Good morning, and welcome to the Halyard Health First Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be a question-and-answer session. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Dave Crawford, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. It is my pleasure to welcome you to the Halyard Health first quarter 2016 earnings conference call. With me this morning are Robert Abernathy, Chairman and CEO; Steve Voskuil, Senior Vice President and CFO; and Chris Lowery, Senior Vice President and Chief Operating Officer. Robert will begin with an assessment of our first quarter performance and discuss our progress on our 2016 objectives. Then, Steve will review our first quarter results and provide additional detail around our outlook for the balance of the year. We will finish with Q&A with Robert, Steve and Chris. A presentation for today’s call is available on the Investors section of our website halyardhealth.com. As a reminder, our comments today contain forward-looking statements related to the company, our expected performance, economic conditions and our industry. No assurance can be given as to the future financial results. Actual results could differ materially from those in forward-looking statements. For more information about forward-looking statements and the risk factors that could influence future results, please see today’s press release and our prior filings with the SEC. Additionally, we will be referring to adjusted results and outlook; both exclude certain items described in this morning’s press release. The press release has further information on these adjustments and reconciliations to comparable GAAP financial measures. Now, I will turn the call over to Robert.

Thanks, Dave and good morning, everyone. I appreciate your interest in Halyard Health. Last quarter, we said 2016 would mark the beginning of Halyard transformation into a leading medical device company, as we enhance our portfolio, our company, and our culture. To advance our transformation, we’re committed to achieving two objectives for the year. One fuel our growth pipeline and two deliver our 2016 plan. I’m pleased to say that we’ve made solid progress on both fronts, starting with the purchase of CORPAK MedSystems. The CORPAK acquisition is now used first as an independent company and I’m happy to announce that the deal closed Monday. CORPAK is a leader in the [indiscernible] market with a diversified portfolio. The company generated approximately $54 million of sales in 2015. CORPAK improves how patient care is delivered through innovative products such a core track, which uses visualization technology for safe and accurate feeding to placement. CORPAK is a type of company we consider to be a compelling strategic fit for Halyard for two reasons, its product portfolio and its financial profile. CORPAK’s portfolio of unique and segment leading products sold worldwide complements our digested health portfolio. Its call points and manufacturing process fit nicely into our business. In addition, the acquisition creates value for our company and our shareholders. CORPAK’s financial profile aligns with our existing medical devices business, with slightly higher sales growth and similar gross margins. On an adjusted basis, we anticipate that this transaction will be $0.05 accretive this year and approximately $0.15 accretive in 2017. The CORPAK deal is just the beginning of Halyard’s transformation and we intend to execute more acquisitions overtime to further shift our portfolio to higher margin faster growing medical devices. We are also fueling our growth pipeline through other strategic investments such as our…

Thank you, Robert. First quarter sales totaled $385 million, down 1% on a constant currency basis compared to a year ago. Excluding the expected $13 million decline in corporate sales, volume increased 4%, partially offset by 2% lower selling prices. Adjusted gross margin was 36% this quarter compared to 34% a year ago. The increase was driven by favorable commodity cost and currency exchange rates, with an offset coming from lower selling price in S&IP. Additionally, we incurred lower distribution expense as we cycled against higher prior year cost related to the West Coast Port Straight. Adjusted operating profit was $45 million or 12%, down from $46 million a year ago improved gross margin was offset by planned higher research and development spending to support product innovation and SG&A investment for interventional pain to drive organic growth. During the quarter, we incurred $2 million of post spin related charges, $1 million in acquisition charges, $4 million for litigation matters, $5 million in intangible amortization expense and $4 million related to the remeasurement of a prior year deferred tax asset due to a statutory tax rate change in Thailand. Adjusted EBITDA was $55 million for the quarter, which was even with the first quarter a year ago. As Robert mentioned, we reported $0.53 adjusted diluted earnings per share for the quarter. Our performance was impacted by the following three factors. First, our results have benefited from the timing of certain project expenses, primarily marketing related. These are ongoing planned projects and we anticipating incurring these expenses later in the year to support our marketing and sales efforts behind new product launches. Second, it has taken us longer than anticipated to fill a number open of roles that we carried into 2016. We anticipate filling these positions this year. Finally, favorable currency…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And your first question will come from Larry Keusch of Raymond James. Please go ahead.

