Good morning and welcome to the Halyard Health First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I now would like to turn the conference over to Dave Crawford, Vice President, Treasurer and Investor Relations. Please go ahead.

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the Halyard Health first quarter earnings conference call. With me this morning are Joe Woody, CEO; and Steve Voskuil, Senior Vice President and CFO. Joe will begin with a brief review of our financial performance and provide an outlook for business and progress toward our 2018 priorities. Then Steve will review our results and offer additional detail on our financial performance and earnings outlook for 2018. We'll finish the call with Q&A. 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 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'll turn the call over to Joe.

Thanks, Dave. Good morning everyone and thank you for your interest in Halyard Health. Let me begin by saying that we are off to a strong start to the year, as we continue our sales execution and top-line momentum, delivered another quarter of solid earnings, closed the S&IP divestiture, and began reshaping our cost structure with initiating the installation of our new IT system. We are in an excellent position to continue to deliver on our four goals for 2018 that I outlined on last quarter's conference call. First, we've seen continued top-line momentum with 6% organic sales growth for the quarter, and as a more focused company we're well-positioned to continue to enhance our commercial execution. Multiple factors drove growth including continued double-digit demand for COOLIEF and interventional pain. Solid demand for our CORPAK portfolio continued to drive digestive health sales. And last year's oral care contract, along with a more severe cold and flu season, drove growth in respiratory health. In surgical pain, two factors impacted ON-Q pump volume for the quarter. First, the industry-wide bupivacaine shortage which is expected to continue through the second quarter; second, a key pump fellow's inability to fill pumps due to the findings from their FDA audit. Despite these headwinds, our outlook remains positive as we continue to convert new accounts and deepen surgical penetration with our increased sales focus on educating surgeons. Our outreach highlights the efficacy and benefits of ON-Q as a non-opioid pain therapy and is resonating as physicians seek effective alternatives to opioids. In post-operative pain management, life threatening opioid addiction can begin within just three days of opioid use. ON-Q is a clinically superior solution that offers extended relief and non-opioid pain control for the first five days. Halyard is well-positioned to play an important role in…

Thanks, Joe, and good morning everyone. First, let me say that I'm pleased with the results our teams delivered across multiple facets of the business during the quarter. Before we go into a more detailed review of the numbers, I would like to reiterate, as we've stated in our press release this morning that due to the S&IP divestiture, the results of the S&IP business are treated as discontinued operations and the medical device business as continuing operations. As a result, we are required to allocate shared costs that were previously allocated to S&IP entirely to the medical device business. Those costs previously allocated to S&IP totaled $28 million for the quarter and $29 million a year ago. With that, Halyard delivered another strong quarter as medical device sales increased 7% to $156 million. This represents a 6% increase on a constant currency basis. Overall, total company sales increased 6% to $420 million, a 5% increase on a constant currency basis. I'm pleased that we saw strength in medical device sales across interventional pain, digestive health, and respiratory health. Interventional pain continued to be our fastest growing category driven by our direct-to-patient marketing efforts to raise patient awareness and increased adoption of COOLIEF. In addition to CORPAK, digestive health volume was driven by solid demand in our enteral feeding portfolio, including the MIC-KEY brand. Turning to respiratory health, last year's oral care contract continued to boost results. In addition a longer and more severe cold and flu season drove incremental volume growth. We expect to see a modest pullback as distributors reduced their inventory to more normal levels by the end of the second quarter. And finally, as Joe mentioned, surgical pain sales for the quarter were impacted by the bupivacaine shortage. However, our heightened focus on educating surgeons continues…

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Larry Keusch of Raymond James. Please go ahead.

Thanks, good morning guys. So first question, Steve, on the M&A capacity that you talked about which was now $800 million, I think that's up from the sort of $700 million to $750 million range that you've been articulating previously, so could you just walk us through what brings it up now close to $800 million?

It's very -- that one is fairly simple. So in the first quarter just taking the cash flow we generated and adding that you kind of take four multiple on that cash flow, that's what brings you from the $750 million to the $800 million roughly.

