Avanos Medical, Inc. (AVNS) Q1 2017 Earnings Report, Transcript and Summary

Good morning. And welcome to the Halyard Health First Quarter 2017 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please also note today's event is being recorded. I would now like to turn the conference over to Mr. Dave Crawford, Vice President, Treasurer and Investor Relations. Please go ahead.

Thank you, and good morning, everyone. It is my pleasure to welcome you to the Halyard Health first quarter earnings conference call. With me this morning are Robert Abernathy, Chairman and CEO; and Steve Voskuil, Senior Vice President and CFO. Robert will begin with an assessment of our first quarter performance and discuss our progress on our 2017 priorities. Then Steve will review our results and provide additional detail on our outlook for the balance of the year. We will finish 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 the future financial results. Actual results could differ materially from those in forward-looking statements. For more information about forward-looking statements and the risk factors that could influence future results, please see today’s press release and our prior filings with the SEC. Additionally, we will be referring to adjusted results and outlook, both exclude certain items described in this morning’s press release. The press release has further information on these adjustments and reconciliations to comparable GAAP financial measures. Now, I'll turn the call over to Robert.

Thanks, Dave and good morning, everyone. I appreciate your interest in Halyard Health. I am excited to discuss the solid progress we have made against our two 2017 priorities, delivering our plan and fueling our growth pipeline. We are off to a strong start to the year on both fronts. Net sales totaled $396 million and we delivered adjusted diluted earnings of $0.48 per share. Performance was driven by accelerated Medical Devices growth, manufacturing cost savings and favorable currency exchange rates. Medical Devices sales increased 15%, strengthened by our Corpak acquisition and solid demand across all product categories. In S&IP increased demand for exam gloves continued and we also experienced higher demand for facial protection. Overall, volume growth was offset by price loss resulting in a 3% lower sales. Turning to our second priority, we continue to invest in fueling our growth pipeline to shift our portfolio to higher margin faster growing Medical Devices. We are on course to fulfill our commitment to double R&D investment over our first four years. We launched four new products during first quarter and are on track to launch more than a dozen this year. Pain management is the fastest growing part of our Medical Devices portfolio and is a focal point for investment in future growth. In that regard, we have been accelerating funding for clinical outcomes data that validates the efficacy of Halyard therapies. I'm encouraged that our focus has raise the awareness of non-opioid pain solutions and enable us to make additional clinical claims. The FDA recently cleared our COOLIEF therapy for the management of osteoarthritic or OA knee pain. COOLIEF is the first and only radiofrequency treatment to be cleared specifically for OA knee pain. This indication will enable us to better focus our marketing efforts on physicians and their patients who suffer from chronic knee pain. In addition to organic growth, M&A remains an important aspect of our transformation. I continue to be pleased with our acquisition pipeline and we remain focused on executing an acquisition this year. As we disclosed earlier this month, we are extremely disappointed with the recent adverse jury verdict in California, but despite that verdict we believe that our long-term strategy and our ability to pursue M&A transactions has not materially changed. We recognize though that the verdict is just the first step of a multi-step legal process. We believe the verdict is not supported by the facts or the law and we intend to challenge it for the post trial motions, and if necessary, we will appeal to a higher court. Turning to our balance sheet, we generated $27 million of free cash flow in the first quarter and expect to generate $100 million for the year. Our strong balance sheet provides us with the financial flexibility to pursue our strategic priorities. In summary, we delivered a solid start to the year and reiterate our 2017 adjusted diluted earnings guidance of a $1.70 per share to $2 per share. We are well-positioned to advance our transformation into a leading Medical Devices company by generating organic growth and pursuing M&A opportunities. Now I will turn the call over to Steve, who will provide more details on our first quarter performance.

