Q1 2020 Earnings Call

Her 2020 earnings conference call during the presentation, all participants will be in listen only mode. At the end of management's prepared remarks, we'll conduct a question answer session at that time. If you have a question press star one on your Touchtone phone if anyone should require assistance during the conference call. Please press Star and then zero in order to make the call more efficiently.

Limit your inquiries to one question one follow up if you have additional questions you may return to the Q.

As a reminder, this call is being recorded by Hill ROM is copyrighted material. It cannot be reported rebroadcast retransmitted without hill Rom's written consent. If you have any objections. Please disconnect at this time I would now like turn the call over to Miss Mary Kay, Let don't senior Vice President corporate development strategy and Investor Relations Mr. <unk> you may begin.

Thanks, and good morning, everyone. Thanks for joining us for our fiscal first quarter 2020 earnings Conference call. Joining me today are John Girdle, our President and Chief Executive Officer at Hill, ROM and Barbara boat and Chief Financial Officer.

Before we get started let me begin our prepared remarks by reminding you that certain statements contained in this presentation are forward looking statements and are subject to risks uncertainties assumptions and other factors that could cause actual results could differ materially from those described please refer to todays press release and our SBC.

For more detailed concerning risk factors that could cause actual results could differ materially.

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

I would also like you mentioned 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. So without introduction, let me now turn the call over to John Thanks, Mary Kay Good morning, everyone and thanks for joining us today.

Q1 was another successful quarter for Hill ROM following a strong 2019 with disciplined operational execution, we again exceeded expectations on the bottom line.

We're also pleased to reaffirm our full year revenue growth outlook and raise the bottom of our adjusted EPS guidance range.

In the first quarter core revenue growth was 6% another quarter of mid single digit growth, including a contribution of approximately 200 basis points from recent acquisitions.

We achieved gross margin expansion of 160 basis points, a record level since 2015, and adjusted EPS of $1.13 per diluted share an increase of 11%.

Importantly, this strong performance provides flexibility to reinvest in our key growth initiatives and sets a solid foundation for achievement of both our short term and long term financial objectives.

Our teams continued to execute on our vision and four strategic priorities and enhancing our global category leadership to drive durable sustainable mid single digit topline and double digit bottomline growth.

Our priority would advancing category leadership with innovative and differentiated solutions is off to a great start this year.

Q1, new product revenue of more than $120 million exceeded our expectation.

This represents growth of approximately 30% versus last year.

We remain on track to deliver full year, new product revenue of approximately $550 million. This year and are looking forward to a steady cadence of six key new product launches in the second half of the year balanced across all three business units.

This concludes our future digital offerings books on patient falls, a deterioration digital physical assessment tools and a new mobile operating room table to name a few.

Turning to our topline results in Q1, the highlight was our U.S. performance across the portfolio.

Gross.

Core growth of 8% following a strong Q4.

Patient support systems and front line care each grew high single digits.

While U.S. core surgical solutions growth was in the mid teens.

Overall international core revenue declined 1% with 2% growth from emerging markets. We're pleased with strong double digit growth in Latin America, and China for the second consecutive quarter, which was offset by decline international PSS that I'll address in a moment.

As you know we turned on key investments in China last year to accelerate our growth and we're very encouraged that these actions are now translating into improved performance, China remains a key growth opportunity and we're confident it will lead the way to double digit growth in our overall the emerging markets in the back half of the year.

Now, let me review Q1 performance by business at constant currency rates first patient support systems grew revenue, 1%, while core revenue increased 2%.

You S. core revenue advanced by more than 8% driven by contributions across the broad portfolio of connected solutions and services, including care communications and smart beds.

With the continuum of smart bad to smart phone, we're simplifying communications, improving workflows and delivering better outcomes across healthcare systems U.S. med surge bed systems grew high single digits with double digit growth from centrella.

Care Communications, which includes our standard nurse call system, both mobile platform and future digital offerings also include increased at high double digit rates.

Even when excluding the benefit of Volte. This category grew in high teens.

We continue to grow faster than the overall market.

For the U.S. care communications is now larger than our U.S. medsurg product category, representing almost 25% of our U.S. PSS business.

Strong U.S. performance offset the international PSS decline of 15%.

This was result of two factors first a challenging comps for the prior year, which was anticipated and second the timing of some large capital projects, which are now in our backlog.

