Good morning, and welcome to the Halyard Health Third Quarter Earnings Conference call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. Dave Crawford. Please go ahead.

Thank you, Cassia, and good morning, everyone. It is my pleasure to welcome you to the Halyard Health third quarter 2015 earnings conference call. With me this morning are Robert Abernathy, Chairman and CEO; and Steve Voskuil, Senior Vice President and CFO. Robert will begin with an assessment of our third quarter performance and the progress we are making on our key priorities for 2015. Then Steve will review our results in more detail and provide his perspective on our outlook for the balance of the year. We will finish with Q&A. A presentation for today’s call is available on the Investors section of our website www.halyardhealth.com. As a reminder, our comments today contain forward-looking statements related to the company, our expected performance, economic conditions and our industry. No assurance can be given as to the future financial results. Actual results could differ materially from those in the forward-looking statements. For more information about forward-looking statements and the risk factors that could influence future results, please see today’s press release and our prior filings with the SEC. Additionally, we will be referring to adjusted results and outlook; both exclude certain items described in this morning’s press release. The press release has further information on these adjustments and reconciliations to comparable GAAP financial measures. Now I will turn the call over to Robert.

Thanks, Dave, and good morning, everyone. I appreciate your interest in Halyard Health. On November 1st, we celebrated our one year anniversary as an independent company. Those of you who have followed us since day one, know that we launched Halyard with a strategic vision of creating long-term shareholder value by shifting our product portfolio toward our faster growing higher margin medical devices segment. And that we have a step-by-step plan to accomplish that goal. Looking back at our first year, I can say that my management team and I have meaningful accomplishments to be proud of; but that we face some headwinds, some challenges and have more work ahead of us. Our third quarter reflected that theme, a mix some positive results in our separation from Kimberly-Clark and in our medical devices business and challenges in our S&IP business. Let me talk about each of these. First, we remain on track in building Halyard Health as an independent company. Our ability to exit, transition services agreement or TSAs on time and in some cases early is a major accomplishment that positions us to execute our long-term growth strategy of portfolio transformation. To-date, we have exited nearly 90% of the TSAs and are on plan to exit the remaining TSAs in the fourth quarter and in 2016. We are now shifting our internal focus to improving efficiencies and reducing cost. We are also continuing to make progress on our re-branding and repackaging efforts as more than half of our product shipped are now Halyard branded. Customer reception to the Halyard brand continues to be strong. Second, I’m pleased to say our medical devices sales are on track to deliver year-over-year constant currency growth of 2% to 4% consistent with our guidance. Medical devices increased 5% this quarter on a constant…

Thank you, Robert. Before discussing our third quarter results, I would like to remind everyone that our results for 2014 reflect the business as it existed when it was part of Kimberly-Clark. Included in our 2014 results our pre-spin cost associated with executing the spin-off. Now let me start with some key information from our press release. Third quarter sales were $390 million, a 2% decrease in constant currency compared to the prior year. Adjusted operating margin was 12% for the quarter compared to the prior year of 15%. Adjusted EBITDA was $56 million for the quarter compared to $81 million the prior year. Taking a more detailed look at our results for the third quarter, overall sales of $390 million were down 5% compared to $409 million a year ago. Exchange rates negatively affected net sales by 3% or approximately $13 million and lower selling prices impacted sales by 1%. Adjusted gross margin of 35% this quarter was even with a year ago. Manufacturing cost savings and lower commodity prices in the quarter were offset by lower production volume and price erosion in S&IP. Adjusted operating profit was $46 million, down from $63 million a year ago. The decrease was driven by lower S&IP sales volume and pricing and increased standalone costs due to our spin-off. During the quarter, we incurred $16 million of post spin related charges; $9 million for litigation matters and $7 million in intangible amortization expense that were excluded from adjusted operating profit. Additionally the non-cash preliminary goodwill impairment that Robert mentioned was excluded from adjusted operating profit. As a result, adjusted operating profit margin was 12% for the quarter. Looking at our performance on a segment basis, S&IP net sales declined 8% in the quarter to $257 million, down 4% on a constant currency…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Kristen Stewart of Deutsche Bank. Please go ahead.