Thank you, Robert. Let me begin by saying that I'm pleased with our start to 2017. For the quarter, sales increased 3% to $396 million, including more than $15 million of Corpak-related sales. Volume including Corpak increased 5%, which was partially offset by 3% lower selling price. Adjusted gross margin was 37% for the quarter, compared to 36% a year ago. Our portfolio shift to Medical Devices, manufacturing cost savings and favorable currency exchange rates drove our margin expansion, which was partially offset by lower selling prices and higher nitrile costs in S&IP. Adjusted operating profit and operating margin for the quarter was $42 million and an 11% respectively, compared to $45 million and 12% in the prior year as we invested in organizational capabilities. During the quarter, we incurred $1 million of post spin-related charges, $2 million for acquisition -related charges, $8 million for litigation matters and $6 million for intangible amortization expense. Adjusted EBITDA was $53 million for the quarter, compared to $55 million in the prior year. As Robert mentioned, we reported $0.48 adjusted diluted earnings per share for the quarter, our performance benefited from an increase demand for facial protection, driven by the earlier timing of the cold and flu season compared to the prior year. Second, we drove greater plant and manufacturing cost savings. Third, R&D expenses of $8 million was lower than expected due to the timing of certain projects, despite a slower than anticipated start, we remain committed to fueling our growth pipeline by investing $40 million to $45 million in R&D this year. Our adjusted effective tax rate was 35.2% as the full year impact of a few discrete items were recorded in the quarter. Despite these discrete items, we remain confident that our full year adjusted effective tax rate will be within the 32% to 34% range. Now turning to our segment results, Medical Devices delivered another solid quarter of growth. Net sales increased 15% to $146 million, aided by Corpak-related sales. Organic volume growth was in line with our plan at 4%, as we experienced solid demand across all categories. Medical Devices operating profit increased 28% to $38 million from $30 million a year ago, performance was driven by higher sales volumes, which were partially offset by planned higher SG&A expenses. Moving to S&IP, markets remained challenging as net sales decreased by 3% during the quarter to $247 million. In total, S&IP volumes increased 1% compared to the prior year, driven by continued demand in exam gloves and higher demand in facial protection. Volume growth was partially offset by anticipated lower volume in surgical drapes and gowns due to a customer transition to a GPO where Halyard is not currently on contract as previously discussed. Lower selling prices concentrated an exam gloves led to a 4% price loss for the quarter. S&IP operating profit was $18 million, compared to $25 million in the prior year. Lower selling price and higher nitrile costs were offset by manufacturing cost savings and favorable currency exchange rates. As Robert mentioned, our balance sheet and cash flow generation remains strong. We ended the quarter with $143 million of cash, cash from operating activities less capital expenditures or free cash flow totaled $27 million for the quarter. We invested $10 million in capital expenditures in line with our expectation to invest between 2% and 3% of total sales in 2017. Shifting to our 2017 outlook, while we do not provide quarterly guidance, I would like to remind you of the timing of a few factors that will impact our second quarter performance. On our last conference call, we highlighted our expectation that nitrile costs would increase in the first half of the year. We began to see elevated costs at the end of the first quarter. We continue to anticipate nitrile costs will peak in the second quarter, rising more than 20% compared to the first quarter before returning to more normalized levels in the second half of the year. This will lead to lower gross margins in the second quarter. Second, we are committed to investing in R&D to drive growth through innovation and add value to our pipeline. Because of our lower spending in the first quarter, we expect R&D to accelerate beginning in the second quarter. Given these factors, our second quarter earnings are expected to be our lowest for the year. However, as Robert mentioned, we are maintaining our adjusted diluted earnings guidance of a $1.70 per share to $2 per share. Also, our 2017 key planning assumptions, which we provided on our year end 2016 conference call remain unchanged. As the year unfolds and we gain additional visibility into factors that could affect our performance, such as continued currency and commodity variability, we will provide an update on our outlook and key planning assumptions as appropriate. In summary, I'm pleased with our start for the year. We have a strong balance sheet and remain committed to investing in growth opportunities that advance our transformation into a leading Medical Devices company. With that, operator, we are ready to take questions.

[Operator Instructions] Our first question comes from Chris Cooley of Stephens. Please go ahead.

I am sorry, can you hear me now.

Yes. We can hear you, Chris.

Yes, Chris.

Apologies there. Thanks so much taking the questions.

Sure.

Just a quick question on the gross margin side here this morning and I appreciate the color there, Steve, with FX and manufacturing efficiencies. But could you maybe help us think a little bit as well, when we look at, think historically you all targeted kind of the 1-insh plus percent cost savings improvement in the S&IP side. Can we assume from looking at this that you are going ahead of that basis through the first quarter, just trying to get a little bit more finite on the contributors to that better than expected gross margin in the quarter and I have one quick follow-up?

Okay. Yeah. We are already pleased with gross margins. It’s kind of been a multiyear strategy to improve our gross margins across the company. We are up almost 200 basis points and since the point of the spin in gross margin is clearly the strategy of shifting the mix to higher margin. Medical Devices is starting to pay off. Corpak is a key part of the of the gross margin improvement year-over-year. We are up 90 basis points versus last year and Corpak contributed the largest majority of that. But we also had other improvements and you mentioned that the cost savings, the short answer to your question, Chris, is yes. We delivered cost savings higher than we had in our plan and expect those cost savings to continue to be generated quarter-by-quarter throughout the year. We do have a discipline of delivering cost savings and it’s not only focused on our S&IP business but it’s across the entire company and we are particularly focused to getting some of the corporate costs that that we’ve talked about in prior quarters.

