Q2 2020 Earnings Call
Good morning, and welcome to Hill Rom's fiscal first quarter 2020 earnings Conference call.
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Now, let's turn the call over to Mr. Mary Kay adult.
Senior Vice President corporate development strategy, and Investor Relations Mr. don't you may begin.
And words the support thanks.
Good morning, and thanks for joining us for our fiscal second quarter 2020 earnings Conference call I Hope everyone is healthy and remaining state during these challenging times.
Joining me today, our Jon Gruden, Lars President and Chief Executive Officer Hill, ROM and Barbara boat on Chief Financial Officer.
Before we get started let me begin by reminding you that this presentation includes forward looking statements that are subject to risks uncertainties assumptions and other factors that could cause actual results to differ materially from those described including any impact related to the coded 19 pandemic.
Please refer to today's press release, and our AFDC filings for more information concerning risk factors that could cause actual results could differ materially.
In addition on today's call non-GAAP financial measures will be you.
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 includes highlights on her rounds response to the current pandemic.
These materials can be accessed on the Investor relations page of our website.
So with that introduction, let me now turn the call over to John.
Thanks, Mary Kay Good morning, everyone and I Hope you your families and friends are all safe and healthy.
It goes without saying that we're living through an unprecedented and challenging times related to the Coburn 19 global pandemic.
Before we get into the details of the quarter I wanted to take a moment to thank our entire hill ROM team for their unwavering commitment and extraordinary contributions to support our customers.
Frontline caregivers and patients in our United fight against this virus.
So Robert mission of enhancing outcomes for patients and caregivers has never been more vital to the delivery of health care.
Our positive culture has never been more inspiring and our global response, nothing short of impressive on multiple fronts.
We are supporting those on the front lines by rapidly expanding production of critical care products.
We have pivoted, our R&D efforts to introduce a spectrum of new products to meet the unique cobot treatment challenges.
Implemented a comprehensive business continuity plan to ensure a minimal disruption of our global manufacturing operations and supply chain.
And we've delivered approximately $6 million of support in the form of both monetary and product donations to support our health care heroes, who are the frontline's saving lives.
Hill Rom's diversified businesses, our source of strength in these turbulent times.
As a result, we at both the humility and confidence to successfully navigate through the future environment.
The combination of our exceptional execution financial strength and diverse portfolio underscores our commitment to enhancing value for all shareholders today.
And over the long term.
Moving to financial highlights for our second quarter, we once again exceeded our guidance on both the topline and Bottomline.
These results demonstrate our ability to modulate risk and reinforces the critical nature of our product portfolio and our category leadership positions in the markets we serve.
Core revenue growth was 6% our eighth consecutive quarter, a mid single digit growth.
Core revenue includes a contribution of approximately 200 basis points from recent acquisitions.
And covert 19 net tailwind of approximately $15 million then sued toward the ended the quarter.
We continue to be pleased with significant margin expansion, achieving a record adjusted gross margin of 51.2% and operating margin of 18.3%.
This resulted in adjusted EPS of $1.28 per diluted share an increase of 12% over the prior year.
Our financial performance is supported by continued execution of our four strategic priorities.
This is the foundation that allows us to respond globally, while positioning us for the long term.
Growth from new products accelerated in Q2.
On a year to date basis, we've now achieved more than $260 million and new product revenue an increase of nearly 30% to last year.
Importantly, we continue to anticipate full year, new product revenue of approximately $550 million.
I'm proud about how our R&D teams rapidly responding to the challenge of developing five new product innovations for cobot 19 patients.
In addition to receiving emergency use authorization to enhance our met an ABS system for respiratory support. We're also pleased to offer new mobile communications and remote monitoring solutions for vital signs measurements that will help protect caregivers and reduce the overall demand for P.P. as they deal with this virus.
Geographically our U.S. performance was very strong with all three businesses contributing to core growth of 8%.
We also saw improved international performance with core growth of 3%, which was better than expected.
This was the result of strong international Kobin related demand for products like I see you beds, and thermometry, which more than offset the expected impact from the timing of large capital projects in selected markets.
All regions, except EMEA had positive results, including double digit growth in Latin America.
Canada and Asia Pacific.
As you know we turned on key investments in China last year to enhance our position in emerging markets. This quarter. We once again achieved growth in China have more than 20%.
Validating our strategy and investment plans.
While we expect to see some near term Choppiness as a result of the pandemic in China and other emerging markets. This will continue to be a key driver of our longer term growth strategy.
Let me now turn into Q2 performance by business at constant currency rates.
First patient support systems revenue grew 7% and core growth was 8%.
The majority of the early cobot 19 related demand benefited this business.
In the U.S. core growth of 9% well supported once again by contributions across our broad portfolio of connected care solutions and services.
This included double digit growth from med surge bed systems, including this and Trello smart bed and care communications.
Core international growth in this business was 5% and was largely the result of significant demand for Hill ROM I see you beds, particularly from Canada.
In front line care Q2 revenue advanced 7% with strong growth both in the U.S. and internationally. This was was the result of new products and broad based global strength across the Welch allyn vital signs monitoring equipment like the Mama tree and blood pressure monitoring and certain respiratory health products.
Including the matter NAV system mentioned earlier, and our life 2000 noninvasive ventilator.
