Avanos Medical Inc (AVNS) 2017 Q3 法說會逐字稿

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

(Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Dave Crawford, Vice President of Investor Relations.

Please go ahead.

Good morning, everyone, and thanks for joining us.

It's my pleasure to welcome you to the Halyard Health Third Quarter Earnings Conference Call.

Additionally, we will discuss this morning's announcement that we've entered into an agreement with Owens & Minor to sell our S&IP business.

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

Joe will discuss the S&IP divestiture and provide an overview of Halyard's go-forward strategy as a standalone medical device company.

Then Steve will address the company's post-transaction financial profile and our third quarter earnings.

We'll finish the call with a Q&A session with Joe and Steve.

A presentation for today's call is available on the Investors section of our website, halyardhealth.com.

As a reminder, our comments today contain forward-looking statements related to the company, our expected performance, economic 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 Joe.

Thanks, Dave, and thanks, everybody, for joining us this morning.

Let's start with a quick review of the third quarter.

We delivered another strong quarter, with sales of $401 million, up from $398 million in the prior year.

Adjusted diluted EPS came in at $0.60 compared to $0.48 in 2016, and we are raising 2017 guidance for adjusted diluted EPS from between $1.85 and $2.05 to between $2.03 and $2.13.

So a very solid quarter, with strong performance driven by the Medical Devices segment, which delivered growth in net sales and operating profit of 4% and 18%, respectively.

Let's turn our attention to the transaction with Owens & Minor.

This is a transformational and strategic transaction, and as the third quarter shows, we continue to build momentum in our Devices business.

Since our spinoff, we've been talking about the evolution of our business to a leading pure-play medical devices company.

Today's announcement is a major step forward in that strategy.

Let me offer some details about the underlying rationale and why it's the right deal for all our stakeholders.

I see that this is achieving 3 fundamental outcomes.

First, it allows for a more streamlined and simplified structure.

This will result in increased management focus and accountability, while leveraging our deep industry expertise.

Second, this transaction firmly positions us in attractive end markets.

As a pure-play medical devices business, we'll be singularly focused on these higher-value, higher-margin, higher-growth market segments.

Third and most important, it shapes us into a platform for future growth.

It gives us the additional capacity and flexibility to invest in innovative products and strategic opportunities.

The Medical Devices business we have today is already performing well and is underpinned by robust fundamentals.

We have an attractive product portfolio.

We have a leading market position.

We're strengthening our R&D capabilities, and we have a solid profile for revenue and earnings growth.

We see an opportunity to build on these fundamentals and grow into attractive adjacencies.

I like to call these our right-to-win areas, where we either have technology, channels or customer relationships that are complementary to our capabilities.

Let me quickly review the terms of the transaction.

We've agreed to sell the Surgical and Infection Prevention business to Owens & Minor for $710 million in cash.

Owens & Minor is a provider of supply chain services to healthcare providers and manufacturers of healthcare products.

S&IP will be a complementary fit within their current business.

We have also agreed to sell the HALYARD brand name.

We have already begun working on rebranding the company, and look forward to rolling out a new name and brand in 2018.

As a part of this transaction, we'll continue to provide IT services to Owens & Minor for at least 1 year after closing.

Upon conclusion of the TSA, our IT system will transition to Owens & Minor.

We're evaluating options for the implementation of a new IT system and we'll share our plans in the coming months.

In addition, there will be several other areas where we provide transition services.

Lastly, we're finalizing a multiyear restructuring plan to address the synergies.

The transaction is subject to the customary closing conditions.

We expect it to close in the first quarter of 2018.

As I've spoken about before, we're conducting a broader strategic review, which includes a refresh of the M&A pipeline.

This process is still ongoing, but ultimately, our goal is to maintain optionality and balance sheet flexibility so that we can take advantage of the right opportunity at the right time, whether that's development within our business or pursuing an external opportunity.

We intend to provide more information on the use of proceeds, TSAs and other details regarding our restructuring plan in the coming months.

Now let's take a more detailed look at our Medical Devices business.

We've been clear and consistent that our focus was to build the foundation of the Medical Devices business, such that it can stand alone.

We believe now is the right time and this is the right transaction to achieve that, allowing us to capitalize on our strong position and momentum as a pure-play devices company.