Therefore, given the improved visibility to our backlog, we now expect accelerated growth in the second half of the year for this business.

Turning to frontline care Q1 revenue advanced 9%.

The has the highest organic growth rate we've seen in recent years with strong performance in the U.S. and internationally. This growth is the result of new products and broad based acceleration across Welch allyn vital signs monitors physical assessment tools respiratory health products and the vision portfolio.

Lastly, surgical solutions revenue declined 20%, reflecting the impact of the surgical consumables divestiture.

Core revenue advanced 9% driven by strong double digit growth in surgical workflow equipment, including record placements of the integrated table motion globally.

As you know we continued to successfully reshape our portfolio through strategic growth oriented acquisitions.

The acquisition of breed technologies and Volte represent excellent examples of how we can plan to deploy.

Capital to advance category leadership in higher growth higher margin categories, while adhering to our rigorous strategic and financial criteria to generate attractive returns.

Both integrations remain on track we're in the early days of Relaunching. The breed like 2000 device leveraging our vertically integrated direct commercial model and a new attractive and fast growing market with a disruptive noninvasive respiratory therapy for patients in both the acute and home settings.

With Volte, we currently have more than 93000 devices on our platform across the U.S health care system and are driving accelerated growth in our care Communications business. In addition, we are uncovering commercial synergy opportunities that will expand our market leadership and drive incremental value over the long term.

As we further strengthened our connected care value proposition, we are pleased to expand our digital health capabilities with the recent acquisition of XL medical.

Accelerates a software company with a digital platform to improve clinical workflow provide greater access and assimilation of real time patient data and predictive analytics with their vendor neutral interoperable solution.

The addition of a medical device integration platform real time wave forms and a suite of alarm management tools.

Help put actionable data in the hands or caregivers to improve patient outcomes and lower costs.

As you know M&A has been and continues to be an important part of our overall strategy for growth.

With improved balance sheet flexibility, we're in a strong position to enhance our category leadership and further our growth objectives.

We will continue to deploy capital with a disciplined approach adhering to our rigorous strategic and financial criteria to generate attractive returns.

So in closing the first quarter was a great start to the year and we look forward to delivering on both our short term and long term objectives as we execute on our fourth strategic priorities.

With current visibility into the second quarter, we do expect order timing and select international markets to be a modest headwind to both revenue and earnings growth. During this quarter. However, we remain confident in our second half acceleration, resulting from improved international performance and clarity on timing.

In addition, the contribution from emerging markets new products and continued growth from recent M&A transaction will all be tailwinds as we entered the second half.

Thanks, and now let me turn over the call Department.

Thanks, John and good morning, everyone.

For the fiscal first quarter, we reported GAAP earnings of 59 cents per diluted share.

These results include after tax special items related to intangible amortization acquisition and integration costs and other special charges.

Adjusted earnings of $1.13 cents per diluted share advanced 11 cents from one dollar and two cents per diluted share in the prior year period.

These results reflect solid core revenue growth ongoing margin expansion strategic investments to drive long term topline growth and a lower tax rate.

Now let me, let me briefly walk through the piano before turning to our financial outlook.

As John mentioned, we reported revenue of $685 million for the first quarter, which was comparable to the prior year of $684 million.

On a constant currency basis revenue increased 1%.

Our core revenue advanced 6% at the high end of our guidance range and acquisitions accounted for approximately 200 basis points approach.

Turning to the rest of the piano.

Adjusted gross margin of 49.9% improved 160 basis points versus last year with expansion across all three businesses.

Margin improvement continues to reflect the positive contribution from.

Portfolio optimization, M&A, new product launches and the benefits of manufacturing costs and sourcing efficiencies.

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R&D spending of $32 million declined 5% versus the prior year due to project timing.

While adjusted EPS DNA of $200 million increased 5% driven by strategic investments, including our IP transformation and emerging markets.

Our adjusted operating margin in the first quarter was 16.2% and improvement of 50 basis points compared to the prior here.

The adjusted tax rate in the first quarter was 16.6%, reflecting an increase in stock based compensation benefit of three cents per diluted share versus last year.

Excluding the impact of stock based compensation, our first quarter tax rate was 21%.

So bottom line adjusted earnings for the fiscal first quarter of $1.13 cents per diluted share increased 11%.

Excluding that dilutive impact of the surgical consumable divestiture, which contributed five cents per diluted shares last year adjusted EPS increased 16%.