Lastly, surgical solutions revenue declined 25%, reflecting the impact of the surgical consumables divestiture last year core revenue declined 3% as U.S. growth of 9% was more than offset by the expected decline in select international markets related to the timing of large capital projects that we do.
Discussed on our previous calls.
So now with that as a backdrop, we look to the future with an eye toward disciplined execution of our priorities adapting to the current environment to support our customers while advancing our mission.
No company, including Hill ROM will be completely immune from this new reality.
All health care conference will we face with challenges and the global macro environment may continue to pose obstacles for some period of time.
The net impact to hill ROM in various regions and product categories will largely depend on the scope intensity and duration of this pandemic as well as the shape of the recovery in the demand for health care.
These new variables weigh on our ability to predict outcomes. So we have elected to suspend our previously issued guidance.
However, we thought it was important to share a point of view and provide transparency on the current environment and dynamics and the visibility we have on our businesses as of today.
From a demand perspective, our diverse portfolio represents a significant advantage due to the built in hedging.
Some parts of the business are facing challenges, while others are resilient or performing at high levels to meet significant demand.
We currently expect approximately 40% of our business to experienced challenges related to installations and project delays were hospital access is a requirement or were lower physician office visits may impact results.
These dynamics primarily affect surgical solutions.
Telecommunications and position oriented portions of our front line care portfolio.
We expect growth for this category of products to collectively decline by more than 20% in the second half of the year.
However, we also believe it is fair to assume that starting in the fiscal fourth quarter, our access into hospitals for new installations will resume in a large majority of sites and patient access to primary care physicians will gradually return.
The remaining 60% of Hill Rom's portfolio is fairly resilient to the current dynamics, including approximately 40% of the portfolio that is supporting higher demand.
Of course comprises of our smart bed portfolio portions of our respiratory care business.
And other devices and tools aiding caregivers on the front lines to diagnose.
Monitor and treat kobin patients.
As of today strong demand for these critical care products continues.
This reflects the strong Q2 order book and backlog for Med surge and I see you beds are rental fleet and a variety of products within within the front line care business.
For smart beds, we achieved a record level of U.S. orders more than double a typical quarter and representing nearly a 70% increase over Q1.
We estimate that more than half of this growth represents new incremental expansion demand versus an acceleration or pull forward of orders that were already in our funnel.
A key consideration as we look toward the second half and the future does the impact of this pandemic on the outlook for beds and other capital purchases by hospitals local and national governments, including this data preparedness related to another possible wave or planning for future potential pandemics.
While there are multiple reports calling for additional bed capacity.
Which could fueling multi year global growth cycle, we do not have clear visibility on the longer term implications.
Durability of increased demand is evolving dynamic that we will continue to monitor vigilantly.
From a supply perspective, we have doubled down or on our efforts to increase capacity. Our wholesale operations team is doing a tremendous job.
Quickly scaling our workforce by hiring more than 300 additional employees shifting team members to high demand products, while being very rigorous to maintain a healthy and safe work environment.
Our team is monitoring tracking and implementing countermeasures to proactively keep our supply chain, moving and ensuring upstream parts availability.
Im very pleased to report that we continue to have no material disruptions to our global manufacturing or supply chain operations.
We continue on track toward doubling capacity for med surge and I see you beds and patient monitoring anthem commentary, where current demand far exceeds supply.
Lastly, we were in the process of increasing capacity on annualized basis by greater than five fold for our like 2000 noninvasive ventilator.
This device is currently approved in the United States as a critical care and a home care ventilator. It is ideal for supported patients with mild to moderate respiratory distress and for winning from mechanical ventilation.
Patients such as those with Seo PD or cobot 19 may be eligible to use the product that home.
Our capacity expansion will support our efforts to fulfill a 20 million dollar order from health and human services by this summer and additional demand from other acute customers.
So in summary, the entire hill ROM team remains committed to our mission even during this time a great uncertainty.
We believe we have the right solutions and strategies and are well positioned to meet the immediate challenges before us.
We look forward to providing you with continued updates as we position our company for sustained success and deliver enhanced value to all stakeholders.
Thanks, and now I'll turn the call over to Barb.
Thanks, John.
Good morning, everyone.
Fiscal second quarter, we reported GAAP earnings of 70 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 $1.20 cents per diluted share advanced 12% from the $1.14 cents per diluted share in the prior year period exceeding our guidance range of $1.14 cents to $1.16 cents per diluted share.
These results reflect solid core revenue growth.
The impact of Kevin 19 late in our corridor.
I'm going margin expansion as well as strategic investments to drive long term topline growth.
Now, let me briefly walk through our Q2 2020 piano.
We reported revenue of $723 million for the second quarter, which was an increase of 1% over the prior year revenue of $714 million.
On a constant currency basis revenue increased 2%.
Core revenue advanced 6% above our guidance of approximately 4% core growth.
Acquisitions contributed approximately 200 basis points of growth and the net impact of covered 19 revenue with approximately $15 million.
Turning to the rest of the piano.
Adjusted gross margin of 51.2% represents a record level and reflects improvement of 180 basis points.
With expansion across all three businesses.
This reflects the positive contribution from product mix, new products, M&A and portfolio optimization initiative.
And benefits of manufacturing cost and sourcing efficiencies.
R&D spending of $34 million declined 6% over the prior year, primarily due to project timing.
Adjusted as she and I have $204 million increased 2% as lower discretionary spending like travel meeting and certain marketing expenses were more than offset by the impact of acquisition and our IP transformation initiative.
