Avanos Medical Inc (AVNS) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Halyard Health Second Quarter 2017 Earnings Conference Call.

(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, sir

Thank you, and good morning, everyone.

It is my pleasure to welcome you to the Halyard Health second quarter earnings conference call.

With me this morning are Robert Abernathy, Chairman; Joe Woody, CEO; and Steve Voskuil, Senior Vice President and CFO.

Robert will begin with a brief discussion of our CEO transition.

Then he'll hand over the call to Joe, who will provide his perspective on industry trends, his strategic vision for Halyard and our progress toward our 2017 priorities.

Then Steve will review our financial performance and provide additional detail on our outlook for the balance of the year.

We will finish with Q&A with Joe and Steve.

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 condition and our industry.

No assurance can be given as to future financial results.

Actual results could differ materially from those in the 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 Robert.

Thanks, Dave, and good morning, everyone.

I appreciate your interest in Halyard Health.

As you know, I recently announced my retirement as CEO and the board elected Joe Woody to succeed me.

I continue to serve as Chairman to ensure a smooth transition.

I'm happy to report that the transition process has been seamless, efficient and tracking to plan.

Accordingly, I will also be retiring as Chairman of the Board effective September 1. And Ron Dollens, currently our Lead Director, will take over as nonexecutive Chairman.

Now let me introduce Joe.

Joe's an experienced CEO with more than 20 years in the medical technology industry.

Over the course of his career, Joe has a proven record of executing portfolio transformations by driving growth, accelerating innovation and keeping a laser focus on understanding and anticipating evolving customer and patient needs.

His experience, coupled with his leadership skills, make him the ideal person to lead Halyard to the next stage of our transformation.

Before turning the call over, let me say a few words about the progress we've achieved in advancing our transformation.

In short, we accelerated growth in our Medical Devices business and successfully executed our first acquisition.

We built a solid foundation

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recently at Acelity; and prior to that, at Covidien.

While certainly, each company and situation is different, some core elements across those experiences are very relevant to Halyard, such as pivoting toward high-growth, profitable markets; reinforcing the innovation culture as well as a culture that embraces existing and emerging technologies; and instilling a laser focus on the customer, understanding and anticipating evolving customer needs and prioritizing quality, safety and the customer experience.

Building off those elements, I believe we can create significant opportunities for Halyard.

Specifically, I see 3 key focus areas for us going forward: Markets, products and technology.

I want to share my thoughts on each.

First, markets.

We'll expand our focus into high-growth end markets both in the United States and internationally.

Second, products.

We have a significant opportunity to leverage the effectiveness of our non-opioid pain therapies, both ON-Q for postsurgical pain relief and COOLIEF for osteoarthritic knee pain, take advantage of this opportunity.

Outside of our pain categories, we offer differentiated and preferred products, such as CORTRAK, which ensures the accurate placement of nasal gastric tubes.

These solutions deliver improved patient outcomes and health care economic benefits.

The third key focus area is technology.

We'll enhance our technological capabilities and partnerships by leveraging existing and new technologies across our diverse portfolio and drive a new generation of more advanced technologies in clinical therapies.

Now looking at the medical device sector more broadly.

It continues to be healthy and exciting with enormous potential.

And the M&A is dynamic, which we plan to take advantage of as we incorporate acquisitions as a driver of our growth.

CORPAK is an excellent example of our ability to identify strategic, accretive acquisitions, effectively integrate them into our business and leverage our operation's infrastructure.

All combined, I believe there are a number of prospects for us to advance and accelerate our transformational goal of being a leading medical devices company.

We'll continue to focus on growth, whether through strategic M&A, new product development, expansion into new markets or better leveraging our businesses to generate more synergies and increased productivity.

To move to the next phase of our strategic journey, we will need to enhance our execution, energize the culture and sustain and enhance our strategic focus on customer needs and increase the speed and performance of our initiatives to fuel our growth pipeline.

An important step in advancing our transformation is to achieve our 2 priorities for the year, and we've made progress on both.

Our first priority is to deliver our 2017 plan.