Okay, that’s perfect. And then I guess one other I guess two-part question here is so you indicated that there was no change to the planning assumption, so I assume 4% to 6% growth for medical devices, you obviously did 6% organic constant currency in the first quarter. So how should we think about sort of what that implies for the remainder of the year and I do recognize there is a tough comp in the fourth quarter? And then I guess alongside of that question, just on COOLIEF which continues to do really well maybe Joe you could talk a little bit again the model I think you sell the capital, and the consumables, but how many hospitals out there have a generator or kind of what's the right way to think about what kind of target is sitting out there?

Thanks, Larry. We were obviously at the higher end of our range for this quarter and we had a strong fourth quarter. We're being cognizant on the fact that we have a supply chain that we talked about in the script in the ON-Q I-Flow business and a very strong cold and flu season. That said, we're seeing a lot of momentum in the business really across the business and we’re focused next on getting our international business moving and as we move into the quarter and if we perform against that high-end we're thinking about a 5% to 7% range for the business, but we're not ready yet to talk about that to understand the supply issue a little bit more and see what happens with the stronger flu season and the destocking associated with that. You're right about COOLIEF. We do sell capital, and then, obviously we benefit from the sale of disposables. We are in with COOLIEF in roughly about 500 sites. I think that there is another doubling of that capacity available to us just in hospital and in some cases in hospitals by several units. And then of course we've talked on other calls about the fact that we have a very focused reimbursement effort to get ambulatory surgical centers and private orthopedic offices or sites where they can perform this procedure with better reimbursement. So we see a pretty good long runway for this and obviously we're bolstering that with our clinical studies as well.

I'll like to add is as is our practice, and we get to the mid-year mark, I'll take a look at all the planning assumptions and I'd expect we'll be adjusting some of those at that time.

The next question comes from Kristen Stewart of Deutsche Bank. Please go ahead.

Hi, thanks for taking my questions. Congratulations on the quarter. Just for clarification did you guys quantify at all what you thought the impact of flu was to the top-line, is it a percentage point or two percentage points or any way to better quantity that?

We didn't disclose it. But it was just over a point of growth for the device business in the quarter.

Okay. And then is it the right way to think about the base earnings generation of the business, if you were to take out the S&IP [stranded] [ph] cost, I guess you can't really just take your guidance and then take out this quarter because we will continue to see some impact of discontinued operations for at least a month; is that fair?

Yes, that's right.

Just trying to get a -- okay.

That's right. The second quarter will start to get easier, you’ll only have one month of S&IP, so it will get a little bit simpler but yes, that's right.

But if we were to take kind of the base earnings is it annualizing kind of around a buck in earnings, is that the way to think about the core ongoing continuing business if we take out the [stranded] [ph] cost, does that sound about right?

Yes, it’s little tough to extrapolate from here and look what we’ve done so far and kind of project pro forma for the rest of the year. I would say on balance I'd tie a little bit light relative to what our model would suggest. But again, if we get to mid-year mark, we will be able to get a little bit more of a picture once we have the S&IP side fully behind us.

The next question comes from Rick Wise of Stifel. Please go ahead.

Good morning everybody. May be just starting off with the comments about ON-Q, just wanted to make sure I'm understanding it correctly if I heard you correctly, Joe, you talked about the shortage continuing through the second quarter, will it be -- couple of related questions -- will it be as bad in the second quarter as it was in the first, help us understand maybe what resolves it? And maybe talk a little bit more about the FDA third-party audit and just trying to understand how you obviously had a solid quarter overall, how big a drag was -- were these two factors in this quarter likely to be in the next quarter and if I put it in context, you’re talking about sort of feeling good about a 5% to 7% ex-headwind outlook, is that what it would be without all of this noise, I'm just trying to figure put all this in context.

