Avanos Medical Inc (AVNS) 2017 Q4 法說會逐字稿

Hello, and welcome to the Halyard Health Fourth Quarter Earnings Conference Call.

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

I'd now like to turn the conference over to David Crawford, Vice President of Investor Relations.

Mr. Crawford, please go ahead.

Good morning, everyone, and thanks for joining us.

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

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

Joe will begin with a brief review of our financial performance and outlook for the business, provide an update on our S&IP divestiture and outline our 2018 priorities.

Then Steve will review our results and provide additional detail on our financial performance and planning assumptions for 2018.

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

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 Joe.

Thanks, Dave.

Good morning, everyone, and thank you for your interest in Halyard Health.

Let me start by saying that 2017 was a strong year for us, and I'm proud of our team's accomplishments and execution.

Our results demonstrate our continued momentum as we delivered a record quarter of organic growth in Medical Devices with solid performance across all categories.

Additionally, we increased the number of product launches, and at the same time, delivered earnings above plan.

We achieved all of this while executing our transformation into a focused medical device company with the announcement of the sale of our Surgical and Infection Prevention business.

We began 2018 building on our strong 2017 performance.

For the third consecutive year, we have increased our organic growth rate for the Medical Device business, moving from 1% in 2014 to 5% in 2017.

Medical Device sales grew over 8% in the fourth quarter, and we earned $0.73 adjusted diluted earnings per share, enabling us to achieve full year earnings ahead of our guidance.

For the full year, Medical Device sales increased 8% to $612 million, up from $566 million in the prior year, driven by 5% organic growth and 3% growth from our CORPAK acquisition.

A number of drivers contributed to this strong performance, including the growing demand for our non-opioid pain solutions like COOLIEF and ON-Q; the continued growth of our CORPAK business; and the successful conversion of a GPO contract for oral care.

We expect these trends to continue in 2018, giving us further confidence in our growth prospects over the near and long term.

Over the past several months, I, alongside our management team, Board of Directors and strategic advisers, have conducted a comprehensive review of our portfolio.

We've developed a dual-track growth strategy consisting of both organic and inorganic opportunities that we will pursue with our more focused business.

We are taking action to implement the right organizational structure that can drive performance today and is flexible and scalable for our future.

In addition, we continue to invest in our business, including strengthening our leadership team.

This morning, I'm pleased to announce the appointment of John Tushar as President, Global Franchises.

John will be responsible for Global Franchise strategy and strategic marketing and leadership of North America sales and marketing for our Pain Management and Chronic Care franchises.

John is an accomplished professional with experience that spans many facets of a global business, including global marketing, M&A and corporate strategy.

Most recently, he served as President and General Manager of Teleflex's Surgical Division.

We're excited to have a seasoned Medical Device executive with experience in developing and executing a global strategy, driving growth and identifying and integrating acquisitions.

This dovetails nicely with our strategy.

With our focused and experienced leadership team, we can accelerate our growth, drive efficiencies and create opportunities.

Today, we're well positioned in large addressable markets focusing on Pain Management and Chronic Care.

In both of these categories, we see significant opportunity for organic growth through call point and site access expansion, strengthening our innovation capabilities and differentiating our products through enhanced medical education, clinical outcomes and awareness.

Let me highlight 3 examples of the strategic investments we will make in 2018 to achieve this growth.

First, we will look to differentiate our products through expanded clinical evidence.

With COOLIEF, we see the ability to distinguish ourselves from alternative therapies by demonstrating superior duration in pain relief, improved function and quality of life for patients who suffer from chronic pain.

Overall, we expect investment in clinical studies to grow more than 50% in 2018.

As you can imagine, most of the studies will focus on COOLIEF to help position the therapy for enhanced reimbursement coverage.

Second, we see an opportunity to accelerate COOLIEF adoption and growth by reaching the approximately 11 million patients who experience severe knee osteoarthritis.

We will expand the use of direct-to-patient advertising along with an increased effort to raise awareness with the physicians who treat knee osteoarthritis.

Finally, with ON-Q, we will continue to invest in educating medical professionals with an emphasis on surgeons about the benefits and efficacy of non-opioid pain therapies.

While anesthesiologists typically administer the treatment, surgeons make the decision to treat patients with ON-Q and represent an under-leveraged growth opportunity.

As in prior years, we will also accelerate our investment in R&D faster than the rate of our sales growth.

The increase in investment has enabled us to enhance our talent and capabilities, and we have been able to increase the number of product launches each year for the past 3 years.