Adjusted operating margin was 18.3%, reflecting an improvement of 190 basis points compared to the prior year.
Interest and other non operating expenses for the quarter of $23 million included an unplanned impact from currency devaluation of approximately $5 million.
The adjusted tax rate was 21% and adjusted earnings for the fiscal second quarter of $1.28 cents per diluted share increased 12%.
Excluding the dilutive impact of the surgical consumable divestiture, which contributed six cents per diluted share last year I.
Adjusted EPS increased 19%.
Now turning to cash flow.
Cash flow from operations for the first six month of 2020 with $157 million flat to prior year.
Capital expenditures on a year to date basis totaled $46 million.
$15 million higher than the prior year, driven by I T transformation costs and capitalized software costs related to R&D investment.
As a result year to date free cash flow totaled $111 million.
Our balance sheet and overall financial position remains very strong.
During the quarter, we've raised our dividend for the 10th consecutive here.
Today, we returned $99 million to shareholders through dividends and share repurchases during fiscal 2020.
Our debt to EBITDA ratio at the end of March was 3.3 times, and we ended the quarter with $291 million and cash.
We continue to operate well within our debt covenants and have no material debt maturities until 2024.
And lastly, given our recent refinancing efforts last year, we have access to our revolving credit facility of up to $1.2 billion to address and in capital needs as necessary.
Now before turning the call back over to John Let me comment on our decision to suspend guidance.
First it's important to note that we are actively monitoring evolving landscape and tracking to potential implications geographically and within each of our three businesses.
We continue to see accelerated demand across some areas in the portfolio. During April. However, we are now also experiencing some project delays.
Barely in surgical solutions care communication in certain areas, our front line care due to lower physician office visits.
As a result, and given the ongoing uncertainty scope and evolving nature of the pandemic.
We're not in a position to reasonably estimate the net impact of these dynamics on our future financial performance at this time.
We would also not recommend extrapolating our recent results into projections for the remainder of the fiscal year.
We look forward to providing you with additional updates in the future.
Thing and with that I'll turn the call back over to John.
Thanks, Barb I like to close our prepared remarks. This morning by reiterating our commitment to Hill Rom's mission and strategy.
The value of our diverse product portfolio ability to rapidly innovate and adapt and our response to the current crisis provides positive assurance our ability to execute in times like these.
Our balance sheet is strong and affords us the optionality to continue to invest in our strategic priorities, including new product innovation emerging market growth and acquisitions.
We are fortunate to be well positioned to play a pivotal role in the global response to coated.
And we remain focused on our longer term growth prospects that will add further value to health care delivery.
Of course not.
None of our success would be possible without the hard work and dedication of our entire Hill ROM team I'm humbled.
And inspired by our employees consistent dedication and extraordinary efforts.
On a daily basis I receive messages about our employees heroic efforts.
Customer in patients success stories and words of support thanks and encouragement.
We share these stories inside the company and postings that we call Hill ROM strong as they acknowledge the power of teamwork and our role to help.
While bringing our mission to life. So thanks, and now lets turn over the call acuity.
Thank you we will now begin the question and answer session of Hill Rom's Q2 earnings call.
If you have a question. Please press star one on your Touchtone phone.
If you wish to remove yourself from the Q press the pound key.
You are using a speakerphone. Please lifting handset to ask your question, we will pause for a moment well, let's just being compiled I'd like to remind participants that this call is being recorded and their digital replay will be available on hill Rom's web site for seven days at Www Dot Hill ROM Dot com.
First participant.
Our first question comes from Larry Keusch of Raymond James.
Your question please.
Thanks, Good morning, everyone.
Obviously John.
Lot of demonstration of but what you guys are doing to.
Continuing to execute during during that depend damages.
I guess just some some questions as you know as you think about the remainder of the year and I recognize that she was suspended your guidance but.
How are you thinking about you know just ramping up procedures at this point kind of whats the view right now relative to.
How preparedness either by hospitals or governments may may shake out here again, just just some high level thoughts is as you kind of think about the dynamics around the remainder of the year.
Yeah. Thanks, Larry first let me start with our vision and our strategy I feel really good about division, we outline of advancing connected care and the criticality of that.
In in the prior pre cold environment, the current coven environment, and even the post cobot environment.
That strategy and our main strategic priorities really hold intact throughout this period of time and in fact, if anything had been reinforced.
So I mean and and I think we're in this as I try to communicate in our prepared comments were written a really enviable position.
We can stay the course without radical.
Contemplation of significant shifts in resources and and capital deployment.
So to both invest internally and continue to look for external inorganic opportunities. So let me start with that comment first as a backdrop.
Specifically around the recovery.
I I think we're pretty much in line with what what what you're hearing around our peer group and and our providers. We've listened very closely to what our providers are saying I've had a lot of interactions with major provider.
Networks, and individual hospital Ceos and Cfos.
And I think there's a growing consensus that we start to see elective procedures come back at the back half of the current quarter and then as we enter our fiscal fourth quarter. It continues to accelerate.
Does it in our fiscal fourth quarter ever get back to.
Get back to the kind of pre covert volumes that's that's a.
That's a crystal ball that no one has to really determine what that return to baseline activity looks like and when it comes back. So that's all you know our comments around the shape and and speed of recovery and what the healthcare demand effectively ends up looking like over the next six months.
