Avanos Medical Inc (AVNS) 2015 Q3 法說會逐字稿

Good morning, and welcome to the Halyard Health third-quarter earnings conference call.

(Operator Instructions)

Please note that this event is being recorded. I would now like to turn the conference over to Mr. Dave Crawford. Please go ahead.

Thank you, Casio, and good morning, everyone. It is my pleasure to welcome you to the Halyard Health third-quarter 2015 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 third-quarter performance and the progress we are making on our key priorities for 2015, then Steve will review our results in more detail and provide his perspectives 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, www.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 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. On November 1, we celebrated our one-year anniversary as an independent company. Those of you who have followed us since day one know that we launched Halyard with the strategic vision of creating long-term shareholder value by shifting our product portfolio toward our faster growing, higher margin medical devices segment and that we have a step-by-step plan to accomplish that goal. Looking back at our first year, I can say that my management team and I have meaningful accomplishments to be proud of but that we face some headwinds, some challenges, and have more work ahead of us. Our third-quarter reflected that theme, a mix of positive results in our separation from Kimberly-Clark and in our medical devices business and challenges in our S&IP business.

Let me talk about each of these. First, we remain on track in building Halyard Health as an independent company. Our ability to exit transition services agreements, or TSAs, on-time and in some cases early, is a major accomplishment that positions us to execute our long-term growth strategy of portfolio transformation. To date, we have exited nearly 90% of the TSAs and are on plan to exit the remaining TSAs in the fourth quarter and in 2016.

We are now shifting our internal focus to improving efficiencies and reducing costs. We are also continuing to make progress on our rebranding and repackaging efforts as more than half of our products shipped are now Halyard branded. Customer reception to the Halyard brand continues to be strong.

Second, I'm pleased to say our medical devices sales are on track to deliver year-over-year constant currency growth of 2% to 4% consistent with our guidance. Medical devices increased 5% this quarter on a constant currency basis. That's two consecutive quarters of constant currency growth of 5% or more driven by continued strong growth of COOLIEF and improvement in ON-Q.

Third, the S&IP segment continued to face headwinds. While S&IP sales in the third quarter were the highest quarter of the year, sales declined 4% in constant currency compared to last year. We attribute the decline to three factors.

First, market dynamics affecting our pricing. Second, the continued competitive market intensity in surgical drapes and gowns. And third, a slower than planned uptick in sales conversion in our exam glove business.

Although we have recently renewed several key contracts and accelerated market share gains in exam gloves, the overall challenging pricing dynamics in S&IP are likely to continue into 2016. As a consequence, during our annual goodwill impairment testing conducted in the third quarter, we determined that the S&IP segment's fair value no longer exceeds the carrying value of its assets on our balance sheet. As a result, we recognized a $476 million non-cash preliminary goodwill impairment that we announced in today's press release.

Steve will provide more details about the impairment in a moment. But it's important to note that this is a non-cash charge that does not directly impact our cash flow from operations, our bank covenants, or our liquidity. Most importantly, the charge will not change our day-to-day operations and does not change our long-term growth strategy of shifting and our portfolio to higher margin and faster growth medical devices. We understand the importance of generating improved results in S&IP in order to position Halyard for future growth, and we remain confident in our strategy and the path we charted since day one.

Now let me turn to a few other headlines for the quarter. I'm happy to report that we delivered slightly above our plan, $0.52 adjusted diluted earnings per share driven by growth in medical devices, commodity deflation, and manufacturing cost savings. We also controlled discretionary spending to help counteract the impact of lower S&IP sales volume.

We ended the quarter with $113 million of cash on the balance sheet. While we'll continue to control expenses in a disciplined manner, our strong financial position will help us continue to fund research and development and pursue M&A to accelerate growth in our medical device business.

As we look to the balance of the year concluding our third-quarter earnings results, we now anticipate full-year adjusted diluted earnings per share to be at the top end of our previously reported range of $1.90 to $2.10. As a result, we are narrowing that range to $2 to $2.10. Our immediate task at hand is closing out the year by delivering our sales and EPS guidance and laying the groundwork for a successful 2016.

With that, I'll turn it over to Steve for more details on the quarter and our outlook for the balance of the year.

Thank you, Robert. Before discussing our third-quarter results, I'd like to remind everyone that the results for 2014 reflect the business as it existed when it was part of Kimberly-Clark. Included in our 2014 results, are pre-spend costs associated with executing the spinoff. Now let me start with some key information from our press release.