Thanks, Rick. We were down slightly in ON-Q and it's an industry-wide shortage on bupivacaine and we talked about a pump filler with a particular FDA issue. That said, we have contingency plans in place and as they come back on board, I do think it will carry through the second quarter. We look at it as slightly more than the benefit of the flu season and underlying in that business we're really pleased with it, it’s a bit frustrating because we’re seeing sort of the mid-single-digit growth, lot of account conversions in surgeon area and that moving has the ability to move quickly in north of that mid-single-digit range. Just to give you one example of just how we feel about this. One is we’re very pleased with the fact that our overall portfolio is growing, and just one example of that where we have to look other areas to make it up is in the first quarter of the year for CORPAK in terms of capital sales we sold half what we sold for the full-year last year, we’re focusing on international business. So we have other places to go despite this but it’s frustrating because it will make us that much even better.

Joe, you also said in the past publicly that you hope to -- you aspire to complete two deals in 2018. Maybe just help us understand where are you in that process and given the extra cash flow and the $800 million capacity, how that’s changing or not what direction you might go, are you more optimistic you're going to see something couple of deals this year, less optimistic where are you right now?

So, I'm optimistic, I don’t feel pressure though because we’re going to make sure that the deals are value creating. We do have the benefit obviously the progression of our organic growth which is good and makes the decisions easier. We are in talks with a handful of smaller deals, some of those would be oriented around channels, others would be oriented around technology but all of them are really on strategy. So I’m confident there but again what makes this an easier process and decision-making is that we have really strong underlying organic growth.

Yes. And maybe just last turning to international, you've mentioned it several times sort of more visible way in this whole dialogue so far, help us understand where your international leadership team is, your infrastructure what needs to happen, what's in place now, what needs to be in place to create this -- it sounds like you have more focused opportunities that you're envisioning, Joe? Thank you.

Thanks, Rick. It still growing slightly slower than our North America business and I see lots of opportunity because we're not well penetrated in either chronic care or the pain business. Two executives we brought on board, John Tushar, oriented strategy for the franchises and Arjun Sarker who was also at Covidien prior to joining Halyard had a lot of experience in international. What really has to happen there in my opinion is not one of the ocean, but focus in a couple of key areas where we can invest and I think we can fund that investment internally alongside the top-line growth with things like in some cases going direct versus distributors, making sure that we have the right distributors and putting the same type of commercial rigor and investment frankly that we'd put into the North American business that really paid off and you can see that momentum, I think the same thing exists really outside the U.S. for us is a great opportunity.

Yes, I would just add. I think it's a big change having Arjun reporting directly to Joe, and now we've got a stronger international voice at the table, and as he digs in and gets his hand around not only the Asia-Pacific region which he has been in previously but the European region and we have opportunity to drive more growth and also do it more efficiently. So we look at those structures today and I think we want to work as efficient as we could be so sort of a two part play there.

And just to be clear, as I talked about this Arjun just started, we’re in a strategic review right now, I see the benefits really coming towards the end of 2018 into 2019 we’re really trying to establish ourselves for 2019.

The next question comes from Matthew Mishan of KeyBanc. Please go ahead.

Great, thank you for taking the questions and congratulations on closing S&IP?

Thanks, Matt.

Thanks.

Hi, Joe. As the opioid legislation has kind of request through Congress, what have you been most encouraged about so far?

Well, first of all it is a change for how you're -- we've not really been actively involved in government affairs or working with reimbursement specialists. But the thing that encourages me the most is that both parties are very receptive to this. There is an action plan built in place from Representative Kim to go right now. And as well the committees [indiscernible] in energy and commerce have been receptive for working alongside of AdvaMed and making sure that we're aligned, even though we have our own effort. So we've met with over 30 Senators and Congressional Leaders and they all reference the President's direction to make medical devices that elevate pain more accessible to patients. And so again I think it's an unfortunate crisis that we're in the country and we see the news headlines every day but we cannot put solutions in. By the way, we’re not the only company that offers those solutions; there are other medical device companies that are working as well. So I’m very encouraged and as you may know from doing some of the reading, the work is around both reimbursement for educating, making people aware of these devices and trying to change the setting of care, so out of the hospital and maybe more into ambulatory surgical center and in some cases private hospice. So I think the whole industry not only higher can be helpful there.