I am pleased to report we completed another solid quarter, with adjusted diluted EPS of $0.51.

With a strong first half of the year driven by focus on execution, we now expect 2017 adjusted diluted EPS to range between $1.85 and $2.05.

Turning to our second priority, which is fueling our growth pipeline.

We are investing in innovation while building on our strengths.

For instance, we continue investing in our fast-growing interventional pain business.

During the quarter, we launched our COOLIEF direct-to-patient marketing campaign for the treatment of osteoarthritic knee pain.

Response has been strong and represents an exciting market development opportunity.

Also, we launched 3 products that demonstrate our commitment to improving outcomes and safety.

Year-to-date, we have launched 7 products and remain on track to launch more than 12.

With that, I'll turn the call over to Steve for a more detailed look at the quarter and our outlook for the balance of the year.

Thank you, Joe.

Let me start by saying that I'm pleased that our execution in the first half of the year positioned us to raise our 2017 adjusted diluted EPS outlook.

For the quarter, sales totaled $399 million, even compared to the prior year.

Volume, including CORPAK, increased 3%, which was partially offset by lower selling price.

Adjusted gross margin was 36% for the quarter, unchanged compared to a year ago.

Our portfolio shift to medical devices, manufacturing efficiencies and favorable currency exchange rates helped offset the impact of lower selling prices and anticipated higher nitrile cost.

As the year unfolds, we anticipate gross margin expansion in the second half of the year, as our portfolio shift continues and commodity costs decrease.

Adjusted operating profit and operating margin for the quarter were $40 million and 10%, respectively, compared to $41 million and 10% in the prior year.

During the quarter, we incurred $2 million for acquisition-related charges, $6 million for litigation matters and $5 million for intangible amortization expense.

These were partially offset by a $2 million spin-related benefit from the higher-than-expected sale of Kimberly-Clark-branded inventory.

Adjusted EBITDA was $51 million for the quarter, even compared to the prior year.

As Joe mentioned, we reported $0.51 adjusted diluted earnings per share for the quarter.

Three factors drove our performance: First, our ability to drive greater manufacturing and distribution efficiencies in such areas as material waste, production optimization and inventory management; second, while R&D expense increased sequentially to $10 million, it was lower than expectations due to disciplined project decision making; finally, through our ongoing tax planning, our adjusted effective tax rate was 27.2%.

Now turning to our segment results.

Medical Devices delivered another solid quarter of growth as net sales increased 5% to $149 million.

Performance was aided by 1 month of incremental CORPAK sales and higher volumes across all product categories.

Organic volume grew 3%.

Performance was impacted by volume that shifted to the fourth quarter due to an order pattern change from our key distributor of IV infusion products in the U.S.

Medical Devices' operating profit increased 40% to $41 million compared to $29 million a year ago.

Performance was driven by higher sales volume and manufacturing efficiencies.

Lower SG&A from CORPAK-related synergies and the timing of our marketing spend also aided performance.

Moving to S&IP.

Markets remained challenging, but our business year-to-date is ahead of plan.

Net sales decreased by 4% during the quarter to $247 million.

In total, S&IP volumes were flat compared to the prior year.

Continued volume growth in exam gloves was offset by lower volume in Facial Protection due to the timing of cold and flu season and decreased exam glove sales to Kimberly-Clark.

Lower selling prices, concentrated in exam gloves, led to a 4% price loss for the quarter.

S&IP performance was largely impacted by anticipated higher nitrile costs as operating profit was $15 million compared to $25 million in the prior year.

Lower selling price also affected performance, which was partially offset by manufacturing efficiencies and favorable currency exchange rates.

Moving to our balance sheet and cash flow generation.

We ended the quarter with $155 million of cash.

Cash from operating activities less capital expenditures, or free cash flow, totaled $13 million for the quarter, in line with our expectations.

We continue to project full year free cash flow of $100 million.

Shifting to our 2017 outlook.

As highlighted previously, we expect to earn adjusted diluted EPS between $1.85 and $2.05.

Additionally, we lowered our key planning assumption for commodity inflation to $5 million to $10 million from $10 million to $20 million for the year.