Third-quarter sales were $390 million, a 2% decrease in constant currency compared to the prior year. Adjusted operating margin was 12% for the quarter compared to the prior year of 15%. Adjusted EBITDA was $56 million for the quarter compared to $81 million the prior year.

Taking a more detailed look at our results for the third quarter, overall sales of $390 million were down 5% compared to $409 million a year ago. Exchange rates negatively affected net sales by 3% or approximately $13 million, and lower selling prices impacted sales by 1%. Adjusted gross margin of 35% this quarter was even with a year ago.

Manufacturing cost savings and lower commodity prices in the quarter were offset by lower production volume and price erosion in S&IP. Adjusted operating profit was $46 million, down from $63 million a year ago. The decrease was driven by lower S&IP sales volume and pricing and increased stand-alone costs due to our spinoff.

During the quarter, we incurred $16 million of post spin related charges, $9 million for litigation matters, and $7 million in intangible amortization expense that were excluded from adjusted operating profit. Additionally, the non-cash preliminary goodwill impairment that Robert mentioned was excluded from adjusted operating profit. As a result, adjusted operating profit margin was 12% for the quarter.

Looking at our performance on a segment basis, S&IP net sales declined 8% in the quarter to $257 million, down 4% on a constant currency basis, which represents a 2% decline in volume and a 2% price loss. S&IP operating profit for the quarter fell to $26 million compared to $37 million the prior year as a result of lower sales volume and price, lower fixed cost absorption as we curtailed production to manage inventories, and stand-alone costs.

As Robert mentioned, we continue to face some challenges in S&IP. Let me provide some additional details.

First, as a result of competitors aggressively discounting, we continue to see price erosion and some market share loss in certain S&IP categories. While we've been successful in renewing key contracts, these contracts were negotiated at lower prices than expiring contracts. Given the current dynamics in S&IP, we continually focus on striking the right balance between maintaining market share and driving profitability, and our approach varies by category. In some categories like sterilization, we will utilize innovation and pricing to aggressively defend our leading market share. In protective apparel, which is our lowest margin category, volume losses more likely as competitors use price to gain share.

Second, certain product categories, due to their competitive intensity, are proving to be more challenging to achieve that balance. While we have gained new accounts in surgical drapes and gowns leveraging new innovations like our AERO BLUE performance gowns, these increases have not completely offset pre-spend account losses in North America and EMEA.

Third, we are beginning to see positive results from our renewed focus in our exam glove business. We have grown our North American market share for the second straight quarter and have a strong new business pipeline. To date, we have secured $11 million of incremental annual contracts. While we had expected to realize more benefit from those commitments in the third quarter, the conversion process has taken longer than we anticipated. We now expect these commitments to benefit our fourth-quarter 2015 and our full-year 2016 results.

Exam glove sales to Kimberly-Clark are another driver. To date, these sales are running below prior year by approximately $5 million due to elevated pre-spend purchases and inventory adjustments. It's important to note that while these sales represent approximately 5% of our total S&IP business, the margin on these sales is minimal given our pricing agreement post spend.

Medical devices delivered another solid quarter of growth led by interventional pain, digestive health, and ON-Q. Compared to prior year, sales increased 3% to $126 million or 5% on a constant currency basis. Results were driven by 4% higher volume and a 1% gain in selling price, partially offset by 2% of unfavorable currency exchange rates.

Interventional pain delivered another strong quarter with 22% growth fueled by continued momentum of COOLIEF in North America. Within the surgical pain category, we are seeing encouraging signs that the market dynamics continue to improve. ON-Q posted 5% volume growth in the third quarter.

This was the first quarter since the fourth quarter of 2013 that ON-Q delivered year-over-year growth. It's the second quarter consecutively that ON-Q sales have increased. Medical device operating profit for the quarter improved 40% to $29 million compared to $20 million a year ago. Increased research and development and investment was more than offset by higher volume and price, manufacturing cost savings, and lower general and administrative expense due to lower amortization.

Before moving to the balance sheet, I would like to discuss the non-cash preliminary goodwill impairment in a little more detail. In accordance with GAAP accounting rules, we perform our annual impairment test as of July 1 each year. As such, we conducted our annual impairment test in the third quarter, which resulted in the preliminary impairment charge of $476 million related to the goodwill in our S&IP business. The size of the impairment charge will be finalized in the fourth quarter.