While these launches have helped us maintain our market leadership, we have also been accelerating investment in breakthrough technologies.

In our Pain Center of Excellence, we're pursuing other transformative non-opioid pain therapies and solutions.

We will continue to leverage our commercial expertise to introduce new therapeutic applications to help drive improved patient outcomes in the coming years.

We'll complement our organic growth opportunities with M&A as we look to leverage our capacity of $700 million to $750 million.

In terms of financial criteria, we're looking for targets with the ability to deliver growth and margins at or above our current categories.

Having completed a strategic portfolio review, we are viewing M&A through a wider lens.

We will explore opportunities that leverage our technologies, help us expand our call points or increase our addressable market.

Today, our pipeline is robust with a wide range of targets that vary in size.

Finally, let me highlight our 4 goals for 2018, which align with the areas I just discussed.

Our first priority will be to build on our top line momentum and execute our strategic investments to set us up for future growth.

Second, we will close the S&IP divestiture and deliver our TSA commitments.

We expect to close in early second quarter, and as a reminder, we will net approximately $600 million from this transaction after tax and transaction costs.

Our third priority is to continue the process of rightsizing our organization as we become a leaner, more agile business.

We will be working aggressively to drive efficiencies and eliminate dis-synergies while investing in a more efficient IT infrastructure.

These significant actions will enable us to build a scalable infrastructure with the appropriate cost structure for a company of our size following the S&IP divestiture, while delivering on our commitment to reduce our operating costs by $30 million to $40 million by the end of 2021.

I'm confident in our restructuring plans, and we are well underway in executing them.

Finally, we'll look to strategically deploy capital through M&A to enhance shareholder value.

Clearly, we are well positioned to succeed in 2018 and have made significant progress in our transformation into a pure-play medical device company.

Our efforts have positioned us to capitalize on growth opportunities, and we are committed to make strategic investments to build on our momentum through commercial execution, product innovation and M&A.

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

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

Thanks, Joe, and good morning, everyone.

First, let me also comment on how pleased I am with the work and results our teams delivered in 2017, and particularly pleased with our continued Medical Device top line momentum, our disciplined cost management and strong cash flow.

Before we go into a more detailed overview of the numbers, I would like to reiterate, as we stated in our press release this morning, that due to the S&IP divestiture process, the results of the S&IP business are treated as discontinued operations and the Medical Device business as continuing operations.

As a result, we are required to allocate shared costs previously allocated to S&IP entirely to the Medical Device business.

These costs previously allocated to S&IP totaled $30 million and $116 million for the quarter and for the year, respectively.

In 2016, these costs were $33 million and $114 million, respectively.

With that, Halyard delivered another strong quarter as Med Device sales increased 8% to $166 million.

Overall, total sales increased 4% to $428 million.

We saw acceleration in Medical Device sales across all product categories.

Surgical Pain sales increased, driven by solid demand for ON-Q in North America.

Also, the shift in timing of IV infusion sales to a key distributor, which we discussed on our second quarter earnings call, contributed 1 point of growth.

Interventional Pain continued to be our fastest-growing category due to our outreach efforts to raise patient awareness and increase adoption of COOLIEF.

And finally, last year's oral care contract conversion continued to lift Respiratory Health sales.

The continued top line momentum in the Medical Device business drove a 17% increase in operating profit to $39 million compared to the fourth quarter of last year.

For the quarter, adjusted EBITDA was $64 million compared to $51 million in the prior year.

Adjusted gross margin from continuing operations was 55% due to the inclusion of shared distribution and IT costs, which were previously allocated to S&IP.

Going forward, we continue to expect a low 60s gross margin for the Medical Device business after the S&IP divestiture closes.

Net income totaled $33 million compared to $10 million a year ago, which includes a $10 million benefit from the Tax Cuts and Jobs Act.

As Joe mentioned, we earned $0.73 of adjusted diluted earnings per share.

3 factors contributed to our strong performance.

First, as I mentioned, the strength in Medical Device volumes.

Second, we continue to prudently manage expenses.

As we focused on separating the business, we delayed investment in SG&A across corporate areas and operated with higher vacancy levels to minimize the cost of our restructuring.

We also delayed some investment in our franchise teams as we completed our portfolio review.

However, in 2018, we'll accelerate our investments in initiatives that create value in our business, while also executing on opportunities to drive efficiencies in our corporate structure.

Finally, because of the accounting classification of S&IP as held for sale, we were required to stop depreciation on our S&IP and IT assets for the last 2 months of the quarter.