Okay, yeah, thanks. Good morning, guys.

Good morning, Larry.

Hey, Robert, could you in the S&IP segment talk a little bit about the competitive environment, obviously you referenced that you are seeing some progress with gloves given your renewed focus there, but I am sort of just curious as to how you are thinking about the competitive dynamics out there and I think, in the past you talked about you felt like the competitors were getting close to a point where it would be more difficult to lean on price, but just want clear thoughts.

Thanks. We haven’t seen a significant shift in the competitive environment, it continues to remain very competitive. Our planning assumption around price loss in S&IP continue to be price loss in that 2% to 4% and that’s exactly what we saw in the first quarter here. We do believe because we have seen an increase in polymer price this last quarter that would have gone across the entire industry that will start to buffer a little bit some of the deeper discounting on some of the contract bids. But really significant change in the overall competitive landscape at this point. As you know we are a year and half into re-negotiating contracts following the real reduction in commodity price in polymer and we’ve got another sort of year and half to go before all of the big contracts with the GPOs will have been renegotiated and we expect to continue to see price loss through the remainder of this year and into next year.

Okay, terrific. And then just two quick ones for perhaps Steve. So free cash flows as you mentioned was $35 million obviously a strong number, I think your guidance for the year had sort of indicated $100 million plus and I recognize the plus side of that. But obviously you’re annualizing now closer to $140 million. So just want to get your thoughts around how we should think about the ramp in cash generation for the remainder of the year? And the other quick one was on the post spin transition cost, I think if saw this correctly you’re now looking at $0.20 to $0.22 and I believe at the time of the fourth quarter it was $0.13 to $0.20 so just curious about the change there.

Yeah, I will start with the first one, cash generation was very strong in the first quarter obviously you saw very light CapEx in the first quarter and I think the kind of counter balance that we are going to see in the next couple of quarters is the ramp-up in the SG&A spending. So as we talked about on the call as we spend more on long-term incentive, we spend more on some of the organization that will be a little bit of drawn cash as we go into the future. But we still would obviously call it over 100 I don’t think we’re going to put a two finer point on that number, but we are certainly more optimistic coming out of a strong cash quarter.

And Larry, I will take the second one post transition cost. Our planning assumption was it would be in the range from $10 million to $15 million for this year and we still believe that range is appropriate.

Okay, great. Thanks very much.

Thank you.

The next question will come from David Lewis of Morgan Stanley. Please go ahead.

Good morning. This is actually John Demchak in for David.

Hi, John.

So Robert wanted to start off on the guidance a bit on the quarter. So results were very strong especially in S&IP and across gross margins. And I guess from listening to the commentary it sounds like there is not much I guess that would be one-time in nature. So I guess I was a bit surprised that guidance didn’t move I guess higher. So I mean as I kind of think about the balance of the year with FX a little better, commodities cost getting a little better, tax looks a little better, S&IP looks a little better. And the deal on the quarter was pretty strong. So why would we not expect to see I guess these are results are kind of a carry forward throughout the balance of the year?

Yeah John we certainly had that conversation and talked about whether we should maintain current guidance. And ultimately I just decided it’s just too early. We’ve only got one quarter behind us now. We’ve been -- went through every one of the planning assumptions on S&IP volume, S&IP price, device volume and price. Our cost inflation and commodity cost all those. And said each of those planning assumption still seems appropriate. So just too early planning assumptions still seem right, there were some items as we look to the first quarter we said there is some phasing items particularly around spending and marketing. We did get some benefits from commodity while we’re expecting our commodity cost inflation to impact this by $5 million to $10 million. We actually had a positive benefit from currency and from commodities this first quarter that we don’t anticipate would continue for the remainder of the year. So there are a few things that did hit positively in the first quarter, but ultimately we look that and said we think the planning assumptions for the year are still appropriate.

And whether anything one time in nature kind of in this quarter or is it I guess just business kind of as usual?

No it was fairly clean quarter overall other than the sort of phasing things that we talked about.

Yeah I’d say the only -- we talked a little bit about hiring so we are little behind on hiring. And so that was something we probably had planned to be a little further along on that front that will carry a little bit forward as we fill those roles it’s not unusual just we look to fill those roles in the next couple of quarters.

