Good morning and welcome to the Avanos Second Quarter Earnings Conference Call and Webcast. 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 Mr. Dave Crawford, Vice President, Investor Relations, Treasurer. Mr. Crawford the floor is yours, sir.

Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the Avanos second quarter earnings conference call. With me this morning is 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 our business and progress towards 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, avanos.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 first conference call since we rebranded the company as Avanos. Our new name represents advancement and moving forward. This morning I'm excited to share with you that we have continued to move forward in the second quarter. Delivering another solid set of results as a focus to medical device company. At the midpoint of the year, we're in a strong position having made significant progress towards achieving our 2018 goals. We increased sales 7% year-to-date on a constant currency basis. This strong top line performance allows for raising our full year sales planning assumption. We completed our S&IP divestiture and are on track and fulfilling our TSA commitments and finally we hosted our Inaugural Analyst and Investor Conference where we detailed the strategic framework we're executing to further drive growth, acceleration and innovation. Turning to the second quarter, we continued our strong top line momentum and commercial execution. Achieved a significant milestone towards the reimbursement of radiofrequency nerve ablation for knee procedures performed at non-acute settings. Launched the company's first direct-to-patient television advertising campaign and completed our first acquisition of 2018. Moving to Q2 results, revenue for the quarter grew 7% on a constant currency basis. Multiple factors contributed to our strong sales growth. The continued market expansion of COOLIEF generated double-digit growth in interventional pain. In chronic care, we saw strong demand in both categories. In digestive health, innovation and a focus on Mic-Key and extension sets drove sales. While in respiratory, we saw solid demand for closed suction products as well as some benefit from last year's oral care contracts. In Acute Pain, sales of our ON-Q pump continue to be impacted by two external factors. First the continuing industry wide bupivacaine shortage and second a key third…

Thanks Joe and good morning, everyone. First let me say that it was an extremely busy quarter for the global Avanos team and I'm proud of the results we delivered. 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 in the medical device business as continuing operations. As a result, we are required to allocate to shared costs that were previously allocated to S&IP entirely to the medical device business. These costs previously allocated to S&IP, totaled $9 million for the quarter compared to $28 million a year ago. With that Avanos delivered another strong quarter with medical device sales increasing 8% to $161 million. This represents a 7% increase on an constant currency basis driven by 5% volume growth in a favorable mix and price benefit of 2%. We continue to see strength in medical device sales across interventional pain, digestive health and respiratory health. Interventional pain continues to be our fastest growing category as we raise patients awareness through our marketing efforts and saw increased adoption. With our heightened focus on commercial execution, we also saw higher conversion from our single probe kits to multi-probe kits driven by the acceleration of knee procedures. Importantly, multi-probe kits significantly reduce the overall time a physician needs to perform the COOLIEF procedure. This shift to multi-probe kits drove a portion of our favorable failed mix given their higher selling price compared to single-probe kits. In digestive health, we saw volume growth in Mic-Key and extension sets driven by efforts to gain market share in the alternative site market. Additionally, the recent launch of the 14 French Mic-Key GJ…

[Operator Instructions] the first question we have will come from Matthew Mishan of KeyBanc. Please go ahead.

Could you first talk a little bit about the strength around chronic care? I mean the first quarter seemed like there was some flu related stocking, but second quarter the momentum really continued and it seems like you're talking lot about alternative sites. Can you explain a little bit more of what you're doing there?

Yes the so momentum did continue Matt. It also continued internationally for that business. remember there was about half a point or oral care, but we talked to couple of calls ago about a job ticket focused on getting better growth in alternative sites for that business, in the US outside of just the hospital settings that's proved well and also particularly on the closed suction product in particular there. So just generally across the board the chronic care business was strong and again there was a little bit of benefit in international as well from that business.

And then price mix in the quarter was I mean stronger in the medical device than it's been historically and seemed unusual for that segment, what drove that?

I'd say it was a little more mix than price. Steve may have a thing or two to say, but generally on the product side the micro cool probes we're seeing at trends itself three to do the procedure faster versus just one and a similar effect in chronic care with a shift to the Turbo-Clean product with a better mix. So it's a little early to tell these things are going to stay with us, but they were positive and I think more oriented to mix. I don't know Steve, do you want to add anything?

Yes, I agree historically we've been up one, down one or flat kind of from price mix standpoint. This was actually the first quarter that it was a little bit more meaningful and it really was mix more than price and I think some of that's the year-over-year comparison in that equation as well.

Okay and then lastly on the medical device margin coming in, in the low 21st because where it's been, I guess the reinvestment portion of it. As far as this synergies are you allocating more of the corporate cost specifically to that medical device line, as a result of following the acquisition [indiscernible]?