This change benefited our results by approximately $4.5 million.

This accounting treatment will continue until the divestiture closes.

Now for a brief recap of our full year 2017 results.

Medical Device sales of $612 million increased 8% compared to the prior year.

Overall, total sales were $1.6 billion, a 2% increase.

Medical Device operating profit increased 25% compared to the prior year to $155 million, driven primarily by higher volume.

Additionally, Medical Device operating margin expanded 350 basis points to 25%, which marks the third consecutive year of margin expansion.

Adjusted EBITDA totaled $226 million for the year compared to $211 million in the prior year.

Overall, we delivered adjusted diluted earnings per share of $2.35, an 18% increase compared to the prior year.

Shifting to our balance sheet and cash generation.

We ended the year in a strong financial position with $220 million of cash on hand.

Cash from operating activities, less capital expenditures or free cash flow, totaled $52 million for the quarter, which was a new quarterly high.

For the year, we generated $101 million of free cash flow.

I'm pleased that we continue to generate strong free cash flow, which will help fund our future growth.

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

We will provide earnings guidance once the sale of S&IP to Owens & Minor is completed.

However, we are providing the following key planning assumptions for continuing operations.

Building on our momentum in 2017, we expect Medical Device sales to increase 4% to 6% on a constant currency basis.

We expect to accelerate growth in R&D to support Medical Device product innovation and breakthrough technologies.

Given our current portfolio, we anticipate our spend will be more heavily weighted to the first half of 2018.

We expect the foreign currency translation impact on the Medical Device business to be even compared to the prior year.

The adjusted effective tax rate is expected to range between 25% and 27% for the year as the Tax Cuts and Jobs Act will have a positive impact on the company's adjusted effective tax rate.

We continue to expect net dis-synergies from the S&IP divestiture to range between $15 million and $20 million.

We expect that a portion of the proceeds from the divestiture will be used to repay our term loan.

Finally, as mentioned, we will also increase our strategic investment to capitalize on our organic growth opportunities.

In summary, we continued our momentum in the Medical Device business and delivered adjusted diluted earnings per share ahead of our plan.

Our strong balance sheet provides us with the firepower to invest in growth opportunities, including product development and M&A, which will further accelerate our transformation into a leading medical device company.

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

(Operator Instructions) And the first question comes from Larry Keusch with Raymond James.

I guess, 2 questions here.

First, I just want to touch upon one of the growth drivers for 2018 in the Medical Device business, which is COOLIEF.

Could you sort of talk about what you anticipate the growth drivers to be there?

And sort of the activities around expanding usage within OA knee indication, I guess, reimbursement if you could weave that in as well?

Thanks, Larry.

This is Joe Woody.

There are a couple of ways that we're driving growth in COOLIEF.

One is to remind everyone, the reimbursement today is in the hospital setting, primarily with the pain management physicians, although orthopedic surgeons are very interested because of the outcomes in the product, in some cases, are driving patients.

So we're working to drive patients to the sites.

That's proving very effective.

And then we're also working on expediting better reimbursement in orthopedic office or sports medicine or an outpatient clinic, and that requires time and it does require things like lobbying and studies.

And we are initiating some studies, as an example, against hyaluronic acid and really anywhere we feel we need to prove that data.

That said, the growth trajectory of that business has sort of increased towards the end of the year, and we talked about that earlier, the investment that we were putting in.

And we have actually said on these calls, we're in sort of 450 to 500 hospitals.

There are many more hospitals in the U.S. that we can get into.

We're selling capital really each month that drives the growth in that business.

And I do believe that once we get the reimbursement right for outpatient setting, and I said this at JPMorgan, this allows for us to then enter a several hundred million dollar market.

If you think about hyaluronic acid as just one treatment for osteoarthritis, that's close to $1 billion market in the U.S. We are working on mechanism of action and going to be sharing data, and we believe, in some cases that we can get up to 2 years of pain relief.

And if you compare this to steroids or you compare this to HA, it's a far better outcome.

But again, that does take some time with the payers.

Yes, all I would add is, it seems like every time, this time of year, we're talking about additional investment behind COOLIEF, and that's clearly the case again.

We've got investments on the front end in terms of reimbursement specialists to help grease the gears of that process and help customers.

We've got investment in front end sales.

As Joe said, we're going to invest more in medical education and clinical, of course clinical doesn't necessarily payback in '18, but laying the seeds not only for strong a '18, but beyond.

