Good morning. And welcome to the Halyard Health Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please 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 with a standalone medical devices 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 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 the 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 spin-off, 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 unless the right deal for all our stakeholders. I see this is achieving three fundamental outcomes, first, it allows for 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 an 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 leading market positions, we're strengthening our R&D…

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 fire power to invest for growth. We'll have an estimated net after-tax proceeds of approximately $550 million as a result of the divestiture. A port of those proceed 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 $650 million. Our objective is to maintain balance sheet flexibility to invest for growth. With low cash need 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 our R&D and product development. We believe we have the 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 a 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. With that said, we see plenty of opportunities for value adding transactions and will consider M&A targets that have characteristics like attractive top-line growth, positioning us in new and adjacent markets with significant potential for future growth and scale and significant free cash flow generation 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 effective integrate new acquisitions, deliver…

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 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 question.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Rick Wise with Stifel. Please go ahead.

Good morning, everybody. Good morning, Joe. Congratulations, it's obviously a major exciting move here today. Maybe just to start-off, you 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 peer growth, top-end of peers from a growth perspective or something else then just again high level thoughts initially?

Thanks Rick. You are right. For us, this is transformational and very strategic. We end up with a very streamlined and simplified structure. Obviously, we will be just spinning an 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 have been talking about a lot. I think we have been sort of clear and consistent and we do believe, this is the right time for this transaction. This is the right transaction which will have the right fire. 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 a spin-off to sort of my background and the prior management team executing our Corpak and really frankly this divestiture process was starting to build the muscle for what you are talking about performing more in line with our peers and in fact working towards exceeding our peers on the top-line. And that said, I think, we now have a lot of levers in our business, the capacity that will now have for M&A, the ability to improve margins over time. And so, it's very, very exciting day for us here in the company and I think for investors as well. I will just offer if Steve want to add anything to that?

I think that's well summarized.

Okay.

Got it. And another question, just again on the deal pipeline and M&A which again you referenced multiple times. Maybe you could comment on, how you see as -- the future shaping up on the M&A front, just looking ahead is it more likely you do a larger transactions or multiple Corpak size and maybe you comment on the pipeline. Is the pipeline picking up, is this, how quickly can all this materialize?

So Rick, I would say that we are 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 are working on one or two as we speak. And then, we shifted a little bit of our net that we cap with the strategic review that we have done in our portfolio. So, we are looking at -- again, in my view near adjacencies where we do have in some cases a channel or technology or relationship where perhaps the technology is changing to a new technology that's changing procedures and have effect on 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 it have the right sustainability, the right financial profile or the business and that the broader business, it really the margins and the growth that we aim to achieve.

One last question for me now. Steve or Joe, how do we think about the adjusted EPS base now S&IP, we are just quickly putting pen to paper and lot of moving pieces. But, we were sort of thinking $1.50 plus or minus a couple of times. Steve, you want to try to focus me, focus us a little more clearly?

Sure. We were 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 we are going 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 place holder. We have a segment for corporate, which gives you a pretty good picture of our corporate cost. And then, we have give a little bit of guidance year one to synergy and again I'd say that's still a work in progress. But, as a reference point to start, I think those are privately three inputs as you think about 2018 and then as we talk about in the call. We are very focused on not only recapturing those to 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 that continue to grow 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 will share more details on that as we go forward. But, as a kind of broad starting point, hopefully that gives you a little bit of a guideline.

Thanks and congratulations on a very exciting move.

Thanks Rick. It looks exciting. Thank you.

The next question comes from Matthew Mishan with KeyBanc. Please go ahead.

Hi. Good morning, and thank you for taking my questions.

Hey, Matt.

I just want to follow up on some of the questions around the dilution and for next year. Is the way -- how much of the corporate cost, I mean, you were about $72 million to $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 are working these, you see it in our model, we don't allocate any of those to the segments. And so, clearly there is going to be some dis-synergy or loss of efficiency if you want to say in the corporate cost side. As we have said to Rick just a minute ago and our goal is to streamline that over time. But, particularly in the first year, we were going to still have to provide a lot of the same support as we do the TSAs and so forth for LMI. The world of the activities at corporate doesn't look a lot different in 2018 than it did in 2017, until you roll off of those TSAs. And so, you are 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 cost 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% to 36%, are those the key moving pieces there?

You are going to have some additional cost savings. You are also going to have some obviously growth in the business and so those I think -- two things that are going to push you the other direction. But, broadly that's the right way to think about it.

Okay. And then -- go ahead.

We talk about it internally as a kind of separation period, which is what we are talking about now than more of a transformation then the ability to accelerate the top line 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 will be working to take cost out as we can alongside of what Steve outlined so.

Okay. Fair. And then, lastly on the medical device growth, 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 to one way or another at this point for the full year?