It's really hard to predict and even the transition between our third quarter in our fourth quarter is really hard to predict and some of our areas.
And that you know those are some of the main reasons, we suspended our guidance.
Even though we're halfway through our own fiscal year, just the timing of what the outcomes will look like in Q3 versus Q4 is is a very complex equation, whether or not on a lot of new variables that weve never seen before so.
In general.
We think things do start to recover from here as states begin to open up and as the understanding of.
The financial implications to.
Health care providers, both in the hot zones of UN impacted cobot area.
And equally important those are not heavily impacted a one would argue that those health care providers and no systems that kind of shutdown activity and then did not have a wave of cobot patients arrive.
There are suffering pretty significantly financially as well I.
I think the other thing that I would comment on which is a bit of a macro comments, Larry and that's really <unk> around the point of the stimulus money that's been provided and approve from Congress.
The actual flow of those funds is theres only starting to begin to show up.
And so the amount of of funds that any individual provider receives a is still an unknown they've received some small portion of the total amount allotted to them, but they haven't received nor do they have visibility to what that ultimately looks like for them. So we have a short period of uncertainty.
We were providers don't understand their current.
PNM and their own balance sheet.
That should get resolved in the next couple of months along with the resumption of of normal activity around surgical ambulatory care and diagnostic care. So once those two things come together I think the environment for our.
Our customer our biggest customer group of acute care centers will be a much better understood.
I think we'll be able to then provide better clarity on what that what the implication of that is to the capex environment.
Okay.
Very good I guess, just a one other one here and maybe just a superfast one for bar, but [noise].
Again.
You sort of got into this a little bit on on your prepared comments that you know one might think that does the buying right now of beds would would represent a pull forward out of demand and you might find yourself in an air pocket, but I think you're sort of suggesting that may not be the case. So again, maybe you.
And on what your what you're seeing out there and and you know why why do you think this may not just be a pull forward situation and then just quickly for Barb I think if I have this right I know that you're now looking for $40 million of noncore revenues.
In this fiscal year I thought it was previously closer to 25 million. So if I am I right on that could you just please help us understand what changed thanks ill take I'll take the first part Larry and then pass over the non core revenue piece to Barb I think if you're looking at slide 25 in our presentation I think that really gives you a nice dips.
Section of of the of the resilient part of our portfolio to 60% of which as I stated in my prepared comments, 40% of that 60%.
Is experiencing high demand.
Remains significantly high demand as we stated in our comments both in beds vital signs monitoring thermometry respiratory care.
All of those are seeing a significant increase in demand.
On the bed portion, we try to and did provide commentary of how much we think of that is pull forward.
Roughly half of it or more than half of it. We think is it just increased demand for additional capacity.
And we saw.
Many areas around the U.S. in and around Canada, and Europe, where suddenly there was an increased demand for expansion capacity.
And it wasn't that clearly not pull forward of of our pipeline restarting our near term pipeline that we had visible to us.
And we're actively working so roughly a little more than 50% was expanded demand into bed category and the remainder was pull forward from future periods.
For more than near term.
So that you know that said I mean, I think we're we're obviously looking at a very robust Q3.
Oh, we have good visibility to it we have as significant record orders and backlog of smart beds coming into the quarter.
And continuing orders and backlog building in somebody's other critical products like been up like monitors and and respiratory products. So so those continue to give us near term.
Visibility that we're going to have a very strong Q3.
What happens in how we transition I think you are laid it out well, which is we're going to have a transition.
Yeah. This is a week none of us want this to be sustained.
For the sake of humanity that we have this ongoing.
You know.
Rush for did for expanded capacity. So there will be a transition what I like what I love about our portfolio is that we're really proposition to adapt and I think we've proven we can be quick and agile.
To adapt to the new environment as it transitions and our portfolio being as broad and diverse as it is will allow us to transition when that time comes transition away from.
From some of these critical care products into the portfolio products that are driving value for health care and represents a nice growth opportunities for us in the future along the lines of respiratory health and remote patient monitoring.
And I'll turn it over to bar for the comment around the non or the question around the non core revenue hi, Larry. Thanks for the question Youre absolutely right. You know previously we had been estimating that at the noncore revenue from our international Oems surgical business was gonna be 25 million, we've actually seen some income.
Creased demand from them this quarter and so you know we are we are working to meet that therefore, we now estimate amazing that it can be closer to 40 million. It does not change our trajectory about exiting this business nor does it change our goal of.
No I sort of retiring the core noncore calculations for next year.
Okay, great. Thanks, guys appreciate it.
Thank you.
[noise], Rick wise of Stifel.
You May ask your question.
Good morning, Hi, John Hi, Barbara.
Yeah.
Let me start off.
With.
Yeah, I mean, obviously.
It sounds like <unk>.
It was impacted and understandably hospitals are focusing elsewhere, maybe you could help us appreciate and a little more detail.
You know exactly what's happening and how you expect this critical part of your business and strategy. How you expect to care comes story to unfold over the next six months or get restarted and maybe just as part of that John you could you know given the significant smart bad demand.
Could you spend a minute, helping us understand how that possibly I'm thinking about correctly, but possibly potentially accelerate your conductivity initiatives as we recover if I'm thinking about it correctly.
Yeah.
Great. Thanks, Rick Yeah, So care com, what did deliver double digit growth for us in this in the second quarter.
