Becton Dickinson and Co (BDX) 2013 Q4 法說會逐字稿

Hello, and welcome to BD's fourth fiscal quarter and full fiscal year 2013 earnings call. At the request of BD Inc., today's call is being recorded. It will be available for replay through November 12, 2013 on the Investors page of the BD.com website or by phone at 800-585-8367 for domestic calls, and area code 404-537-3406 for international calls, using confirmation number 69586788.

I would like to inform all parties that your lines have been placed in a listen-only mode until the question-and-answer segment.

Beginning today's call is Ms. Monique Dolecki. Ms. Dolecki, you may begin.

Thank you, Jackie. Good morning, everyone, and thank you for joining us to review our fourth fiscal quarter results. As we referenced in our press release, we are presenting a set of slides to accompany our remarks on this call. The presentation is posted on the Investor Relations page of our website at BD.com.

During today's call, we will make forward-looking statements and it is possible that actual results could differ from our expectations. Factors that could cause such differences appear in our fourth fiscal quarter press release and in the MD&A sections of our recent SEC filings.

We will also discuss some non-GAAP financial measures with respect to our performance. A reconciliation to GAAP measures can be found in our press release and its related financial schedules and in the slides. A copy of the release including the financial schedules is posted on the BD.com website.

Leading the call this morning is Vince Forlenza, Chairman, Chief Executive Officer and President. Also joining us are Chris Reidy, Chief Financial Officer and Executive Vice President of Administration; Bill Kozy, Executive Vice President and Chief Operating Officer; Tom Polen, Group President; and Linda Tharby, Group President.

At this time, we would like to announce some leadership changes in the business which took place on October 1. Tom Polen has been promoted to the role of Group President for two of our business units, Medical Surgical Systems and Pharmaceutical Systems. Tom had most recently been the President of Diagnostic Systems, and before that, President, Preanalytical Systems.

Linda Tharby has also been promoted to the role of Group President for two areas of responsibility, Biosciences and Preanalytical Systems. Linda had most recently been the President of Diabetes Care, and prior to that, Linda served as Vice President and General Manager in Pharmaceutical Systems, after serving as Country General Manager in Canada.

In their new roles, Linda and Tom will report to Bill Kozy, Executive Vice President and Chief Operating Officer. For the purposes of today's call, Tom will continue to answer questions related to Diagnostic Systems and Linda will answer any questions related to Diabetes Care.

Alberto Mas will be assuming Tom's prior responsibilities in Diagnostic Systems. Alberto had most recently served as President of BD Biosciences for the past two years. Prior to that, he served as Worldwide President for BD Medical, Medical Surgical Systems for six years. He made major contributions to key initiatives, including ReLoCo and ReKindle and the Carmel Pharma acquisition.

Ranjit Banerjee will be assuming Linda's prior responsibilities as the President of Diabetes Care. Previously, Ranjit served as Vice President and General Manager of Injection, Medical Surgical Systems, since October of 2009. In his prior role as Vice President of Operations for Medical Surgical Systems, Ranjit was responsible for ReLoCo, our manufacturing initiative which you have heard us talk about for a number of years.

Claude Dartiguelongue will assume all responsibilities previously held by Alberto as the President of BD Biosciences. Claude was previously the President of Pharmaceutical Systems since October of 2009. Claude has had a broad range of experiences at BD, including assignments in BD Biosciences Marketing, Instrument and Service Management in Diagnostic Systems and Marketing Management in Diabetes Care. Claude made major contributions to key initiatives, including our acquisition of SSI and moving us into the self-injection space. Claude will report to Linda Tharby in her new role, and Alberto and Ranjit will report to Bill Kozy. Vince will provide more color on these leadership changes in just a moment.

As we stated in our press release, earnings per share were impacted by a few one-time charges this quarter. We incurred a pretax charge related to the RTI verdict of $341 million, or $1.06 diluted earnings per share from continuing operations, as well as a charge for non-cash pension settlements of $6 million, or $0.02 diluted earnings per share from continuing operations.

The Medical Device Tax in the quarter was $13 million, or $0.04 per share. For the purposes of our conference call today, we will refer to adjusted diluted earnings per share excluding the aforementioned charges. In noted circumstances, we will also exclude the Medical Device Tax.

For comparison purposes, we would like to remind everybody that we had an adjustment in the fourth quarter of fiscal year 2012 of $20 million, or $0.07 per share, for various pension settlements. It is now my pleasure to turn the call over to Vince.

Thank you, Monique and good morning, everyone. Before we discuss the Company's performance, I would like to comment on the organizational changes Monique just walked you through. As we continue pursuing the Company's strategy, we bolstered our leadership structure to help ensure our future success and continue the development of our senior leaders. The leadership changes we just discussed demonstrate our commitment to management development and the importance of running multiple businesses as a part of executive development.

This leads to better decision-making and an increased focus on growth as we develop more impactful solutions for our customers. These changes will enable us to seek strategic synergies across our diversified portfolio and nicely complements the international restructure in 2012 and the additions of Ellen Strahlman and Chris Reidy in fiscal year 2013. We are extremely pleased to have all of these leaders in their new roles as they help the Company through our next phase of growth.

Now, I will begin with a brief review of BD's performance for the fourth quarter, the full fiscal year 2013 and our FY 2014 guidance highlights. Chris will then walk us through a detailed review of the financial and segment performance and how we are thinking about the various elements of our P&L for 2014. I will spend the balance of the time discussing our upcoming portfolio highlights and then opening up the call for questions.

As we stated in our press release, we are proud of our accomplishments during fiscal year 2013. Our strategy is continuing to deliver results, as evidenced by our strong finish to the year. Growth this year was driven by solid performance in Medical and Diagnostics, with a nice improvement in our Bioscience business. We continued to see strength in international sales of safety engineered products and emerging markets.

Our innovation initiatives continued to fuel growth, both organically and through recent acquisitions.

