Avanos Medical Inc (AVNS) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Halyard Health First Quarter 2018 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, 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 our -- an outlook for our 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 continued 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 4 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 the more severe cold and flu season, drove growth in Respiratory Health.

In Surgical Pain, 2 factors impacted ON-Q* Pump volume for the quarter: first, the industry-wide bupivacaine shortage, which is expected to continue to the second quarter; second, a key pump filler'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 surgeon 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 3 days of opioid use.

ON-Q is a clinically superior solution that offers extended relief and non-opioid pain control for the first 5 days.

Halyard is well positioned to play an important role in reducing opioid use.

From an earnings perspective, for the quarter, we delivered adjusted diluted earnings per share of $0.76, ahead of our expectations.

For the year, we expect to earn between $1.65 and $1.85 of adjusted diluted earnings per share from continuing and discontinued operations.

With the divestiture now complete, we have become a focused pure-play Medical Devices company in attractive high margin, high-growth end-markets with roughly $800 million of acquisition capacity to execute our dual-track growth strategy.

We are actively evaluating M&A opportunities through a wider lens, exploring areas that leverage our technologies, help us expand call points and increase our addressable markets.

And finally, as a smaller, more agile company, we're focused on driving efficiencies and rightsizing our corporate cost structure.

During the quarter, we began the installation of our new IT system, which will generate $15 million to $19 million of cost savings when completed in 2019.

This more efficient structure will support our internal growth, help reduce costs in other areas and speed integration of M&A activity.

While we are working to drive efficiencies and reduce corporate costs, we are also making the necessary strategic investments to ensure we are well positioned to capitalize on the opportunities ahead.

Let me highlight 4 examples of strategic investments we made during the quarter that support our growth strategy.

First, we are consistently shifting our R&D investment from sustaining to transformative projects.

In the first quarter, our R&D investment increased 35% compared to the prior year, and we launched 4 Medical Device products.

The most significant was our 14 French Mic-Key* GJ Tube, which strengthened the competitive position of our Digestive Health portfolio.

Second, our investment in clinical studies continues and is expected to grow more than 50% this year.

During the quarter, we initiated a new study to show the favorable differentiation of Coolief to other therapies widely used today, including hyaluronic acid.

Enrollment in this randomly controlled 200-patient study is progressing as planned.

Additionally, my team and I are engaging in a robust government relations effort to help improve the reimbursement of Medical Devices and other non-opioid pain management therapies.

Through our efforts, alongside AdvaMed, we are aiming to impact current legislation working its way through Congress.

Finally, we see an opportunity to strengthen our international performance.

To lead this effort, we recently appointed Arjun Sarker as Senior Vice President of International, who will report to me.

Arjun brings deep experience and a solid track record of driving commercial success and revenue growth.

Prior to his appointment, Arjun served as the Vice President and General Manager of Halyard's Asia-Pacific region.

He also held leadership roles with Covidien and served as their Vice President and General Manager of Southeast Asia.

Growth in our international regions has trailed our domestic business, but we believe, with an increased focus and leadership, we can see acceleration in 2019.

With 1 solid quarter behind us, we are well positioned to achieve our 2018 goals.

With our streamlined business and the full focus of our leadership team, we will continue to accelerate our top line momentum, drive efficiencies and create new opportunities for growth.

We look forward to sharing more details about our strategy at our first Analyst Day on June 21 in New York.

With that, I'll turn the call over to Steve.

Thanks, Joe, and good morning, everyone.

First, let me say that I am 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 increase 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 reduce their inventories 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 focused on educating surgeons continues to pay dividends as account conversions remain strong and in line with our plan.

The continued top line momentum in Medical Devices resulted in operating profit of $40 million, a 6% increase compared to a year ago.

Operating margin for Medical Devices was 26%, even compared to the prior year as growth in our higher-margin products was offset by increased R&D investment and strategic growth initiatives.

Adjusted EBITDA increased to $59 million for the quarter, up 12% compared to the prior year.

Adjusted gross margin from continuing operations was 59%.

Gross margins for the quarter were negatively impacted by the inclusion of shared distribution and IT costs, which were previously allocated to S&IP.

Post-divestiture, we expect adjusted gross margins in Medical Devices to be in the low 60s going forward.

Net income totaled $20 million compared to $13 million a year ago.

As Joe mentioned, we earned $0.76 of adjusted diluted earnings per share.

Three factors contributed to our strong performance: first, Medical Device volumes came in at the high end of our planning assumption; second, though we increased SG&A for growth investments, the acceleration was behind our plans, and as we move into the second quarter, we expect further increases to fund strategic investments that enhance future growth; and finally, because of the accounting classification of S&IP as "held for sale," we were required to stop depreciation on S&IP and IT assets.