First to mean, if you think about the progression starting it out before I got here to spend 1% and then moving to 3% and then 4%. That's impressive. We are committed to the range of 4% to 6% and we have not backed off of that. I think we said also in the past that in Q2, we had some IV infusion business move to the fourth quarter. And then, we had some other impact in the business on a health trust contract in oral care. Lastly, just generally, there is a movement of positive upward in Q4 typically not just for our business but a lot of businesses, end-medical device and the COOLIEF area in particular is a progression for us as we work at getting better reimbursement as we work more and converting some of these consumers, they come into the sites where we are providing that capability. So, and we are still committed to the 4% to 6% and then a progression into Q4 from where we are today.

All right. Thank you very much and congratulations once again on the detail.

Thanks Matt.

The next question comes from Jonathan Demchick with Morgan Stanley. Please go ahead.

Hello. Thanks for taking the questions. One of the follow-up I guess on some of the others that really talk about the standalone device business and removing S&IP, I guess really come in means of the pro forma number. Kind of following up a little bit, it sounds like if you just take the $17 million or so that you have reported as operating profit from this is IT, add back depreciation and amortization and then, the sort of corporate, sorry dis-synergies cost that you've really talked about. We're really talking about removing somewhat of like $80 million to $90 million of EBITDA from this companies, is that right and there we kind of think about in the 90 in forward areas when we start getting the savings that work about down?

If we're not, Jon sorry, we're there to tell the confirmation. We're not going to get that detail, but try to get the guidance on EBITDA yes for 2018, I mean I think you are looking at it the right way. But we're not going to get more specific on 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 is the transformation stage that really starts that on the graph that you guys have pushed out. How should we thinking about that the target saving is rolling in, I mean we are, I believe we're about three areas almost exactly past the spin of Halyard from Kimberly-Clark, I mean it seems that margins have stayed relatively in the same area that we spun within then there hasn't really been a major step-up yet. I'm sure you would be thinking about that its still like three years out before you'd really start seeing in another significant ramp up in margins 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 the TSAs roll-off, you are going to begin to see some of that improvement, but these are still out there and that's a little bit further out its going to be the IT transformation. So, although people, bud for this transaction, we'd probably doing some IT transformation in 2018, I think we've talked about that in the past. But, obviously this is going to put up 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 there will be more in the 2020 to 2021 timeframe when that rolls in, but that's a pretty significant margin lift towards the backend of the planning horizon.

Understood, one last one, I just wanted to try to better understand the IT and rebranding efforts and how much, 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 be thinking about IT is basically the current IT system within your current company is really moving over OMI and you are building a brand new one is that the right way to think about it?

Yes there is 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 and of course rightsizing it for the size of the company in the sort of agility and scalable infrastructure that we're going to launch 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 will come back with more details to provide some color around that as we do more due-diligence there.

Thank you, very much.

Thanks Jonathan.

[Operator Instructions] The next question comes from Chris Cooley with Stephens. Please go ahead.

Thank you [indiscernible] 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 need to make from a sales and marketing standpoint not just heat on the street, but also in terms of building the clinical [indiscernible] support sales [indiscernible] at this standpoint [indiscernible] or I should say hide and focus on the device portfolio and how that's kind of incorporated into your thoughts into the 2018, 2019 margin to help, what it's all about?

Hey Chris, I think I heard you and I'm going to give it a short here and if we somehow missed a part of your question we're happy to go back to us and we'll have Steve be additive to these comments. But when you think about the commercial side of business, there is 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 spend expand that to the outpatients gives them more favorable coding and reimbursement there. Ultimately they would then be, I think as we progress our business opportunities first to expand our channel as we're going to become very focused on the top-line growth. 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, so we 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 we 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 is ready for their kind of growth 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, with the job to keep the business stable, but we are going to even then begin to make some of those capability investments to set us upward, the future growth we expect.

And then just another input that and obviously with the different capacity for M&A, M&A can change your profile as well on the margin in often times their synergy opportunity are 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 would have it in our time here that we covered everything you were asking.

That was great, can you hear me now? Joe can you hear me. Maybe I mean just try one quick follow-up and I'll follow-up offline. But Steve could you just breakout for us the impact of weather during the most recent quarter both from a top-line, but also from a margin perspective and will there be contingent liability with the litigation to S&IP side will that transfer or can you help us better understand maybe an update on that as well? Thanks so much.

On the weather side, we did have some impact, we had a bit on the top-line not material and so we didn't spend a lot of time on it on our prepared remarks. We mentioned that polypropylene had popped up towards the end of the quarter and it seems to be sort of staying at that sustained level that will have a little bit of an impact, a little bit of an impact in the quarter, but that wasn't our plan, but overall, not materially in that. On the litigation side just to pick that up, so the down-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. As the down-related litigation there, we'll remain with our company with Halyard today, we'll not go to the buyer. Other litigation that as it comes up in the normal course of business of course would go to the buyer.

Thank you and congratulations.