Turning to slide 5, I'd like to highlight some key achievements in 2013. First, our disciplined M&A program continued to drive growth. This fiscal year, we completed the acquisitions of Safety Syringes Inc., or SSI, and Cato Software Solutions, as well as a licensing agreement with CRISI or CRISI Medical Systems. These acquisitions, along with the recently annualized acquisitions of KIESTRA and Sirigen, contributed about 80 basis points of top-line growth.

Second, we have continued to strategically invest in higher growth emerging markets. We made an incremental investment of $40 million in fiscal year 2013. Emerging markets grew over 13% this year and continues to be a key growth driver for the Company. Emerging markets now represent over 24% of our overall revenues.

Third, we continued to focus on innovation across all three segments. This fiscal year, we launched over 20 new products organically and through acquisitions. Revenue from new products and acquisitions as a percentage of sales is now at about 13%. We will discuss our new product launches in more detail later in the call.

Fourth, we continued to drive operating effectiveness and efficiency initiatives, which provided underlying margin expansion. In the last few years, we have created global shared service centers and have also continued our ReLoCo initiatives. This fiscal year, our ReLoCo program provided incremental savings close to $50 million. Due to our sustained focus in recent years in this area, efficiency initiatives have now become an integrated component required in business plans across the organization.

Lastly, we maintained our strong capital structure. This includes 41 consecutive years of dividend increases and a consistent share repurchase program, which highlights our commitment to return capital to shareholders.

Moving on to slide 6, we have outlined our fourth-quarter and full-year revenue and EPS results, which I will speak to on a currency-neutral basis.

Total Company revenues in the quarter were strong, increasing by 7.2%. This includes about 120 basis points from acquisitions, with an additional 60 basis points of one-time and timing benefits. This brings underlying growth in the quarter to about 5.4%. Chris will provide you with more color on that in just a moment.

Adjusted diluted earnings per share excluding the Medical Device Tax were $1.58. This represents 12% growth.

For the 12 month year-to-date results, revenue growth was 5.4%. Acquisitions contributed about 80 basis points and other favorable benefits contributed about 40 basis points to revenue growth for the total year. This brings underlying growth to about 4.2% for the year.

Adjusted EPS growth was 11.9%, excluding the Medical Device Tax.

On slide 7, you will see the guidance for fiscal year 2014 on a currency-neutral basis. We have also provided guidance excluding the impact of the Medical Device Tax, which will annualize after our first fiscal quarter.

For fiscal year 2014, we expect currency-neutral revenue growth of 4% to 5%. Based on our current view of the environment, we expect to be around the midpoint of that range. Of course, we have contemplated a number of factors that could bring us above or below the midpoint of that range, including pricing, a stronger or weaker flu season than expected, product launches and macroeconomic conditions in the US and Europe. The impact of sequestration and slower-than-expected growth in emerging markets could bring us to the bottom end of that range.

On the bottom line, we will continue to deliver a better quality of earnings. From fiscal year 2014, we expect EPS growth to be between 8.5% to 9.5%.

Excluding the incremental impact of the Medical Device Tax in the first quarter, earnings per share are expected to grow 9% to 10%. Now I would like to turn the call over to Chris, who will walk you through our financial performance in the fourth quarter and total year, along with the additional details from our fiscal year 2014 guidance.

Thanks, Vince, and good morning, everyone. I would like to begin by discussing the key financial highlights for the fourth quarter. As Vince mentioned earlier, we are pleased with our fourth-quarter results. Strong growth of 7.2% was aided in part by 120 basis points from acquisitions and 60 basis points due to stimulus spending in Japan and a reversal of an unfavorable timing of orders in Advanced Bioprocessing from the third quarter.

Additionally, we received the benefit of strong orders in Pharmaceutical Systems and competitive gains in the Medical Surgical Systems unit. Pricing in the quarter was about flat. Overall, we experienced underlying growth of 5.4% in the quarter, which gives us good momentum going into fiscal year 2014.

Emerging market growth was strong and continued to deliver results which I will speak more about in a moment. Adjusted earnings-per-share growth excluding the Medical Device Tax was 12%. We also completed an additional $44 million of our share repurchase program, bringing our total year repurchases to about $450 million.

On slide 10, I will review our revenue growth by segment on a currency-neutral basis. Fourth-quarter revenue of $2.1 billion was a record quarter for us. This represents growth of 7.2%. For the total year, Company revenues grew 5.4%.

BD Medical fourth-quarter revenues increased 6.7%. Growth in this segment was driven by strong sales in the Medical Surgical and Pharmaceutical Systems units. Medical Surgical Systems growth was 6.2%, led by emerging markets, international safety sales and competitive gains related to a competitor exiting a portion of the market.

Growth in Diabetes Care was 5.9%. This reflects continued geographic expansion and strengthened new product sales, such as the BD Nano with EasyFlow technology.

Pharmaceutical Systems growth was 8.3%, driven by our recent SSI acquisition and in part from strong orders in the quarter. For the total year, the Medical segment grew 6%.

BD Diagnostics' fourth-quarter revenues increased 6.3%. The segment's growth was driven by solid sales of Preanalytical Systems safety engineered products, KIESTRA lab automation installations and the continued ramp-up of BD MAX in Diagnostic Systems. We have also made significant progress with Veritor, bringing our total placements worldwide to over 7500 units. For the total year, the Diagnostics Segment grew 5.2%.

BD Biosciences' revenue growth was strong in the quarter at 11.6%. This was driven by solid instrument placements and cell analysis, in addition to incremental sales related to research funding in Japan. Additionally, Advanced Bioprocessing experienced a reversal of an unfavorable timing of orders from the third quarter. Excluding the aforementioned items, underlying growth in Biosciences was about 4% to 5% in the quarter. For the total year, Biosciences grew 3.6%.

Now moving on to slide 11, I will walk you through our geographic revenues for the quarter. BD's reported US revenues increased 3.4% versus the prior year. Revenue in our US Medical segment increased by 4.3%. Strong growth in Pharmaceutical Systems was driven by our recent SSI acquisition and strong orders. The Diagnostics segment grew 1.6% in the quarter. This reflects growth in Preanalytical Systems safety products and progress with sales of our Veritor point-of-care product. This was partially offset by continued softness in our women's health business due to extended cervical cancer screening intervals.