Thanks. And then shifting over to some of the corporate structure and costs you're going to have over the next few years, give a better sense of how many people work with S&IP to Owens & Minor versus your initial expectation. And then, as a third bucket of cost savings, you really haven't quantified yet, when do you think you’re going to be more able to fully size that?

Sure. On the people that have conveyed, we haven't shared a number. What I would say is that it worked out to both our benefit and my benefit to have a lot of needs beyond the direct S&IP team. And so a number of resources across the corporate areas conveyed over and that obviously gave us or gives a head start from an organization standpoint and benefits them as well. So that's been a positive. On the second part of the question, and I'll call it the third phase a lot of activity underway even as we speak, we're right in the middle of a supply chain optimization exercise doing the same thing on our distribution network, we may have mentioned that even on our last call, so those two pieces are moving forward to complete sometime over the summer. And then we've got also a piece of work looking I'll say at the all other purchase services and other costs that hit that corporate line. And I think we like to be in a position by the time we get to the back half of the year to get more clarity in the timeline around that chunk of restructuring that would then go alongside the two pieces we've already talked about the organization piece and the IT piece.

All right and thank you. And then last question just following up on Kristen's question around the pro forma base, I'm sorry to get into the read, but I think the accounting people are going to like this. As we go from like a buck 55 to buck 85 down to where the pro forma base is, how should we think about tax adjusting, what the tax adjustment is on the $28 million corporate cost, should we phase just $28 million divided by 3 and put like a month of second quarter in there and then you also talked about depreciation like nothing has been depreciated IT assets, how much of that was in the quarter and then any other considerations we should be talking about?

Yes, you may expect a little bit in reverse order. So the depreciation on the IT and the S&IP assets for the quarter in total was $7 million, so that was how much hit there. In terms of working through the allocated cost may be I’m going to take your question a little bit different direction, but I think maybe it will help, in the fourth quarter call, we talked a little bit about the allocated S&IP cost and I think at the time it was $116 million and how those broke down and how you could work from there down to a EBITDA for the device business. And if you look at the first quarter and kind of take that same framework, our device piece for the first quarter was $40 million. The corporate costs that we disclosed were about $14.5 million. If you add back depreciation and amortization you sort of get to a call it a normalized pre-debt synergy EBITDA about call low 30. And then, if you take the synergies disclosure that we've before sort of 15 to 20 for the full-year that would suggest $4 million to $5 million on a quarterly basis that would then take that 32 down a little bit further when you take off those synergies, if you think about the future, we didn’t have synergies in the first quarter. But I think if you use that model that will probably give a picture, if you take to the future, what the EBITDA will look like for devices on a standalone basis with those synergies factored in.

[Operator Instructions]. The next question comes from Chris Cooley of Stephens. Please go ahead.

Good morning. Appreciated to taking my questions.

Good morning, Chris.

Just curious, when we think about the operating line and I realize still pretty fluid at this stage of the transition but during the fourth quarter you all delayed some spend on the SG&A line and you talked about running at a higher vacancy level there similarly here in the 1Q still remain light. Just curious if one this is based maybe more of an optimization or running leaner going forward from a SG&A perspective or should we expect those costs to come back into the P&L later on in the year and I’m just kind of curious if your expectations for where that level of spend would be if that's in fact the case would be commensurate with where you’re previously higher lower. Just want to get some clarity there and then I've got a quick follow-up.