Commodity costs should provide a tailwind in the second half of the year.

However, there are several factors that will offset this benefit.

First, unfavorable currency exchange rates for the Mexican peso and the Thai baht compared to our plan are expected to be a second half headwind.

Second, from a manufacturing standpoint, while we generated efficiencies above our expectations, we will begin to anniversary some of those projects implemented in the second half of last year.

Also, we anticipate higher distribution cost in the third quarter as we relocate some of our global distribution centers.

Third, as I discussed, R&D spending was below our plan, but we remain committed to accelerate investment to grow our innovation pipeline.

Our other key planning assumptions, which we provided on our year-end conference call remain unchanged.

In summary, we are well positioned to deliver on our plan and fuel our growth pipeline.

We're at the midpoint of the year and we've increased our guidance.

Our strong balance sheet provides us with firepower to invest in growth opportunities, including M&A and innovation, that will further accelerate our transformation into a leading medical devices company.

With that, operator, we are ready to take questions.

(Operator Instructions) And your first question will come from Rick Wise of Stifel.

Welcome, Joe.

Maybe just first, I mean, you laid out a very compelling plan and it makes a lot of sense, the transformation acceleration.

Maybe you could just expand on that a little bit, the advance and accelerate, the expanding into faster-growing markets.

It's early, but do you see these opportunities in adjacent areas?

Are you going to inevitably have to move into new verticals or whitespace?

And do have aspirational goals for M&A divestitures?

And I'm sorry for the long question, but I want to add, x number of sales?

But just can you just give us a little meat behind those compelling thoughts?

Thanks, Rick.

Yes, I think I'll do both.

I'll give you some impressions and then a little bit of an idea how I might go about strategy.

So first of all, I'm very excited about the opportunity I see.

I've seen a lot of challenged business in my time, and this is a great foundation and really sort of a blank sheet.

We have strong positions in our markets.

We have a supportive board with cash for M&A and good cash flow generally in the business.

I think I can impact faster growth, M&A, both that way and from commercial excellence.

And the innovation opportunity is strong, especially mid and long term.

And then I also believe that there are couple of really strong growth opportunities I immediately see in the business at COOLIEF in the pain segment and frankly, obviously, seeing what's going on with CORPAK.

In terms of strategy, I think there's a good strategy here.

I think I can enhance that strategy.

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and my focus is going to be on technology.

Because I believe that you need to have differential technology.

I think we have some here.

I'm a supporter in the long term of PMAs and that type of approach to the business.

And again, I can foresee pain being an area where we obviously invest.

And you could see additional M&A there.

And you've seen the organization and the management team prior to me do that type of adjacency work with CORPAK and accretive deals.

So the M&A piece initially will be the same: Accretive, high-margin, near adjacencies, more likely in the medical device segment.

But over time, I see that we need new platforms in the business.

And I think as you move sort of into the back half of '18 and into '19, there's opportunity for us.

And that's going to be a big part of the strategic review, is what are those new platforms and where do we have a right to win.

So I also said a lot.

You asked a lot of questions, I said a lot.

I'll pause there.

Okay.

Two quick last ones for me, a little more briefly.

Steve, through the first half, you did roughly $1 in EPS.

You called out some incremental second half headwinds and challenges.

But it's -- you're basically saying you're going to do a $1, in round numbers, in the second half if you look the math on the commodity prices.

Is there -- why so conservative?

Why not guide to the upper end more confidently?

It seems like things are moving the right direction.

Yes.

I think we had a very solid performance in Q2, particularly on cost of sales.

I think cost of sales was probably the star of the show in the second quarter.

Plant efficiencies, waste and delay were at record levels.

We had a lot of projects put in place in the back half of last year that delivered a lot of savings in the second quarter.

It's -- clearly, some of that's going to be sustainable and move forward.

We won't think we're going to lay up 2 more quarters of that kind of fantastic plant performance back-to-back.

So that's one factor.

The other on the cost of sales side also is fixed cost absorption.

You look at our balance sheet and we ended pretty lean on inventory at the end of 2016.