Okay. Just a couple of quick ones on the 60 minute report. I mean understandable that you guys are 100% behind the products and I’m sure you have the testing to support that as well. But as I watched the report as I guess customers may watch the report it’s certainly it was not the most positive look of MICROCOOL. So how do we think about the exposure here and how have your conversations with customers gone following this report as they think about MICROCOOL versus competitors?

Yeah thank you for bringing it up. We’re going to have a lot of conversations about the 60 minutes report this week and the weeks to follow. And we’ve particularly focused on our customers, our employees as well as our investors. Specific to your question on customers many of our customers have express support for us and they understand that we have a strong track record of quality and performance. You heard in my prepared remarks earlier, we sold 598 million gowns never had a single issue in terms of injury or harm. We have this extraordinarily low complaint rate. And the customers do understand that. We have decades of kind of positive relationships established with the customers. But you categorized it right. This was a -- this reflected very poorly on Halyard the report did. We take exception with how we were portrait by 60 minutes. Once again it’s rehashing information this has been out there all along. In terms of the exposure it’s 3% of sales with the MICROCOOL. So it is significant that’s a big portion of sales and these are important sales force. I wouldn’t want to downplay that much. We will certainly be vigorously communicating the product quality and we will stay very close to customers through the next couple of weeks and then particularly into next round of negotiations with hospitals and group purchasing organizations in our gown business.

How many of I guess -- MICROCOOL generally a sole source product with GPO contracts or it is multi source or sole source?

Not necessary sole sourced, there are some competitive products that make a protection claim similar to MICROCOOL. So it is a competitive product in the marketplace in terms of our competitors having a similar product with the aiming for claim.

Just one quick final one for Steve probably, we’ve seen I guess movement in your bond pricing following that the 60 minutes report probably around how the uncertainty of MICROCOOL impacts. So do you think perhaps could impact your ability to do deals near-term or is that less of a concern?

I think as the sensational aspect of this die down I would expect to see the bond pricing level out. Clearly a reaction to the story and if we were going to the capital markets today would have an impact on our pricing to be sure. But as we look forward and again we have got a multi-year M&A agenda I don’t see it long-term or even as we get passed the staging into later parts of the year, I don’t see it being a big overhang on our ability to access the capital markets. And again as Robert said, the underlying facts in the case have not changed there is no evolution so it will continue to evaluate that in terms of what if any future cash claims might arise from it, but at this stage we do not see it impacting the capital markets.

Understood. Thank you, guys for taking the questions.

Thank you, John.

And our next question will be from Rick Wise of Stifel. Please go ahead.

Good morning, everybody.

Good morning.

Let me start off Robert may be actually it’s could be a question for Steve. Steve could you just flush out your comment, several times you talked about if I heard you and understood you correctly distributor inventory build in the quarter, if I understood that correctly, can you give us a little flavor of what that contributed and does that suggest that second quarter or third quarter sales are less, because of that is this typical seasonal patterns just help us understand little bit that dynamic?

Sure. We see and we try to track movements in distributor inventory, obviously it was a big factor in 2015 particularly in the first quarter, this year we saw just out of the gates about a one quarter or excuse me a 1% impact in the first quarter relative to what we’ve said the normal run rate for the year and to your question could we see that come back in future quarters we could, expectation might be we see some of that in the second quarter, but it gets harder to call obviously the distributor inventories are moving all the time. Our data is not perfectly precise, but if you look at the first quarter we see about a 1% impact.

Robert, turning to your ongoing M&A focus with CORPAK closed where are your thoughts now about where you are going next? I mean, is this -- are there other possible deals in the pipeline that we could see yet this year and may be talk a little bit about CORPAK integration what needs to be done to move that solidly into the portfolio of your selling teams.