As you will recall, last year when we completed the impairment testing, the fair value of our S&IP business exceeded its carrying value by only 6%. This was disclosed in our 2014 third-quarter 10-Q. As we have discussed, during the course of 2015, the competitive dynamics in S&IP were more challenging than expected as price declines and volume losses affected our segment results. Even though we expect S&IP volumes to stabilize and grow slightly in the balance of the year sequentially, we now anticipate price loss in the neighborhood of 2% due to lower commodity costs and continued changes in the competitive landscape.

We anticipate that this price environment will carry over into 2016 as pricing will reflect discounts on contracts renewed in 2015 and an environment of lower commodity costs continues. We took these pricing and competitive market dynamics into account in our discounted cash flow models when we calculated the fair value of the S&IP business for purposes of the 2015 goodwill impairment test. We concluded that the fair value of the business no longer exceeded the carrying value of the S&IP net assets on our balance sheet. This difference represents the first of two elements in the overall goodwill impairment charge.

The second element is related to the large amount of goodwill on the S&IP balance sheet associated with legacy acquisitions. In the impairment analysis, this legacy goodwill is compared to implied goodwill after tangible and intangible net assets are stepped up to their fair value. Those intangible assets were developed over the course of Halyard's long history within Kimberly-Clark, such as our significant domestic and international customer base, our widely recognized trade and product names, and technology and know-how associated with many of our manufacturing processes.

As these intangible assets are fair value for the purposes of the impairment analysis, along with the write-ups of other net assets on our balance sheet, the residual value left to allocate to implied goodwill quickly diminishes. The difference between this implied goodwill and the actual goodwill on the S&IP balance sheet represents the second element of the impairment charge and over half of the overall charge. It is important to recognize that this impairment is a non-cash charge and that it does not impact our cash flow from operations, our bank covenants, or our liquidity. Most importantly, this preliminary non-cash charge does not affect our ability to execute on our long-term strategy of transforming our product portfolio to higher margin and faster growth medical devices.

Now let's turn to our balance sheet and cash generation. For the quarter, cash from operations was $19 million compared to $24 million a year ago. At quarter end, we had $113 million of cash on hand. We continue to move aggressively to build out our M&A pipeline. Our cash balance, along with our current leverage, positions us well to shift our portfolio to medical devices.

Robert has already discussed our updated view for our full-year 2015 adjusted diluted EPS, and now I'd like to review the key planning assumptions that we have revised and built into our updated outlook for the balance of the year. Based on continued challenging dynamics, price erosion, and anticipated lower glove sales to Kimberly-Clark, we now expect S&IP sales to decline 5% to 7% for the year in constant currency. This assumes normal timing and severity for this year's cold and flu season.

Based on our commodity outlook, we now anticipate cost deflation in key inputs of $25 million to $30 million, up from our previous guidance of $20 million to $25 million. With the recent weakening the US dollar, we now anticipate negative foreign currency translation to impact net sales between 2.5% and 3.5%. Additionally, we expect a negative currency impact on operating profit to be in the range of $10 million to $15 million.

Our remaining 2015 key planning assumptions, which we affirm, are as follows. Net sales growth on a constant currency basis is expected to decline 1% to 3% compared to 2014. We anticipate that medical device sales will grow 2% to 4% compared to 2014 on a constant currency basis.

To support product innovation, we anticipate research and development investment of $30 million to $35 million. Capital spending is expected to be the range of $70 million to $75 million for the year; this is slightly above our long-term target of 3% net sales due to the spend related projects. For 2015, we anticipate spin related transitional costs to be in the range of $45 million to $55 million. We continue to forecast the total amount for 2014, 2015, and 2016 to be in the range of $60 million to $75 million. Finally, our adjusted effective tax rate for 2015 is expected to be in the range of 37% to 39%.

In summary for the quarter, we delivered adjusted earnings per share slightly ahead of our plan as well as another quarter of medical devices growth. In S&IP, we are beginning to see encouraging signs in our exam glove category and remain committed to improving that segment's overall performance. While we have more work ahead of us, we are well positioned to execute our strategy of transforming our product portfolio to higher margin and faster growth medical devices.

Casio, we will now take any questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Kristen Stewart of Deutsche Bank. Please go ahead.

Hi, thanks for taking my question. Can you guys hear me okay?

Yes, Kristen. Good morning.

Hi. Good morning. I was just wondering, I wanted to obviously talk a little bit more about the S&IP business and I just wanted to kind of go over to what extent do you feel like you've covered I guess the renewal of different contracts? And at what point do you feel like we have kind of hit a bottom that you feel confident that you can kind of gauge at what level you feel like you have got a handle on what the bottom of the pricing cycle may be?