We built back a little bit in the first quarter but put back about $22 million in the second quarter.

And that was by design, just thinking ahead to the last of stage of the CORPAK integration and preparation for that, also the oral care build out that we talked about in the past.

So there's a reason for it.

But that drives more efficiencies through the plants when they're running faster and get some fixed cost absorption.

As we look to the back half, we don't see that repeating, either.

We're going to be back on the focus on inventory and may actually see it reverse a bit as we take some volume out of that pipeline in the back half of the year to continue the focus on working capital efficiency.

So that's on the cost of sales side.

And then distribution also very strong through the first half, strong in the second quarter.

But we have 3 DC moves that we have to do by the end of the year, one that's happening right now.

And we know from past experience, we get some inefficiency and additional cost with those DC moves, and so I don't think we're going to see quite the same distribution performance in the second half.

And then as we talked about in the prepared remarks, sequential R&D, I expect to see move up.

That's our goal.

We're not going to spend it to spend it, we're going to be focused and disciplined, but we would expect to see some incremental investment there.

And then finally, tax rate.

We're not going to put up 2 more 27.2% tax rates but really land inside the 32% to 34% range.

So when you kind of take all of those things, Rick, and I know that's a lot.

That's what's kind of causes us to temper the enthusiasm after a pretty strong first half.

We are going to have some headwinds, notwithstanding the nitrile benefit, and I think particularly in the third quarter, where some of these DC moves and then some adjustments in inventory will probably take place.

That's very helpful.

And just a quick thank you to Robert.

And congratulations on all the hard work and all the achievements.

And best of luck.

Enjoy your grandkids.

Thank you.

Thank you, Rick, I appreciate that very much.

The next question will come from Larry Keusch of Raymond James.

Just want to echo Rick's comments to you, Robert.

Larry.

So Joe, I want to pick up on 2 things that you were addressing.

And I just want to make sure I'm sort of understanding where you're going with this.

So it sounds like you believe, over time, we should start to think about this company as having -- potentially moving towards PMA-like products, which it certainly hasn't done in the past.

So I want to make sure I'm understanding that, that you believe that, that's directionally where the company should go.

And I understand it's over time.

And in the context of that, what do you think about just sort of levels of R&D spending?

Are they sufficient at this point?

Or do you think that they continue to need to move higher?

Particularly if you're going to start to support a PMA approach.

Thanks, Larry.

And it is -- the PMA approach is a longer term and you certainly have to temper your investment along the way.

But as an example, Lee Burnes, who heads R&D for our business now, we worked together in the Vascular business at Covidien.

And he's, I think, been very wise with the way he spends and invests.

And recently, he's brought in some high talent.

And actually, that's enabled him to spend less in some areas for outsourcing.

But he sees that in the mid and long term, there are opportunities in our pain business for us to advance our technologies and get to that level.

And certainly, it will take time.

And of course, the other way to do that, Larry, is to acquire a company that has that type of a position.

So we want to position ourselves over time.

I think initially, we need to continue along our 4 segments and bolt-ons that are accretive and the whitespaces that are just natural for us in our channel.

But we've got to move to that for long-term sustainability, in my view.

Okay, great.

And then 2 others, 1 more for Joe and 1 for Steve.

So Joe, the second question is, look, the strategy for the company had been to bulk up the Medical Device business, improve that part through R&D spending.

So organic means, inorganic means and sort of use the cash flows off of S&IP to help drive that inorganic process.

So if that's where the high-level strategy of the company -- I just want to see, as you sit here today, and I recognize things can change, sort of where do you see S&IP in that strategy going forward?

Is it still a driver of the cash flow that can be used for M&A?

Well, obviously, that's changed over time, S&IP in particular, but I do think it's a good business.

It can be stabilize and grow.

I mean, I've managed and turned around more difficult situations.

I think back to Smith and Nephew with sort of a negative -- the wound care business turned around there, negative mid-digits.

Even worse for KCI with much more price erosion, $300 million or so in price over the time when I was there on what was effectively 90% gross margin products, that makes it difficult.