Yeah. The only thing I would add to that is the notwithstanding the strong start on cost savings, we are still going to face the nitrile pressure particularly in the second quarter and so I think if we kind of step back on the full year basis, in think, we said on our last call. We said gross margins for the year roughly flat to prior year and I would say as we sit here that’s still our thinking.

Understood. Well, great job in the first quarter. And I guess, just as a -- as my follow-on. I guess, I miss understood this earlier, but you mentioned on -- in your prepared remarks that you started to see an elevation in nitrile pricing as you exited the calendar quarter. I think you still expect to see 20 plus percent here the rise in that, but you expected to not only increase but also flow to the P&L same quarter, that's a 90-day window. I guess, I thought there was a little bit longer lag there. Can you maybe help refresh my thinking on that…

Yes. I will…

… just the commodity price. Thank you so much.

Yeah. Before we talk about it being in the first half of the year, as it turned out, we had very little impact in January, February, more of an impact is a spike up in March. We now expect over the next 90-day window as you said, including April, May and June, that we will see the worst of the nitrile pricing. We expected there can be a sequential increase of $0.05 to $0.10 for total currency impact, I mean, total commodity impact hitting the second quarter. And beyond that all the forecast are dropping back to 2016 pricing levels, so that we’ll be back toward a more normal pricing structure for the second half of the year. So we are optimistic about that and that’s one of the reasons that we feel quite confident in maintaining our current earnings guidance in the $0.70 per share to $2 per share range.

Super. Congratulations again on the great quarter.

Thanks, Chris.

Thanks, Chris.

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

Yeah. Good morning and thanks for taking the questions.

Thanks, Matt.

Hi, Matt.

Hey. We have seen some really strong kind of volume numbers in Medical Devices from some of your peers and 4% is pretty much in line with where you guys have been in that 4% to 5% range and you have been able to sustain it? We little bit surprise you can see the same volume bump that some of your peers have seen? And maybe if you could parse out what pieces of the portfolio did really well in the quarter and maybe what kept it down?

Well, let me start by saying, we're really pleased all four of our big segments, respiratory, care, digestive health, surgical pain and interventional pain, all grew year-on-year, so strong performance there. This continues a multiyear improvement in terms of growth rate of Medical Devices. You will remember in 2014 devices were only growing at 1% and in 2015 it was 3%, the last year it was 4%. So the first quarter this year matched last year's growth rate at 4%, but we feel quite confident in the midpoint of the range at 5%, so growing in that 4% to 6% for the full year. One of the reasons we feel good about that is that, our COOLIEF just got the approval for the marketing specific indication that we can start talking specifically about the osteoarthritic knee pain. So we expect to see stronger growth in the back half of the year as we begin to market that. Also we are starting to see some benefits now that will increase in the back half of the year for the HealthTrust GPO award for respiratory care. That’s the oral care contract that we talked about last quarter. What performed well, I would say, every one of the business is performed as we expected. We expected COOLIEF to deliver double-digit growth, it did. We expected our ON-Q business to deliver mid single-digit growth and it did. And we expected our respiratory care and digestive health independent of Corpak to deliver in that low single-digit growth rate and they did. So really the story is more about ramping up the growth for the remainder of the year, because of some of the things like the new marketing material have with COOLIEF and HealthTrust contract is coming for oral care.

Okay. Got it. And then on to the Medical Device margin, was it -- when you look at it was -- was it predominantly timing of, because they came in well above where we or where we had estimated. Was it predominantly the cadence of R&D, can you talk about some moving pieces around the strength in the margin there?

Yes. Mostly, let me add that we are pleased with 20% operating margins for Medical Devices. It is a spike up or adverse predominantly due to Corpak and as we look at second quarter we certainly expected to drop back some, because we have lower R&D spending in the first quarter and we are going to be ramping up that R&D spending starting in the second quarter. So you'll start to see a little bit of market pullback in Medical Devices off of that 26% level.

Okay. Got it. And last question on the free cash flow, year-over-year it was a little bit lower and I think your expectation for $100 million is down year-over-year. Can you talk about some of the headwinds to free cash flow year-over-year that you're facing?