Good question. We'll start with the contracts first and then I'll talk about whether we have sort of found the bottom or not. In terms of the contracts, they are all right on schedule. Last quarter, I talked about our largest contract which is our surgical business with one of the large GPOs that we were looking to shift that contract by one year and we were allowed to do that so that was postponed until next year, so that gives us a really solid base of contract business in surgical. Other contracts have been negotiated and are either completed at this point or well along the process. We haven't lost contracts with GPOs through that negotiating time, so we feel good about the contract negotiations.

We continue to see, though, the pressure in S&IP. We continue to see the price loss so, whereas earlier in the year we were talking about 1% price loss; we are now signaling for this year and into next year a 2% price loss. That price loss is coming predominantly in our glove business and in sterilization, so we're really focusing on using price strategically to win contracts at the hospital level as well as to maintain our leadership position in sterilization wrap. Price loss is clearly dialed up from that 1% level to the 2% level.

The second part of the difference in S&IP that we haven't talked a lot about in the past is that we sell gloves to Kimberly-Clark and they use those gloves in their industrial business and those sales are falling short of the forecast for the year, so we've seen a little bit more of a dial back there in terms of our planning assumptions going forward. And the third part, it's really kind of an unknown and it's still out there and may indicate whether there will be continue to be some softness is share loss in surgical. A lot of our volume loss this year has been in the surgical business, and into a lesser extent in apparel, but surgical in particular has been an area of concern.

Some of that surgical loss is due to the consolidation of custom procedural tray manufacturers, the custom packer business. The consolidation has happened as Medline, Cardinal, and Owens & Minor have been buying up customer procedural tray companies, so we have seen some share loss as that consolidation has happened. We feel like we have got a sense of what that share loss is today, and we don't feel like there is significant share loss going forward but it is sort of a quarter-by-quarter analysis, Kristen, as we look at that.

Okay, and then just thinking about the cash flows, what would you say is kind of the normalized cash flow that we should expect on an annualized basis just in terms of thinking about your ability to pursue acquisitions going forward, if we were to think about the next couple of years balancing that with some of the ongoing transition costs?

We will give you better information on that in the first quarter when we do our forward-looking guidance but cash flow continues to be strong. Our cash from operations continues to be strong. We are generating strong cash flow both from our S&IP business and from medical devices. I would say as we really look at the year, we are sort of over delivering the cash in the medical device area and slightly under delivering the cash in the S&IP business. But in total the cash flow from operations continues to be strong which will allow us to pursue our strategy of growth through acquisitions. Steve, do you want to add anything?

Yes, I would just say that there will be some pressure on S&IP cash flow certainly based on the performance this year and, as Robert said, the carry forward of pricing, but that impact on our ability to borrow is not going to be material enough to impact our ability to transform the portfolio.

So no material impact on strategy from S&IP that you see at this point?

That's right.

Okay. Great. Thank you.

Thanks, Kristen.

The next question comes from Larry Keusch of Raymond James. Please go ahead.

Hi, good morning, everyone.

Hi, Larry.

I guess I just wanted to start with perhaps a couple of questions on the medical device business and then I just had a financial question for you. Could you talk a little bit -- I know you talked a little bit about ON-Q but could you talk just broadly about the trends that you are seeing within the big buckets within the medical devices business?

Let me talk about each of the four big buckets, and I'll start with our interventional pain. We continue to see strong growth there driven by our COOLIEF business. That's the business that had been growing at sort of that 60%, 70%, 80% range quarter by quarter. It's continuing to grow in that sort of range, so we are very, very pleased with the growth of COOLIEF which is driving the overall growth of our interventional pain.

Our surgical pain business, the majority of the surgical pain business is on ON-Q, and ON-Q continues to show that we did find the bottom in terms of that business, that it been declining for a year and a half and now it has turned to growth. So up 5% in the ON-Q business in this last quarter, which was very, very, very pleasing to us because we had signaled that our key messages in the marketplace around non-narcotic pain medication and the effective treatment of using non-narcotic surgical pain through ON-Q is certainly resonating. That business anchored with ON-Q is showing growth.

Then our other two businesses, respiratory care and digestive health, we maintain very high market shares in those two categories. They typically grow with hospital surgical procedures and hospital utilization so they continue to be strong with low-single-digit growth.