Now turning to cash flow.

Cash flow from operations was $77 million, which was a decline of $39 million from the prior year.

The decline in cash flow was largely related to the inclusion of an extra payroll period, and reimbursable transition costs related to the divestiture as it surgical consumables business as well as the timing of collections.

Capital expenditures totaled $24 million $9 million higher than the prior year period due to the impact of rig recent acquisitions I T transformation costs and capitalized software costs related to R&D.

As a result free cash flow totaled $53 million.

In terms of the balance sheet and financial leverage we completed the refinancing of our long term bonds during the quarter and maintained a debt to EBITDA ratio at the end of December of 3.2.

Now let me conclude this portion of the call by providing an update on our guidance for the fiscal 2020.

As noted in the press release, we are reaffirming our full year revenue growth and our raising the bottom up or adjusted EPS guidance range.

So for the full year, we continue to expect reported revenue growth to increase 1% to 2% I thought that reported and constant currency basis.

And core revenue to increase 5% to 6%.

Excluding the incremental benefit of acquisitions prior to the anniversary date core revenue is expected to increase 4% to 5%.

Non core revenue totaled approximately $150 million in 2019 and is expected to decline to approximately $25 million in 2020.

By segment on a core basis, we expect all three businesses to grow in the mid single digit range.

From a profitability standpoint, there's no change to our outlook. We continue to expect adjusted gross margin to expand 100 to 150 basis points.

R&D to increase and most single digits, representing approximately 5% of sales.

Adjusted EPS DNA of approximately 27.5% of sales, reflecting the impact of recent M&A transaction investment a key organic growth initiatives and our IP transformation as well as our business optimization savings.

As a result, we continue to expect an adjusted operating margin at approximately 18.5%.

We expect to other expense, which includes interest of $75 million to $80 million and lastly, we expect a tax rate of approximately 20% and a share count of approximately 67 million shares.

With strong first quarter results, we're raising the bottom end of our previous guidance range by four cents per diluted share.

Our prior guidance with $45.46 to $5.56 per diluted share and we now expect adjusted earnings of $5 in 50 cents to $5 to 56 cents per diluted share.

From a cash flow perspective, we continue to expect operating cash flow of approximately $430 million and capital expenditures of approximately $100 million.

This translates into free cash flow guidance of approximately $330 million.

For the fiscal second quarter, we expect revenue to decline, 1% to 2% on both reported and constant currency basis.

We expect core revenues to increase approximately 4%, including the contribution of acquisitions of approximately 200 basis points.

The topline guidance reflects a challenging U.S. comparison, given 10% core growth last year in the same quarter.

Hi, Yes in 2019.

As well as the timing of large capital projects in select international markets.

Q2 guidance translates into a core revenue growth for the first half of the year of approximately 5%.

Based on this we're providing Q2 guidance for adjusted earnings per diluted share of $1.14 cents to $1.16 cents.

This includes dilution of approximately six cents per diluted share related to the surgical consumable divestiture. Excluding does it divestiture, we expect adjusted EPS growth of 6% to 7% into second quarter and growth of 11% to 12% for the first half of the year.

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

I'd like to close by reiterating the high confidence and conviction, we haven't our ability to execute on our strategic priorities.

We expect revenue acceleration and improved profitability in the back half of the year with more contribution from new products emerging markets and recent M&A.

We continue to be excited about our long term growth prospects and enhancing value for shareholders.

Of course, none of our recent success will be possible without the hard work and dedication of the entire Hill ROM team.

We strive to foster a culture that provides our employees with the opportunity to excel and encourage them to live Hill rom's values and mission.

As a result, I'm very proud that Newsweek recently named Hill ROM to the 2020 list of America's most responsible companies. This recognition along with the passion of our employees exhibit everyday supports our ability to achieve our goals.

Building, our strong foundation to achieve continued success and improve outcomes for patients and their caregivers by advancing connected care.

With that let's open the call up for acuity.

Thank you. He will now begin the question answer session. If you have a question. Please press star one on your Touchtone phone if you wish care live yourself from the Q press the pound see if you're using a speakerphone. Please lift the handset ask your question Little Pos for a moment, while the list is being compiles I would like to remind participants that this call is being recorded.

An additional replay will be available on the Hill ROM website for seven days at Www Dot Hill ROM Dot com.

First question comes from Matt Taylor with you B S. Please go ahead.