For example, today, Medical Devices represents 68% of our quarterly operating profit compared to 37% when we spun off in the fourth quarter of 2014.

Annual organic topline growth has increased steadily in Medical Devices over the last 3 years.

We saw 1% growth in 2014, increasing to 3% in 2015 and 4% in 2016.

Looking at this year, we're targeting organic growth in the existing portfolio of between 4% and 6%.

In terms of operating profit margin, we've also seen continuous improvements in the Devices business.

We've expanded margins to 25% over the last 12 month period from 21% in 2014.

Looking at our business on a pro forma basis.

As a pure-play medical device company, we'll initially target 2 areas.

Our pain management franchise consists of surgical pain for postoperative pain relief and interventional pain for chronic pain relief.

The chronic cure franchise comprises our Digestive Health and Respiratory Health solutions.

Each of these has category leading positions with clinically relevant product portfolios, and will form a solid starting point for us to build upon.

Looking at our organic topline and operating margin growth today, they are essentially flat.

Post divestiture, we expect these to grow at a higher rate.

In terms of gross margin, we'll move from mid-30s today to low-60s.

The divestiture enables us to focus on building a devices portfolio across our 4 franchises in Pain Management and Chronic Care.

I will also consider opportunities in attractive adjacencies where we believe we either have or can create the right to win.

Let's look at our 4 franchises in more detail.

Pain Management represents the fastest-growing part of our Medical Devices business.

We already have a strong foundation through our innovative therapeutic solutions.

Let me highlight 2 specific examples that are excellent alternatives to the traditional treatment of pain with opioids.

COOLIEF, our fastest-growing product, is focused on radio frequency and nerve ablation for the treatment of chronic pain and is the only FDA approved radiofrequency treatment specifically for osteoarthritic knee pain; and ON-Q, which provides patients with postsurgical pain relief and healthcare providers with improved economic outcomes.

Within Pain Management, Surgical and Interventional Pain represents a large addressable market of approximately $4.5 billion with attractive fundamentals.

We're seeing a movement toward outpatient services, a demand for reduced patient time in hospitals, a growing need for non-opioid pain solutions and the ability to demonstrate improved economic and patient outcomes.

Going forward, our focus will be to grow our leadership position through expanding market adoption of our pain therapies, leveraging our current offerings to create solutions in adjacent and international markets, and pursuing new opportunities that can complement our core Pain Management franchises.

Now let's look at the other category of our business, Chronic Care.

This category is a more mature market but it is also attractive to us, both in terms of our current position as well as the opportunities to grow.

Chronic Care, as we've defined it, represents an addressable market of approximately $1.5 billion, and as with Pain Management, we're working from a position of strength.

We have market leading positions and clinically preferred solutions across our key product offerings, with a strong brand portfolio, including Ballard, MIC-KEY* and CORTRAK.

Wherever we're competing, we've seen consistent growth in recent years, driven by product development and M&A.

For example, leveraging our CORPAK acquisition, we've acquired and developed new products which allowed us to broaden our portfolio and our Digestive Health franchise.

And in the Respiratory Health market, we've maintained our leading closed suction catheter market position while growing our North American oral care market share with a significant new contract.

We also see significant opportunities and believe we can expand our already strong position in Chronic Care in 3 ways: first, by developing new more innovative technologies to manage the health issues we already addressed today; second, through leveraging our existing product and solutions to enter into new but related categories of the market where we can extend our leadership; and third, through acquisitions, as demonstrated by CORPAK, where we were able to acquire, integrate and commercially optimize innovative products.

With that, let me hand it over to Steve, who'll run through the financial implications of the transaction and review our third quarter performance.

Thanks, Joe, and good morning, everyone.

As Joe mentioned, the key benefit of the transaction is the acceleration of cash flow that provides us with the firepower to invest for growth.

We'll have an estimated net after-tax proceeds of approximately $550 million as a result of the divestiture.

A portion of those proceeds will ultimately be deployed to rebranding the company and replacing our IT platform.

The balance of the proceeds will provide us with an additional $250 million of M&A capacity, bringing our total capacity to $600 million to $650 million.

Our objective is to maintain balance sheet flexibility to invest for growth.

With low cash needs for capital spending, our standalone devices business will generate excess cash flow to help fund growth.

We'll be highly focused on driving growth internally through R&D and product development.