Well, we continued to be pleased with the cash flow story, $27 million of free cash flow, we now got $143 million of cash on the balance sheet. We knew it was going to be lower this year, because we had tremendous progress on working capital in 2016 for the full year. There were some things that we are able to accomplish last year that we won't be able to duplicate year-on-year, so we knew it was going to be below the $160 million number. But we also said last year was a historically low capital spending year. We were coming off a fairly large capital spending as we separated the company. We had some planned spending that we needed to do to get separated from Kimberly-Clark. So we are back toward a more normal capital spending level of somewhere between 2% to 3% of sales. That’s the other contributing factor.

Got it. Thank you very much.

Sure.

Thanks, Matt.

Our next question comes from Dave Turkaly of JMP Securities. Please go ahead.

Hi. Thanks. I was just wondering could maybe spend a little time talking about that the COOLIEF the market maybe if there are other indications you can go after? And then maybe some of the competitive landscape and sort of what you're seeing on the reimbursement side as well?

Yeah. Let me start with -- this was about two years of work to get this clinical evidence through the FDA and approved. So it's been a big celebration around our headquarter operation, not just with our interventional pain team but with everyone, everyone know that this was an important milestone for us. It does give us the ability to talk about the biggest opportunity area, which is knee, so there is more knee replacement being done and projected to be done over time. So this is a tremendous opportunity for us to have a very specific marketing material that can go to physicians around the pain relief and we market directly to consumers. We have consumer marketing so this allows us to talk instead of talking generally about pain relief, we can talk very specifically about pain relief and what to expect in terms of the pain relief. So our biggest opportunity is to concentrate on using this new indication with the knee pain. Over time, yes, there are other indications that we could pursue, there is clearly hip replacement, there is shoulder pain, but our concentration right now because of the growth area and the biggest opportunity for penetration of this therapy in the market as with the knee. In terms of reimbursements, we have had -- we have some reimbursement challenges that we've been able to get around during this last year. We continue to focus on using the new information that we have now to get preapproval for surgery, as well as to get to those providers who have declined coverage. So this gives us a lot more firepower in terms to be able to address any reimbursement issues. So it's a big win all around.

Great. And just one follow-up, I guess, on the selling efforts there, do you need to hire more people or is it going to be sort of a specialized group that will target the OA opportunity, or how you plan to tackle that?

We have plan to go ahead for that one, so you will remember we were adding people last year both on the clinical side and on the selling side, so we ramped up the salesforce last year. The entire salesforce is trained specifically to be able to sell the knee procedure, as well as other procedural usage, hip, spine, et cetera. So there is not a change in strategy but we were planning on this success and we got ahead of it in terms of our hiring, so we are mobilized already to be able to use this information going forward. Further to that, obviously, you can tell how optimistic I am. We also plan to success when we did our guidance for the year, so we built that into our expectation of growth and that’s why we have got that 5% Medical Device growth as our planning assumptions, because we expected to get this approved in the first half of the year to allow us to accelerate growth in the back half.

Thanks a lot.

Thanks, Dave.

Our next question comes from Jonathan Demchick of Morgan Stanley. Please go ahead.

Hello. Thanks for taking the questions.

Good morning, Jon.

So, Robert, S&IP had a solid quarter, but I wanted to dive a little deeper into a couple of factors there. First, I guess, on the volume side, I was curious if you could help us understand and perhaps, quantify the flue tale in this quarter and potentially the sequential headwind we can be expecting in the next quarters, just given that the later timing of flu last year? And then, second on, on pricing and margins in S&IP, those have been a bit lower the last couple of quarters, are these the levels that we should be expecting moving forward throughout the year or are there efforts being made to maybe bring margins backup a bit?

Yeah. Let me talk about S&IP first quarter and potential impacts on second quarter. We did have a strong cold and flu season, which drove facial protection sales. It is not one of our largest categories in S&IP but it was still significant and as you compare that to last year the lighter cold and flu season that did hit, hit predominantly in the second quarter, so you get a little bit of shifting there between first quarter and second quarter when you compare ‘16 to ’17. The second element in our S&IP growth is all about gloves. We continue to be very strategic in terms of growing gloves. It is margin accretive for S&IP business. But unfortunately it's got majority of the price fall, so 50% of our total price loss is coming from gloves, but it’s one of those levers that we're finding the sweet spot of driving topline, getting margin improvement, while unfortunately realizing some price loss. I think that will certainly continue. The other impact that I need to talk about on margins is certainly the nitrile impact. As I mentioned in earlier, we had some nitrile impact in the first quarter, but we expect margins to dip in the second quarter for S&IP and then just start to rebound in the third quarter and fourth quarter. So I cautioned not to be too optimistic about holding operating margins in Q2, but looking for operating margins to stay in that that high single-digit range throughout the second half of the year as we drive strong cost savings and we see nitrile returns to more normal pricing levels.