This change benefited our results by approximately $7 million for the quarter compared to the prior year.

With the divestiture complete, we're focused on reshaping our cost structure in 3 primary areas.

First, our organization.

We will optimize our corporate costs and transform into a leaner, higher-performing, pure-play Medical Devices company.

Second, IT restructuring, which will be a multi-year process.

As you know, our IT costs are a significant portion of corporate cost and a central element to our cost reduction program.

After the restructuring, we'll have a scalable infrastructure to support our growth and drive efficiencies for about half the cost.

Finally, looking ahead, we'll implement plans that drive efficiencies in supply chain, distribution and purchased services.

Shifting to our balance sheet and cash generation.

We ended the quarter in a strong financial position with $203 million of cash on hand.

During the quarter, we repaid $40 million of our Term Loan B credit facility, and we'll pay off the balance with the proceeds from the divestiture.

Cash from operating activities less capital expenditures or free cash flow totaled $17 million for the quarter.

Now let me turn to our 2018 outlook and our key planning assumptions for the year.

We expect to earn between $1.65 and $1.85 of adjusted diluted earnings per share, including earnings from both continuing and discontinued operations.

The key planning assumptions we shared on our last conference call remain unchanged.

In summary, we continued our sales momentum and delivered adjusted diluted earnings per share ahead of our plan.

With the S&IP divestiture complete, we have the firepower to invest in attractive growth opportunities and are in a strong position to accelerate growth as a focused, pure-play Medical Devices company.

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

(Operator Instructions) The first question comes from Larry Keusch of Raymond James.

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'd been articulating previously.

So could you just walk us through what brings up now that to close to $800 million?

Yes, it's very easy, that one's fairly simple.

So in the first quarter, just taking the cash flow we generated and adding that, if you kind of take a 4 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's 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 about, again, the model.

I think you sell the capital or -- and the consumables, but how many hospitals out there have a generator?

And, 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 of the fact that we have a supply issue that we talked about in the script and 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 because we need 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're in with Coolief in roughly about 500 sites.

I think that there's another doubling of that capacity available to us just in hospitals.

And in some cases, these hospitals buy 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 clinical studies as well.

All I would add is, as is our practice, when we get to the mid-year mark, we'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.

Just for clarifications, did you guys quantify at all what you thought the impact of flu was to the top line?

Is it 1 percentage point or 2 percentage points?

Or any way to better quantify that?

We didn't disclose it.

But it was just over 1 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 SI&P (sic) [S&IP] stranded costs?

I guess you can't really just take your guidance and then take out this quarter because we'll continue to see some impact of discontinued operations for at least a month.

Is that fair?

(inaudible)

Yes, that's right.

The second quarter will be -- start to get easier, you'll only have 1 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 analyzing kind of around $1 in earnings?

Is that the way to think about the core, ongoing, continuing business if we take out the stranded costs?

Does that sound about right?

Yes, it's a little tough to extrapolate from here and look at what we've done so far and kind of project the pro forma for the rest of the year.

I would say, on balance that's probably a little bit light relative to what our model would suggest.

But again if we get to the mid-year mark, we'll be able to give 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.

Maybe just starting off with the comments about ON-Q.

I just wanted to make sure I'm understanding it correctly the -- If I heard you correctly, Joe, you talked about the shortage continuing through the second quarter.

Will it be a -- a couple of related questions.

Will it be as bad in the second quarter as it was in the first?

What -- 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 were these 2 factors in this quarter or 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% x headwind outlook.

Is that what it would be without all of this noise?

I'm just trying to figure -- put all of this in context.

Thanks, Ricky, and we were down slightly in ON-Q, and it's an industry-wide shortage on bupivacaine, and we've 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 real pleased with it.

It's a bit frustrating because we're seeing sort of the mid-single-digit growth, a lot of account conversions in the surgeon area.

And that moving has the ability to move quickly 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 to other areas to make it up is, in the first quarter of the year for CORPAK, in terms of capital sales, we sold half of what we sold for the full year last year.

We're focusing on our international business.

So we have other places to go despite this, but it's frustrating because it would make us that much, even better.

Yes.

Joe, you also said in the past publicly that you hope to -- you aspire to complete 2 deals in 2018.

Maybe just help us understand -- where are you in that process?

And given the extra cash flow and the $800 million in capacity, how that's changing or not?

What direction you might go?

Are you more optimistic that you're going to see something -- a 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 of the progression of our organic growth, which is good -- it makes these decisions easier.

We are in talks with a handful of smaller deals.

Some of those would be oriented around channel.

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 in 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 in sort of a 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 more focused opportunity that you're envisioning, Joe?

Thanks, Rick.

It's been 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, more oriented to 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 [blow] the ocean but focus in a couple of key areas where we can invest.

And I think we can fund that investment internally alongside of the top line growth.