Hi, good morning, and thanks for taking my question.

So I think the first question had to ask is just about the timing of orders that you called out you Spss and some of your comments that you had confidence in the acceleration in the second half of the year can you talk about what gives you that confidence what affected the order timing and just kind of what the funnel looks like for orders there.

Yes, Thanks, Matt as John .

Yes, the timing of orders.

And international is really primarily driven out of the middle East region, where we saw ship in the timing of orders that were in process and are now in our backlog for the second half. So what's really is a a shift of about $10 million of revenue that shifted from from.

First half and primarily Q2 into the second half.

Thats one of the drivers of of that ship on top of that as we've mentioned we're still in the early phases of getting emerging market growth.

Traction, we're really pleased with how is working in China in Latin America, as we look to the second half of the year the emerging market growth.

I will add about 150 basis points of accelerated growth in the second half of the year driving the overall international growth to be a 200 basis point tailwind in second half. So that's the primary.

Driver of that confidence and conviction around the second half acceleration is a shift primarily out of the middle East.

And then.

Seeing that Alex acceleration of the investments made a year ago in China to drive emerging market growth to 150 basis points plus in the second half.

Okay. Thanks fixture.

And that as a follow up I just wanted to ask you that the good news as we saw some pretty nice.

Core growth in front line care and surgical you talked about some of the factors driving that I was hoping you could maybe just go a little bit deeper on some of the main ones, including the integration of the.

Are you acquisition and just checking up on volte as well.

Yes, so as you noted the.

Growth was really bounce in the first quarter across all three businesses core growth of.

8%, U.S. PSS, 9% FL see the highest rate, we've seen ever and surgical core growth.

9%, but mid teens in the U.S.

So the drivers NFL seem to your question were our vital signs devices, our physical assessment tools and our vision care products that are driving the portfolio as you may recall, we just launched.

Our new retina Vue RV 700 device in the fourth quarter last year, and we're really pleased with the traction we're seeing in the first quarter here. So.

Those are the main drivers of the growth breezes. The breed acquisition is really in a re launch phase there was no material contribution and we don't really expect any significant contribution to exit the year in Q4 at that point, we would expect to see about a 50 to 100 basis points of of the contribution from the Breeze acquisition as we ramp.

That product into our sales organization and continue to ramp up on prescriptions for that device. So that again provides another kind of.

Supporting growth driver in the second half the year Eze Breeze ramps.

Got it right. Thanks, a lot Jeff.

Thank you.

David Lewis with Morgan Stanley 's on the line with a question. Please state your question.

Good morning can you hear me okay.

Yeah, Good morning, David.

Great all right. Thank you so John I want to come back to digital here for a second so the.

The digital business I think is larger than investors think it obviously growing a lot faster, but specifically this quarter patient communications or care comp was up high teens without Volvo drove about two points of growth for the quarter. So I just had specific pace you colocation visiting a lot investors are I wonder what is driving the growth in patient communication X mold and just you think about the back half of this year.

Heading into 21, what gives you the confidence in the sustainability of growth in sort of those two franchises that I had a quick follow up.

Yeah.

So the drivers there really are the value proposition that is that that enhance care communications provides the hill ROM.

Nurse call platform is a more premium segment product.

So it's got more fully feature set of customization alerts and alarms and integration.

That is that that we compete for primarily.

Before.

A couple of years now we've been winning business at a much higher rate than our competition and that has led to a nice order and backlog in that business.

Continues to be that way.

So I think the unique part of our value proposition is one the product offering is at the higher tier.

Of feature set secondly.

Hill, Rom's value proposition and our ability to scale larger customers and larger IDN, we have some very significant customer.

Implementations that we're able to to deploy because of our service team at our technical teams.

To deploy these real it relatively complex.

Syndication systems and implementations, so we're well positioned.

To compete and and offer assurance that we can.

Scale in complex IDN environments.

And that just helps feed into the the bolt acquisition and help drive their growth as they become part of Hill ROM whiskey altogether.

Okay.

Alright, great Okay.

David and Atas and ask John to comment on some of our product launches coming in the second half in the digital area as well yeah. The second half launches David.

Recall is our digital product offering for both falls and patient deterioration are planned for Q3 in Q4 there'll be more of a limited launch as we get to those launch timings, but we're on track there. The we're really excited about the progress that we're making and the unique.