Sure, yes. It’s a bit of both, Chris. If you look at fourth quarter, as you said, we were light around SG&A, the first quarter we spent a bit more still down year-over-year but a bit more sequentially. But we -- it's a combination of two, we’re running with higher vacancies some of that is intentional as we drive efficiencies, new organization and consistent with our future organization plan that’s one component. The second component though is, to the other part of your question we're going to spend more in a quarter that had partly on a corporate side. Again the corporate team is very focused in Q4 and Q1 on the -- on getting the separation complete, but also on the business side, as Joe has talked about before we've got a number of investments that we want to make on the business side including more clinical, additional sale focused, reimbursement specialist, and we were a little bit light bit light on that spending plan as we exited the first quarter, but we expected to ramp up going forward. Joe, anything to add yet?

Yes, just to pick up on Steve’s comment the clinical studies we highlighted one in the script which was the study of 200 patients and however [indiscernible]. There's more about that we want to do, to show COOLIEF benefits over a lot of different technologies, so there is some increase there. The activities on reimbursement and government affairs that cost we could see increasing a bit as we go into the year. We're also having a very focused effort on commercial payers that’s sort of what the headcount and an activity based area that’s direct to patient advertising that you'll all start to seeing on national level here as we move into Q3. But I do think that it’s really a good return and it has immediate impact and especially in COOLIEF where the business is accretive from a margin perspective, it’s a good place for us to invest.

I agree it fully. And then, just kind of come back to a prior point and on the earlier questions on the international side of equation definitely like the way that's setup now as we kind of think about the go-forward I believe in the prior quarters you talked about 2019 as being really -- I mean sorry, the international business is really being more of a 2019 opportunity. I’m just kind of curious when you think about that underlying base business here in the States currently got it four to six on a volume growth basis, what incrementally should we think about in terms of what kind of growth rate from international as that business really starts to lineout as we go into 2019, I’m just trying to think about potential for a step-up there on the blended growth rate on the core? Thanks.

Right. We really haven’t quantified the number but we talked about the fact that this is really roughly $150 million or so outside of the U.S. in 2018. It’s being growing more low-single-digit, so stepwise visibility to step it up to high-single-digit. I definitely think over time may not exactly happen in 2019, it can be a double-digit grower, it should be because we’re still underpenetrated and because we have a smaller base there and many of our products that are been introduced effectively, commercially into this country, so I’m encouraged over time for sure.

Yes, I'd follow it that as the effort this year, we have more international growth in our plan that we had last year. So we do have some step up and we -- just as Joe and I focus on commercial execution, domestically we believe that focus on commercial execution on the international business can yield some short-term wins, but the more meaningful change I think as Joe said will in fact in 2019 and beyond while we get the organization fully settled and effective and we improve on that commercial execution in a sustainable way.

The next question comes from Jonathan Demchick with Morgan Stanley. Please go ahead.

Hello, thanks for taking the questions and congrats on closing the deal. Wanted to start off with EPS guidance, so the $1.65 to $1.85 includes discontinued Ops, so on a continuing operations basis if you back out this quarter’s discontinuing Ops and the part of next quarters that’s going to be discontinued ops, it appears do imply may be $0.50 to $0.70 something around there of continuing ops benefit now, obviously 1Q and 2Q will also be pressured, so perhaps that kind of cancels out to more flat in the first half for continuing op, so is it fair when you look at the two half run rate of the business that’s the $0.50 to $0.70 of continuing ops assumption that’s really embedded in the guidance. Is that a fair way to think about 2018?

Jon, I think the $0.50 to $0.70 is a little bit light relative to the way that our model would suggest, that maybe one we can talk offline a bit more but I think that’s a little bit lower than what we would call if we’re trying to pull those pieces apart. 2Q is going to be a little bit more pressure, as Joe said, we've some top-line impact relative to surgical pain that we're anticipating that's had such a strong volume quarter in devices in the first quarter and relatively low OpEx. So we’ll expect to see a little more pressure in the second quarter but don't expect to see say some rebound and in line with our guidance in the back half of the year.