Very helpful. Just a quick follow-up on the MicroCool litigation, Robert, you are very clear on the disappointment with the April jury verdict and it seems pretty clear that the penalties are to be reduced substantially at the very least. But how are you looking at the risks for damages in this case, as well as in future cases including the VA and DOJ? And then also, have you seen any additional filings following the recent ruling?

Yeah. So let me start by for all those on the call that might not know some of the background. We did have an unfavorable jury verdict in a California class action case. We are disappointed with the verdict. We don't believe it is supported by the facts or the law. We recognize the verdict is just the first of a multi-step process and we intend to challenge it through post-trial motion and if necessary appeal to higher court. But the key messages had change. We continue to stand by the safety and efficacy of our MicroCool surgical gowns. In fact, today we sold nearly 70 million of them with zero complaints of injury due to barrier protection. So that part of the case, while disappointing. It’s not new news out there in terms of what’s being reflected. We current -- we certainly expect any punitive damages to be reduced. There's a reason to have confidence in that. The U.S. Supreme Court has stated that the constitutional outer limit of the ratio between the punitive damages and compensatory damages in case like ours is somewhere in the 9 to 1 or lower. In our case we believe the ratio should be lower. Obviously, we believe that. We intend to rely on this and other illegal remedies and seeking to reduce the jury's punitive award, because the award that they gave was 100 times compared to that 9 to 1 ratio that I just mentioned. It was 100 times the compensatory damages. So we certainly expect that to be addressed on the field or through earlier decisions. There haven’t been any other actions that had been issued and anything will be listed in our Q and our K that will be published here in the next few days.

Thank you very much.

Thank you.

[Operator Instructions] Our next question comes from Larry Keusch of Raymond James. Please go ahead.

Hey. Good morning, everyone.

Good morning, Larry.

Good morning. So just a couple of quick ones here. So, Robert, maybe help us understand it, at least it is my understanding that part of the issue with the spike in nitrile prices is somewhat supply driven and so, A, is that the correct way to think about it and if it is how much visibility do you have to that second half reduction in pricing that that you looking for?

Yeah. Let me talk through that little bit. Both the supply and demand there are issues related to -- on the demand side where key materials that nitrile can go into automobile production in China predominantly and there have been some issues related to natural rubber latex where manufacturers of automobile parts like tires switched to nitrile which spiked up demand that has now dropped back. There was also some issues in terms of some of the major manufacturers were taking some maintenance downtime. So it was both the supply and demand issue. What we get visibility to is certainly forecast around acrylonitrile and butadiene, and typically those forecast will be able to indicate over the next few months whether there is going to be a spike in those key materials that go into making up the nitrile material that we use for our exam gloves. So we did have visibility. There is a lag between the movement of the pricing that you can look up and follow of butadiene and acrylonitrile. It is a month or so lag. So that lag is what push some of the pricing into the second quarter that we had anticipated could have come in the first quarter. But we are now starting to see those prices drop dramatically. So we're confident that it looks like we are containing that nitrile spike in the second quarter.

Okay. That's very helpful. Two other ones, Corpak continue to do really well, certainly looks like revenues coming in better than we were looking for. So just wondering if you can give a little sensitive of where the strength is coming from in Corpak and maybe refresh us on your accretion targets for that business for 2017?

Yeah. Corpak has been a terrific acquisition. It is just a strong strategic fit. The teams that have joined us are very skilled. We able to combine the sales organizations that at our digested health businesses, so they are caring the full bundle now, both through the abdomen feeding, as well as the nasal gastric feeding, a lot of growth which we anticipate in and which was built into our plans is going to come from our -- the new technology around CORTRAK. Clearly that’s the opportunity for us is to have more and more of the CORTRAK technology which is higher margin. It's a better clinical outcome in terms of lower cost for the physician and hospitals. So that’s where we are focus on growing that part of the business. But we are also pleased that across the total business, having the full bundle will give us a better leverage on both the -- through the abdomen feeding, the MIC-KEY product, as well as the Corpak nasal gastric products.