No, you've kind of hit the big pieces on the margin. You've got more investment year-over-year, in fact more coming in the back half even then we had in the first half. And all around those areas we've talked about in terms of more clinical evidence, more in R&D, more COOLIEF direct-to-patient which actually it's having a meaningful impact. The impact of the dis-synergies begin to roll in at least for the two months of the quarter that we weren't together with S&IP. It will continue to see that over the course of the back half and then recalled last year, we actually had pretty low investment in the second part particularly on R&D and so you're seeing a little bit of year-over-year comp element in there as well.

Thank you.

The next question we have will come from Jonathan Demchick of Morgan Stanley.

I wanted to follow-up on Matt's question about that margins and really just kind of thinking how it trends more into the back half of the year. I think if you back out the S&IP allocation this year, you get somewhere around like 15.5% operating margins. It sounds like obviously an extra month of dis-synergies, this is going to happen or a couple extra, one extra month of dis-synergies as well as increased investments. So I mean is it safe to say, that 15.5% kind of from this quarter is probably the high point for the balance of the year and that you probably be expecting something closer to 15% in the back half and you start allocating more of the cost in, is that a fair kind of pro forma based kind of start thinking about the cost savings that are [indiscernible] build in 2019.

Yes I don't know if I can get that specific John. In terms of laying it out by quarter, but what I would say, I mean the key seems I think you're hitting on it right we're going to have more that investment spending, hitting in the back half. We're going to have a little bit of more to call it full quarter as you said of dis-synergies rolling in. and we will see some improvement against the dis-synergies overtime, we're not going to see as much in the back half as we're going to see in 2019 and certainly beyond as we talked about in the investor conference and so I think that's kind of the way we're looking at it for the balance of the year.

And John this is Joe Woody. I would add this is temporary related to the divestiture, if you look historically at the medical devices business we've been accelerating, improving the margin and we'll get back to that I believe into 2019 and those investments though, you've seen the top line performance they're paying off there's probably even more we can do so that's why we're continuing to invest alongside of working on the dis-synergies.

Understood, just following up I guess [indiscernible] little bit on the earning line guidance. It was still pretty wide I think it about 10% range really between the top and the bottom. I mean should we think the main kind of bridges that get you to both of edges of that is really on the dis-synergy side investment side of things. Is there anything else that we should really be factoring in?

I think that's the big piece the dis-synergies and investment side. I'd say we're also as we talked about on the call letting the acute pain business play out in the back half, we certainly saw some impact at first quarter. We probably saw little more impact in the second quarter from that business and I think in fact the third quarter may even have a bit more and so it's really a combination of that SG&A OpEx piece combined with a little bit of hedging for the top line recovery in acute pain.

Great and then one follow on just on chronic care. I think Matt touched upon this, but it really has been doing very well in the first half of the year. Sounds like the alternative sites is been really a big driver there. Should we be rethinking the just general growth trajectory of this business with some of these investments? I mean I think I've generally thought of these businesses as being more of a low-to-mid single-digit grower. It's been close to double digits to the first half. I mean what is the correct trajectory to really be thinking about on this business.

I think the long-term trajectory is more mid. I think the opportunities though and with the right time we would call it change would be Core Pack [ph] on an international level and the same with this change now with [indiscernible] leading the international business and we saw a little bit of a benefit already and it's only just starting. Though there were some distributing movements in that for the quarter, the two things would be the international business, the continued double-digit growth of Core Pack [ph], so mid solid, mid single obviously and then, but those other two areas could push it up a little bit.

And you'll see in the back half, that Oral Care contract, which is not a big add, but it's been adding for the last, over the last year, that will soften now as we kind of start [indiscernible] clearly they're doing great, but as Joe said it, it's probably hitting it little bit over its average here.

Understood. Thank you very much.

The next question we have will come from Ravi Mishra of Berenberg Capital Markets.

So I've a couple of if I could squeeze in, hopefully a number of questions, try not to take too many. But I wanted to start with that chronic care segment. Would you mind quantifying that oral care benefit? I think last quarter you said something around 200 basis points to the combination of flu and oral care, could you maybe parse that out for this quarter. and then for the interventional pain business I'm curios on that CMS comment that you made regarding the 2020 RF nerve ablation code that sounds pretty exciting and it sounds like it's geared towards specifically towards COOLIEF, could you help us understand the classification of that code, is that CPT1, 2, 3 code or how does that change the reimbursement dynamic? And I guess I'll have a couple of follow ups on guidance after this? Thanks.

Ravi, this is Joe on oral care for the total business is about half a point, but for the chronic care business it's about point in the current quarter. We are excited about the reimbursement. The reimbursement for the knee treatment of osteoarthritis of the knee for the code will actually be for both RF and COOLIEF, but as you know we've been doing a study on COOLIEF versus HA we've already done along corticosteroids, we're going to initiate one against RF and try to prove a longer duration and even a year of the pain release. I think we're well positioned even though it's a code for all areas and then it does open up, the change to get in a much larger market. So it's very key going forward in 2020 and we're definitely excited about it.