You proposition to really say patient lives and and lower cost as a result of these digital tools, along with the algorithms and AI.

Or.

It's been a stretch, but certainly the algorithms that we're able to to bring into that portfolio as well.

And the XL jot it down at that.

The recent acquisition, we sell medical certainly feeds into that.

Well right because we're now able to do third party integration with a couple of hundred third party different pieces of equipment out there drive a smart alert and alarm and also display on the smartphone real real real time wave forms of patient data.

Okay very helpful. Then John but I know the focus this year as sort of transitioning kind of the growth portfolio away from beds and trella into the pipeline. You've just described but maybe thinking about central this year. What are you seeing from central we sort of assume low single digit kind of 3% grow for controller. This year. What are you seeing early in the year end are there any concern.

And do you think about the back after the year anything you're seeing on the competitive product launch on the bed side. Thanks, so much.

Yes. Thank you.

The centrella in the quarter as I mentioned with had double digit growth is probably.

Hi, double digit growth, but the important part is that for our U.S. medsurg business.

We saw.

Mid single digit growth rates in our mid search business. So the trial is the lead product there, it's growing at double digits and driving the whole category to be a mid single digit hi, mid single digit grower.

In terms of changes to our outlook.

Other competitively or from a macro point of view, we don't see anything imminent that changes the environment. There. So we like the we'd like the outlook for for continued.

Single digit growth as we've mentioned in our guidance that we are our expectation our guidance is low single digit growth in med surge as we entered the year.

And as we sit here today that looks highly confident if not slightly improved.

Okay. Thanks, so much.

Bob Hopkins with bank of America's on a line of question. Please state your question.

Thanks, and good morning, just a follow up on that last comment can you give us a sense as to where central is a percentage of your installed base in the United States is it still below 10% of your installed base currently.

Yes, still below 10% Bob.

Okay, Great and then just a follow up a little bit more on the on the O U S business and just to maybe give us a little bit of a better sense for the assumptions you're using for.

So that that business declined 15% in in the quarter, what do you assume for growth in that business in the Q2 guidance and then the back half guidance just wonder if you'd be little more specific with your assumptions. There yes sure. It's specific to Q2, we see about as an example, why is that middle East we have about.

25% decline.

Projected in Saudi in the Gulf region.

And that is really the single largest factor of the what's pushing the the timing of revenue to be backend loaded the good news as we know where those orders are.

There there in up there in our backlog we have good as good sense of timing as we sit here.

Currently in our second quarter, we were very good feel for when those will occur and hence the push out on that international revenue.

And Bob just to clarify a couple of things. So as we look to add Q1 performance overall core revenue for international in Q1 declined 1% and that really was localized and isolated to the U.S. PSS business, which declined that 15% F healthy and surgical both grew in Q.

One internationally and we were pleased with our performance.

We look at Q2, given all the drivers that John has outlined all three businesses are expected to be flat to slightly slightly down as we think about the performance across those three businesses in international and so that is that is sort of the overall view of where we are with the 25% decline in Italy.

Being a key driver is whats pulling down those growth rates down.

Hopefully that gives you a little more depth, yeah, and then I've talked to US yeah. We touched so many times about our international business is so much more exposed to project timing and capital purchases.

Thats the way the shape of the phasing of revenue growth. This year looks right now is.

Reshaping of.

Of lower Q2 based on international and now a higher back ended the year.

Based again on the on the back end growth for international all the growth international can be backend loaded.

This year. So we've seen this before in the middle East business. So not not I guess is shocking, but what's your confidence that you'll get it back in the middle East in the back half relative to previous situations, where middle East surprise like this in terms of push back in orders is it just how would you characterize that.

I'd say, it's very high confidence Bob and the other part that we didn't have before there were going to have this year is the investments we turned on in China and emerging markets, we really see that progressing nicely second quarter in a row of double digit growth and growth in both Latam in China.

The the confidence we have in other emerging markets is really high.

So that is becoming.

More and more visible and more exciting as we as we look at the second half the year, so regardless of what what may or may not transpire in middle East, which were confident about we've got a new source of growth in emerging markets that we did not have before.

Terrific. Thank you very much.

Larry cursed with Raymond James is online with a question. Please state your question.

Yeah. Thanks, Good morning, everyone I guess, John I, just wanted to start with that connected care question. So I'm curious as as you're starting to roll out. This this comprehensive portfolio of.

You are connected care components.