Okay, terrific.

And then just one other one, and I guess, it's sort of 2-part question, is how should we think about the free cash flow generation for the standalone Medical Device business?

Said another way, if you've got this $101 million for this year on a combined basis, how we'd begin to think about free cash flow for next year?

And then, you obviously reiterated the dis-synergy number of $15 million to $20 million.

You also talked about the cost savings number of $30 million to $40 million.

Maybe Steve, at a high level, help us think about those moving pieces once you get rid of the S&IP business for 2018.

Sure.

Steve's going to handle it.

I'll just say one of the good things for us is that more than half of our cash generation is from Medical Devices.

I think it does set us up pretty well.

But Steve, you want to take Larry through that?

Yes.

I think we're lucky that this is a very cash-generative business on the device side.

We saw it this year, and we saw last year, and it's increased every year.

So going forward, especially we give earnings guidance a little bit later, we'll give some more perspective on cash flow.

For 2018, it'll be clouded by a couple of things and will have more separation costs, cash costs that will impact that.

There'll also be some capital -- capital deployed for the IT transformation, both those unusual, but will impact cash flow for 2018.

But going forward, again, very cash-generative business; margins have continued to increase and sales growth has continued to grow.

So we're very optimistic on the larger picture on cash flow.

On the $15 million to $20 million and $30 million to $40 million, I would say, no change from our prior understanding.

We still believe in 2018 we're going to be left with $15 million, $20 million of stranded costs that we'll have to absorb on the remaining business.

And if you saw in the press release and the commentary the talk about $116 million of allocated costs that have previously gone to S&IP, that $15 million to $20 million, you can think about it as the rump of that portion that doesn't go away in the first year.

I mean, we are as committed as ever to getting not only that cost out, but then ultimately, driving a total of $30 million to $40 million of cost savings over the next couple of years.

A portion of that, as we talked about in the past, will come on the back of the IT transformation, some direct IT and some indirect back-office costs that follow as well as some organizational design changes that you guys saw the 8-K that we did in December to sort of lay the leading edge of some of that org design work that will be happening as well.

So I think no change, but very committed on getting those costs out.

And just the gating of that $15 million to $20 million through the remainder of 2018 once the S&IP business is gone.

Is it ratable?

Or does it pick up?

I would assume picks up towards the back end of the year.

Yes.

Larry, we'll probably give a little more picture on that when we guide that.

It probably does a ramp up in the back half a bit, if you had a normal fourth quarter OpEx spending.

This year actually spent quite light -- or light to our plan on OpEx in the back half.

But if you kind of normalize that, we typically spent a bit more in the last quarter, and on that basis alone it's probably a little -- it's a little more back-end weighted than front-end weighted.

And the next question comes from Rick Wise with Stifel.

Let me start off, if I could, with the guidance in the base.

A lot of moving numbers here.

Maybe I'll direct this to Steve first.

I appreciate your going to give us more guidance post the close of S&IP, but just for the sake of putting some framework around the NewCo outlook.

It'd be great, Steve, if you could help us wrap our arms around the base business earnings power and make sure we're thinking apples-to-apples.

I mean, I can come at this several ways.

What is the apples-to-apples 2017 base you'd have us think about '18 -- framing '18?

But say it differently, would you have us just take the Med Device profit of $155 million, net out the $116 million in S&IP overhead, add back depreciation or something like mid-40s base before the $15 million, $20 million in dis-synergies?

A lot of moving pieces here, and I appreciate you don't have all the answers.

But it'd be great if you could just get us all at the same time on some kind of more solid ground here as we head into the year and set up our models.

Yes.

And I have say it is complicated this quarter.

I think we said the accounting was going to pose some challenges, and certainly it does, as you look through the press release.

We've tried to provide some color to help that understanding.

But appreciate the challenges.

If you think about the Med Device, so we got the top line -- set that aside, if you think about the Med Device margins and you look at the Q4 segment results at the end of the press release, we included table to give you some picture of what the Med Device segment's margin would look like.

If you kind of use that as a starting point, you factor in that there are some adjusting items that are not included in that segment margin, you factor in the dis-synergies that we talked about for 2018, that will give a picture on the impact of margins for 2018.

And then probably a couple of other adjustments.

You adjust that in 2018, we're going to have some growth in the business, obviously.

We're also going to have some more normalized level of spend.

Again, quarter 4 was light from an OpEx standpoint and so normalized 2018 for that.

And then, as Joe said, we're going have some investments for growth in 2018 in the areas we talked about.