Understood very, very clear and just a quick follow-up on some of the restructuring activities that you talked about so I mean and also kind of reconciling that into the S&IP business. But I mean basically $28 million of cost from S&IP this quarter about $115 million annualized and you talked about a number of restructuring is already you have the December 1 which was I think like $10 million to $13 million or so and then you had a couple targeting IT which was the $15 million to $19 million and then some extra some reduced costs. How should we think about those restructurings has it either helped the lower the base of S&IP versus creates the savings I’m just trying to think of where those are kind of accounted for in the plan?

Yes, great and that’s a bit of both, Jon, to be honest. On the organization side and I'll take that one first. A portion of the organization restructuring was to eliminate some of those allocated cost and really reduce down to that ramp up dis-synergies that we talked about at $15 million to $20 million. That was a result of a portion that carries on into the savings side that goes further. IT is somewhat similar there our portions of IT that will scale down naturally out of those allocated costs. So as we have less employees, we will have less computers, less devices, less storage and so you can manage there as a portion of IT that just shrinks in that allocated costs anyway but then we need the restructuring to direct savings beyond that and that's the new infrastructure really taking our IT costs down by roughly half what they were before. So both the ORG and the IT contribute in part to reducing dis-synergies on the front on the allocated costs and also contribute to savings on the back half.

And we have a follow-up from Kristen Stewart of Deutsche Bank. Please go ahead.

Hi, thanks for taking my follow-up. I just wanted to clarify Joe I think one of the comments that you had direct with the ON-Q impact is being slightly more than the benefit of flu, was that in this first quarter or was that something expected for the full-year?

That’s Q1. We do see this into Q2 but we’re mitigating with new partners as well. But again we also see offsets in our business as well I gave CORPAK example that where we’re seeing strong capital there also in COOLIEF.

Okay, perfect. So then just the commentary about M&A in evaluating through a wider lens, I think the term kind of wider lens is new not really too much into exact wording but have your thoughts changed at all now that you closed S&IP and just given some of the opportunities that you have on the size of deals or maybe I’m just reading too much into the fine print?

Yes initially, we’re focused on some smaller deals obviously and we just did that and we’re focused on our cost piece in delivering the organic growth. But the wider lens this is a little bit both chronic care and new adjacencies as well as in the categories of pain where we participate today and we don’t look at it just from a company perspective but technology and also channel but all on our strategy that we’ve outlined thus far. And I think when we get together June 21st in New York it’s going to become a lot more clear and the investors are going to get a chance to hear from all the people involved in that but we’ve been very, very active.

Okay, and then just one last question on the June 21st Analyst Day not to kind of front run that but what should we be expecting from you guys, will you provide something that looks like a longer-term plan or more details on kind of a pro forma base, any kind of color heading into that day would be appreciated?

I’ll tee that little bit and Steve wants to make a couple of comments but generally a strategic overview from myself and then John Tushar is now in-charge of our franchises, so you will hear from the franchise leaders and the key initiatives we want to update as well on some encouraging milestones in our breakthrough technologies, we're going to give attendees a chance to look at our technologies and see how they work and then hear from customers that utilize the technologies and products. So you can get an understanding of what the run rate might be and sort of what critical milestones are in terms of our reimbursement efforts in our clinical studies and we will be talking about our plan going forward. Steve, you want to pick up on that?

Yes, we’ll certainly be giving an update on the restructuring efforts, the different programs that we talked about in past, we’ll give an update on progress against the synergies and then we really want to do on financial section to talk about what is the underlying healthy growth algorithm for this business, what does that look like this dual-track strategy that we talked about organic and M&A working together with the cost takeout and so we want to make sure we give a good picture of what that model looks like when you can brief past some of the noise that we've had last year and this year with discontinued ops and look ahead few years.

[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back over to Joe Woody, Chief Executive Officer for any closing remarks.

I want to thank everybody for your interest in Halyard Health. We’re very excited about the opportunities ahead and as a reminder on May 8, I’ll be presenting at the Deutsche Bank Global Healthcare Conference. Information about how to access that presentation will be found on the Investor Relations section of website halyardhealth.com. Thanks a lot.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.