Great and then maybe just on the guidance. I'm just curios in terms of your volume commentary that 5% growth coming I think it was against 3% comp last year. Any sort of commentary on breaking it down between US and O-US. Are we looking at same kind of 5% in both markets or how's that changing and just curios in terms of what your view is on the overall utilization environment that you see in your businesses? And then just maybe one last one on guidance. On the top line is there any change to the FX assumption that you had in your revenue guide and it's if not or if so, what will that be?

Steve will handle the currency side of it, but the volumes were a little bit higher in international than we normally would have seen and that's I think the beginning some of the success we'll see, although there was a bit of distributor movement and so they've moved up across the board with the exception really of acute pain, so Steve you want to handle the currency?

Yes, it's not currency that we saw the quarter slight benefit and I'm on the top line, we don't think for the year it's going to be that meaningful, so it's not a big factor going forward.

Great. Thank you.

Next we have Chris Cooley of Stephens.

Congrats on your first quarters of pure-play and devices. Just maybe two from me at this point. Could you help us parse out a little bit more on the quarter, when you look to growth and as we didn't find this in the second half of the year? Maybe kind of semi-quantifying the headwind you have on the ON-Q relative to the incremental growth that you're seeing with COOLIEF. And would really be interested in that latter part if you could drill down a little bit more in terms of whether you're just seeing broader utilization, more volume within existing user just trying to help better you get handle on that growth that we're seeing that product line, then I've got a quick follow-up.

Okay, Chris. I'll say a couple of things and then Steve's welcome to join in as well, but generally in the quarter we had COOLIEF continue double-digit, we talked about respiratory alternative site and in digestive health, we had an innovation impact where we had a launch and these are all areas where the volume is increasing and there was a little bit of mix benefit in respiratory. In terms of IVP and COOLIEF, it's a combination of new sites through capital sales but also getting great pull through in the script we talked about the direct-to-patient advertising that we put in place, seeing four times that kind of [indiscernible] really that we've seen in the past and it does take a couple of months to get those patients in processed into the [indiscernible], but that was all positive and the other thing. Is that we've seen a small balance in international. I think with the [indiscernible] direct management and putting a focus on commercial there. The quarter frankly could have been better volume wise, by as much as two points better. If we were dealing with the bupivacaine, ropivacaine supply and pre-fill issue around Q pain. We're cautiously watching that because we did see a little bit of slight worsening of that from Q1 to Q2 and Steve mentioned three could be tougher and then oral care is going to back off hence we're not ready to go much further in raising really until we get through 2019 and really understand acute pain, although the underlying business in acute pain. Whether or not affective by the drug shortage or pre-fill are growing high single-digit and we're happy with that. We're also converting a lot of orthopedic surgeons well over 100 with our specifics, but Steve [indiscernible].

The only thing I would add is, overall utilization industry, utilization probably not a bigger factor Joe said our focus is more on utilization getting our procedure more widely adopted overcoming barrier, overcoming some of the near term challenges in the acute pain side of the business. So less about those, then about overall utilization.

Right and then my just two quick follow ups, could you just remind us your kind of expectations for the contribution from Game Ready here in the back half of the year with the close now. Basically in the full quarter early run rate as we think about the back half and then lastly from an M&A perspective $750 million in capacity. I know you want to consolidate and maybe get down, to maybe just a couple of IT systems. Ideally one, before you find a new one but to help us think about maybe potential timing for additional M&A as you think of that's really more of a 2019 event or is there's still some potential here in the back half of 2018.

So I'll handle M&A and Game Ready. I mean Game Ready we've talked about $35 million in sales last year and so we're going to get half the year of benefits and it's growing slightly better than our business and so that's a positive thing and the pipeline is really strong in M&A and we continue to work, you can never time these things out. It is possible though that we could see another deal before the close of the year and we're working toward that goal.

Game Ready from an earnings contribution side, we really haven't factored anything for the back half this year.

Thank you.

[Operator Instructions] the next question we'll have will come from Larry Keusch of Raymond James. Please go ahead sir.

Just a couple of quick things here. Joe just maybe talk a little bit about the visibility that you have on the [indiscernible] challenge that you have in front of you right now.