We believe we have a strong basis to build upon with a more focused strategy.

Our product development track record is solid.

So far this year, we have launched 11 new products, tracking ahead of our target to launch more than 1 dozen new products in 2017.

Looking forward, our increased investment over the last few years has helped us build an attractive pipeline in our Interventional Pain and Surgical Pain franchises, where we can introduce solutions to a market seeking non-opioid pain therapies.

That said, we see plenty of opportunities for value-adding transactions, and will consider M&A targets that have characteristics like attractive topline growth, positioning us in new and adjacent markets with significant potential for future growth and scale, and significant free cash flow generations and accretion over time.

We are strengthening our M&A capability and are focused on ensuring that we have the right team, structures and processes in place to allow us to effectively integrate new acquisitions, deliver growth and synergy potential and maximize shareholder value.

As you know, Joe has a strong track record in this area.

So combined with our learnings from CORPAK and how we're approaching the S&IP divestiture, we're confident that we're building the right team and skills for future M&A activity or external partnerships that we may pursue.

We are currently conducting a strategic review, which includes a refresh of our M&A pipeline.

We're approaching the next phase of our evolution through a 3-phase process.

Our priority in the first phase is the separation of the 2 businesses.

We currently expect this to take about a year.

The key work streams here are the TSAs we'll provide to Owens & Minor, covering IT and related functions as they integrate the S&IP business.

We will begin work on positioning our going forward business, focusing on organizational structure, teams and our new corporate name and brand identity.

At the same time, we'll be working to reduce stranded cost and minimize dis-synergies.

In the second phase, we'll work on the transformation of our remaining business.

Again, we expect this phase to take about a year.

During this period, we would expect to start seeing initial results from prior M&A and growth investments.

As the TSAs roll-off, we'll focus on rightsizing the organization to a leaner, higher performing, pure-play devices business.

Coinciding with this, we'll also be in a position to initiate our own IP transformation.

The third and final phase will be one of acceleration.

At this stage, we'd expect to see even greater impact on our topline growth from prior investments.

We also expect to be operating with a more efficient IT system and an optimized portfolio, and anticipate that our new IT environment and streamlined organizational structure will deliver operating profit improvement.

After the divestiture, we will have dis-synergies and inefficiencies in our corporate cost structure.

We will work aggressively to take out costs as we rightsize the organization and become a leaner and more agile business.

Our initial estimate for 2018 is net dis-synergies of $15 million to $20 million.

We'll continue to focus on eliminating dis-synergies and drive further efficiencies in our corporate overhead.

And beyond 2018, our transformational goal is to achieve $30 million to $40 million of savings to eliminate all dis-synergies and position Halyard with efficient and scalable infrastructure for growth.

Additionally, the divestiture impacts our effective tax rate.

We expect to see an initial tax rate post divestiture of 35% to 36%.

We will work to find opportunities in how we operate our business in an effort to make our tax structure more efficient, just as we have demonstrated annual tax savings since the spinoff.

This is a complex transaction and we have a lot of work to do.

However, this is the right deal for Halyard, and we are confident in our ability to execute.

As we've demonstrated before, we will manage the transaction risk and avoid disruption to the business as we work through the process.

We will provide you with an update once our transformation plans are finalized in the first quarter of 2018.

Now let's turn to our third quarter earnings.

I'm pleased to report that our team delivered another solid quarter, and as a result, we are raising our 2017 adjusted diluted EPS outlook.

Sales increased 1% this quarter to $401 million, driven by 2% volume growth, partially offset by selling prices which were down 1%.

From a segment perspective, Medical Devices delivered another solid quarter of sales growth.

We saw continued strong demand in Interventional Pain and Surgical Pain, and increased sales in Respiratory Health as we worked on converting a new GPO contract for oral care.

Turning to S&IP.

Markets remain competitive, but the business is showing encouraging signs, as price loss was at the low end of our expectations.

Adjusted gross margin was 36% for the quarter, flat compared to the prior year.

We experienced elevated polypropylene costs late in the quarter, as several petrochemical plants were shut down due to Hurricane Harvey.

As we enter the fourth quarter, we anticipate costs will remain elevated.

We reported $0.60 adjusted diluted earnings per share for the quarter.

Performance benefited from 2 major factors.