Including double digit growth revolt. So we.
Came into the quarter, a feeling good even as the initial phase of co bid was hitting it was still ended up with a double digit growth product category for us.
However, as we ended the quarter, we we saw customers completely focused on preparedness around cobot.
And and the patients that were about to becoming indoors, so and restricting access of course, which makes complete sense.
We're still in that phase of of of.
Taking care of these patients and restricting access to.
Our teams, who would need to be there to be on onsite to install and complete the verification validation of the of the communication systems and it and be able to recognize revenue. So we we expect that will occur again, you know along the trajectory that we tried to outline around the next two quarter.
There's.
And as we get into our fourth quarter fiscal fourth quarter that our access greatly improved and we can in a majority of sites. When we can get back in there and complete the work and and begin to get revenue recognition going in the interim period, one of the five products. We launched was around volt extend.
Which was deployed in several applications to allow a cloud based solution for off premises use I'm in a field hospital situation specifically.
And that was met with with the with strong response, we also partnered with agile M.D., which is really a an AI small AI company with some great technology to help really.
Develop best practices around pathways and clinical pathways in early warning.
Texan for.
Patients who are deteriorating specifically around cobot 19.
Which I think was a good early deployment of the strategy, we talked about many times around our digital product offering and how do you take the connectivity of monitoring patients. So the next level. So you can provide insight and intelligence and we're happy to be doing that with this partner.
The current environment.
As it relates to the second part of your question around the longer term strategy I think I think you're absolutely right. Rick that this does validate the importance of.
Of clinical communication.
Workflow communicating with patients who are potentially in isolation of monitoring their vital signs very closely in real time, and being able to respond and adapt to.
A changing condition for patients.
Some of these solutions can easily be adapted to help preserve PB and manage patients as I mentioned in isolation.
Preventing actually you visits.
So we think that is strategically very well aligned and the recent acquisition, we did with XL medical there's another. Good example, right yet live waveforms honest smartphone you're able to monitor a patient status and and a and C and interact with the patient vitals without having to be in a room.
So we are.
No again.
[noise] it reinforces our strategy and gives us confidence that we're up brother right path here as we as we think about a post cobrand world.
Great and maybe just on the financial side, you obviously had.
Excellent record gross margin seems like your long term on a path so moving them higher because.
Portfolio the mix.
New product et cetera, but just.
I'll give guidance now.
I'm not expecting something precise but.
As we think what the next couple of quarters are you sustainable this level because of the.
Great.
The strength in the portfolio, we're seeing or no.
But the mix is actually going to be a headwind for the next quarter, how should we think about it and as long as you're doing Transalta sneaking me.
Maybe you can talk about capital deployment and M&A price what are your priorities now thank you.
Hi, Rick inspired Hey, I'm first talking about gross margins, we haven't seen really healthy gross margin expansion in the first half a year. When we think about Q2 in particular, we saw 180 basis point 140 in that coming from portfolio mix, but it's important.
Remember that a that portfolio mix about half of that contribution is coming from the divestiture surgical consumable business last year as well as contributions from our acquisitions and as we anniversary those days, you're not going to see that same list that you get in the first part of the year from those those.
Actions, so that it's going to wane as you think about the back end of here now as you think about the mix of the portfolio you know as John outlined earlier, you know, we do think that there's about 40% of our portfolio, there's going to see some challenges in the remainder of the year.
In that bucket, our some of our lower margin products. So overall, we think product mix in the latter part of the year will still be a positive for us, but there will be many puts and takes in there as we look at demand changes and think about what the underlying cost structures are so I would just encourage you to think about you know.
The anniversary of our M&A activities and how that will reflect in the gross margin over the course of the year, but also take into consideration. We do think we'll see positive contribution from portfolio mix.
Just just from the changes were seen in demand in the second half the here.
With regards to capital deployment, you know John used the phrase earlier about staying the course and and I would say that that is exactly the same when we think about capital deployment balance sheet is really strong cash position is good access to capital is good as well and so when we think about.
Priorities as we've talked about before you know first and foremost we're gonna be looking for ongoing growth opportunities. So M&A will remain a priority for us I'm looking for the right M&A with the right financial and strategic.
Criteria.
We will continue to maintain our dividend. We just recently increased it that's the 10th year in around that we've increased our dividend that's not something that we see changing at all.
And then you know with regards to other areas you know stock repurchases. We have traditionally used to repurchases as just a way of managing are on dilution over the course of the here and in fact at the beginning of Q2 before 'cause it really started to be felt in the markets here we can play.
You did this year's repurchase odd to offset dilution for 2020.
And then finally, you know if we don't have great investment options to go after in front of US we're going to use whatever cash we have two to continue to pay down debt and and build up our coffers for when we do see the right opportunities. So really staying the course here the parties really haven't changed as we think about on capital deployment.
Thank you.
David Lewis of Morgan Stanley is online with the question. Please state your question.
Hi, Good morning, and thank you for your doing four for patients and hospitals, John and team I I want to go out a little bit more John and you've got some questions here in the next six months means very clear from your presentation. The next quarter is going to see a significant demand in the business I.
I don't think investors are very focused on the next six months there kind of two debates out there John if you take over the next 12 to 18 months. One debate is there going to see some level of pandemic preparedness, that's going to be sustained and the other is that there's this this is just an acute demand dynamic and the capital environment is get challenge is going to get challenging. So my kind of questions. There related are you know what or how.