There was an industry-wide shortage, there was a big article in Fortune Magazine. I think a lot of people have read about what's going on there and it looks like, toward the end of the year it could look to get a little bit better. We just probably have a little bit more of a positive outlook for 2019. We did announce our partnership with Leiters, an exclusive relationship to give us way to diversify with other pump fillers and so we think that's going to start to benefit us, towards the middle of the found quarter, that issue around it is that, GPOs and IDMs and the pharmacies themselves and hospitals have to go out and validate the site. They have changed in all their process to switch over, so it takes a little of time, we have a much better longer strategic plan around how to shore up our supply so that this doesn't happen to us in the future. But there's heavy focus by the FDA on 503B's and this bupivacaine, ropivacaine or caines [ph] if you will shortages really real and there's some really bad situations with hospitals that they're facing. That said, the underlying business is strong which is and I'm happy that we've got a stronger portfolio with better commercial execution to be able to whether this. And so we think that, as we get into next year we're going to be able to put that growth back on the table.

Okay, perfect and did I hear you correctly that you said for the 2Q, there was if not for the bupivacaine issues with ON-Q the volume would have been 200 basis points higher?

Yes we would have been looking at more like a 9% growth versus 7%.

Okay, got you terrific and then two last ones. Just back to the margin, the 20% margin for the quarter. Is that the right way to kind of think about it for back half of the year, that's kind of what we're going to be running at? And the other question is for Steve, what if my math is right, the tax rate that you - even with the lower tax rate imply a higher tax rate for the second half of the year, what drives that up?

Yes, maybe I'll take those in reverse order. The tax piece, we've benefited we had sort of lucky strike in the second quarter. The new tax law allows for accelerated benefit when stock options are exercised and we just happened to have two senior former executive that executed a significant amount of options in the second quarter, so we got a sort of one-time benefit in the Q2 tax rate that kind of brought the whole water line down for the year. So you're right we're - that won't be sustainable at that level in Q3 and Q4. We expect Q3 and Q4 to look more like 25% in that range and that really leads the math to the guidance update that we did on the tax rate. From a margin standpoint, Larry I think you're thinking about it. I say the right way, that's the right starting point against that 20% we're going to have more investment in the back half versus the first half on those growth investments that we referenced and you'll - have little bit more dis-synergy two months in Q3 versus full quarters in the back half. So all else equal it will be I'd expect it to be down a little bit versus the 20% that we had here.

Okay, perfect. Thank you very much.

[Operator Instructions] next we have a follow-up from Matthew Mishan of KeyBanc.

Steve, I think we talked about the med device margins, how should we be thinking about the corporate cost run rate going forward? I think originally there was $9 million in there and it was a $20 million number. What's the right run rate for the corporate cost as we kind of model out 3Q and 4Q?

On the order historically the corporate cost have been as high as 70%, 75% probably our run rate for this year as we look to the back half it's more like a 605 kind of range.

And on the bupivacaine shortage, how does that impact the competitive landscape as far as Pacira goes. It doesn't seem there's fair impact, it seems like they're gaining momentum. Are you at a disadvantage to them at this point as a result of this?

I think you see some in some cases hospitals that are looking at long, acting locals, looking at really solutions they can get to. But lot of the success I think Pacira is seeing right now from the shoulder indication and the focus they have in that area. When we inspect our business on a weekly basis, we're not seeing a lot of major account turn and we're kind of focused a little bit in a different area and a different way with the types of procedures we're on ON-Q pump. It's better suited for the patient titration, the management of the pain and getting [indiscernible] somebody who have total need within 24 hours without following or problems that might, sometimes be associated with long lasting local. So I think there's as I've said in the past, there'll be a lot of different long last locals coming into the market. Other pump fillers, but this is a $4 million problem that is low penetrated. So I think we'll be able to carve out our unique position in that area.

And then also, outside of the reimbursement for the RF procedure in the knee. I think there's also been some recent CMS proposals to reduce these opioids at least a couple of weeks ago and I think there was some specific mention of medical devices in there as well. Could you comment on what you're seeing [indiscernible] recent proposals and how it could affect you?

That Bill has gone through the house, he's working his way through the Senate and essentially it's going to provide an opportunity for medical device makers, not just us but really all those associated with devices they can relieve pain versus opioids to get better reimbursements at different sites outside of even just hospital and possibly an education component to it, for physicians when they educate patients. That said, it will be a little bit like this the knee code which the CMS teams will have about a year and half or two years probably it would work with the med device makers on how to make that happen. But there will be a pushing effort if you will from the legislations to CMS to really after this. And so there could be benefits for anybody in the pain business.

Thank you.

Well at this time we're showing no further questions. We'll go ahead and conclude our question-and-answer session. I would now like to turn the conference call back over to Mr. Joe Woody for any closing remarks. Sir?

I'd like to just thank everyone for their interest in Avanos. We're very pleased with our momentum in the first half of the year and very excited to build on this as we take advantage of the very attractive opportunities we have ahead. Thank you very much.

And we thank you sir and to the rest of the management team for your time all for today. Again the conference call is now concluded, at this time you may disconnect your lines. Thank you everyone. Take care and have a great day.