First, during the quarter, multiple teams were focused on executing the divestiture of the S&IP business.

As a result, we delayed the timing of some SG&A investment in corporate areas, such as strategy, finance and IT, in order to focus our efforts on the transaction.

Additionally, we held open vacancies in areas outside of sales, marketing and R&D to minimize future dis-synergies.

Second, as a result of ongoing tax planning, our adjusted effective tax rate was 29.7% for the quarter.

For the year, we now anticipate the adjusted tax rate to be between 31% and 33%.

Looking ahead, we anticipate accelerated investment in SG&A for corporate functions, as we implement projects delayed by our focus on the divestiture.

SG&A investment is also expected to increase within our franchise teams for growth capabilities.

Now let's turn to our balance sheet, where we've seen continued strength.

We ended the quarter with $166 million in cash.

Cash from operating activities less capital expenditures, or free cash flow, totaled $9 million for the quarter.

This was impacted by fewer working capital efficiencies and higher capital expenditures.

For the year, we now expect to generate approximately $80 million in free cash flow.

This reduction from our previous estimate is a result of cash expenditures related to the S&IP divestiture and higher inventory levels than initially planned.

Shifting to our 2017 outlook.

As Joe highlighted previously, we now expect adjusted diluted EPS to be between $2.03 and $2.13.

Based on current trends and our visibility into factors that could affect our performance, we are also updating 4 key planning assumptions, which are detailed in this morning's third quarter earnings release.

In summary, we delivered another strong quarter, driven by solid performance in Medical Devices, where we are well-positioned to continue to build on our momentum.

With that, I will turn it back to Joe for his final thoughts.

Thanks, Steve.

Today's announcement is a transformational milestone in our strategy to become a focused medical devices company.

While work remains to be done, this is a major step forward in what we've set out to achieve.

We see significant opportunity in medical devices, and this transaction, as it accelerates our transformation, positions us in highly attractive end markets and creates the platform for future growth.

With that, Steve and I welcome your questions.

(Operator Instructions) The first question comes from Rick Wise with Stifel.

Congratulations, obviously a major exciting move here today.

Maybe just to start off, you've touched on it, and both you and Steve said multiple times the word growth.

Clearly, that's a priority.

Maybe just start us off just with initial take on your vision.

You essentially have a clean slate now to build a new, faster-growing, higher-margin company.

How do we think about that vision, Joe, to be a pure growth, top end of peers from a growth perspective or something else?

And just, again, high-level thoughts initially.

Thanks, Rick.

You're right, for us, this is transformational and very strategic.

We end up with a very streamlined and simplified structure.

Obviously, we'll be participating in attractive higher-margin, higher-growth end markets, and it really does shape us into a platform for future growth.

It is well-planned, and then part of the natural evolution of the business, we've been talking about it a lot.

I think we've been sort of clear and consistent, and we do believe this is the right time for this transaction.

It is the right transaction.

We think we have the right buyer.

What it allows for is really more capacity in terms of M&A, more focus from a commercial level on our organic growth.

And if you think about our business from the spinoff to sort of my background and the prior management team executing on CORPAK, and really, frankly, this divestiture process, we're starting to build the muscle for what you're talking about, performing more in line with our peers, and in fact, working toward exceeding our peers on the topline.

And that said, I think we now have a lot of levers in our business, the capacity that we'll now have for M&A, the ability to improve our margins over time.

And so it's a very, very exciting day for us here in the company, and I think, for investors as well.

I'll just offer, if Steve wanted to add anything to that.

I think that's well summarized.

Another question.

Just, again, on the deal pipeline and M&A, which again, you have referenced multiple times.

Maybe you could comment on how you see the future shaping up on the M&A front?

Just looking ahead, is it more likely you do larger transactions or, no, multiple CORPAK size?

And maybe comment on the pipeline.

Is the pipeline picking up?

Is this -- how quickly can all these materialize?

So Rick, I would say that we're open to both types of transactions.

Obviously, CORPAK was a success.

We think, really, in the Chronic Care side of the business, and particularly in pain, there are more transactions like CORPAK for us.

We're working on 1 or 2 as we speak.

And then we've shifted a little bit of our net that we capped with the strategic review that we've done with our portfolio.