Hospital Ceos and procurement offers are saying about you know how prepared they were and how prepared they have to be in the future and then on the other side of the equation. How do you think this crisis compares to the due 2008 financial crisis from a capital perspective in that one quick follow up for Barb.
Yeah.
I think it's early innings right to two were still in the middle of the crisis dealing with a these these illnesses coming in the door and.
And at the same time planning on getting back into into.
Some level of normalcy on elective and urgent procedures.
Yeah. The early early indications would be and as you know I wouldn't want to extrapolate too far off of this but there's a tremendous amount of input from providers. Both here in the U.S. and internationally that we were not prepared.
And we don't have enough capacity.
Whether that was our intense discussions on ventilators, a that we were directly involved in or the panic if that people had in their eyes and in their urgency around getting new I see you beds, and and med surge beds into their environment.
Not to mention monitoring equipment, and and and the like so.
Post is this a pandemic and post.
The analysis of how well we were prepared here in the U.S. and how well various countries in Europe and around the world had been prepared.
I think we'll see some I wouldn't be surprised we don't see some some large scale changes around you know what what our surge capacity is and how we deal with it.
We've clearly.
So.
As bad as this has been it could've been a lot worse and and we were not in the state of preparedness that we should be.
So that you know there's likely a longer term you know opportunity here for market expansion tour to say.
And then and then I guess as it relates to the Capex environment. We went through this before we've been through multiple cycles and we did a retrospective review recently and we looked at it again.
In the last couple of weeks.
During a very uncertain and.
Look you know uncertain time around Obama care and a liquidity crisis from the financial crisis during that time, which is different than this I would argue worse in some ways.
As it relates to Capex.
During that time, we saw double digit decline in what is now 10% of our portfolio. So that would represent about a 1% headwind.
In the future as we get past you know into the timeframe, you're talking about 12 to 18 months or so if that scenario develops.
I think that's a reasonable headwind to consider I don't think we would change our view on that.
You know, what's what's unknown in the near term is is really this transitional period of was when we come off of this strong Q3, you know what is Q4 looked like what does Q1 look like.
It will be what it will be I think we are extremely well positioned to adapt and adjust and move our emphasis in our portfolio with the times and with the changing needs in the healthcare environment and I do think that are strong value propositions around care com around remote patient monitoring.
And in the acute care setting and integrating that with care accomplished form.
Driving a respiratory care business for home ventilation.
As well as acute ventilation that we're seeing now from this pandemic.
But also as we pivoted on our several of our new product introductions I would highlight you know that one of the ones in there deserves a special attention, which is adding remote monitoring.
Two are one of our model one of our vital signs monitoring devices for temperature blood pressure and SPL too.
This will be a device that next month, we're going to launch and it will allow us to have multiyear parameter vital signs monitoring in a ambulatory or home setting that is directly connected.
Through when it happened and web site to allow clinicians to monitor patients without seeing them without need to be either bedside without having them without having them to come in the office.
Ideal for cobot patients, but also for remote patient monitoring and Tele health. So I think that represents yet another accelerated growth factor for the company as we as we look as we look forward.
[noise] I've done started very very helpful. Over the next 12 months. Thank you for that very detailed and then bar just a quick one for you I think the volatility of the device environment is giving us kind of a new definition of what incremental in decremental margins are from any of our businesses I guess I was struck.
By some of your comments here other supply companies are seeing significant upside to numbers, but significant spending associated with that upside just give us a sense of how you're thinking about incremental decremental margins. During this process and specifically with some of these increased demand forecast an increase capacity dynamics what type of manufacturing spending.
And what type of a logistical spending you're having to do support these customers and what that means kind of from a margin perspective here over the intermediate term. Thanks, so much.
No worries, David a nice to hear funny you know, it's as we think about you know what we're doing to expand our capacity we've talked about how we've done some additional hiring we have done some minor re priority reprioritization in our capex spending to make sure that we're putting the right equipment in there as well but.
In general the only real headwinds that we've seen a with regard to overall cost as it's been related to to free you know and transportation and and we were experiencing some of that already into Q2, and yet we still posted that 40 basis point of productivity improvement and and so we feel.
We feel like we've got a good handle on the incremental costs that are coming our way as a result of the stress in the supply chain, but they're not material and were more than able to offset that what the ongoing initiatives that we have in our manufacturing organization.
Yeah, and the only other point I might make their David is as we've seen.
Our outlook being as.
Confident as it is is we are looking.
And were say of course, we're saving money on less travel unless meetings and someone were going to redeploy the that that money into investments internally where weekend.
Get more out of our new product launches and come out the back the other side of this pandemic really in a in a stated preparedness and readiness to adjust and adapt so.
Those organic investments are are are going on in our are activated as we speak.
Great. Thank you so much.
Pub Hopkins Bank of America is online with the question.
Please state your question.
Hi, Thanks, and good morning, Thanks for all the detail.
One to follow up on some of the questions have already been asked one on.
Beds in capital and the other and secure communications and I guess, the when asked the question on the outlook for Besen capital I realize there's a lot of uncertainty here about the near and intermediate term.
John you you highlighted at least the potential for what you call the multiyear demand cycle.
