the next six months to 12 months?

[Carlyn D. Solomon:]

Yeah, Matt. This is Carlyn. What we saw, if you go back several quarters ago, and you called it right, is that we did see HCA place a big order. And that really influenced our results over Q1, Q2 in terms of revenue. But what we also see is just kind of an underlying strength, and I'd say stability in the capital markets, where we've had orders more broadly dispersed than simply within HCA. And we see that stability, and I would kind of emphasize that, at this point, we see that stability continuing here for the next quarter or two. We don't really have visibility a lot beyond that.

[Matt Mishan:]

And then, you're making significant investments in the rental business right now. If you look at the year-over-year change in CapEx, I think you've indicated that the majority of that change is due to that investment. Any way you could help us size what the return on that investment is potentially going to look like? And how it would potentially impact revenue growth in, not just the back half, but maybe into the next year or two as well?

[John J. Greisch:]

Yeah. I think the thing I'd point you to, Matt, is again the rental business is a business with margins north of 50%. So, it's a very attractive business for us financially. I think, more importantly, it's a service type of business for us that gives us additional value to bring to our customers as they're looking for either peak rentals or specialized product rentals for their patient need. So, in addition to selling capital every day, this is our recurring revenue stream, if you will, within our bed frame business that just enhances the relationships we have with our customer. So, strategically, very important part of our business and, financially, it's the highest margin side of our patient-handling business, slightly higher than our capital business. So, the returns on those investments are quite attractive. I'm not going to get into specifically what's the ROIC in those investments, but hopefully my comments help you understand why that business is important to us, and very attractive financially.

[Matt Mishan:]

And last question for me, then I'll jump off. On Trumpf, and I'm sorry, I missed the first part of the call, but – if you mentioned it, what was the dollar number for Trumpf in the quarter, and what was its organic growth on a constant currency basis?

[John J. Greisch:]

We don't disclose the quarterly revenues for Trumpf for competitive reasons. The growth was up about 5% year-over-year here in Q2.

[Steven J. Strobel:]

Pro forma.

[John J. Greisch:]

Yeah. And we obviously didn't own it last year.

[Matt Mishan:]

All right. Thank you, John.

[Operator:]

Our next question comes from Gary Lieberman with Wells Fargo. Your line is open.

[Ryan K. Halsted:]

Thanks. Good morning. This is Ryan Halsted on for Gary. I wanted to go back to the rental business. Obviously, you mentioned some strong volumes there. I was just curious if you could maybe provide some detail around that. What kind of visibility do you have in the rental volume? And then, as that's increasing, do you expect you could potentially see less pressure on pricing over the remainder of the year, and maybe into next year?

[Carlyn D. Solomon:]

Yeah. So, Ryan, this is Carlyn. On the rental volumes overall, we kind of – there's a cyclicality to this, and I'm starting to understand, being new to the company, where you see, through the flu season in the early part of the year, a higher rental rate. And we saw that in the first half of the year. We're – also believe we're going to see good strength in the back half, because of our contracts that we signed with HCA for their rental business. And so, I think you can kind of plan on the business not taking quite the dip it might in some years and being relatively flat. If you look to our visibility into that, it really comes on the basis of these contracts and how they play out over time. In terms of our pressure, in terms of cost, I don't think that's going to change. Hospitals across the environment are really focused on cost. Every bid is very competitive. We like our ability to compete in the market and to do quite well. But I don't think we're going to see any relaxing on the intense price pressure that you see across the healthcare environment.

[John J. Greisch:]

And Gary (sic) [Ryan] (48

[Ryan K. Halsted:]

Helpful. Then on the international business, you mentioned in your comments that you're optimistic, you see some improvement in the second half of the year especially in the Middle East and Latin America. Maybe you can just comment on some of the things you're doing there that gives you that optimism.

[John J. Greisch:]

Yeah. I'll ask Carlyn to answer that. But just to clarify my comment there, those comments were around constant currency improvements. So, obviously, we have some significant FX headwinds on our reported international revenues. But constant currency, we expect to see good, good growth here in the second half.

[Carlyn D. Solomon:]

Yeah. And I think in – I'll start with, first of all, saying the Middle East and Latin America are two of our kind of lumpy international businesses. And we've seen that where you're going to have quarters that are really good quarters, you're going to have quarters that aren't as good. I think in the Middle East, this quarter, because of a easier comparable quarter a year ago, we're going to see some nice growth. We also see – and I want to mention this – in Europe, we see an improving situation for us where we're seeing some top-line growth. And because of some of the actions taken previously, we're seeing improved and (50

[Ryan K. Halsted:]

All right. Thank you.

[Operator:]

There are no further questions. I will now turn the call back to Andy Rieth for closing remarks.

[Blair A. Rieth:]

Thanks everyone for joining us. Have a great day and we'll talk to you soon.

[Operator:]

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect, and everyone have a great day.