So we're looking at, again, in my view, near adjacencies where we do have, in some cases, a channel or a technology or a relationship where perhaps, the technology is changing to a new technology that's changing procedures and have the type of margin profile and the growth that we are looking at.

But that is not to say that we wouldn't necessarily look at a new platform if we thought they have the right sustainability, the right financial profile for the business, and that's the broader business, and really, the margins and the growth that we need to achieve.

One last question for me now.

Steve or Joe, how do we think about the adjusted EPS base now ex S&IP, I mean, we're just quickly putting pen to paper, and a lot of moving pieces.

But if we're sort of thinking $1.50, plus or minus a couple of dimes, Steve, do you want to try to focus me, focus us a little more clearly?

Sure.

Yes, we -- we're obviously not giving guidance on 2018 now.

And in fact, still a lot of moving pieces, finalizing the cost take-out plan and even making sure the closing date occurs as planned.

So a lot of work with us and OMI to fine-tune that time between now and then.

If you think about the go-forward model, I think one place to start is, we have a segment broken out for devices, so you start with that as a placeholder.

We have a segment for corporate, which gives you a pretty good picture of our corporate cost.

And then we've given a little bit of guidance on year 1 dis-synergies.

And again, I'd say that's still a work in progress, but as a reference point to start.

I think those are probably going to be 3 inputs if you think about 2018.

And then as we talk about in the call, we're going to be very focused on not only recapturing the -- those dis-synergies, but also driving efficiencies in the corporate cost.

We have some irreducible minimum that we need to be a global public company because that remains our aspiration to continue to drive business outside the U.S. But at the same time, we know as a company, now in a different size range, we've got to take every opportunity to look at corporate efficiencies.

And so we'll share more details on that as we go forward.

But just as a kind of broad starting point, hopefully, that gives you a little bit of a guideline.

The next question comes from Matthew Mishan with KeyBanc.

I just want to follow up on some of the questions around the dilution and for next year.

Is the way we -- how much are the corporate costs?

I mean, you're about $72 million, $73 million of corporate cost in a given year.

How much of those are going to be able to be allocated to S&IP?

Yes, today, the way we work, and you see it in our model, we don't allocate any of those to the segments.

And so clearly, there's going to be some dis-synergy or loss of efficiency, if you want to say it, on the corporate cost side.

As we said to Rick just a minute ago, our goal is to streamline that over time.

But particularly, in the first year, where we're going to still have to provide a lot of the same support as we do to TSAs and so forth for OMI, the world of the activities at corporate doesn't look a lot of different in 2018 than it did in 2017 until you roll off of those TSAs.

And so you're going to see more of that efficiency drive kick in as the TSAs roll off, and we can do more to streamline the corporate cost.

So is the way to think about for next year, you lose the EBIT from S&IP, the corporate costs remain relatively the same, and then you put on top of that the $10 million to $20 million in dis-synergies?

And then also, the tax rate goes up to 35%, 36%.

Are those the key moving pieces there?

You're going to have some additional cost savings.

You're also going to have some, obviously, growth in the business.

And so, those, I think are 2 things that are going to push you the other direction.

But broadly, yes, that's the right way to think about it.

Okay.

And then -- go ahead.

I just wanted to say, we talk about it internally as a kind of separation period, which is what we're talking about now, then more of a transformation, and then ability to accelerate the topline and the margins.

But just because we are servicing TSA, it doesn't mean that we won't lose sight of continuous improvement, and obviously, we'll be working to take costs out as we can, alongside of what Steve outlined.

Okay, great.

And then lastly, on the Medical Device growth, just especially for this year, I believe you have implied in a pretty significant acceleration for 4Q, and you still have a pretty wide range of growth, 4% to 6%.

Is it biased one way or another at this point for the full year?

Well, first, I mean, if you think about the progression, starting out before I got here, the spin, 1% and then moving to 3%, and then 4%, that's impressive.

We're committed to the range of 4% to 6%, and we've not backed off of that.

I think we've said also in the past that in Q2, we had some IV infusion business move to the fourth quarter, and then we have some other impact in the business on the HealthTrust contract in oral care.

Lastly, just generally, there's a movement of positive upward in Q4, not just for our business, but a lot of businesses in medical device.

And the COOLIEF area, in particular, is a progression for us, as we work at getting better reimbursement, as we work at -- more at converting some of these consumers that come into the sites where we're providing that capability.