But 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've put into the North America business, that really paid off.

And you can see that momentum.

I think the same thing exists really outside the U.S. for us as a great opportunity.

Yes, I would just add.

I think it's a big change having Arjun reporting directly to Joe.

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's been in previously, but the European region, and we have an opportunity to drive more growth and also do it more efficiently.

So we look at those structures today, and I think we did -- we probably weren't as efficient as we could be.

So it's sort of a two-part play there.

And just to be clear, as I've talked about this, Arjun just started.

We're in a strategic review right now.

I see the benefits -- it 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.

Congratulations on closing S&IP.

Thanks, Matt.

Thank you.

Joe, as the opioid legislation has kind of progressed through Congress, what have you been most encouraged about so far?

Well, first of all, this is a change for Halyard.

We've not really been actively involved in government affairs or working with reimbursement specialists, but the thing that encouraged me the most is that both parties are very receptive to this.

And there's an action plan bill in place from Representative Kinzinger, right now.

And -- as well the committees, Ways and Means and Energy and Commerce, have been receptive.

We're working alongside of AdvaMed and making sure that we're aligned, even though have our own efforts.

And we've met with over 30 senators and congressional leaders.

And they all referenced the President's direction to make Medical Devices that alleviate pain more accessible to patients.

And so again I think it's an unfortunate crisis that we're in, in the country.

And you see the news headlines every day, but we can offer solutions and 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 then trying to change the setting of care, so out of the hospital and maybe more into ambulatory surgical center and, in some cases, private office.

So I think the (inaudible) industry not only Halyard can be helpful there.

And then shifting over to some of the corporate restructuring costs you're going to have over the next 2 years.

Do you have a better sense of how many people went with S&IP to Owens & Minor versus your initial expectations?

And then on the third bucket of cost savings, which you really haven't quantified yet, when do you think you're going to be -- 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 OMI's benefit.

They had 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 us 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 on the -- 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 in our distribution network.

We may have mentioned that even on our last call.

So those 2 pieces of work are moving forward to complete sometime over the summer.

But then we've got also a piece of work looking, I'll say, at the all other -- the purchased services and other costs that hit that corporate line.

And I think we'd like to be in a position by the time we get to the back half of the year to get more clarity in the time line around that chunk of restructuring that would then go alongside the 2 pieces we've already talked about, the organization piece and the IT piece.

All right.

And then last question.

Just following up on Kristen's question around the pro forma base.

And I'm sorry to get into the weeds, but I think the accounting people are going to like this.

As you go from like a $1.65 to $1.85 down to what 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 not being able to depreciate IT assets.

How much of that was in the quarter?

And then any other considerations we should be talking about.

Yes, maybe I'll take that 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 -- maybe I'm going to take your question a little bit different direction, but I think maybe it will help is, in the fourth quarter call, we talked a little bit about the allocated S&IP costs, and I think at the time, it was $116 million and how those broke down, and how you could work from there down to EBITDA for the device business.

And if you look at the first quarter, and kind of take that same framework, our device OP for the first quarter was $40 million.

The corporate costs that we've disclosed were about $14.5 million.

If you add back depreciation and amortization, that sort of gets you a, call it, a normalized pre-dis-synergy EBITDA of about, call it, low $30 million.

And then if you take the dis-synergies disclosure that we've had before, sort of, $15 million to $20 million for the full year, that would suggests $4 million to $5 million on a quarterly basis.

That would then take that $32 million down a little bit further -- wouldn't take off those dis-synergies.

If you think about the future, obviously we didn't have dis-synergies in the first quarter.

But I think if you use that model, that will probably give a picture as you think to the future what the EBITDA will look like for devices on a standalone basis with those dis-synergies factored in.

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

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, if this is maybe a more of an optimization or running leaner going forward from an 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 where -- commensurate with where you were previously, higher or lower?

Just wanted to get some clarity there, and then I've got a quick follow-up.

Sure, sure.

Yes, it's a bit of both, Chris.

If you look at the fourth quarter, as you said, we were lighter on SG&A.

The first quarter, we spent a bit more.

Still down year-over-year but a bit more sequentially.

But we -- it is a combination of 2. So we are running with higher vacancies.

Some of that is intentional as we drive efficiencies in the organization and consistent with our future organization plans.

That's one component.

The second component though is, to the other part of your question, we are going to spend more in the quarters ahead, partly on the corporate side, but 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 sales focus, reimbursement specialists.

And we were a little bit light on that spending plan as we exited the first quarter, but we expect it to ramp up going forward.

Joe, anything to add to that?

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 on hyaluronic acid.

There's more of that we want to do to show Coolief benefits over a lot of different technologies.

So there's 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 both the headcount and an activity-based area.