So definitely more challenged situations.

But you're seeing the team progress.

They've done a great job with this business in terms of cost and continuous improvement.

And I think about -- you look at small green shoots, right?

And I think about Q1 to Q2 outside of Facial Protection, we had a movement up in all of the products.

So I do think that can be a strong business with the right level of innovation, geographic expansion and obviously stabilizing glove pricing.

So it can still be helpful, in terms of a cash flow perspective, to our over-arching business.

Okay, great.

And then last one, Steve, just wanted to touch on the cadence of expected price pressure within the S&IP business.

You have a fairly favorable comp in the fourth quarter.

So as we think about the second half of the year, is the right way to think about pricing, sort of consistent where we are now in the third quarter?

And then given the favorable comp, and as you move out into the year, hopefully start to see some improvement?

Yes, I think that's exactly right, Larry.

I think that, as Joe said, for the second quarter, we're pleased with what we saw at S&IP.

It's ahead of our plan for the quarter.

Volume was positive everywhere but Facial Protection.

So encouraged by that.

On the pricing side, pricing is in the high side of our guidance range for the second quarter.

But for the reasons you said, the back half, the comps get easier, particularly on the gloves side.

And again, gloves still accounts for more than half of all the price loss in this category.

All the other category is less than 3%.

So as we get to the back half, we're going to lap a couple of glove contracts that are going to make an easier comp.

And then as you said, the fourth quarter of last year was particularly strong from a price loss standpoint.

And so we're still -- we still feel like the range we have out there from the planning standpoint is the right place to land.

The next question will be from Jonathan Demchick of Morgan Stanley.

So Joe, I want to start and kind of a follow off a little bit of that Larry was asking about.

In Robert's introduction, he mentioned your experience with transforming businesses in years.

There was a very large focus on the medical technology side with markets, products and technology.

Wasn't a lot of focus on the S&IP segment.

It sounded in your last answer that you still do remain pretty committed to that business.

Is that the right way to be reading that?

I mean, obviously, there was news intra-quarter about the potential of divesting the business.

In any given time frame as you're managing a business like this, you're constantly evaluating your portfolio broadly across divisions, but even against specific products inside of divisions.

Obviously, we wouldn't comment on any kind of media speculation.

But I do think it's our job to create value in the business and to be -- remain committed to the businesses that we have.

So that's my perspective on that.

And I'm sorry, I forgot the second part of your question.

I mean, I think that covered that part pretty well.

And I just have I guess one quick follow-up on, I guess, the margin side.

And it seems, particularly, that the Medical Device business' margins, at least over the first 6 months of the year, have been very strong.

I mean even stronger than when you started, I guess, looping in CORPAK.

So -- and this is probably more for Steve, but I was just wondering if you can kind of help us think about what the margins for the Medical Device business as a stand-alone.

Not necessarily a stand-alone entity, but I mean, as I kind of think about, as you guys break out margins for -- sorry, for Medical Devices, how high do think this should go?

Or is this kind of the right margin profile, in that upper 20s percent range, as you just think about Medical Devices?

Yes.

Thanks, Jon.

I mean, clearly, bigger margins are better.

So we love to see the progression.

As we talked about in the last call and this call, the fact that we've underspent a little bit in R&D versus planned is helping that device margin.

So the 27% or so that we have this far, I think it's a record.

But at the same time, we've also haven't spent as much on R&D as we had planned.

So we're not high-five-ing on that side.

On the other hand, we talked all year about this was going to be a year of margin progression on the device side.

And so we are seeing that play out.

And as you said, Jon, if you go back to the time of spin, where you were kind of high teens and then into the low 20s and now, hopefully, more solidly in the mid-20s, we're pleased with that progression.

And I think as we continue to look, as Joe said, at organic and inorganic opportunities that are going to be margin-enhancing and provide more growth, I think we see more longer-term upside there, even despite some of the investment we have to do back on the R&D side.

The next -- (Operator Instructions) And our next question will come from David Turkaly of JMP Securities.

I know you've mentioned some of the R&D plans you have and it seems like the pain business is a clear focus.