Okay. Perfect. And then just two financial questions. I'll just rattle them off and you can answer them. I'm just trying to make sure I'm thinking about this correctly but you maintained the minus 1% to minus 3% sales growth on a constant currency basis for the Company yet you reduced the outlook for S&IP to that minus 5% to minus 7%; that's obviously 70% of the business. I'm just trying to understand how the overall guidance was maintained in light of the med device guidance remaining unchanged, so that's question one.

Question two is, if my math is correct, I think the spin related charges are just under $29 million year to date, I think $28.5 million, and you've got $45 million to $55 million targeted for the year so I'm just trying to understand what perhaps changes in the fourth quarter to step those charges up.

Let me first take the guidance on total Halyard sales and why we've maintained that range of 1% to 3%. Let me start by just reminding everyone that we're at -- our total Halyard sales year to date constant currency are down 2% so it's sort of right in the middle of that 1% to 3% range, and our S&IP sales year to date are currently down 5%, so we are already sort of in those two ranges, the low end of the S&IP range and right in the middle of the sales range for the total company. But as we go into the fourth quarter, obviously, we've left the range pretty broad.

Fourth quarter tends to be the quarter where you can have quite a range of sales based on whether you have a particularly heavy cold and flu season or whether you have a pandemic that comes through, so we have left the range pretty broad. Assuming that our medical device business continues to show the sort of growth it has in the last two quarters, which was plus 7% in the second quarter and plus 5% in the third quarter, that would indicate that we're going to have some medical device sales that gives us the momentum to offset some of the decline in S&IP to get us squarely in the middle of that net sales growth range that we have maintained.

Picking up that second piece on one-time costs, our numbers are slightly different than yours, Larry. We would say $34 million year-to-date spending. Either way, we would expect to be on the low end of that range that we've communicated.

Perfect, thank you very much.

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

You mentioned some expense discipline, and I guess SG&A came in below what we were thinking. Is that one-time in nature or is that something that we can kind of count on going forward?

It's not one-time in nature. We've actually been just controlling our spending very tightly, realizing that we've had the shortfall of S&IP sales, particularly in the volume area. So we've controlled SG&A so we had some ramp-ups expected for this year in terms of hiring plans. We've been a little more conservative in terms of that hiring plan. We've been a little more conservative in terms of some of the spending in key categories, none of which are going to compromise our long-term strategic focus of transitioning our portfolio toward medical devices over time and strengthening and stabilizing our S&IP business.

The only thing I would add, David, is we're going to expect to see some increase sequentially. So fourth quarter tends to be a step up a bit in G&A spending in some of that, say, deferral and management will catch up a little bit in the fourth quarter.

Okay, and then you mentioned some share loss in surgical but that you think you've identified it and were kind of -- we know what it is now. Can you just comment on how much share you think you lost in that business, where you stand today?

Yes, we don't give specific share numbers but it is a couple of percent from the baseline of where we started. And as we look at it, a big portion of it is in surgical non-sterile that goes into custom procedural trays. We believe that share loss has come as a result of the consolidation, the purchase of the custom procedural tray companies by Medline, Cardinal, and Owens & Minor. We are focused on capturing back some of that business. That business is contracted at the hospital level, so it's not the sort of thing that just arbitrarily gets to be selected by the owner of the custom procedural tray business. We are concentrating on making sure that we have got the contracts for that part of the business and that they are maintained.

A last quick one. The litigation expense, can you just remind us what that is?

The litigation expense includes predominantly litigation that was pre-spin related, so it includes both the California litigation as well as some chondrolysis litigation. There are small amount of additional litigation cases that have come up after the spin, predominantly chondrolysis as well. The total legal expense -- total legal accrual will be both a feature of the California case and other cases.

Do you expect those to continue?

Do I expect those cases to continue or do I expect other legal expenses to happen?

I'm just trying to get a sense for the $9 million. Is that a good number of what you anticipate or is that going to drop off as we look forward?

The $9 million includes both litigation expenses and then accruals for potential settlements across the variety of cases that Robert mentioned, so going forward you can expect that there will be additional litigation expenses as we defend those cases. Again, that will roll through that line item.

All right, thanks.

(Operator Instructions)

The next question comes from David Lewis of Morgan Stanley. Please go ahead.

Good morning. Just a couple of quick questions here. Thank you. A question, Robert, just your commentary on pricing. Is 2% pricing for next year a firm number? Does that reflect just the GPO negotiations or is that sort of an all-in estimate for GPOs and the competition that we are seeing this year?