So again, we're still committed to the 4% to 6% and a progression into Q4 from where we are today.

The next question comes from Jonathan Demchick with Morgan Stanley.

I wanted to follow up, I guess, on some of the others who really talked about the standalone device business and what -- removing S&IP, I guess, really kind of means as a pro forma number.

Kind of following up a little bit, it sounds like if you just take the $70 million or so that you guys have reported as operating profit from S&IP, add back depreciation and amortization, and then the sort of corporate -- or sorry, dis-synergies cost that you've really talked about, we're really talking about removing somewhere of like $80 million to $90 million of EBITDA from this company.

Is that right?

And then we kind of think about in the '19 and forward areas when we start getting those savings and working that down?

Steve, we're not going to -- sorry, we're not -- we're just having a conversation.

We're not going to get that detailed to try to give you guidance on EBITDA yet for 2018.

I mean, I think you're looking at it the right way, but we're not going to get more specific than that yet.

We've got more work to do yet to put together the 2018 plan.

Okay, very clear.

When we're talking about, I guess, the improving margins over time, it looks like, in 2019, as the transformation stage that really starts that on the graphic you guys have pushed out, how should we be thinking about the target savings rolling in?

I mean, we are -- I believe we're about 3 years almost exactly past the spin of Halyard from Kimberly-Clark, and I mean, it seems that margins have stayed relatively in the same area that we spun with, and there hasn't really been a major step up yet.

Should we be thinking about that it's still like 3 years out before it really starts seeing another significant ramp-up in margins as those get worked down?

No.

We would expect to see some, certainly by the time we get into 2019.

2018 is going to be a little bit complicated because of the TSA support that we'll have to provide.

By the time we get to 2019, as those TSAs roll off, you're going to begin to see some of that improvement.

The piece that's still out there that's a little bit further out, it's going to be the IT transformation.

So all else equal, but for this transaction, we'd probably be doing some IT transformation in 2018.

I think we've talked about that in the past.

But obviously, this is going to put a space in between, as we've got to provide stability and help OMI transition their business.

And so as you know, a big part of our corporate cost, and actually, a big part of allocated cost is IT.

And so as we get that solution, and then that will be more in the '20 to '21 timeframe when that rolls in, but that's a pretty significant margin lift towards the back end of the planning horizon.

Understood.

One last one, I just wanted to try to better understand the IT and rebranding efforts and how much that's going to really cost, I guess, in the near term.

Is there any more visibility you can kind of give towards that item?

And then also, the way we should we thinking about IT is basically the current IT system within your current company is really moving over to OMI and you're building a brand new one?

Is that the right way to think about it?

Yes, there's a couple of options there, Jon, and that's one of the pieces that we're still working through.

Obviously, we've got a commitment to provide stability to OMI through that transition period.

And there are various IT flavors for using a version of the system we have today to something that's totally new in our minds, of course, is rightsizing it for the size of the company and the sort of agility and scalable infrastructure that we're going to want going forward.

So we've got more work to do.

We've talked in the past, the cost for that kind of system can vary widely, and we'll come back with more details to provide some color around that as we do more due diligence there.

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

Congratulations on a great transaction.

Maybe, Joe and Steve, you could just help us out in terms of thinking about what types of investments you would need to make from a sales and marketing standpoint, not just feet on the street, but also in terms of building the clinical dossier support (inaudible) sale from a cost benefit standpoint going forward with this renewed, or I should say, heightened focus on the device portfolio and how that's kind of incorporated into your thoughts there into the 2018, 2019 margins?

And then I have one quick follow-up.

Chris, I think I heard you, and I'm going to give it a shot here.

And if we somehow missed some part of your question, we're happy to go back to it, then I'll have Steve be additive to these comments.

But when you think about the commercial side of the business, there's a lot of opportunity in our business in terms of medical education investment, market development.

In the case of COOLIEF, today our reimbursement profile is primarily in the hospital.

We'd like to expand that to the outpatient, give some more favorable coding in reimbursement there.

Ultimately, there would then be, I think, as we progress our business opportunities for us to expand our channels, we're going to become very focused on topline growth.

And in the prior question, in year one, we want to make sure that we don't disrupt our Device business, that we obviously service those TSAs appropriately because want to see Owens & Minor be very successful in their business as well.