And I think as you kind of frame it up with those adjustments, it'll start to give you a picture of what the 2018 margin can look like for the Med Device, our [mainco] business.

Maybe we can probably talk in more detail about that off-line.

But I think that's the framework.

Again, overall, for 2017, as we look out on an apples-to-apples, a solid quarter.

Margins well in the Med Device business, accretion in those margins over the course of the year, so another year of margin accretion there.

So from our standpoint on an apples-to-apples basis, for the quarter, very strong performance by Med Devices.

The only thing I would add...

Go ahead, it's all right.

Just I think a lot of people are going to have this question, and we talked a little bit about ourselves yesterday and we hope to be filing an 8-K once we have the close of the transaction in early Q2 with OMI.

On our next call, we're planning to talk much more broadly about this.

And I just would point people to the competency that we do have in improving EPS.

There've been a lot of things -- I've been pleasantly surprised with frankly like distribution synergies and manufacturing efficiencies or watching how the team went after the synergy on CORPAK, and we've got good momentum.

So this is not a bad news story.

It does not reflect our confidence at all.

And we clearly understand our job in value creation and increasing our top and bottom line.

It's just about getting the clarity and really having a tighter, very clear communication to investors.

Yes.

If I could turn, Joe, to your comments on M&A.

You clearly -- you're signaling in much the same way you have in recent months, that you're active, that this is a key aspect of the year and years ahead.

A couple of questions specifically.

Do you think -- should we expect or hope -- and I know you can't commit, but should we expect or hope you're going to do a deal?

Do you expect and hope you're going to do a deal or deals in 2018?

Are you that active?

And maybe I'm over listening to your language, but you said something about a wider lens that's -- I don't know, maybe that's new to me or I'm reacting to it.

Is that new wider lens in terms of the size or in target types?

Or does that suggest more transformative deals?

Any incremental color would be great, Joe.

I can tell you my personal goal is to do 2 transactions in 2018, and I do believe that we have the capability to do that.

And on the last call, we talked about the fact that if those are small deals you can manage them differently.

If it was more of a midsized deals, it's not like we have to integrate straight away with all of the work we'll be having in terms of closing OMI and delivering on the TSAs.

You can imagine that the M&A team was very intently focused on the S&IP divestiture, and that's still ongoing as we negotiate and close out the TSAs, although I'd say the bulk of those are all the way through.

But they're now dispersed all over the world, and we're actively involved in sort of 10 or 15 different companies that we're looking at and deciding which ones we're going to go deeper in.

It's always hard to call the timing on these things, but I would also point investors to the recent hire, John Tushar from Teleflex, who ran their Surgical business and also has an M&A background.

Having an executive on the commercial and strategic side for the franchise that can link, I think, is going to help us expedite some of that.

So I was confident enough to put in a personal goal for myself, and I do think we have the bandwidth to do it.

And that lens comment is more oriented -- we did a very deep exercise with our board, had it validated out through a third-party on the entire Med Device landscape and looked at where we thought we could win in Pain, and we talked about orthopedic pain and healing at the JPMorgan conference because 60% of what we do in ON-Q is around orthopedic surgeons, and we're looking to expand that.

And then obviously, the eventual movement and more to sports medicine orthopedic in COOLIEF.

And then in Chronic Care, I think we can still be additive, whether it's CORPAK-type of acquisitions, but then also there's some transformative things in the minimally invasive area happening around there.

So we have a very focused effort there, and I'm confident we'll get there.

And I'm happy to be in this position, frankly, to have good organic growth and an ability to execute M&A.

And the next question comes from Matthew Mishan with KeyBanc.

Just trying to understand what the base of the business is going into 2018?

I just want to make sure I'm understanding it right.

There's a certain amount of costs with that already -- are currently allocated to S&IP, and then you have a cost base on the corporate side.

And I just want to make sure I'm thinking about that corporate cost like $72 million, $75 million in corporate costs you have, those are completely staying with Halyard Health and not coming back?

And then the corporate -- and then some of the costs that you have already allocated to S&IP are actually coming back to Halyard Health, and OMI is not necessarily taking all of those.

And the piece of those corporate costs are higher than the $15 million to $20 million of dis-synergies you're talking about because that's net of restructuring.

And then how much of the restructuring, the $30 million to $40 million of the restructuring that you said over the next 3 years is eaten up in that net number, in that net dis-synergy number this year?

Okay.

I'm going to try to take those in order, but if I miss one, please circle back on me -- starting with your corporate cost question.