How how central is central lab, becoming in the conversation with the hospital administrators because it seems to me that really to take advantage of a lot of what you're doing you have to have centrella and that's something that the competitors can't offer.

So again I think certainly reflected in the first quarters numbers central was strong.

But but again want to really understand how that conversations taking place and where central is playing that role.

Yes, I think the presumption there Larry is correct and centrella the integration of of US kill it cynical communications with both their mobile nurse call.

And nurse call and the now the new components Weve added with the XL medical acquisition.

All of that from a smart bed to smartphone is now a nice continuum offering.

So it certainly positions us nicely for seeing growth across that portfolio. The reason, we as we've talked about before the reason we've lowered our expectations on growth for Centrella is we're coming off a high base.

And it is.

We're at levels of of acquisition or acquisition, but purchases and revenue with Cinderella and the whole mentors carried with it really haven't seen in a while so we're being prudent about what what the incremental growth would be on top of that.

But there is a sustaining of this high level of.

Of centrella purchases that go along with this overall solution set so confidence is still there I think we're being measured and prudent about what additional growth. We can see in the centrella product offering as more and more customers move to this direction.

And we'll see how it unfolds it could be a source of.

Of upside the future and when it looks that way, we'll let you know, but as we sit here today I think the way we call. It at the beginning of the year was the right was the right way to characterize it.

Okay, perfect and then just.

Two other quick ones, just coming back to the middle East what's not clear to me is what perhaps was what's driving that push out.

In in these orders.

And do you get a sense that its unique to to hill ROM or is there something going on in the region that that might be broader than that for the industry and I guess for four barb just on the free cash flow.

You know you're kind of I think you said $53 million for for the first quarter.

How does that ramp towards that that 330 for the year 'cause because obviously I don't quite big second half ramp.

[noise] would kill it may take a lot of one person or we can come back where I'm sure the middle East Hi, Larry So we did reiterate it for the full year, our confidence and being able to drive $430 million of operating cash flow and that translates with $100 million with the capital into a 330 coupon.

Really had a lot of timing items in there. So as we talked about there's some sort of logistical things like we had an extra payroll cycle in the quarter that that has an impact year over year as well as a this receivable we have related to the transition service agreement on on the sale and the surgical consumable.

Those are really just point in time sort of things that accounted for about half of our decline year over year. The other half is really about timing of receivables and the thing that gives me confidence. It's just in the first couple of days of January we had a large moments of those receivables coming in so I really take that it was just a function of what cash came out.

In the last week of December versus what came in in the first week of of January . So we feel very confident about our projections and where we're going to be for the remainder of the here.

And then Larry the first part of your question the Q2 comp in the Middle East when we're not going to account names. We haven't believe me because we go through a pretty rigorous process of looking where we are and what the future looks like.

On a fairly regular rigorous in routine basis here. So we know exactly where those are it's about again in the quarters about $6 million, but on top of that we had a tough comp in the middle East in Q1 of around the same magnitude.

That has given us a bit of.

Headwind in the first half of the year out of the Middle East I don't think its industry based industry wide at this point I'm not I wouldn't I wouldn't have enough visibility to actually make that determination.

All I can say is that as a specific hill ROM issue at this point, there's little noise around.

Well, we see some delayed or protracted decision, making and because of some of the unrest that taking place in the region.

And that we did factor some of that into our Q2 perspective.

That is the likelihood given that macro environment is that things might slow down for us I can't speak to others, but it might slow down for us and and that's that's factored into this guidance in Q2.

Okay terrific. Thank you very much.

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

Good morning, everybody.

It may be directed more toward barb.

I'm about to start off with the balance sheet, you highlighted the bond refinancing and leverage 3.2 times, maybe just update us.

Where are your hope where you're hoping over the next 12 months or so you think that 3.2 times leverage can go and and and.

Just as part of that Barb.

I think buried in the press release. It says you added 170 million to the share repurchase program, just curious to understand you're thinking about that and what the implications are if any for for the M&A program.

Rick Thanks for the question. So tell me they try to take those in turn we did in the year at 3.2. It is a lower 3.2 than than the 3.2, we had.

At the end of our fiscal year the per quarter. So we are generating good cash flow and our leverage is coming down pretty steadily as we go in terms of projections of where we would be at the end of the year. It all really dependent on what sort of M&A transactions that we will we will we will tackle throughout the course of there as we've talked.