US Biosciences' revenues grew 5%, driven by solid instrument placements. The segment was also driven by the reversal of an unfavorable timing of orders in Advanced Bioprocessing from the third quarter.

Moving on to International, we continue to see strong growth. Revenues grew 10.1% currency-neutral, driven by solid growth in all three segments. Medical segment grew 8.3% and Diagnostics grew 10.8%. Both segments experienced strong growth in emerging markets and international safety sales. The Diagnostics segment received a benefit from strong KIESTRA Lab installations in the quarter.

Biosciences grew 14.7%. This was due to solid instrument placements, incremental sales resulting from research funding in Japan and the reversal of unfavorable timing from the third quarter in Advanced Bioprocessing.

For the total year, US revenues grew 2% and International revenues grew 8% currency-neutral.

On slide 12, we continued to see strong growth in emerging markets in the quarter, which accounts for over 24% of our total revenues. Emerging market revenues grew 14.6% currency-neutral, which is the strongest quarterly growth in emerging markets that we have seen in several years. This was driven by double-digit performance across all three segments and a benefit from tenders in India and Latin America, which were originally expected in the first half of this year. China revenues grew by 20% and safety sales in emerging markets grew by about 15%.

As we continue to build our infrastructure and focus on localized R&D, it is evident that our investments in emerging markets continue to drive robust growth for the Company.

Moving to Global Safety on slide 13, currency-neutral sales increased 6.4% and grew to $536 million in the quarter. Revenues in the US grew 4.2%, which continues to benefit from our recent acquisition of SSI. International sales grew 9.5%. Medical Safety sales grew 8.2%, while Diagnostics grew 4.7%, driven by a range of safety engineered products. For the total year, Safety Revenue grew 6.6% currency-neutral, driven by strong international growth of 11.9%.

Turning to slide 14, we experienced a 40-basis-point expansion in gross profit this quarter, after absorbing an unfavorable impact of 10 basis points due to foreign currency. On a performance basis, positive contributions from ReLoCo and raw materials were partially offset by acquisition and start-up-related costs.

Slide 15 recaps the fourth-quarter income statement and highlights our foreign currency-neutral results. Since we have already discussed revenue and gross profit, I will move down the income statement to SSG&A. We experienced an increase of 12.6%, or 9.9% excluding the impact of the Medical Device Tax. Drivers of this increase include legal fees, emerging market investments, and acquisition costs.

R&D reached 6.3% of sales in the quarter, which was in line with our expectations as we continue to invest in new products and platforms. Our tax rate declined by 10 basis points over the prior year, reflecting the R&D tax credit in the US.

Operating income grew at 4.8%, or 7.9% excluding the impact of the Medical Device Tax. Adjusted EPS in the quarter was $1.54, or an increase of 9.2%. Excluding the impact of the Medical Device Tax, adjusted earnings per share increased 12% over the prior year.

Slide 16 recaps the adjusted total year income statement and highlights our foreign-currency-neutral results. As I mentioned earlier, revenues grew 5.4% for the year. Acquisition contribution of 80 basis points together with benefits from a strong flu season and competitive gains brings us to an underlying growth of 4.2% for the year. Pricing had an unfavorable impact of about 10 basis points.

Gross profit grew 6.3% for the year, which was at the upper end of our guidance range at 51.8% of sales. SSG&A increased 8.3%, or 6.2% excluding the Medical Device Tax. This was slightly better than our original expectations.

R&D reached 6.1% of total revenues, in line with our expectations. Operating margin grew 4.1%. The Medical Device Tax had an unfavorable impact on income growth of 260 basis points. Our tax rate of 24.5% was an improvement of 30 basis points over the prior year and reflects the continued trend of tax rate improvement that we have seen for a few years now.

We repurchased about $450 million in shares for the total year, completing this year's repurchase program, as expected.

Adjusted diluted earnings per share of $5.81 grew 9.3% over the prior year, or 11.9% excluding the Medical Device Tax. As a reminder, earnings-per-share growth also benefited by about 200 basis points from our $1.5 billion 2012 share repurchase program.

Better quality of earnings and strong EPS growth is the result of our multiyear strategy of investing and innovating for growth.

Now turning to slide 17, I would like to walk you through the various elements of our P&L guidance for the full fiscal year 2014. In summary, we expect revenues to reach about $8.4 billion, with growth of about 4% to 5% on a reported and currency-neutral basis. This contemplates our Medical segment growing 4.5% to 5.5%, the Diagnostics segment growing 3.5% to 4.5% and Biosciences segment growing 3% to 4%. In our Diagnostics Systems business, we anticipate a negative impact of about $25 million due to a lost customer contract. This has already been contemplated in our guidance range.

We expect revenue growth to continue to be driven by emerging markets, new product launches in all three of our segments and continued growth of safety engineered devices. We will also continue to look for strategic M&A opportunities, which have not been contemplated in our revenue growth guidance.

Also, we expect the most recent acquisitions of SSI and Cato to contribute about 20 basis points of growth to the Company in fiscal year 2014. The acquisitions of KIESTRA and Sirigen have annualized and will be included in our base going forward. The growth drivers I just mentioned will be partially offset by the expected unfavorable impact of pricing pressure.

Based on our current view of the environment, we expect negative pricing pressure of about 20 to 40 basis points for the year. However, as Vince mentioned earlier, pricing can fluctuate. Additionally, our reported growth guidance assumes a euro-to-dollar exchange rate of $1.37 for the year.

We expect gross profit margin to be between 51.6% and 52%, which includes about 60 basis points of erosion due to negative currency translation. About half of the expected currency erosion will be driven by translation adjustments recognized in the first quarter due to the timing of inventory movements.

Our ReLoCo program remains on track and is expected to deliver incremental savings of about $30 million.