Yeah, let me start with CORPAK, we were able to close the deal this Monday very pleased by that, it’s the exact strategic fit that we hope for our first acquisition. We are continuing to look at other acquisitions, we have an active radar screen with acquisitions and at this point we said we could be prepared to do another acquisition this year, it was an area that was not digestive health, it would be difficult for us to do two acquisitions in the digestive health business and properly integrate CORPAK into Halyard Health, But if there was an acquisition that was attractive value creating for shareholders a good strategic fit for Halyard in an area like team management we would certainly be a part of that conversation with the company. In terms of CORPAK itself, we have an integration team in place, we were there at CORPAK following the announcement roughly a month ago, the integration process is underway, our initial focus is to make sure that we maintain the growth momentum and the business momentum that the company now has. Then the second step in that integration would be to determine how to begin pulling the two companies together. The sales organizations, manufacturing, headquarters’ operation. Clearly we need the talent that is in the CORPAK organization particularly talent in research, quality across their selling organization. So we look forward to that talent joining us. We communicated to the CORPAK teams that we come back in about 60 days with a very detailed integration plan and be able to share that with them.

Thanks and just one last one from me. Coming back to the guidance question again, I mean obviously you had really nice outsized first quarter performance you’ve added this accretive deal, it’s closed, it sounds like it’s going to integrate smoothly. Obviously folks like us would think that it could suggest commentary about upper end of the range or potential -- set the stage for potential move up a bit. Is to what extent if any is the 60 minutes fallout or concern or maybe incremental caution on MICROCOOL part of your thinking there? I mean as I understand it’s early in the year, but is that part of the thinking or no it’s just really appropriate giving your wide range to state here for now?

Yeah actually the 60 minutes was not even considered when we decided to maintain the guidance range. We had a Board Meeting here last week before we knew that the 60 minutes programs was airing. We have the conversation with our Board about what we should do with guidance and we decided and recommended to the Board that we would maintain the guidance. Then after our Board Meeting was over, directors that all returned home that’s when we found out on Thursday that there would be 60 minute report airing. So it didn’t factor into our thinking. It really was more about -- it's just too early and the fact that we thought that the planning assumptions that we were given were still appropriate. And that idea that there were some phasing things that are going to come later in the year and that we had some positive things that happened in the first quarter like currency and commodities.

Thanks for the strong start to the year.

Thank you.

[Operator Instructions]. The next question will come from Matthew Mishan of KeyBanc. Please go ahead.

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

Hey, Matt.

Hey. So Bob I think on under Kimberley Clark I think you’ve previously said that R&D and sales and marketing was an area of under investment for the company. I just wanted to get your sense of confidence that the appropriate investment was made in the overall quality and compliance systems, while you were under Kimberley Clark as well.

Yeah that we have a strong quality compliance organization with very well structured processes of the quality compliance. The quality process is the same process that’s used by many if not all medical device companies, it’s the process that’s audited by and approved by the FDA. So we’ve had a strong quality compliance process in place. As part of Kimberly Clark it continues as part of Halyard. In addition to that we have a strong culture of compliance within the company and that culture of compliance goes across areas like safety and quality. So there is not a concern there. So the issue now is for us to better communicate that to our customers, to our investors so that we can restore confidence that’s been damaged as a result of this 60 minutes program.

Okay, great. And then I just wanted to understand a little bit more around the 4% volume gain in S&IP. Could you just talk a little bit maybe about the easy comparison you had coming off of pandemics preparedness and the pull down in inventories? And then put that in context with your overall guidance, where I think for the full year for volumes to be down I think 1% on the full year.

Yeah there were so many moving parts, it’s important to kind of remember back. First quarter of last year we had all the inventory that had been purchased in the fourth quarter of 2014 the pandemic preparedness product that was all pull down in addition to that we had some distributor destocking in the first and second quarters of last year. And then you compare that to some inventory stocking this year. So we netted all those out and said, really if you did an apples-to-apples comparison that our volume would have been roughly flat to very slightly down as oppose to the 4% up.

Okay, I think that makes sense. And just last one, you called out cost inflation in the quarter and in think the full guidance still implies out cost inflation, there is something changed in the commodity environment which may give you a little bit more confidence that the cost side won’t be up as aggressively.

We did get some benefit in the first quarter as we talked about the polymer price has increased so that was a negative to our P&L this last quarter. But the benefit came in our NI trial [ph], NI trial is the key commodity material used in our glove business. So we got a benefit in NI trials that help offset the negative in polymer and roughly the benefit was about $1 million in Q1. But looking out we still expect the full year cost inflation to be in that range of $5 million to $10 million based predominantly on the fact that polymer price is higher now than it was in prior years.

Right. Thank you for taking the questions.

Thanks, Matthew.