Fundamentally, that's right.

The corporate costs for now are going to be absorbed by the Med Device.

This is now clearly a big part of our cost takeout strategy, it's targeting corporate costs and we talked in the past that actually the largest component of our corporate cost is actually IT.

And so to the extent, for example, we're going after IT transformation and cost savings, that also benefits corporate.

But in year 1, the right way you want to start to think about it is we talked about on the last call is assume those corporate costs go to the Med Device segment and [remainco].

On the $116 million of allocated costs, again, the way to think about those are a lot of -- some of those go away naturally.

So included in allocated costs there, for example, are storage and handling costs for S&IP.

But when S&IP goes away, those costs go away.

Likewise, things like IT usage, with that many employees and facilities, laptops and devices leaving that cost goes down naturally.

Then there's also component where as part of TSAs and cost-sharing agreements with OMI in year 1 and in sometimes year 2, some of those costs can be shared with OMI, so we may bear the burden, but we're going to shift a large portion of those costs to OMI.

When you go through all of those, you're left with that $15 million to $20 million of net dis-synergies out of that number that you have to absorb in the Med Devices business again in 2018.

But then the cost savings of $30 million to $40 million really is targeting both taking costs out of the corporate and eliminating that rump of dis-synergies that's left from the allocated costs, who are really targeted in both those areas.

And inside that, as we've talked in the past is IT transformation, it's organization design, it's supply chain optimization and distribution efficiencies.

So it's a basket of initiatives, all of which, by the way, are underway already.

And so this is not a wait and see.

All of those are projects with leaders happening already.

So Matt, I'll pause, I don't know if that kind of gives out the essence of the question.

No, I think it does.

I think I fully understand the 3 or 4 moving pieces there and how to get to the right number, so I really appreciate that, Steve.

And then how sustainable -- you're talking about some acceleration in COOLIEF into the fourth quarter.

Is that not sustainable as you go through 2018?

What kind of tailwind do you think that would -- that means to your organic revenue growth?

Yes.

So I think COOLIEF will continue to progress even with the reimbursement frame that we have now in the hospital, because there are thousands of hospitals in the U.S. that would be targets for us.

And again, we're in sort of 500 of them and we are increasing that every month.

So that's very positive.

And then I do think in the longer term, mid and longer term, as a reimbursement, we are able to work with commercial payers, but also get a better reimbursement revenue in the orthopedic office and the outpatient setting.

Then you'll see a lot of orthopedic surgeons, sports medicine surgeons, that would normally be focused on surgeries, looking to do this for a day in their office.

But they're so impressed with the results that they're actually referring patients to the hospital that have these OA conditions.

So we think that we've got a good growth runway on that business for a number of years.

And frankly, the same with ON-Q and in the Pain segment anyway, and that's because orthopedic surgeons are really taking a look at ON-Q again and trying to get the patient up within 24 hours for total knee.

Our product is really excellent for that.

The duration of our product is strong and we're getting great results.

So that's why we're focusing more on a surgeon focus there, although we obviously do call in anesthesiologists.

The surgeons are the ones that are really looking at real closely at how we can get a rehab quickly for their patients and really make sure their patients are not utilizing or overutilizing opioids.

Okay.

And last question for me, on the OMI deal, the cost of oil is now like the low to mid-60s.

Kind of how is rising oil and material prices potentially accounted for in the deal model?

And was there any contingency against that to protect OMI?

Yes, I'll take that one.

I'd say oil prices, polymer prices move around.

They were up a little bit in the fourth quarter, you may have seen that a little bit in the results.

There is no deal adjustment mechanism, and honestly, I don't think we know how OMI built their model, that's really up to them.

But I'm sure they took assumptions on some range of outcomes around commodities and currencies just like we would do if we were planning for that business.

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

Just a couple for me.

If, maybe Steve, we can start, go back to the fourth quarter and look at the volume growth there, 9% on the Device business, which is the strongest when I look back at the model on organic basis in several years and up pretty nicely.

I appreciate the color that you gave there, the 100 bps from the timing on the distributors' side.

But still if we just kind of look at the run rate, there's about 300 to 400 basis points of greater growth there.

Just want to come back to that and then reconcile that with the 4% to 6% guide on a constant currency basis for the coming year.

Maybe if you could just talk to some of the puts and takes there, a little bit more color on kind of what you saw in the fourth quarter, and why that does or does not translate to 2018?

Then I've got a quick follow-up.