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

Yes, Christine. Good morning.

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

Yeah, good question. We’ll start with the contracts first and I’ll talk about whether we’ve sort of found the bottom or not. In terms of the contracts they are all right on schedule, last quarter I talked about our largest contract, which is our surgical business with one of the large GPOs that we were looking to shift that contract by one year and we were allowed to do that. So that was postponed till next year, so that gives us really solid base of contract business in surgical, other contracts have been negotiated and are either completed at this point or well along the process, we haven’t lost contracts with GPOs through that negotiating time. So we feel good about the contract negotiations. We continue to see though the pressure in S&IP, we continue to see the price loss. So whereas earlier in the year we were talking about 1% price loss, we are now signaling for this year and into next year a 2% price loss that price loss is coming predominately in our glove business and in sterilization. So we’re really focusing on using price strategically to win contracts at the hospital level as well as to maintain our leadership position in sterilization wrap. So price loss is clearly dialed up from that 1% level to 2% level. The second part of the difference in S&IP that we haven’t talked a lot about in the past is that we sell gloves to Kimberly-Clark and they use those gloves in their industrial business and those sales are falling short of the forecast for the year. So we’ve seen a little bit more of a dial back there in terms of our planning assumptions going forward. And the third part that’s really kind of an unknown and it’s still out there and may indicate whether there will continue to be some softness, the share loss in surgical. A lot of our volume loss this year has been in the surgical business and to a lesser extent in apparel, but surgical in particular has been an area of concern some of that surgical loss is due to the consolidation of custom procedural tray manufacturers the custom packer business, the consolidation has happened as Medline, Cardinal and Owens & Minor have been buying up custom procedural tray companies. So we’ve seen some share loss as that consolidation has happened. We feel like we’ve got a sense of what that share loss is today and we don’t feel like there is significant share loss going forward, but it’s sort of a quarter-by-quarter analysis, Kristen as we look at that.

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

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

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

Okay. So no material impact from the strategy for S&IP that you see at this point.

That’s right.

Okay great thank you.

Thanks, Kristen.

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

Hi, good morning everyone.

Hi, Larry.

So I guess, I just wanted to start with perhaps a couple questions on the Medical Devices business and then I just had a financial question for you. Could you talk a little bit I know you talked a little bit about ON-Q, but could you talk just broadly about sort of the trends that you’re seeing within the big buckets, within the Medical Devices business?

Yeah let me talk about each of the four kind of big buckets and I’ll start with our interventional pain, we continue to see strong growth there driven by our COOLIEF business that’s the business that’s been growing at sort of that 60%, 70%, 80% range quarter-by-quarter. It’s continuing to grow in that sort of range so we’re very, very pleased with the growth of COOLIEF, which is driving the overall growth of our interventional pain. Our surgical pain business, the majority of surgical pain business is ON-Q and ON-Q continues to show that we did find the bottom in terms of that business that had been declining for a year and half and now it’s turned to grow. So up 5% in the ON-Q business in this quarter, which is very, very pleasing to us, because we signal that our key messages in the marketplace around non non-narcotic medication and the effective treatment using non-narcotic surgical pain through ON-Q is certainly is resonating. So that business anchored with ON-Q is showing growth. Then our other two businesses respiratory care and digestive health we maintain very high market shares in those two categories, they typically grow with hospital, surgical procedures and hospital utilization so they continue to be strong with low single-digit growth.