It's a combination of both of those, David. So as we sort of program out what we already know we can negotiate for next year, that would give us about a 1% price loss for next year. Then we factored in an additional 1% of contracts that we will be negotiating next year, so it's a combination of roll forward of new contracts for this year at lower price, as well as anticipation of continued low commodity costs such that we'll have continued price pressure next year.

Okay, very helpful. And then so I think about -- I know it's early to talk about 2016 outlook but if I just think broadly on margins qualitatively, if we think about pricing pressure, comp expense, the R&D investment that we saw step up this quarter, can margins be up next year in 2016?

I would expect margins -- we've sort of found the set point. Now we have got a path forward where we're going to start looking at how to recapture our 200 basis points of dissynergy at gross margin line and 500 basis points to dissynergy at the operating margin line. There are some offsets, though. We're increasing our spending on research and development. As you remember, we're going to have some strategic investments to both grow our medical device business and to set us up for future growth beyond that, so it will be a combination of some things that will improve margins as well as some things that would be negative to margins.

I would say although we are not giving guidance yet for 2016 beyond that foreshadowing on price, I think it's fair to say that margins will be pressured next year. That's based a little bit on the bar math that you just did, David. The R&D investment, the additional incentive, we will get some benefits from some of the costs and distribution dissynergies that we had this year that don't repeat to the same magnitude next year, but net-net it'll be some pressure on margins.

Okay, very helpful. And then just lastly, Robert, just thinking about the momentum in the device business. In recent weeks, your key competitor, at least the one we've been focused on the last four to six quarters, they seem more upbeat in the last couple of weeks than they had been in the last six months. Do you still expect sequential gains in ON-Q here relative to that competitor the next couple of quarters? Thank you.

Yes, we expect to continue see some gains in ON-Q. The reason for that is we believe the message about better clinical outcomes from use of ON-Q versus other products is really well understood now in hospitals as well as with anesthesiologists and with surgeons, so that key message about the clinical use of our product that it does work for 72 hours and longer in terms of its pain relief following surgery and that other products do not work for that length of time.

Okay, thank you, very much.

Our final question today is a follow-up from Kristen Stewart of Deutsche Bank. Please go ahead.

Hi, thanks again for taking my follow-up question. I just wanted to go back and with respect to the whole Ebola thing from last year. I just wanted to go back and quantify that because I think that just sets up for a tough comp. Can you just remind me what the estimated sales were last year in the fourth quarter?

We estimated sales from Ebola of $13 million in the fourth quarter of last year and that was then taken off of the first-quarter sales. So we would say really what happened was we shifted $13 million of sales that would've naturally happened in the first quarter of 2016 into the fourth quarter of 2015. (multiple speakers) -- [2015] into 2014.

Okay, so that also is in your obviously guidance making the fourth quarter of S&IP sales also be down pretty heavily in the fourth quarter.

Exactly. And all year we've known we had this tough fourth-quarter comparison coming, so we had that built into our prior sales guidance and our new sales guidance, so I think the real difference is the glove sales to Kimberly-Clark falling well short of our forecast and estimates, as well as the higher price loss than we had in earlier plans and some of the surgical share loss.

Okay. And then you'd also commented earlier in your prepared remarks on the M&A pipeline being quite full, I believe. Can you maybe expand a little bit upon that and just kind of what size of M&A you might be looking for?

I think the key message is sort of the same as prior quarters where we are actively discussing parts of companies as well as entire companies that have product lines that fit nicely within our medical device categories. I think the timing is still in 2016 earlier rather than later in 2016 is certainly what we are targeting. We've got sufficient cash to do acquisitions of sales of, say, up to $150 million in sales, so that would -- assuming the sort of multiples folks are paying now, which would allow us to use, say, $500 million of cash or so. So that is still consistent with what we've been saying in prior quarters, and it feels very much like we'll be able to make that happen.

Okay. Steve, can you make a lower tax rate happen hopefully? (laughter) I think you're at the highest tax rate we've seen in a long time.

Robert reminds me of that every day. That is something we'll look at as well to take first steps next year.

Okay. That's a good thing to look at. Glad to hear you're on that. Thanks, guys.

Thanks, Kristen.

This concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Please go ahead.

Thank you today for your interest in Halyard Health. Information about how to access today's presentation can be found on the investor relations section of our website at HalyardHealth.com. Thanks, everyone.

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