Yes.

I'd happy to, Chris.

And I'll start, and Joe can probably add some color.

But fourth quarter was fantastic.

And we've been calling a big fourth quarter all year I think when we were sitting at the mid-year mark with 3% organic, we needed the big fourth quarter to be able to deliver the guidance and we had a lot of confidence we would get there.

And you mentioned already some of the key drivers, but the OA knee approval by the FDA was a big factor.

We have been selling hard against that approval and have more plans to do so in 2018, again, on the back of additional investment and to build out the capability that we need to do.

But that was a factor.

Certainly, moving the IV piece from the second quarter into the fourth quarter, as you said, added about 1 point to the fourth quarter performance, we're still getting some benefit from oral care.

We'll begin to lapse that in the first and second quarters of 2018.

But from a fourth quarter standpoint, that was still additive to the year and has ramped up well.

And then I guess, I just -- the last point is all businesses did well.

We're kind of calling out COOLIEF, but all the businesses on the device side had a strong performance.

And again, not surprised by that, we needed that in the plans.

And as we look to 2018, I think it's recognizing, okay, you can start to lap oral care.

You're going to have -- IV is going to probably drop off again from the kind of level you saw in the fourth quarter, and there'll be some normalizing of things.

But I'll turn it to Joe, if he has anything to add to that.

Yes, thanks, Chris.

The only thing I would add is we do have a bit of seasonality to our business, and we can look at that historically.

But frankly, ON-Q, COOLIEF and CORPAK as well still have legs in terms of penetration and growth.

And we've talked on a couple of calls that for the past 7 months, Steve and I have been personally spending 3 hours a week with the commercial teams and work with them on sales operations and tiering their customers and changing a little bit about the way that we're gaining penetration into existing accounts, or same-store sales would be one way to look at directing patients.

And I think that continues.

In the fourth quarter, Steve hit on IV, the order and oral care, was a benefit that was sort of one-time, not going to see that again as you go into first half of 2018.

But then longer term, which I think is important, I do think this area still have a room to grow and with John Tushar coming in and me having the ability in Q2 to transition a lot of the U.S. commercial over to him, I'm going to be putting my attention on the international part of our business, which frankly, is an opportunity as we move into 2019.

As you expect from a lot of companies, U.S. companies of this size, the attention on international can be better, and it will be.

And so that's sort of the mid and long term along with the reimbursement in COOLIEF.

You had a follow-up, I think, Chris?

Yes, I appreciate the color.

So just to summarize what I think I heard you guys say.

The 4% to 6% is kind of historically what the company has guided, and clearly, with the heightened focus and the positive momentum, you're very comfortable in that kind of historic 4% to 6% range, which you set here is the early bar on growth for Med Device.

Am I hearing you correctly?

Yes.

That's correct.

We're very comfortable.

Okay.

Perfect.

And then just moving forward to maybe 2 quick housekeeping follow-ups.

One on the tax rate, Steve.

You guys were always really patriotic and doing your best to pay as much as you could, and it's nice to see that come down, but still a little bit higher than I think what we we're seeing on some of your peers out there.

Post-spin of S&IP, just maybe thoughts as to where that effective tax rate could go over time?

And then I feel obligated to ask a margin question as well.

So just help us think a little bit about the IT cost spend.

And I know you've been balancing 3, 4 systems, I believe, at this point in time.

How quickly can you consolidate?

And then how does that play into overall just better cost savings, working capital management?

Sure, I'd be happy to.

So on the tax rate side, obviously, as you pointed out, very patriotic and we're happy to be just slightly less patriotic going forward; big impact for us.

As we go forward, we still have some tax planning opportunity.

As you can imagine, we have landscape of opportunities we would have talked about if we didn't have tax reform a number of those are no longer relevant, but some still are, in the way we organize our Mexican manufacturing operations and so forth.

So we've got some work to do.

We still think there's a some room on tax rate to bring that down further.

And we'll give some more guidance as we may be tightening that range as the year progresses.

On the margins side, maybe on IT, again, we talked about this a little bit in the past, we believe that is probably -- again, bearing in mind the context here we have to have a new IT system aside from the high cost model that we operate today as that moves on to OMI, we need to have the new IT system.

And so we expect to be putting that system in place really starting around now.

We're just finishing the last stages of planning, a detailed time lining around that work.

We believe it's going to be about 18- to 24-month process.

We're going to want to move as fast as we can to get to the backside of that.

But then also do in a way that manages the risk, because we recognize an ERM transition have to be managed very carefully.