SSG&A as a percentage of sales is expected to be between 25.2% and 25.6%. This reflects an estimated incremental $14 million related to the Medical Device Tax in the first quarter.

Our guidance also reflects continued investments in emerging markets of an incremental $25 million, as well as costs related to new product launches and EVEREST.

Fiscal year 2013 was the peak year of spending for our EVEREST program. We do not anticipate any significant headwinds or tailwinds next year for EVEREST.

We expect our R&D investment to be in line with fiscal year 2013, between 6% and 6.3% of revenues, as we continue to invest in new products and platforms.

As a result of the items I just detailed, operating margins is expected to be between 20% and 20.4% of revenues. Excluding the unfavorable impact of foreign currency and the Medical Device Tax, we expect our operating margin to improve by about 70 to 80 basis points. About half that margin expansion is anticipated from favorable pension assumptions, bringing our underlying margin expansion to about 30 to 40 basis points.

We expect our tax rate to be between 23.5% and 23.7% as we continue to see improvement from geographic mix.

Earnings per share from continuing operations are expected to grow 6% to 7% as reported, or about 8.5% to 9.5% currency-neutral. Excluding the incremental Medical Device Tax, currency-neutral EPS growth is expected to be between 9% and 10%.

Our cash flow is expected to remain strong, with operating cash flow of about $1.8 billion in fiscal year 2014.

We plan to repurchase about $450 million in shares, which is broadly in line with historical levels. Our expectation for capital expenditures is about $600 million. This increase over the prior year is primarily driven by increased investments in international manufacturing, capacity expansion and efficiency programs.

While we typically do not guide by quarter, I would like to note that for the first quarter, we expect currency-neutral revenue growth to be around the midpoint of our full-year guidance range.

For earnings per share, we expect currency-neutral growth excluding the Medical Device Tax to be broadly in line with revenue growth, as raw material pricing together with unfavorable SSG&A and R&D comparisons will impact the level of P&L leverage delivered in the quarter.

On a reported basis, we expect earnings per share to be between $1.25 to $1.30, which assumes an unfavorable currency impact due to the timing of inventory translation adjustments. Also, we expect that our revenue growth is likely to be more heavily weighted in the front half of the year, while earnings growth will be more weighted to the back half of the year. This is due to the timing of certain investments, together with less litigation expenses in the back half of the year when compared to fiscal year 2013.

Now I would like to turn the call back over to Vince, who will provide you with an update on our product portfolio.

Thank you, Chris. We have been discussing our robust pipeline for some time now, and in fiscal year 2013, there were over 20 significant product launches. I will not review them in detail, but we have highlighted them on slides 19 and 20.

Looking to fiscal year 2014, we have some products that are key to our success going forward. Some of them will launch in fiscal year 2014; others were launched in fiscal year 2013.

In BD Medical, the acquisition of SSI added a safety product to our Pharmaceutical Systems Portfolio. We also launched next-generation glass and plastic syringes in that unit as well.

We recently announced a commitment to create the Odon Device, a product aimed at addressing maternal and newborn mortality caused by obstructed and prolonged labor, typically in developing countries. Along with the World Health Organization and other organizations, we look forward to addressing this serious problem.

For BD Simplist, you may have heard that we have just announced the FDA approval of Morphine, which is consistent with our expectations. BD Rx will begin production of Morphine immediately and projects initial availability in early calendar year 2014.

We continue to plan for 20 to 30 drug launches over the next several years. Right now, we have an additional three drugs in the pipeline submitted to the FDA that are in various stages of approval.

In Biosciences, we recently launched two new products. The BD FACSAria Fusion improves on the solid foundation of patented technologies, exceptional multicolor performance and ease-of-use from our first-generation product. This sorting knowhow is now being combined with best-in-class biosafety expertise to create a fully-integrated advanced cell sorter and biosafety solution for research laboratories.

We also launched our next-generation BD FACSCanto flow cytometer, now with a 10-color capability. The system delivers higher sensitivity and resolution for more accurate results.

This coming year, we are also anticipating the launch of our BD FACSPresto, our CD4 analyzer for emerging markets, as well as the launch of additional Sirigen dyes.

On slide 22, you can see the anticipated products in our Diagnostics space. This includes an expanded menu on the Veritor point-of-care device. On the BD MAX platform, we plan to launch our GC/CT and Trich assay in addition to the Staph SR and enteric bacteria panel. Additionally, we will launch our BD Onclarity HPV test on the Viper LT system outside of the US. We believe that the genotyping available with this assay will be superior to anything else currently on the market and we look forward to that launch later this quarter.

On slide 23, before we open the call to questions, I would like to reiterate the key messages from our presentation today. First, we are pleased with our accomplishments in fiscal year 2013. We continued to execute on our strategy and deliver on our long-term commitments.

Second, our focus on growth and innovation is continuing to yield results. We are seeing the proof points with our continuing success in new product launches, acquisitions, geographic expansion initiatives and efficiency programs.

And third, we are confident in our fiscal year 2014 outlook. Our focus for fiscal year 2014 is to continue to meet the customer needs by offering complete solutions across our six worldwide businesses.

We expect to drive revenue growth of 4% to 5% and continue to deliver a higher quality of earnings. We expect EPS growth of 8.5% to 9.5%, or 9% to 10%, excluding one quarter of the Medical Device Tax.

We believe that we have built a strong foundation this fiscal year that provides us the platform for continued growth. And finally, we are committed to delivering continued value to our customers and our shareholders around the world as we pursue our purpose of helping all people live healthy lives.

Thank you, and we will now open the call to questions.

(Operator Instructions). Amit Bhalla, Citi.

Hi, thanks. Can you hear me okay?

Sure, Amit, that's fine.

Okay, great. I wanted to start just first with guidance and the operating margin expansion. Maybe, Vince or Chris, could you walk through some of the gives and takes here? It looks like FX is having an impact on the op margin expansion, so I just wanted to understand that to be the case. And also, if you could give some detail on pension and some of the other moving parts to drive leverage from revenue to earnings.