There's direct-to-patient advertising that you'll all start to see on a national level here as we move into Q3.

But I do think it's really a good return, and 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.

No, I agree fully.

And then just to kind of come back to a prior point, in one of the earlier questions on the international side of the equation.

Definitely like the way that, that's set up now as we kind of think about the go-forward.

And I believe in the prior quarters, you talked about '19 as being really -- sorry, the international business has really been more of a '19 opportunity.

I'm just kind of curious, when you think about that underlying base business here in the States, you're currently guided 4% to 6% 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 line out as we go into '19?

I'm just trying to think about a potential first step-up there on the blended growth rate on the core.

Great.

We really haven't quantified the number, but we've talked about the fact that business is going to be roughly $150 million or so outside of the U.S. in 2018.

And it's been growing more low single digits.

So step-wise, there's an ability to step it up to high single digits.

I definitely think, over time, it may not exactly happen in 2019, it could be a double-digit grower.

It should be because we're so under-penetrated and because we have a smaller base there, and many of our products haven't been introduced effectively, commercially into this country.

So I'm encouraged over time for sure.

Yes, I would -- all I would add is the -- for this year, we have more international growth in our plan than 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 probably come in '19 and beyond, when 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 of Morgan Stanley.

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, after you back out this quarter's discontinuing ops and the part of next quarter's, that's going to be discontinued ops, it appears to imply maybe $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 ops.

So is it fair when you look at the 2Half run rate of the business that, 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?

John, I think the $0.50 to $0.70 is a little bit light relative to the way that our model would suggest.

That may be one we can take offline a bit more, but I think that's a little bit lower than we would call if we were trying to pull those pieces apart.

2Q is going to be a little bit more pressured.

Joe said we were going to have some top line impact relative to surgical pain that we're anticipating.

We've also had a -- 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 then expect to see, say, some rebound and in line with our guidance in the back half of the year.

Understood.

Very, very clear.

Just a quick follow-up on some of the restructuring activities that you'd talked about.

So I mean -- and also kind of reconciling that into the S&IP business.

But I mean basically, $28 million of costs from S&IP this quarter, about $115 million annualized.

And you talked about a number of restructurings already.

You had the December one, which was I think like $10 million to $13 million or so.

Then you had a couple targeting IT, which was the $15 million to $19 million and then some extra from reduced costs.

How should we think about those restructurings as it either helps 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, John, 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 costs and really reduce down to that rump of dis-synergies that we've talked about at $15 million to $20 million.

But there's also a portion that carries on into the saving side that goes further.

IT is somewhat similar.

There are portions of IT that will scale down naturally out of those allocated costs.

So as we have less employees, we'll have less computers, less devices, less storage.

And so you can imagine there's a portion of IT that just shrinks in that allocated costs.

Anyway -- but then we need the restructuring to drive savings beyond that.

And that's the new infrastructure really taking our IT cost down by roughly half what they were before.

So both, the org and the IT contribute, in part, to reducing dis-synergies in the front, on the allocated cost, and also contribute to savings on the back half.

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

I just wanted to clarify, Joe, I think one of the comments that you had to Rick with the ON-Q impact that it's 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 the CORPAK example that we're seeing strong capital there and also in Coolief.

Okay.

Perfect.

And then just the commentary about M&A and evaluating through a wider lens.

I think that the term kind of wider lens is new, not to read too much into exact wording.

But have your thoughts changed at all now that you've closed SI&P (sic) [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, no.

Initially, we're focused on some smaller deals.

Obviously, we've just divested, and we're focused on our cost piece and delivering the organic growth, but the wider lens will be inclusive of looking at both Chronic Care and new adjacencies as well as that in the categories in 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 21 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 reactive.

Okay.

And then just one last question on the June 21 Analyst Day.

Not to kind of front-run that.

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, Dave, would be appreciated.

I'll tee it up a little bit, and then Steve wants to make a couple of comments.

But generally, a strategic overview from myself, and then John Tushar, who's now in charge of our franchises.

You'll hear from the franchise leaders and their key initiatives.

We want to update as well on some encouraging milestones and 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 runway might be and sort of what critical milestones are in terms of our reimbursement efforts and our clinical studies.

And we will be talking about a plan going forward.

Steve, you may want to pick up on that.

Yes, we'll certainly be giving an update on the restructuring efforts, the different programs that we've talked about in the past.

We'll give an update on progress against dis-synergies.

And then what we really do on the financial section is talk about what is the underlying healthy growth algorithm for this business, what does that look like, the dual-track strategy that we've talked about, organic and M&A working together with the cost take-out.

And so we want to make sure we give a good picture of what that model looks like when you can breeze past some of the noise that we've had last and this year with discontinued ops and look ahead a 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 will 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 our website, halyardhealth.com.

Thanks a lot.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.