I was just wondering, do you have any ongoing plans on the COOLIEF side?

I know that reimbursement can be a little difficult or -- and I'm curious to see sort of how you think those products are being covered today.

Are they getting easier or harder?

And do you think you might benefit from some data in that segment?

Yes, I think we're seeing -- and in particular in the OA space.

But in general in COOLIEF, we've put a focus on helping the pre-authorizations where we can do that and make sure our customers are where the processes the patients need to go through to get access to a payer.

And that means it will be a build up over time in particular in that business.

Yes.

I'd say we've (inaudible) again, underneath the 3% organic device growth for the quarter.

COOLIEF had a strong performance.

You saw the national media attention that therapy is starting to garner.

And out of that has come a lot of sales leads, along with the OA indication, which we'll be selling hard against in the back half of the year.

It takes a while to convert those sales, but we continue to be optimistic on the expansion of that therapy.

So much so that even in the last couple of weeks, we've directed a little bit more funding into that space to make sure we can capture on and take advantage of that some attention.

While our SG&A remains somewhat level for the year, that's an area where you will likely see some investment from us, and in particular on COOLIEF because it's such a good opportunity.

And then -- I mean, to the extent that you can give color in terms of the growth in ON-Q and COOLIEF, specifically under that 3%.

And then the other last one for devices, the distributor, the IV thing, do we just think of sales there that you thought were happening this quarter now becoming online in the fourth quarter?

Yes.

I mean, just roughly, I can say on the IV piece, the movement, just 1% of growth for this quarter.

And we do think the second half of the year will pick that up.

Yes, basically a change of a distributer contract.

And so I'd like to hope we get that back in the back half of the year.

You can't guarantee it, the distributors don't always order the way we want and the timing we want.

But I'd like to see we get that point back later.

So if I kind of just up back, though, on device growth organically and think about the back half of the year, probably 1 point behind for the second quarter.

I still feel we have a good shot of being inside that range for the full year.

And you look inside the performance this year -- in this quarter, you can see some bright spots.

We talked about COOLIEF already.

We're still building the oral care side on the respiratory business.

ON-Q itself had a very solid quarter, continuing to leverage the ON-Q track technology that, I think, we talked a lot about on the last call.

And so -- and I will say the CORPAK business continues to outperform expectations.

So taken in total, we look at that and are pretty optimistic about the back half.

Our plan for this year always called for increasing growth rate on the device business over the course of the year.

But clearly, we've got a lot of work to do to get from a 3% organic solidly into the 4% to 6% for the year.

The next question will be from Matt Mishan of KeyBanc.

And just following up on the last question.

Could you walk through some of the drivers of why you're confident that the -- and why you had in your plan that the second half of '17 versus first half of '17 will see accelerating Med Device growth?

I can make a couple comments and then Steve can pick up.

The COOLIEF area that we talked about, in particular in OA.

He talked about the oral segment, the GPO win there.

But generally, the plan does normally accelerate in H2.

Historically, if you go back and you look at the years in the past, but we get that pickup generally in sales.

But Steve, you may want to add a couple thoughts.

Yes.

I think we've touched on some of the pieces.

COOLIEF, the growth rate there, I think, on the back end of some of the media attention, the investments we've made on clinical and selling side, even the back half of last year.

It takes a while to get all those sales folks efficient, effective in the marketplace.

But we do see momentum building there.

Again, ON-Q continues to perform well through the second quarter.

And so as we look in total, still feel that we're going to see that ramp up in the back half, again, on the basis of some of the investments on the clinical and the -- on the selling side that we've been making, really, through the back half of last year, even in first part of this year.

Okay, great.

And then on the pricing in S&IP, I think that 4% pricing still feels pretty challenging.

First off, do you think that -- like especially as Joe has communicated.

Do you think that normalized pricing for that business is still a minus 1%?

And when do you think you might be able to get down there?

I'll let maybe Steve pick up on the historical and long term.

But one thing that surprised me as I came into the business from the outside and now on my fourth week, is that 50% of the price is oriented around one portion of the business, in gloves.