And I'm, just curious from where you sit today, you're kind of how would you characterize the potential for that to actually happened is you know is that sort of low conviction level at this point high conviction level at this point just wondering from what you're seeing today, how much can do she might have that that's a possibility.
You know Bob as we've all looked at various pandemic models and learned more acutely what a epidemiologist do.
Good day to day basis, I think weve.
It's become it and in this particular cases become highlighted to me into our team here.
In the area of I see you capacity in particular.
Whether it's certain spots in our country in the United States or.
Significant increases in demand that we've seen internationally.
I'll point out recently, Canada as an example.
And they came in with a flurry of orders a across the country and Italy was another one.
Where they are there action really spoke volumes around from a relative point of view, how how they recognize their woefully short of I see your capacity.
To deal with these kinds of pandemics or or oak outbreaks.
I I actually think it's more into potentially more international where it's really clear that I see you capacity is not at the level it should be.
And and probably you know some some regions.
That have been hard hit, namely in New York, New Jersey.
Who have you came very close and without the additional.
Field hospitals that were put in place.
They could have been in a really difficult situation.
Even worse than it was.
So it's starting to say, but I do think that you know the post mortem on this or the post to post action review of this activity is likely going to recommend something in that area I'd be surprised that didnt.
That's yeah, especially so it's not conviction level less than 50 50, all that said left less than 50 50, we have it. Unfortunately humans have a short memory. So once this is passed I don't know for going to really take on the lessons and a change our behavior, but I.
I think it's warranted in this area that we had better better capacity.
Very fair answer and then on community care Communications I heard your answer to Rick's question, there's the potential for this.
The other side it has been a dynamic for that business too.
You know potentially accelerate I guess I'm because the need for it seems so acute.
That's a decent sized business for you know I'm just wondering.
Given all that you know today, just thinking about the long term outlook for for that business and I know, it's connected to the whole company, but you know independently roughly around prepaid debit around $300 million.
What do you think the gross out like a durable growth outlook is for that.
Care Communications business is it.
You know double digits is a 20% plus just kind of.
A rough thought on what you think the durable growth outlook is for secure communications on the other side the pandemic understanding that today.
You're limited in terms of your ability to install inside the hospital yeah. Great question I can tell you what it was in our prior outlook. We did have a view to double digit growth there over that three year period.
Ah that's under.
Revisitation as we kind of get through this remaining part the year and.
And then think about our guidance for next year, but but strategically speaking the growth outlook the need and the innovation that's going to take place in that area does not change my view.
It is.
Reinforces the importance and <unk> and the direction, we were taking and I think puts us in a really good position to have acquired some of the best assets out there added to it with the recent acquisition.
Next I'll medical.
And quite frankly, some of the some of the opportunities for innovation there as we get exhibited with our partnership with agile Andy we can rapidly partner and expand in that digital.
A product offering very quickly and ER and adapt very quickly. So I'm I'm excited about it and very excited about the prospects of adding even more value.
Two clinical communications in the acute care setting integrating it with smart beds, and smart monitoring a beds and making sure that vision comes to life in a meaningful big way, but also taking it off premises and looking at ways to do that.
In in a non acute care setting.
In the future. So I think strategically great business, we're going to continue to invest there and we really like our positioning.
Thanks, Jack we have time for two more questions. This morning.
Certainly Kristen Stewart of Barclays is on the line with the question. Please state your question.
Hey, good morning, everyone I'm just a couple of questions for me just <unk> first on this slide 25, it's very helpful. Just my get a sense you know for kind of the 60% I think you've done a good job of kind of quantifying some of the downside at the 40%.
And the reduced demand I guess I'm, just trying to understand what the upside level as uh-huh, yeah. The 60% they said resilient demand, but it seems like that's more significant upside, particularly in the third quarter. It seems like you're having a harder time kinda quantifying what that fourth quarter look like but anyway.
Can kind of help us just sort of size, maybe your backlog of business and I know you've got that 20 million dollar contract coming in from HHS, but any other weight. It just kind of size on the rest of backlog on in terms of dollars or anything in that and then I just have one follow up.
Yeah. Thanks, Chris we try to do that in this slide here in our prepared comments you know what the orders on the bed side of things being 70% above our Q1 level and having you know orders you know two X our normal level.
In in beds in total so those are probably the best indicates we can provide you at this point.
As we come into April you know our view hasn't changed a that continues to look solid.
You know what might what Weve you know some some of this activity whether it's on the capital side around beds or the surgical side.
It's very easy whether it's here or internationally for the.
A project or a delivery to ship.
In Q4 versus Q3 or vice versa. So the timing around Q3 Q4 theirs is it's hard to two predicted on one of the primary reason is that we decided to withdraw guidance.
Just because of that the timing element and the shape and slow but that recovery, where we can get back in and complete the work around care common and.
And surgical installations that we're scheduled so.
No I wish I could give you more just don't have the clarity of the crystal ball between Q3 in Q4.
And I wouldn't be right to say those that 40% businesses kind of looking down 40% of your revenues are down more than 20, and then the 60% is.
Up X 10, or any yeah, so what do.
Yeah, I guess, what I would do is if you take that 60% then split it into 20% being pretty stable.
Flat to flat to low single digits. So now you have this remaining 40% that's the offsetting ballast to the 40% declining right.
So the 40% increasing is increasing at a much higher rate than.
The 40% declining right I mean, that's where we're seeing significant.