Sure, I will take that, Amit. You are right -- in fiscal year 2014, the gross margin has an FX drag of about 60 basis points, which on an all-in basis means the gross margin is flat. We are driving about 60 basis points of lift FX in.

The 60 basis points of drag from FX, about half of that relates to the inventory translation adjustments, which hits mostly in Q1. The rest results in weakening currencies such as the yen, which is driving lower revenue. But also we have reduced expenses and we are more profitable there and that is flowing through, so it is less of a natural hedge.

For the FXN, we are driving about 60 basis points of improvement, and that goes back to ReLoCo improvement, as well as a slight improvement from the pension benefit that shows up in COGS. That is partially offset by startup cost and some deterioration from raw material pricing as well. And the startup costs, as you know, are line extensions and product launches.

Okay. Thanks very much.

David Roman, Goldman Sachs.

Thanks you and good morning, everyone. Vince, I was hoping you could spend a couple of minutes on the US business. And as I look at the performance in the quarter, with the exception of what looks to be a big order in Pharmaceutical Systems, the US franchises look to be roughly flat in aggregate or maybe even down a tad.

Could you maybe just talk a little bit about the environment and your businesses more specifically, about what is happening? Maybe just touch on new product launches in the context of the environment and how you see the domestic franchises playing out?

Yes, I will make a couple of comments; then I will ask Bill Kozy to add some other color on this. But we really haven't seen utilization changing much in our businesses. So we would say basically that it is fairly flat from a utilization standpoint.

Now of course, there is the same exception we have been talking about for a couple of quarters now and maybe for a year now, in women's health business, where the path screening intervals, of course, have lengthened, and we are now up to about maybe 60% of the customer base have moved to the longer interval. And that continues to impact us. Even though we had some good performance in terms of instrumentation in the US and globally with some new products, the disposable piece continued to go down. So that has been impacting the growth that we have been seeing.

In the US, in terms of diabetes care, maybe a little softer market as well. So those are the major factors. Bill, is there anything else you would want to add to that on the US, besides Pharma Systems being strong?

Sure, just two minor things. Number one, we were up against a year-on-year comp in Diabetes Care with a comarketing agreement that has moved on.

And secondarily, in the US, it's particularly unique as a geography, because the bulk of your late-stage, late-lifecycle products continue to have a base of revenue in the US. So you see things in Medical, some smaller product lines, like Interlink and anesthesia products and so forth, that they are just a revenue headwind at this point in time for the US. As we see those things move out in the next year or two, we are hoping to see the US top-line performance start to improve.

David Lewis, Morgan Stanley.

Good morning. Vince, maybe kind of a two-part question, but both related. Could you just give us a sense of the M&A contribution for fiscal 2014? And then sort of related to that, given that the buyback is down here in 2014 relative to 2013 and obviously 2012, which I think is consistent with your guidance, but I am just trying to get a sense of how investors should be thinking about your use of the balance sheet as it relates to M&A. Are we thinking about similar deals that BD has always done? Has your appetite for larger transactions potentially gone up? And does your buyback being a little lower signal that maybe you are more comfortable with slightly larger deals, just given the successful integration of some of the smaller transactions? So those two questions. Thank you.

Sure. So it was 80 basis points, I believe, in the year, 120 basis points in the quarter, were the contributions to M&A. Is that right, Chris?

Yes, and you also -- into 2014, it is about 20 basis points of lift next year.

So from an M&A standpoint, the way we are thinking about M&A is we are trying to build out complete solutions for the customer. So it is not randomly go out and find plug-in acquisitions, but it is very strategically build a franchise.

Let me give you an example. The work that we have been doing in medication assurance, where you have seen us do Facile, you have seen us do Cato and CRISI. So they start to give us a portfolio of products that really elevates the conversation in terms of need with the customer. So that is the first factor. And we are going to continue doing that around our businesses and increase our relevance to the customer base.

The second part of the question is, yes, we are feeling that we have made progress in terms of our ability to identify and to do due diligence and then integrate our acquisitions. And we think that over the last year, we have proved that out.

And while our focus, it does remain on these plug-in acquisitions, we do have some more confidence to do somewhat larger deals. So that is the way I would pull it all together for you.

Kristen Stewart, Deutsche Bank.

Hi, thanks for taking the question. Just to go back to the revenue guidance, this past year, you guys had commented that underlying growth was I think 4.2%, and that included negative price of about 10%. Your guidance for next year of 4% to 5% has 20 basis points of acquisition, but a little bit more of a pricing headwind. So just trying to get a sense of what gives you confidence that either you are going to see better mix or better underlying unit growth relative to the base this year.

Kristen, could you repeat that? We didn't catch all of it.

Sure. So growth this year, you ended the year with 4.2%, and that included negative price of 10%. Next year, you are guiding to 4% to 5%, with 20 basis points of acquisition and a greater pricing headwind. So it would basically imply that underlying unit growth is going to be faster. So I am just trying to get a sense for why you believe that, or maybe it is perhaps mix benefit from new products.

So Kristen, you are exactly right. The midpoint of our range, let's say, that we pointed to is about 4.5%. If you look at the underlying growth, we have about 4.2% when you normalize for the one-time items. That also includes the headwinds we mentioned of the $25 million from the lost customer contract and the expected 20 to 40 basis points.

So you are absolutely right, it does contemplate an acceleration or a continued momentum. Again, we are seeing that from emerging markets growth and we are continuing to see Safety growth as well. So we are seeing that continue, so the range is a continuation of that momentum that we saw this year.

And continued ramp-up of the new products that we have been talking about. And as I was going through the portfolio, you would have noticed that I talked about things that we launched in 2013 and that we are launching in 2014. So we have been early on in the ramp-up and we continue to expect to make progress in terms of new products as a percent of sales. So those are the factors.

And what is your just baseline assumptions regarding the US and healthcare reform impact?