So those would be the types of investments.

We've also said we still are committed to the 6% target in R&D.

We haven't quite reached that point yet, but that's because the R&D team is doing the right job, focusing where they can win, and where is a good investment in the business.

I think I heard that much of your question, and Steve, you want to add anything to that?

Yes, I would just -- I think that was well summarized.

We're going to be very focused on driving out dis-synergies and corporate cost efficiency, but we are also -- have an eye towards the growth platform that we want to make sure it's ready for the kind of growth we want to drive in the future.

And Joe mentioned some of those reinvestment areas, and so again, probably not as much of an issue for 2018.

We've got a lot of wood to chop to keep the business stable, but we are going to even then begin to make some of those capability investments to set us up for the future growth we expect.

And then just another input is that, and obviously, with the different capacity for M&A, M&A can change your profile as well on the margin, and oftentimes, there's synergy opportunity or just a higher-margin set of products.

So that's going to be another lever for us in changing the margin of our business.

But Chris, we were having a hard time hearing you.

Did we cover everything you were asking?

That was great.

Can you hear me now?

Hello?

Can you hear me now?

Maybe I'm just going to try one quick follow-up and I'll follow up offline.

But Steve, could you just break out for us the impact of weather during the most recent quarter, both from a topline but also from a margin perspective?

And will the contingent liability, with the litigation to the S&IP side, will that transfer?

Or can you help us better understand maybe an update on that as well?

Sure.

On the weather side, we did have some impact.

We had a bit on the topline, not material, and so we didn't spend a lot of time on it on our prepared remarks.

We mentioned that polypropylene had poked up towards the end of the quarter, and it seems to be sort of staying at that sustained level.

That had a little bit of an impact, had a little bit of an impact in the quarter, but that was in our plan.

But overall, it's not a material impact.

On the litigation side, just to pick that up.

So the gown-related litigation, so later today, or I guess, tomorrow morning, our Q will come out.

And as always, the Q has a good summary of all the most recent information relative to litigation.

The gown-related litigation there will remain with our company, with Halyard today, will not go to the buyer.

Other litigation as it comes up in the normal course of business will, of course, would go to the buyer.

The next question comes from Larry Keusch with Raymond James.

Steve, just thinking a little bit about the tax dis-synergies that you talked about upon the sale of S&IP, can you talk a little bit about how long it typically takes to kind of get the tax planning strategies into place.

And I know this is a long-range question, but if you got the sort of mid-30-ish tax rate and not contemplate any tax reform in the U.S., can you drive that back down again?

Yes, (inaudible).

It would be great if we got some, but again, we're not going to wait for that.

And I think we are confident we can get back down into the range or lower than where we are at today, the kind of mid-30-ish targeting that we talked about in previous calls for Halyard.

One of the things we lose with this structure is we put in place some tax planning that involve some of our international manufacturing locations, which are going to be going to the buyer.

So that's really what -- one of the things that drives the reset.

On the other hand, things like the R&D tax credit are going to be even more meaningful here on a smaller base.

And so we want to be aggressive on the tax side.

Again, the only caution I'd say is that in 2018, because we still have to support the structure we have and provide transition services to OMI, some of the bigger structural things may be difficult to implement in the first year.

But I can tell you that the planning is already underway for those things, and it actually has been for a little while.

So clearly, it will be incumbent on me to help drive that rate down to a better place like we did for Halyard.

Okay, perfect.

And then 2 other ones.

Just on the $30 million to $40 million in savings that you talked about, where are you anticipating those savings coming from exactly?

And what's the right timeline to think about when you can get to that rate of $30 million to $40 million?

Yes.

So out of that $30 million to $40 million, there's a portion we have already identified even today in looking to the size of the corporate infrastructure post-TSA and trying to do some design work around benchmarks for companies our size.

There's a sizable portion of that $30 million to $40 million that we have sort of lined out today.

But there's also a significant portion that is related to the IP infrastructure.

And again, we've talked in the past about how big a savings that could be for us, just given the -- how cumbersome our structure, I guess, is today, and so it's very stable.

But for a company our size, it's quite expensive.

And so there's also a sizeable piece of that $30 million to $40 million that is going to rely on us driving efficiency into that IT system.

Again, we really do know how to do that.