And our next question will be from Dave Turkaly of JMP Securities. Please go ahead.

Thanks. Moving over to the device side for a sec, I was wondering if you wouldn’t mind sharing the ON-Q growth number and then as we are looking 5% volume in the quarter and a deal coming on, do you think the volume number alone accelerates throughout 2015 may be to something slightly higher than that?

No we are pleased with ON-Q this is our third consecutive quarter of growth we have said early last year that we expected ON-Q to return to growth and it has, while we do not give the specific numbers I will tell you ON-Q was in that sort of mid-single-digit growth range, which we’ve pleased with and then the surgical pain category in general there was an offset a little bit with our IV business, which was down but specifically to ON-Q very pleased by its return to growth.

Great. And just wondered on the gown side I guess I would wondered if you do willing to shares if you look back kind of trailing 12 months. Just that business as a component of S&IP, what does the volumes looks like there I mean has that business been growing over that period on from a volume standalone?

The gown business over and I will backup for several years the gown business has been relatively flat. In 2014, we gained some share, in 2015 we lost a little share, but if you go back over several years plus or minus half percent or 1% we would be either up or down. So it’s a very stable business in terms of its overall volume.

And just a quick follow-up there. How many of these AAMI-4 gowns are there in your portfolio and have you guys launched any other new ones since 2010?

There are two AAMI-4 gowns in our portfolio MICROCOOL is one of those two. And we have not launched any other AAMI-4 gowns.

Okay, thank you very much.

Thank you. Thanks, David.

And our next question will be a follow-up from Larry Keusch of Raymond James. Please go ahead.

Yeah, just one quick one. Obviously, you don’t provide quarterly guidance and there were a bunch of moving pieces in this quarter, so I was wondering if you could give us some sense of that $0.53, I am assuming it was ahead of your expectation and if it was, just help us bridge again on a per share basis kind of what the benefits were there?

Yeah, certainly the benefits -- are you talking about Q1 this year versus Q2 last year would you like to bridge more toward expectations going out for the remainder of the year Larry?

Yeah, no, I was really just trying to wrap my arms around the $0.53 what you were actually anticipating for the quarter and again I am assuming it did better and what kind of got you there was really what I was trying to understand?

Yeah, exactly. So there is a couple of things that we clearly moved in our flavor. The volume benefits in S&IP were favorable to our expectation. Gross margin both commodities and currency was a nice benefit. And then the one that really kind of stood out was some hiring delays, we’re filling positions and we’re behind in filling the positions, we do intend to fill those for the rest of the year. So we got a pretty big benefit in SG&A from just having vacant positions that will be filled later in the year.

Yeah and the only thing I would add as we’ve also have marketing and advertising phase more towards the back of the year obviously we’ve got 9 of the 10 innovations yet to hit the market. And so we expect to see that profile harder as we go forward the next three quarters.

So will that be I mean is that $0.10, $0.15 on that $0.53 I’m just again trying to get my arms around that.

Order of magnitude Larry on the SG&A side you’re probably talking somewhere $0.08, $0.09 something like that. And if you go on the gross margin side and in there is the commodity piece the currency piece. The absence of as much spending on distribution, recalling last year that we have the port strike. But that by itself is probably another $0.08 $0.09 those were the big pieces and then you got a little bit of tax, a little bit of volume.

Got it. Okay prefect thanks very much.

Thanks, Larry.

[Operator Instructions]. And we have a follow-up from Rick Wise of Stifel. Please go ahead.

Hi, just one quick one from me. I don’t think anybody asked; were there any extra selling days in the period?

We’re all staring each other. We’d have to look that, not that we’re aware of.

Okay just checking, but thank you. I’m going to -- I must take that as a no if you’re not thinking about it.

Wasn’t a factor, thanks Rick.

Thank you.

And ladies and gentlemen this will conclude our question-and-answer session. I would like to hand the conference back over to Robert Abernathy for his closing thoughts.

Well thank you today for your interest in Halyard Health. I’ll be presenting tomorrow morning at the Deutsche Bank Health Conference in Boston. Information about how to access that presentation can be found on the Investor Relations section of our website halywardhealth.com. Thank you everyone.

And ladies and gentlemen this concludes today’s presentation. Thank you for attending. You my now disconnect your lines.