So in terms of healthcare reform, we basically have it in as a neutral. It is extremely difficult right now to forecast how this is going to impact the markets that we are in. How fast are they going to go in terms of fixing the website, we don't know. There seems to be major issues there.

And so we know it will be somewhat a positive if you get the uninsured covered. And people who had put off elective surgeries, there could be a small bump there. But we also see negative pressure emerging in terms of consolidation and pricing and whatnot.

So at the end of the day, we put it in as a neutral and we will watch it as we go forward. And if we see changes, we will update you on those.

Mike Weinstein, JPMorgan.

Good morning, everybody. It's Kim here for Mike. First question, if we could on, Simplist. Just curious with the recent Morphine approval --

I'm sorry. Could you speak a little louder? We're having trouble hearing you.

Oh, sorry. Can you hear me better?

A little better.

Okay. A question on Simplist. And with the recent Morphine approval, just curious how that is tracking relative to your expectations. And if you could, share with us what level of sales you are expecting from Simplist in 2014.

So I will let Bill Kozy talk to that. But I would tell you right now, as we guided for fiscal year 2013, we said it wasn't going to be significant. And we knew that was because we didn't have a broad array at launch and people were going to be in the mode of just starting to try the product. And we have included a ramp-up in Simplist in our guidance. Bill, do you want to talk a little bit more about it?

Sure. We are encouraged by the number of evaluations we have got going on right now. As you know, we have only got a few drugs; they are relatively lower volume. The Morphine launch that Vince described is important to us, because it really brings a higher volume drug application to the BD Rx portfolio.

So when we get that rolling out in January, that period of January to June next year will be most important for us.

As mentioned, several hundred evaluations and a few hundred customers who have ordered twice, which we are taking as a point of encouragement. We continue to work very closely with some of our major customers, like the IDNs and the GPOs that you know that BD has relationships with. And that will be the focus as we roll out Morphine in some of these other drug applications over the next couple of quarters.

So we are not going to give specific guidance on this. We want a little bit more experience under our belt, and once we have that, then we will start to give you some more precise information.

I would just add that the timing of the Morphine approval was right in line with when we expected it to occur and was part of our guidance.

Okay, great. All right. Thanks a lot.

Rick Wise, Stifel Nicolas.

Good morning, Vince. How are you doing?

Good.

Perhaps you could give us a little more color on what is happening in China. You really saw some nice sequential acceleration, 20% in the fourth quarter versus I think it was up 18% in the third quarter, despite the tougher comp. Just update us on some of your investments there and just perhaps some of the key drivers in fiscal 2014 in terms of both investments and opportunities.

So we have done well in China and we are encouraged by what we are seeing. First, from a macro environment, I know there has been a lot of concern about would healthcare spending slow down. And we track -- our Country organization tracks a bunch of measures out there. We have not seen that in the markets that we participate in. So number one, we continue to see strong spending.

Number two, we have successfully implemented across the entire BD portfolio. And so it is not just medical or one piece of the business now; it is all of the businesses implementing quite well in China. And that is a result of the infrastructure building that we have done.

Third, this year, we started to expand our footprint into what people call Tier 2, and as we have done that, we have built our distribution network.

Then lastly, we have effectively partnered with the government of China to improve the healthcare system. As I have mentioned in the past, we have done three memorandums of understanding on infection control, and we continue to implement that program with them.

Looking forward, we are going to continue to expand that distribution reach, and we are starting to put R&D in Asia. That process began in 2013, and we will do that in Singapore and some in China. So we are becoming a more fully-integrated Company in China. So all that together has meant that we both kind of built the market and have gained share in a number of our businesses.

Richard Newitter, Leerink Swann.

Hi, thank you for taking the questions. Can you hear me okay?

That's fine, Richard.

Okay, great. Just on the guidance commentary, I think, Vince, you had mentioned that it was going to be at the midpoint. Can you just describe with respect to the assumptions that could bring you above or below, what the midpoint assumes. Flu I get is a little bit unpredictable. But particularly if you could give more commentary on what could happen in the emerging markets to get you higher or lower, and what is embedded in the assumption at the midpoint.

Sure. So the way to think about our starting point, which is the midpoint, is pretty much that the environment remains consistent from what we saw in 2013. So on emerging markets, it says that we are continuing to see the same rate of healthcare spending that we saw in 2013. So obviously, if there was an acceleration, that could bring us up towards the higher end of our guidance range.

The concern is of course geographies such as Latin America, where there has been a lot of political unrest, some concerns about global kind of spending in the region, heightened by some of the spending that they are doing for the World Cup and the Olympics and whatnot. So will that impact us? That could take us down in terms of revenue growth in those regions. So those are some of the swing factors on emerging markets.

Then we always have the kind of timing of large NGO tenders and when they actually happen. So this year, we saw some move from the first half of the year to the second half of the year. We always have the possibility that they move into another year. So the timing on those things can always impact us.

Coming back to the US, our concern is that we have seen some nice improvement in Biosciences, and we saw some really good growth this quarter. Now, in the US Biosciences, we don't know what is going to happen come January, when the government once again starts to face up to the budget issues and the debt ceiling and what will they do with sequestration. So that is a question mark for us.

Looking to international in that business, what will the Japanese government do in 2014? We saw a nice stimulus program, so we didn't assume any major stimulus in this set of guidance.

So those are some of the bigger factors. Chris, anything else you would want to add on that?

No, I think the only thing is pricing. Obviously, with 20 to 40 basis points in our guidance, we were down about 10 basis points this year. But if you look back to 2012 and fiscal year 2011, we are in the 80 to 90 basis points range. So that is a volatile assumption.

Bill Quirk, Piper Jaffray.

Great, thanks. Good morning, everybody. Chris, just wanted to pick up on your last comment regarding the historic impact on price, and I guess the reprieve, for lack of a better term, that we saw in 2013. Could you just help us think a little bit about what is driving the pricing assumptions in 2014? Is this essentially just going back and saying, hey, we had a nice gift here in 2013; we don't expect it to continue? Or is there something more acutely that you are starting to see here at the beginning of the fiscal year? Thanks.