Thank you, Chris.

Thanks a lot Chris.

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

Yes hi, good morning. 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 funding strategies into place and, I know this is a long range question, but if you got the sort of mid 30ish tax rate and not contemplating any tax reform in the U.S. Can you drive that back down again?

Yes. I would, it would be great if we got some. But, again we're not going to wait for that and I think we are top there, we can get back down into the range or lower to where we are at today that kind of mid 30ish targeting that we talked about in previous calls for Halyard. One of the things we lose with this structure, as we put in place some tax planning that involves some of our international manufacturing locations which are going to be going to the buyers. So that's really what, one of the things that drives the reset. Now 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 would say 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 actually has done for a little while. So, clearly albeit incumbent on need to help drive that rate down to a better place like we did for Halyard.

Okay, perfect. And then two other ones, just on the $30 million to $40 million in savings that you talked about, where you anticipate those savings coming from exactly and what the right timeline to think about when you can get to that that rate of $30 million to $40 million?

Yes. So, out of that $30 million to $40 million, there was a portion we all have already identified. Even today, again looking to the size of the corporate infrastructure post TSA and trying to do some design work around benchmarks for company's our size. There is a sizable portion of that $30 million to $40 million that we have sort of lined out today. But, there is also a significant portion that is relating to the IT infrastructure. And again, we talked in the past about probably get 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 of our size, it's quite expensive. And so, there is also a sizable piece of that $30 million to $40 million that is going to rely on us driving efficiency into that IT. Again, we believe we know how to do that, we are ready and prepare to do that for Halyard HoldCo, but we got to do now, kind of retune that plan for something that would be appropriate for our new size and shape. But, second, we put them -- we got work to do to just fully delineate all those savings to simply to go get them. But, we are 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-up fresh on that side. And I don't need fresh, so 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 saving sets 2021 somewhere in that timeframe. I mean, still a couple of years away, it sounds like.

I think that's right. We would hope that by 2020, maybe you are starting to give the first -- if we are rolling this out, the new system you would be doing some of that work. But, I could imagine full realization might drag into 2021 for the IPDs.

Okay, perfect. And then, the last one. Actually this sort of two part there. Just again, can you help us think about once you got this standalone medical device and I understand things will be dynamic with potential inorganic additions to this? But, just as you contemplate the business today, how do you think about the cash flow generation off of that business. And then, on the TSA, I just want to be clear, are you actually getting paid anything for those, for those TSAs during that first half or is that just part of the agreement to support OMI?

Sure. I mean things are also in reverse order. So, on the TSA ADS, we've -- say mostly finalized those schedule, 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 will talk more about how are going to kind of show that in our adjusted earnings for 2018, try to get some clarity. So, we are to the incremental cost for providing that service and matching it up against the revenue. So, you get a little bit of look through of what's actually happening, so it provides more color on that, if we get closer to next year [by the end of this year] [ph] On the cash flow side, one of the strength of the device business and we talked about this quite a bit leading up. Actually device will drive a significant portion of our cash flow and it's grown every year kind of along with the operating margin in the top-line growth. And so, this is a business that throws of cash even though we have been investing in R&D, even though we have been investing in things like COOLIEF for reimbursement. And so, we've delivered the expectation we are going to be able to continue to drive cash flow growth out of that business. And if we look back -- we looked at the last couple of years as we proof point, so that we can o that.

Okay. Terrific. Thanks guys. Congrats

Thanks Larry.

[Operator Instructions] The next question comes from Kristen Stewart with Deutsche Bank.

Hi. Thanks for taking the question and congratulations. 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?

Thanks Kristen. For the type of growth that we are considering in our business there is a willingness for us to look at all of those. I think in terms of technology deals, we can neither invest in early stage or bring in and with our R&D and quality, regulatory, and reimbursement capability basically accelerate that and it be additive to our technologies. The other thing is, is that, we are also looking and evaluating more Corpak type of deals that are accretive initially and/or closer to our base. And then, we are scanning the horizon as well for platforms that would be asset to our business. And we would not sort of -- not consider as if you will. We are considering as part of our landscape as well. The thing I would say is that we're getting 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, third area of growth?

That's a possibility. I think first we are going to look towards pain and see where we can be active and expand there. We like that market. Rosso are going to look at our chronic care area and look at what's happening there. There are some more differentiated technologies and development there and close procedures to whether it's [indiscernible] today. But obviously, if something opportunistic comes along in terms of the platform, if definitely we would equally look at.

I think that's probably a good build off, so we talked about earlier. Now, we got a management focused on the devices and the spaces in and around our areas. And so, I think that's one of the things that's pretty exciting about the future that brought them out.

Absolutely.

Okay. Thanks very much. Congratulations again.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Joe Woody for any closing remarks.

Well, thank everybody for joining the call. This is a very exciting day. And I feel [indiscernible] 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.

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