When we got to the back of that, there'll be significant savings in at least 2 areas.

One is direct IT costs that we said in the past that our IT costs of the future need to be order of magnitude half of what they are from a pre-transaction standpoint, to be in the kind of benchmark level you'd expect for a company the size we're going to be.

The second cost savings then comes in a lot of back-office transactional work, which, as you pointed out today, is done around the world that we don't have the same language being spoken as we do those transactions, and when we have the common IT platform, we'll able to consolidate a lot of that activity on the back of a common language and transaction process.

But there are other benefits.

Supply chain will have of much more visibility in the cost of sales, have better visibility in the global inventory.

All of those will also be additive to the story.

So we're excited about it.

It's a lot of work.

It's a lot of work on top of a lot of the work we have to do to complete the separation.

And no doubt, be able to focus on M&A going forward as well.

But we've got the right team in place, they're deep down the path, (inaudible) planning and excited about being able to drive those savings on the back.

And the next question comes from Jonathan Demchick with Morgan Stanley.

This is Jon.

Thank you so much for taking the time.

Just one quick question.

I've been hopping a little bit between calls, so I apologize if I missed this.

But I mean, you can talk about the $30 million and $116 million for the quarter and the year, respectively, that was, I guess, no longer allocated in S&IP, but previously was.

Are these costs that we think, following the divestiture, they just go away, right?

None of those costs specifically get kind of added back?

And then on top of that is what we get the dis-synergies number.

I know you've probably tackled this a number of times, but I just wanted to make sure that I understood that correctly.

Yes, no problem, Jon.

We talked about it a little before, but I'm happy to just walk through it again.

So we think about the $116 million that's currently allocated, when the transaction gets completed, a number of those costs go away naturally.

So for example, inside there are storage and handling costs for S&IP.

When S&IP goes away, we will not be incurring storage and handling costs for that anymore, so that will scale down naturally.

Also some IT costs, you can imagine a lot less people, less facilities, less devices, less laptops, all of that will scale down naturally as well.

And then we have organization design, and we are taking deliberately -- taking some costs out of that group as part of that org redesign that we talked about or released in the 8-K in the fourth quarter.

And then the fourth component is we have some cost-sharing arrangements.

So for some costs that don't go away immediately, we are sharing those costs to support through TSAs or cost-sharing arrangements, share those costs with OMI.

When you go through all of those elements, you're left with the dis-synergies of $15 million to $20 million that we talked about in the past.

So think about those remaining dis-synergies as what's left after you've gone through those other steps for 2018.

Okay.

So at the midpoint, basically, we're talking this $116 million number becomes $16 million, something like that?

$15 million to $20 million, that's right.

Yes.

Okay, perfect.

And then the second question I had was more on, I guess, the device profit for the quarter.

First off, is it safe to assume that when we look at the prior quarters of the year versus the current quarter, that we're still on an apples-to-apples comparison for just the device unit profit that you guys are reporting?

And then I guess, the second part of that will be, if you can just maybe help me understand the bridge lower that it kind of took in 4Q and the expectations for where it should be heading into next year?

Sure.

Yes.

To answer your first question, yes.

So if you look at the fourth quarter, it's apples-to-apples with the previous 3 quarters.

There's no change underneath that.

And then, again, hopefully the table in the back of the press release helps you with that.

But it is apples-to-apples.

On the margin, over the course of the year, obviously, in every year, we have some volatility in device margins quarter-to-quarter.

I think one of the biggest drivers here if you look at R&D spending, we had order of magnitude, $7 million of R&D spending for the first quarter, and we get about $13 million in the fourth quarter.

And that has a bearing on how that Med Device operating margin plays out, probably the biggest piece inside there that moves quarter-to-quarter.

We had a pretty big R&D spending in the fourth quarter.

We kind of closed out projects and finished things through.

So that's the biggest driver, the fourth quarter.

(Operator Instructions) Okay.

And there is really nothing else at present.

However, I would like to return the call to Mr. Woody for any closing comments.

Thank you.

Look, I'd like to thank everybody for the continued interest in Halyard Health.

As you can tell, we're very excited about the opportunities ahead in our business.

Over the next couple of weeks, we're going to present at the Raymond James Institutional Conference on March 6 and the Barclays Global Healthcare Conference on March 14.

For everyone interested, information about how to access these presentations can be found on the Investor Relations section of our website, halyardhealth.com.

So thanks, everyone, and have a great week.

Thank you.

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