About from a capital deployment standpoint, our priorities are really about growth investments and in particular looking at M&A and and where we believe that we can find.

Acquisitions that are going to help us accelerate that topline growth and accelerate our gross margin as we go as well.

With regards to you know the 170 million dollar share repurchase approval really our prior approval, we're starting to weighing down. So this is about replenishing.

Our our freedom to operate in this area and and our approach has not changed we will continue to look at share repurchases as a way to offset ongoing dilution. We are not changing our approach to do anything differently from from that that strategy.

A great turning to gross margins you, obviously had just an excellent quarter, there and you called out the various factors.

Mixed new products supply chain couple of things that you had projected to 100 250 basis points improvement this year. It sounds like we should be thinking.

At the high end, even with the second quarter.

Since I'm I'm, assuming maybe in correctly that the capital.

It might be lower margin, maybe not you can comment but yeah. So one.

Reflecting all bad where from here with gross margins are we after we.

Potentially above.

Your your guide range on GM is for the year and you also called out supply chain, maybe where are we in the process of rethinking in looking for efficiencies there.

Again, thanks for the question. So so we were very pleased with Q1 hundred 60 basis point improvement in gross margin in Q1.

You know is [laughter].

[laughter] excuse me at the higher end of what we've guided to for the year.

But we reconfirmed that we think 100 250 basis points for the year, It's where we think the expansion will go on with regards to the key drivers for Q1 very is about 40 basis points of improvement in our underlying productivity.

And and that's just a reflection of the ongoing good work that the organization is doing.

And the balance of that is really coming back to two key drivers. One is the divestiture the surgical consumables business, which accounted for about 50 basis points and then the balance of that is the portfolio. The new portfolio that we're bringing through our new product launches as well as the acquisitions that we.

Yeah.

As you think about how that plays out over the course of the here I want to call you back to what we said about the three year plan, which is you know we're going to get sort of.

Stronger gross margin expansion in the first part of the three year plan that applies to the first part of this year as well.

Because of that surgical consumable divestiture and so as you think about the full year, we still think a 100 250 basis points for the full here makes a lot of sense.

But the three year time period, as we get towards the back into that we'll see a greater contribution coming from the productivity improvements that we expect to see over that time period, but the productivity improvements are not.

We're not done we believe that there's still opportunity through improved processes and.

Improved sourcing that we can continue to drive efficiencies across this year and into the three year period.

If I could just get one moran.

John you highlighted breeze and you're at the early stage of the product. We launch just remind US briefly if you could why the relaunch and you kindly said.

No material contribution that all.

Right now, but 50 to 100 bed bips potentially a little.

The at the end of year unfolds.

Talk about the relaunch and how what are you trying to achieve how broad is that just a little more color in detail would be really great. Thanks. So much.

Sure Rick Yes, the first phase was bringing our two sales forces together and making sure that one's trained and and.

Confident on the on the product and and bring it bring it to customers. So that has occurred.

And we're in the early stages of that launch we're seeing nice initial productivity of our sales team as they have this new product in their portfolio as you'll recall is about a 70% overlap with the prior customers and the new customer target group for the Breeze product.

And it really just it the our approach the market is a direct vertically integrated approach. So we're going directly to prescribing physicians.

And really not emphasizing the DMC channel that was in place before we're we're still active with third party DMEA, but but where we are owned DMV. So our primary focus is to drive it with our with our own sales organization and our own DMV.

It's a more direct model, it's more profitable and learn direct control of it so with that emphasis it just takes some time to build up the book of prescriptions to get these new patients on therapy.

So that will climb and be a recurring kind of building revenue stream as these prescriptions come through.

And it's just a natural ramp of of the sales training model and the.

New product launch introduction that we have to be patient with and make monitored and see progress. So.

We're pleased with the early ramp that we're seeing its on track.

With what we expected in our model and.

As expected our model as we said from the get go it's going to via a cumulative ramp that we'll see really start starting to kick in in our Q4 this year.

Really helpful. Thanks.

Sharon we have time for two more questions.

Mike Mattson with Needham is on the line with a question. Please state your question.

Hi, Thanks for taking my questions.

I guess I just wanted to ask about the free cash flow targets for the year. How confident are you can deliver on that just given the kind of shortfall here in the first quarter and you know the guidance for the second quarter.

Little bit of a slow down there so.

So do you know it looks like to me pretty second half weighted.