Interestingly, if you look at the remaining portion of the business, the price is less than 3% decline, which is really what a lot of medtech frankly are facing.

Or devices, even in orthopedics, as an example, are facing that type of -- so the volume of opportunities to come up.

Steve, do you gives us context.

Yes.

I would say our outlook really hasn't changed in terms of where we see things eventually leveling out.

Gloves is still the dominant factor here.

And as we see nitrile price stabilize and those contracts finish the renewal process, that's going to take a big pressure point off from a price standpoint.

And again, I think we're going to see some of that even in the back half of this year.

And as Joe said, then I think, it's going to look more to the macro landscape of what's happening in devices and price pressure in general in this space.

And we'll get a chance, with Joe on board, to kind of refresh the strategy and perspective on all that going forward.

Okay, great.

And then last question, I was hoping if you could help me kind of walk from the midpoint of your original guidance, which was $1.85, to the midpoint of the new guidance.

You got a nice moving piece with the commodity inflation.

I think they gave you probably $0.10 or $0.11.

What were -- is there any way you could quantify some of the other moving pieces to help us understand what some of the other benefits were and maybe some of the other -- how big some of the headwinds are?

And congratulations, Robert and Joe, on the new roles.

Thanks, Matt.

Thank you.

Yes.

And I probably won't quantify this to the level you're going to want, but I'll give you a perspective and a glance at some of the questions.

So if you just step back and look at guidance in general.

We started the year with a $0.30 range, wider than usual, but to account for some of that commodity risk that we saw in the second quarter.

And I'll say, we ended -- might be more lucky than good, but we ended up calling that pretty much on plan for the second quarter.

And I'd like to knock on wood and say we've retired that risk.

And so that's part of the reason for bringing up the bottom.

On the shift to the comp side, the biggest driver, more than the commodities side, is the cost of sales performance.

So going back, I guess, to the first question.

We had a strong performance in the first half, particularly the second quarter.

A portion of that is sustainable.

And so we're going to leverage those improvements in lean manufacturing and continuous improvement to lift the cost of sales side in the back half.

That's the biggest driver for the rise.

The commodity windfall, yes, we're getting some of that.

But on the other side from a planning assumption standpoint, currency, we think, is going to swing the other way.

And so that's going to be more of a planning assumption headwind in the back half in addition to the other things that we talked about earlier with the fixed cost absorption and some of the other things, distribution changes and so forth.

The next question will be from Brittany Henderson of Deutsche Bank.

Joe, I just wanted to dive a little bit deeper on the focus in international markets that you mentioned within your prepared remarks and just the earlier commentary here.

Can you talk specifically about what you're going to do to enhance the strategy as it relates to OUS markets?

And which product areas, as you think about the Medical Devices business for example, do you see as representing the largest opportunity for you internationally?

So, Brittany, what I think, it's really across all of our business, there's opportunity.

I've lived abroad and run 3 or 4 global businesses, and each of the markets are very different.

So one of the things that strikes me initially or specifically is we have a number of distributors.

I think there are opportunities to pick sort of the 3 to 5 areas in these segments where you can evaluate going direct and getting a better opportunity there with the focus.

And obviously, the core products and the devices are already being sold OUS, I think, on the COOLIEF side of things, you have to look at -- for example, if you looked at an area like Brazil, you would look at the private market there when things settle out.

Obviously, there's a certain sort of currency issues and budget issues there.

But there are pockets versus sort of trying to spread that, maybe, too thin across the business.

And then I think it's about over time, the data required in these markets for all the products and the approach is different than the U.S. And it's not uncommon.

Almost every business that I have run has had a U.S.-centric approach, initially.

But I think if we bring a different view out to the markets, there's definitely opportunity there.

Because there's not enough portion of our sales are international.

Okay, great.

And then, Steve, the tax rate came in a little bit better this quarter.

Then for the full year, we're still expecting around that low 30% range.

So I just wanted to get an update as to where you are with your ongoing tax improvement initiatives and why we shouldn't expect to see those improvements continue within the back half of the year.

Yes.

Well, I'm glad to get a tax question because we've done a lot of work in that space.