Okay, perfect. And then just two financial questions, I’ll just rap [ph] them off and you can answer them. So I am just trying to make sure I am thinking about this correctly, but you maintained a minus 1% to minus 3% sales growth on a constant currency basis for the company yet you reduced the outlook for S&IP to that minus 5% to minus 7% that’s obviously 70% of the business. So just trying to understand how the overall guidance was maintained in light of the med device guidance remaining unchanged? So that’s question one and then question two is, if my map is correct I think the spin related charges are just under $29 million year-to-date I think $28.5 million. And you’ve got $45 million to $55 million targeted for the year. So I’m just trying to understand what perhaps changes in the fourth quarter to step those charges up?

Yeah let me first take the guidance on total Halyard sales and why we’ve maintained that range of 1% to 3%. Let me start by just reminding everyone that we’re at -- our total Halyard sales year-to-date constant currency are down 2%. So it’s -- so right in the middle of that 1% to 3% range and our S&IP sales year-to-date are currently down 5%. So we’re already sort of in those two ranges below into the S&IP range and right in the middle of the sales range for the total company. But as we go into the fourth quarter, obviously we’ve left the range pretty broad. And fourth quarter tends to be the quarter where you can have quite a range of sales based on whether you have a particularly heavy cold and flu season or whether you have a pandemic that comes through. So we’ve left the range pretty broad. Assuming that our medical device business continues to show the sort of growth it has in the last two quarters, which was plus 7% in the second quarter and plus 5% in the third quarter. That would indicate that we’re going to have some medical device sales that gives us some momentum to offset some of the decline in S&IP to get us squarely in the middle of that net sales growth range that we’ve maintained.

And picking up that second piece on one-time cost. Our numbers are slightly different than yours Larry we would say $34 million year-to-date spending at either way we would expect to be on the low end of that range that we’ve communicated.

Okay, perfect. Thank you very much.

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

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

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

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

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

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

Last quick on, the litigation expense can you just remind us what that is?

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

Did you expect those to continue?

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

Yeah, I just trying to get a sense for $9 million is that a good number of what you anticipate or is that kind of going to drop off as we look forward?

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

Alright, thanks.

[Operator Instructions] Next question comes from David Lewis of Morgan Stanley. Please go ahead.

Good morning.

Good morning, David.

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

It’s a combination of both of those. So as we just sort of program out what we already know we’ve negotiated for next year that would give us about a 1% price loss go for next year, then we factored in an additional 1% of contracts that we’ll be negotiating next year. So it’s a combination of roll forward of new contracts from this year at lower price as well as anticipation of continued low commodity cost such that will have continued price pressure next year.

Okay, very helpful. And then so I think I know it’s early to talk about ‘16 outlook. But if just in broadly on margins qualitatively if we think about pricing pressure comp expense the R&D investment that we saw step up this quarter, can margins be up next year in 2016?

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

And I would say although we are not giving guidance yet for 2016 beyond that for shadowing on price. I think it’s fair to say that margins will be pressured next year and it’s based a little bit on the bar math that you just did David. The R&D investment, the additional incentive we will get some benefit from some of the cost and distribution dis-synergy that we had this year that don’t repeat to the same magnitude next year. But net-net it will be some pressure on margin.

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

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

Okay, thank you very much.

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

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

We estimated sales from Ebola of $13 million in the fourth quarter of last year and that was then taken off of the first quarter sales. So we’d say really what happened was we shifted $13 million of sales that would have naturally happen in the first quarter of ‘16 and to the fourth quarter of ‘15.

Okay. So that off…

‘15 and ‘14 yes.

Okay. So that also is in you obviously guidance making the fourth quarter of S&IP sales also be down pretty heavily in the fourth quarter?

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

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

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

Okay. And Steve can you make a lower tax rates happen hopeful as well. I think you are the highest tax payer in town.

Yeah, Robert reminds me of that every day. Yes that is something we’ll look at as well to take first step next year.

Okay, yeah that’s a good thing to look out. So glad to hear you on that. Alright, thanks guys.

Thanks, Kristen.

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

Well thank you today for your interest in Halyard Health. Information about how to access today’s presentation can be found on the Investor Relations section of our website halyardhealth.com. Thanks, everyone.

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