Took action to double production in many of those product areas. It takes time to ramp up to that level and then replenished your inventory. So you can't directly correlate doubling production means doubling revenue.
Because of the timing element in a supply chain element that doesn't get factored in.
But it gives you a sense of it's a high double digit grower growth area for us and it's a strong strong tailwind.
Okay, how to get that Chris and that as you as you think about those magnitudes then it becomes all about time and it comes about that sustainability at both of those elements right, but the upside on the downside and that's where it gets really tricky is how well those are going to match up to one another right.
Yeah, sorry, Christian to no bad, but one thing I wanted to just clarify is it you know with the with the surgeon smart beds.
A lot of those again are fully featured beds right with connectivity with centers, we saw a lot of them requesting early sense deployments in there. So we think that's position does really well.
Compared to our our appears in our competitors out there.
Because like we've always said when you, making these capital purchases even in the middle of a pandemic you're going to want of future proof, what you're buying because it's a long lived asset you want to make sure you're going to get the most out of it and I think you know we've been well positioned to.
You know add future features to this is increased demand surge.
Right and those all have occurring type of revenues associated like you said walk sense and all that yes, that's right.
Okay, and I think Barbie you had made the comment on you know don't extrapolate out you know kind of this quarter, but it kind of sounds like if I'm hearing you write on those numbers that it sounds like you're you're kind of thinking that net net these numbers look like your future quarters may again, depending upon the time.
Okay and whatnot it sounds like you're thinking things still seem positive going forward on the balance maybe three key there just with.
On timing with is that order probably come in and and just the timing of maybe somebody bad deliveries on maybe a bit stronger and more kind of see how that core there's kind of shake out I guess directionally I think I've got yeah, I think that there there are certain things that you can feel good about in terms of course.
Okay and expansion you can feel certainly a clear that we're expecting.
Peak demand in Q3, but just you know where we don't want you to extrapolate or where we all need to be cautious because there's too much. That's unknown is really about this timing.
And it's the tiny talking Q3, and Q4 and it's the timing of how long is sustained high demand.
Versus how long it takes us to recover and and to see the improvement in that 40% Dod is being challenged so so I would just you know we're not giving guidance for for the year for a reason because that timing, it's really difficult to estimate.
Now I'm just I'm just first for sake of clarity I don't think we said this but we do expect Q3 to be a stronger quarter than Q2 right.
That that it seems like what's your kind of getting out there Chris and I think we can say that was with a with a high degree of confidence that Q3 will be better than Q2.
Okay, what the shape of that looks like how big it is versus Q4. That's the part we just don't have good visibility on.
Thank you so much and thanks for all you guys are done on something like.
I can't care, Great, Jack and I will close with this one more question.
Certainly.
Matt Taylor.
Yes, it is online with the question.
Please ask your question.
Hi.
Good morning. Thank you for taking my question I'm, sorry, I just wanted to ask you because it is kind of a microcosm of this bigger question that other folks referring to what happened and Canada.
Could you talk about [noise].
The size of the orders there how much that contributed and maybe you know what it represents versus what you normally see there just wanted to get a sense for the kind of a expansion that you're seeing in one market.
Yeah, Matt its I don't think we have specific numbers here, but its Mary Kay is looking but the overall demand we saw and there's some part of that got delivered in Q2, and and Parvus may get delivered on our fiscal Q3.
We're also seeing that in Europe, playing out you know we didn't talk about Europe today on a on the discussion.
And our prior call. We said there were a project delays in EMEA was going to have a stronger Q3 than Q2, and that's still remains our perspective and part of that now is going to be reinforced with.
The demand signal and demand we've seen our critical care products that we outlined earlier, so so we'll see.
Nice contribution from international on a go forward basis as they.
Implement you know somebody's expansion that Canada was one of the one example, as an example of a a market close to home where new demand. It was clearly came through we didnt. We didn't anticipate this kind of level of IC you demand.
Come from Canada, It wasn't in our funnel and almost province by Province by Province, we saw increasing demand for expanded capacity as they were moving quickly get to be prepared for.
The current a virus.
Okay, and then as a follow up you know you mentioned you have this 20 million dollar order for the non invasive ventilators for HHS and I guess I was wondering you know are those products earmarked for the stockpile and have you had any conversations with the federal government with state governments are for international one about.
Any of your products that could be a use that in future stockpile.
Yes. Good question. This 20 million, we'll go to one destination HHS and I think it'll have to go into stockpile ore FEMA will distribute it I think they're working through with that what that scenario is we're also had several states.
Make some purchases of the same product.
Of course want to follow the used to that part and supported and and see that it gets.
Deployed in a in the right setting to avoid additional IC use days or help when patients off of mechanical ventilation, which will be the ideal use a and but there's clearly also use case too.
Provided in the home before and potentially avoid hospitalization. If you can provide like you would oxygen just sit with that next level of support because you'd have oxygen plus ventilation support in it in a non acute care setting, which for koby patients could be a real benefit, but we haven't we don't have to use case yet developed there.
But we were actively looking at trying to do that.
Got it thanks, a lot of huh.
Great. Thank you Matt.
Well, thanks, everybody for the call today and have appreciate all your questions and interests and we look forward to our next update and any interim meetings, we might have.
Ladies and gentlemen, this concludes today's conference call with Hill ROM Holdings incorporated thank you for joining.
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