And so, yes, pleased with the progress.

When we set the guidance for 2017 at 32% to 34%, embedded in there was some work that had to be done to get there.

You'll recall the end of last year, that we ended around 32%, but we had some one-offs in the fourth quarter that didn't make that the sustainable number.

And what we wanted to do for this year was get more to the low 30s in a sustainable fashion.

And so we have a couple of projects that we have been working on, one of which we executed in the second quarter.

And that's what drove the rate down to the 27%.

Inside there is a combination of benefits from 2017, a little bit of catch up from one strategy we were able to take from 2016.

But as you look forward for the balance of the year, you're going to see the next 2 quarters sort of level out at a pace that gets us inside that 32% to 34% for the full year.

But obviously, we'd love to over-deliver that and wind up lower.

But we still have more to do on the tax side.

Then on the same side, you start thinking about next year and what's going to take us the next step down.

Okay, perfect.

And then just finally, Robert, it was great to hear you on the call today.

I just echo everyone else's sentiments.

It's been such a pleasure to work with you, and I hope you enjoy your retirement.

And Joe, we look forward to working with you further.

Thank you, Brittany.

(Operator Instructions) The next question will come from Chris Cooley of Stephens.

Let me just echo those same sentiments, Robert, hope you enjoy retirement.

And we're going to miss you.

But Joe, look forward to working with you going forward.

Thanks, Chris.

Maybe if we could just start.

Maybe -- Joe, maybe it's a little bit premature in this regard.

But you talked about accelerating growth through M&A and moving into higher-acuity type offerings.

Does this mean that we need to change the framework in which we contemplate the company's M&A activity?

I know CORPAK's essentially spoiled us all with cash-on-cash accretion there very early on.

Just talk to us about how we should think about that, as well as what I would assume to be the incremental investment you'd need to really tack into the wind on that type of an opportunity and execute it from a sales perspective thereafter.

I don't think, initially, you really have to change your model and the way you think about M&A.

Because I think the first step for us is just to continue to the great strategy of moving up and down this 4 product segments looking for the bolt-on, accretive deal.

And the team has shown a competency in that and, by the way, in fast integration.

So that gives me great comfort in that.

Sometimes, these deals, obviously small ones, even smaller than CORPAK, as an example, take as long or longer as the big ones do.

That doesn't mean that if something popped up on the platform side, that we wouldn't take a look at it but absolutely made sense.

But I think that, that's more of a second step in our business, moving again, as I said in the upfront, more towards the end of 2018.

And then I think, by the ways to your other question about -- we have the capacity to sort of do $300 million or $400 million in acquisitions.

So in that realm, a platform can be a business growing at $80 million or $100 million, but a new platform.

So it doesn't have to be that you are leaving yourself enough powder.

Understood.

Appreciate that.

And then maybe just one quick one from me with Steve.

When you look at the Med Device margins, really standout performance during the quarter.

I just want to make sure I'm hearing you correctly on this.

Was the bulk of that through manufacturing efficiency?

Obviously, better growth on COOLIEF and ON-Q, but just want to kind of try and think about how to frame that as we go through the back half from a margin contribution standpoint.

Certainly it's from gross margin impact, but more so in the case on the device side with the R&D.

And if we had spent more on the R&D side, more in line with the planned ramp up, you would have seen a little bit lower margin on the device side.

Still good, still probably ahead of our plan for the year.

But that's the biggest lever.

We do get some gross margin benefit on the device side as well, but how we profile that R&D piece can be a big driver quarter-to-quarter.

And ladies and gentlemen, this will conclude our question-and-answer session.

I would like to hand the conference back to Joe Woody for his closing remarks.

I'd also like to thank Robert for his contributions to the company and thank all of you.

I want to conclude by saying I'm very excited.

I hope that it comes through in my voice today about our future and embarking on the next phase in Halyard's transformation strategy.

So thank you for your interest in Halyard.

Thank you, sir.

Ladies and gentlemen, the conference has now concluded.

Thank you for attending today's presentation.

At this time, you may disconnect your line.