Okay. And then…

I didn’t answer that.

Yeah.

Let me get to accretion part. So last year we delivered $0.12 accretion. This year we are planning on $0.20 accretion. So that partly because it’s the full year. We were able to get synergies faster than we expected. That’s why our last year over delivered and that's why this year we were able to raise the expectation from what was $0.12 up to $0.20. We still have more synergies that will be delivered late this year. You will start to see those hit more of the P&L in 2018, but -- and that comes from our manufacturing synergies that we’ll get.

Okay. That’s great. Last one for you, and I guess, for Steve and I don't need to get totally into the way every message here. But on the free cash generation, I thought that previously you are indicating free cash flow and recognizing obviously was going to be down meaningfully from a year ago due to all the things we talked about. But I thought you also positioned free cash flow of $100 million or more, the wording in the slide deck today said the $100 million, just want to check the, if there was any change, am I just reading too much into that?

Let’s Steve…

Yeah. No major change, I think, we are still feeling good about how we started the year, we saw a lot of working capital benefit last year as we talked about new tougher to lag that kind of or even match that kind of working capital improvement although we remain focus in that area. So we certainly aspire to do more than $100, but I would read too much into that language, it is not that precise.

Yeah. I think the one thing that I’d probably highlight is, is something that we’ve got slightly different thought process now is our legal expenses. Clearly with the jury verdict we had expected high legal cost in the first half of the year, because we expected a favorable outcome on the jury verdict. Now that had happened, I expect we are going to have continuing higher legal spend that we might have originally built into the plan.

Okay. Perfect. Thanks for that. I appreciate it.

Thanks, Larry.

Thank you.

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

Good morning, Robert.

Good morning, Rick.

Let me start off with ON-Q. Can you just update us on the competitive environment? It seems like ON-Q had a solid quarter and as you said, I mean, very clearly met your expectations. But maybe just again in general what you think and any impact or any impact expected from the [ph] Sera (37:35) J&J joint venture or relationship on the orthopedic side?

You're right in how you classified ON-Q. We are pleased MID single-digit growth right on plan. It return to growth two years ago, so we are now at two years of growth in the business and it’s been a key contributor to our total Medical Device business returning to more healthy growth levels. Nothing really new to report relative to the competitive set particularly for Sera, we see no meaningful change, not following the announcement of their arrangement with J&J. We've always said that this is all about penetration. Our products are used in less than 10% of the surgeries. We say they should be use large decisions as an example. So we are all about -- talking about the concerns over opioid. And like with anything you got more people giving that same message for Sera last year when they modified their key messages instead of being marketing directly against ON-Q and started marketing more specifically as being an alternative to opioid treatment. I think that's one where the messages are being heard and it benefits all of those who have a passion for eliminating the opioid treatments particular post-surgery. So we are pleased with ON-Q. No real change relative to competitive set or anything that’s come out since J&J arrangement with our competitor.

And separate topic to follow up on Larry’s question on acquisitions. Obviously, Corpak has been an excellent transaction for you and it sets a high bar for whatever you're going to do next. Any chance you could give us an update on your thinking about current or near-term or the possibility of further M&A or are you feeling more or less optimistic than you thought in the past about something happening potentially possibly in the second half or this year. How are you thinking about it now? Thank you, Rob.

Yeah. Thank you, Rick. Still feel the same as I did last quarter and the quarter before that, we got an expectation of having a second acquisition this year. We are seeing more smaller sized acquisitions than larger size. Clearly, there has been a lot of focus on the Covidien assets that came out. Those were too big for us to be involved in that discussion. So most of the acquisition sizes we are seeing are in that $30 million in revenue up to about $70 million in revenue kind of Corpak like and some that are even smaller that would be no regrets moves as well. The pipeline is pretty full there. We are starting to see some nice opportunities. I was worried that companies particularly, family-owned companies would be sitting on the sidelines, waiting to get some very exact information around a corporate tax rates, but we are seeing a lot of activity right now. So I remain optimistic that we'll be able to achieve that second acquisition in 2017.

Excellent. Thank you so much.

Thank you.

[Operator Instructions] There appear to be no further questions at this time. I would like to turn the conference back over to Mr. Robert Abernathy for any closing remarks.

Well, thank you again for your interest in Halyard Health. As a reminder, tomorrow morning I'll be presenting at the Deutsche Bank Health Conference in Boston. Information on how to access that presentation can be found on the Investor Relations section of our website halyardhealth.com. Thank you everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.