We were ready and prepared to do that for Halyard Holdco.

But what we've got to do now is kind of retune that plan for something that would be appropriate for our new size and shape, but -- so I gave you some thoughts.

We could -- have got work to do to fully delineate all those savings, and certainly to go get them, but we're not starting with a blank piece of paper there by any means.

Got it.

So just in the context of the points around the IT system and the need to essentially start afresh on that side, and I don't mean fresh that you have to go outside to get a new system.

But it would sound like to really get to those $30 million, $40 million in savings, that's 2021, somewhere in that timeframe.

I mean, still a couple of years away, it sounds like.

Yes, I think that's right.

We would hope that by 2020, maybe you're starting to do the first -- if rolling this out, the new system, you'd be doing some of that work, but I could imagine full realization might drag into 2021 for the IT piece.

Okay, perfect.

And then the last one, actually, just sort of 2-parter here.

Just again, can you help us think about once you got the standalone Medical Device business, and I understand things will be dynamic with potential inorganic additions to this, but just as you contemplate the business today, how do we think about the cash flow generation off of that business?

And then on the TSAs, I just want to be clear, are you actually getting paid anything for those TSAs during that first year?

Or is that just part of the agreement to support OMI?

Sure.

Maybe I can take those in reverse order.

So on the TSAs, yes, we've, I'd say, mostly finalized those schedules.

We still have a little bit of tidy-up work that will happen between now and close, but there are services that will be provided in a variety of functional areas, including IT.

There is reimbursement coming back for that.

We'll talk more about how we're going to kind of show that in our adjusted earnings for 2018 to try to get some clarity.

So we're taking the incremental cost of providing that service and matching it up against the revenues, so you get a little bit of a look through of what's actually happening.

So we'll provide some more color on that as we get closer to next year.

But the answer to that is yes.

On the cash flow side, one of the strengths of the Device business, and we've talked about this quite a bit, leading up, is that, actually, Device drives a significant portion of our cash flow, and it's grown every year kind of along with the operating margin in the topline growth.

And so this is a business that throws off cash even though we've been investing in R&D, even though we've been investing in things like COOLIEF reimbursement, and so we have every expectation we're going to be able to continue to drive cash flow growth out of that business, and as we look back, we looked at the last couple of years as a good proof point that we can do that.

(Operator Instructions) The next question comes from Kristen Stewart with Deutsche Bank.

I was just wondering if you can talk a little bit more on the M&A side about the willingness to do a larger transaction and also the willingness to take on some dilutive deals?

I think -- thanks, Kristen.

For the type of growth that we're considering in our business, there's a willingness for us to look at all those.

I think that in terms of technology deals, we can either invest in early stage or bring in, and with our R&D and quality regulatory and reimbursement capability, basically accelerate that, and it'd be additive to our technologies.

The other thing is that we are also looking at and evaluating more CORPAK or TRAK type of deals that are accretive initially and are closer to our base.

And then we're scanning the horizon as well for platforms that would be additive to our business, and we would not sort of not consider this, if you will.

We were considering those as a part of our landscape as well.

The thing I would say is that we have a lot of levers in our business too, so that we can look at those type of deals.

We can get away from the TSAs in year one.

We can focus on continuous improvement.

We can start to get better drop-through with the growth that we'd like to see in the business.

And by platforms, would you mean looking outside of the area of pain management and chronic care as a third area of growth?

Yes, that's a possibility.

I think, first, we're going to look towards pain, and see where we can be additive and expand there.

We like that market.

We're also going to look at our Chronic Care area and look at what's happening there.

There are some more differentiated technologies and developments there, and close procedures to what do those products offer today.

But obviously, if something opportunistic comes along in terms of a platform, it's something that we would equally look at.

Yes, I think that's probably a good build off of what we talked about earlier.

Now you've got a management focused only on devices and the spaces in and around our areas.

And so I think we're -- that's one of the things that's pretty exciting about the future is to broaden that out.

Absolutely.

This concludes our question-and-answer session.

I would like to turn the conference back over to Joe Woody for any closing remarks.

Well, thanks, everybody, for joining the call.

This is a very exciting day, and I feel a milestone day for Halyard.

We thank you for your interest, and look forward to our next phase of growth and for our next call with you.

Thank you very much.

The conference has now concluded.

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