Well, it is a combination of factors. Clearly, we have talked about having put in more effective price management procedures and really driving a focus on price management. And we think that we have gotten some traction internally with that and have seen some nice results.

Having said that, it can also be impacted by the amount of tenders, et cetera. And so when we look out next year, we see a lot more potential volatility in tenders and particularly in Europe.

So while we are happy with the performance in 2013, we are not declaring victory. It could have been more of an environmental reprieve, and so we are very focused on that going into 2014.

So just to add to that a little bit as well, as Chris mentioned, we are doing a better job of managing pricing across the entire portfolio and globally. And we saw that improvement over 2013.

The environmental pressures are still there. But as we launch some of these new products that are highly differentiated, that is also helping us. So our guidance in terms having some negative price, but being in a much better position in the beginning of 2014 than we were at the beginning of 2013, I think reflects where we are at.

Brian Weinstein, William Blair.

Hi, thanks for taking the question. My question is for Tom, actually. Tom, can you talk a little bit about the BD MAX uptake and any kind of statistics that you can give us to help us understand what the uptake of the product has been here? And then also if you can comment on some of the delays in the pipeline that were highlighted by Vince in your slides. Thanks.

Sure. So, Brian, just starting with MAX, as we shared earlier this year, we expected that it was going to take until the second half -- until the second half of FY13 to really see MAX growth starting to fully offset the declines that we had seen in GeneOhm from prior years. And we are very pleased that we are seeing that positive trajectory. We are up high single digits for the quarter overall. We are seeing very positive feedback from customers. We are now approaching about 300 installations in the field and continue to focus on our menu expansion there.

As you look at some of the delays that we reported in the -- earlier by Vince, it's really two major factors that are influencing those. One is related to clinical trial prevalence. As we are doing more complex panels on MAX, of course, we end up with a large number of organisms that we are looking for in each panel, and the prevalence of those varies significantly. So if you look at, for example, enteric bacteria in GC/CT Trich, those delays are related specifically to prevalence and us expanding the clinical trial length and numbers of sites.

The other major area was just further feedback from FDA related to the depth of the trials required. And that one was specific -- if you look at Totalys in the US. So while we did launch Totalys ex-US in Q4 and fulfilled a nice backlog of orders we had there, the US is going to take us a little longer, based on feedback for additional testing that we had gotten from the FDA.

Derik De Bruin, Bank of America Merrill Lynch.

Just a couple of quick questions. The first one is just on the tax rate -- is can we see further improvement when we go out looking into 2015 and beyond?

Well, we are not going to guide to 2015 and beyond. But if you look at our track record, we have shown significant improvement over the last few years. We are continuing to work that, and you see that in 2014 with a nice step function down in terms of the tax rate, primarily driven by geographical mix.

Matthew Taylor, Barclays.

Hi, thanks for taking the question. So I guess my first question was I just wanted to understand your emerging market assumptions for 2014. You had a better growth year in 2013. Do you expect continued growth at about that level with the additional investment, or what could take it up or down?

So we do continue to expect similar growth in emerging markets as we enter -- as we are in -- the beginning of 2014. Things that can take it up or down is really healthcare spending, number one, in the region -- in the various regions and the continued focus of these governments. Right now, we are assuming no real change in terms of the spending.

Second is that we work with many governments and NGOs, and the timing of their tenders can vary and they can move from one year to another. And so that can impact us as well.

And then just the amount of success that we are having in terms of building new markets and how long it takes to do those things and to influence medical practice. So right now, it is very much we are looking at it as similar to 2013.

Lawrence Keusch, Raymond James.

Hi, guys, this is actually Konstantin for Larry. So just a clarification question. I think I heard you guys say that the incremental investment in emerging markets for BD will be less in 2014 than in 2013. If that is correct, can you explain it? Is it just you guys just invested so much in prior years that now you are going to see the leverage? Or just in terms of -- or are you seeing less incremental opportunity kind of to deploy capital?

It is leverage. We built our core organizations; we are going to continue to build out the sales infrastructure and whatnot. But think about we had to put in a regulatory infrastructure. We had to put in a compliance infrastructure. So those things are in place. And yes, they will have to be expanded over time, but they are not going to have to grow at the same rate as we are growing sales. So you will start to see some leverage in the P&L. And that is the difference year on year, really.

Doug Schenkel, Cowen and Company.

Hi, good morning. So as one looks back at the slide decks over the past few quarters, you know, it seems like something unexpected is happening with chlamydia, gonorrhea and, to an extent, HPV, where you have had some recurrent delays in both the MAX and Viper platforms. And it is interesting, because the delays are not just instrument delays, as the instruments have been cleared. These are really assay delays.

So could you just provide a bit more clarity on what is happening here? Is this a visibility issue or is it something else? And just how are you managing these delays with customers? Thank you.

So Doug, this is Tom. So HPV has not been fundamentally delayed, right? HPV remains on track to launch ex-US this quarter, and again that is an ex-US launch. We have not shared the launch date for the US with customers nor with, obviously, in this forum. We have shared that our clinical trial in the US is underway, but we have not yet shared that date.

On GC/CT specifically on MAX, as I already referred to in response to Brian, that was really a delay related to a clinical trial prevalence that is underway. There is nothing wrong with the instrument or the assay. It is really around the prevalence of the organisms at this point in time, in the trial site that we were testing in.

Vijay Kumar, ISI Group.

Hey guys, thanks for taking my question. I guess a two-part question. One was a quick housekeeping. What was the decline in women's health in the quarter?

And sort of another one was what kind of leverage levels would you be comfortable with? Currently you are running under one turn leverage levels. And we have seen other companies in the space sort of go on an acquisition spree, and that has certainly helped their stock price. Just your thoughts on the leverage levels.

So Tom will take the first part of the question, and I didn't understand the second one -- I didn't hear it. But I'll let Tom go first and then we will come back --.