I'll, let mark bar take the first one there Matt yeah, but if you like I'll take both if you'd like but.

With regards to cash flow, Matt again, what we saw in Q1 was what's really.

A timing issue. So there are there are couple of different pieces that we're looking at.

One was really about the timing of this payroll and that is a timing across the course of the year not something that will impact the full year. The other one at this receivable that we have around the transfer it a transition services.

Related to the divestiture the surgical consumables again, thats, a timing thing and something we wouldn't have had a year ago, but we will.

CF catch up on in Q2, and then third really is about the timing of the billings and so.

You know as I said, a few minutes ago, we saw really strong collections in the first part of January which which would have more than made up for.

The timing difference we had in Q1, so we have high confidence that's why we've reiterated that for the full year. We believe that we can do on both the 430 of operating cash flow and the Threethirty.

As as we look at pre cash flow for the full year.

And then Mike to comment about acceleration in the back half, let me give you the big drivers here new products.

The six significant new products and we're launching.

They really start launching starting in late Q2.

Then going into Q3 in Q4, so new product contribution accelerates in the back half the year.

By about 50 basis points, two to 200 basis points approximately in the second half of your emerging markets as I mentioned before that accelerates to about 150 basis points, which helped bring to.

The entire international.

Contribution to in excess of 200 basis points in the second half of the year. So those are the two primary drivers plus the ongoing contribution of growth from recently.

Completed M&A work.

Mike I would just said that when you look at the first half the year, we had a very strong Q1. When you look the first half of the or core revenue growth.

Is expected to be 5%, which is in line with that full year guidance and then when you look at the EPS growth. Once you adjusted for the impact of the divestiture in the first half the year, we're looking at low double digit growth on npls in the first half as well.

Got it thank you.

Matthew Me, Sean with Keybanc is on the line with a question. Please state your question.

Great. Thank you for squeezing me in.

John Barber Mary Kay can you just talked about the M&A performance I'm, just trying to understand if the numbers represent much stronger than expected volte orders.

Or has the accounting adjustment that was.

Keeping down numbers waned and it's just a more normalized base of revenue.

Yeah, I'll I'll take that.

So in the volt acquisition as you'll recall the anniversary dates coming up April April 1st anniversary. So it continues to track ahead of our expectations.

We're very pleased with the integration of the teams the culture fit the product fit.

And then most importantly, the customer response to to the combined product offerings. So that is expected to grow and in the mid teens on a pro forma basis, which is above the market.

And we're pleased with that performance.

Okay, and then the accounting adjustment that was based upon the initial acquisition related accounting has that has that waned on that or is that there is that still there and you know next quarter to you actually see some acceleration from that.

It is waiting a bit by that each quarter. So it would have been heaviest in the early quarters and it's been declining over that time period, So you're seeing less of an impact of that it's not gone completely but let's have been impacted that I'm in the results.

Excellent and then just lastly.

On the digital offering around patient falls.

Can you describe what that what that's going to look like I'm, having problems trying to contextualize.

Yes, so it's going to be because of the sensor is in an in the bed, namely the weight. The scales that are integrated into the bed itself, it's going to be able to detect movement of the patient in the bed and then connect that into our platform our ecosystem on the digital communication.

Front so.

It will.

Both in terms of the bed settings of where the rails and the bed, our then and the.

Angle, we will be able to detect shipments shifts of patient weight in the bed to to then alert or alarm caregivers around so that's at both.

Our effort here is to get predictive as we possibly can too to anticipate a potential fall risk.

And certainly indicate the position of the bed.

In terms of.

Safety features that are there to prevent the fall.

Excellent. Thank you very much.

Great well thanks, everyone for the questions today I just want to close a couple of comments and say you know, we're very pleased with our start to the year.

The durability and diversity of our growth drivers I think are becoming more and more evident as we think about the discussion we had today and the questions we talked about.

Clearly the investments, we made a year ago in China, and emerging markets as well as other organic growth areas like digital.

Are beginning to show that those investments, where we are well timed as we look at the second half of this year to drive both organic and inorganic growth and it really just like to wrap up the call. Thank all the thousands of Hill ROM associates and colleagues around the world. We've really made saw possible. Thank you for your dedication and passion to our mission in our vision.

Thanks, very much everybody.

Ladies and gentlemen, this concludes today's conference call with Hill ROM Holdings incorporated thank you for joining.