So women's health was actually -- was viewed as really an exceptional quarter for TriPath. Women's health or TriPath was actually up mid- to high-single-digits in the quarter. But that is really a tale of two very different worlds.

So we did see continued declines in that US reagent sales in the TriPath, driven by those interval extensions, as we have shared for the last year and a half. What we saw, though, was that be more than offset by continued strong growth ex-US, as well as pent-up demand for the new Totalys Automation System that we launched in Q4 and shipped a number of those systems, ex-US.

Sure. And I guess just to clarify my question, I guess, thoughts on net leverage levels. You are running at under one turn, and if you were to think of M&A, sort of what kind of leverage levels would you be comfortable with?

So the question is how much leverage would we take on in terms of the balance sheet to do M&A.

Yes.

Got you. Okay. Well, right now we are at -- we are investment-grade. That is very important to us. We are comfortably within investment-grade, and Moody's just reaffirmed us. You have to look at the M&A opportunity and how strategic that opportunity is, obviously. We have the capacity to do a little bit more leverage, but it all depends on the strategic nature of the acquisition. But I would emphasize that the investment-grade is particularly important.

Great, thanks, guys.

You are welcome.

Brandon Couillard, Jefferies.

Hey, thanks. Good morning. Chris, just curious, with this being your first call in the CFO role, how to think about opportunities for working capital improvement and better free cash flow conversion over the next several years, whether opportunities exist or we should think about this metric being relatively stable moving forward.

Sure. So technically, this is my second, but I was only here two weeks the last time. So you are probably right. But in terms of cash flow, you can see that we guided to $1.8 billion, which is an increase from the $1.7 billion-ish that we had this year.

And if you remember back in August, we mentioned that cash flow from operations was actually a bit negative in the first half of the year. We expected that to get back to about flat year over year, and it did. The negative was being driven by a negative working capital situation, buildup of inventory, mostly Safety stock, in the first half of the year.

So we got back to flat. We see that improving going forward, and that is almost entirely driven by improvement in working capital. We get a little bit of a headwind there from the incremental Medical Device Tax, but the big story there is working capital improvement.

What you probably know is that we have added working capital and free cash flow to our bonus payout ratios last year. So we are very focused on driving working capital growth. So you will see a little bit of an opportunity to lift from the current $1.7 billion up to the $1.8 billion going forward.

Peter Lawson, Mizuho Securities.

This is probably a question for Vince and I guess Chris, just on --

I'm sorry. Could you just -- a little bit louder?

Yes, okay. Just thinking about some of the recent announced divestitures of Diagnostic businesses, what are the synergies and benefits you see from kind of housing both Bioscience and Diagnostics with your supply business?

So the question was what are the synergies between the device side of the business and the life science side of the business. And we see that from a global standpoint, having this broader portfolio really helps us, number one, in emerging markets. Number two, it increases our relevance to the customer base in the developed world as well.

And number three, going forward, we think there are potentials for utilizing skills from one side of the Company and the other side of the Company as we move into more innovative spaces -- let me call it that way.

From a financial standpoint, all the businesses, if you do a sum of the parts, are fully valued, but it certainly helps us in terms of consistency of performance. So we see a kind of geographic strategic benefit. We see some capability benefit, and then some consistency benefits throughout the portfolio. Those are the three things that we see.

Jeff Frelick, Canaccord.

Good morning, folks. Hey, Vince, how do you plan to leverage your growing customer base of Veritors with future menu? Any plans for like quantitative tests to follow on? Thanks.

Well, Tom can talk about Veritor. We are in the process of expanding the menu right now.

So, Jeff, as Vince had mentioned earlier, of course today we have flu RSV available. We have adenovirus available ex-US. We have strep FDA-approved already. We are waiting the CLIA waiver, which is what we expect in Q2. We do have a series of other technology development programs underway that does include the ability for higher sensitivity and quantitation. But they are a bit earlier stage and we haven't articulated any menu specifically related to those. While we certainly have those in mind, we haven't communicated those broadly.

But they would not go onto Veritor, is what Tom is saying. They would be on the next generation, for example. Is that what you are saying, Tom, or --?

They could potentially be on Veritor.

They could potentially go on Veritor. Okay.

We are very pleased with the expanding placements of Veritor.

Kristen Stewart, Deutsche Bank.

Hi, thanks for taking the follow-up. I just wanted to go back just on the pension expense. I know that you said that was going to be more of a headwind -- or sorry -- it was a headwind this past year; it is going to be more of a tailwind in fiscal 2014. Could you just maybe help us quantify that on the bottom line, what the impact is going to be?

Yes, I think what we had said was that it would be about half of the operating margin impact. So we were around -- I guess it was 70 to 80 basis points on all-in basis. And net of the pension impact, it is about 30 to 40 basis points.

Amit Hazan, SunTrust.

Great, thank you for taking the question. Just a general question on your new products and kind of look back to guidance back in 2011 was to get to 18% of sales by the end of 2014. We are at 13% now, looking -- if we kind of take that look back, can you talk about whether that is a realistic expectation? And if not, what has missed and how we should think about the trajectory from here?

We think for this year that we are going to be approaching around the 15% mark. So 200 basis points improvement. And we see continued improvement going forward.

It is interesting -- we have made good progress on the new products, maybe a little bit below where we thought we were going to be; but all in all, we are quite pleased.

The other thing that has happened is that our core products have grown faster. And that has been driven by emerging markets, some really good work that we have done, which have grown faster than we contemplated at the time we were giving that guidance. So all in all, I think it has been a pretty positive story.

I would just add that that could also be increased by any additional new acquisitions, because there is nothing contemplated in the guidance for new acquisitions. That would lift that as well.

Right.

That was our final question. I would now like to turn the floor back over to Vince Forlenza for any additional or closing remarks.

Sure. I would like to thank all of you for joining us today and going through our results in 2013 and the guidance for 2014. We look forward to updating you on the year as the year progresses.

As I said, we remain confident in the strategy going forward, our strategy around growth, operating effectiveness and building capabilities. So thank you very much and we will talk to you soon.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.