Becton Dickinson and Co (BDX) 2015 Q2 法說會逐字稿

Hello and welcome to BD's second fiscal quarter 2015 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through May 14, 2015 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 21629817. 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, Vice President of Investor Relations. Ms. Dolecki, you may begin.

Thank you, Christie. Good morning, everyone and thank you for joining us to review our second 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 second 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, Executive Vice President of BD Medical; and Linda Tharby, Executive Vice President of BD Life Sciences.

This quarter, we recorded certain pretax adjustments, which primarily reflect acquisition-related charges and financing charges. Details of these and other smaller charges can be found in the press release attachments or the appendix of the investor relations slides.

As a reminder, our second-quarter results are on a standalone basis and represent only BD. We will report combined BD CareFusion results beginning with the third quarter of fiscal year 2015.

In preparation for the newly combined company, or NewCo, reporting, we have also provided slides which illustrate changes to our P&L, our new reportable segments and the way we will report our geographies going forward. In addition, we've also provided pro forma historical revenue information on a combined basis consistent with our new reporting structure. They can also be found in the appendix of the investor relations slides. Also, for the purposes of today's call, we will provide guidance for BD as a standalone company for the balance of fiscal year 2015 in addition to the combined BD CareFusion outlook. It is now my pleasure to turn the call over to Vince.

Thank you, Monique and good morning, everyone. As we stated in our press release, we are proud of our final standalone quarter as we welcome CareFusion to BD. Our results this quarter highlight our consistent performance and the benefit of our diverse geographic and product portfolio. We delivered solid revenue and EPS growth, which were in line with our expectations. Year-to-date, we delivered revenue growth of 5.1% and adjusted EPS growth of 11.6%, which reflects a growth profile consistent with our external commitments and long-term goals.

As you already know, we officially consummated the acquisition of CareFusion on March 17. This transaction significantly advances our strategy in the Medical segment and accelerates our evolution into a customer-focused provider of complete solutions. Integration activities are progressing as planned and the CareFusion business performance to date is mostly in line with our expectations.

Today, we are pleased to share our financial outlook on a combined basis. We are forecasting solid revenue and EPS growth consistent with our expectations and with high-level qualitative guidance we have provided over the past several months. On an annualized basis, we expect pro forma organic revenue growth of about 4.5%. We expect adjusted earnings per share to be between $7 and $7.10, which represents growth of about 19% to 20%.

On slide 5, we've outlined the guidance for BD on a standalone basis, the impact of CareFusion for the remainder of our fiscal year and summarized the total guidance for our combined company. As you can see, we continue to expect BD on a standalone basis to grow at about 5% on the top line and about 9% to 10% on the bottom line. The acquisition of CareFusion will add 23% to 24% accretion to revenues and about 10% accretion to earnings. This results in revenue growth of 28% to 29% and earnings growth of about 19% to 20% for the total fiscal year.

On a pro forma annual basis, which sums the organic results of both companies, we estimate BD and CareFusion's organic revenue growth would be about 4.5%. These financial metrics are consistent with our previously communicated high teens earnings accretion in fiscal year 2016. We are also reaffirming our commitment to deliver $250 million of cost synergies, which will be fully realized in fiscal year 2018. We will continue to update you as we make progress.

Now I'd like to turn things over to Chris for a more detailed discussion of our second-quarter financial performance and our fiscal year 2015 guidance.

Thanks, Vince and good morning, everyone. I'd like to begin by discussing our second-quarter revenue and EPS results, as well as the key financial highlights for the quarter. Total Company revenues were solid, increasing by 4.9%. Fully diluted adjusted EPS came in at $1.61, growing at 8.2% over the prior year, reflecting a difficult comparison to the prior-year period as expected. As Vince mentioned earlier, our results this quarter highlight our consistent performance and the benefit of our diverse geographic and product portfolio.

We experienced solid growth in both our Medical and Life Science segments. We also saw continued strength in safety-engineered products. We saw some softness in emerging markets mainly due to timing issues. Conversely, growth in the US was strong and I'll provide more color on these items in just a moment.

To summarize, we feel very good about the final standalone quarter and the year-to-date results. Our results year-to-date give us the confidence to reaffirm guidance for BD on a standalone basis. We expect to continue to deliver a very consistent growth profile of 5% on the top line and 9% to 10% on the bottom line.

We are also pleased to announce that we have already begun to deleverage the debt associated with the acquisition of CareFusion, paying down $650 million of the term loan at the end of April. I will provide more explicit guidance details for BD and CareFusion later in my remarks.

Moving on to slide 8, I will review our second-quarter revenue growth by segment on a currency-neutral basis. Organic revenue growth was 4.9% for the total Company. The impact of price erosion was about 10 basis points in the quarter. Year-to-date pricing is better than our expectations, but we are maintaining our full-year guidance of about 30 basis points of pressure. BD Medical's second-quarter revenues increased 5.4%. Growth in this segment was primarily driven by our Medical Surgical systems unit. Medical Surgical growth was 7.5%, which reflects strong international safety sales.

Growth in Diabetes Care was 4.1%, reflecting solid growth of pen needles, partially offset by an unfavorable comparison to the prior-year period. Pharmaceutical Systems growth of 2.6% also reflects an unfavorable comparison to the prior-year period as expected. BD Life Sciences' second-quarter revenues increased 4.4%, primarily properly driven by Diagnostic Systems and growth in Preanalytical Systems. Diagnostic Systems growth of 7.8% was led by strong clinical microbiology sales. We also continue to see good traction with the BD Max platform internationally where we expanded our menu offering.

Preanalytical Systems growth of 4.5% was driven by safety-engineered products and emerging markets. Biosciences revenue growth was 0.8% in the second quarter with strong instrument growth in the US and Western Europe. This was unfavorably impacted by the timing of government funding in Japan as we expected and communicated to you on our previous earnings call. Funding has been approved and we expect growth to normalize by the end of the fiscal year.

Moving to slide 9, I will walk you through our geographic revenues for the second quarter. Softer growth in our international business was supplemented by strong growth in the US. BD's reported US revenues increased 4.5%, primarily driven by strength in Medical Surgical Systems, Diagnostic Systems and Biosciences. We view the environment in the US as stable to improving slightly.

Revenue in our US Medical segment increased by 3%. This was driven by our Medical Surgical Systems unit business, which benefited from strong growth in our Flush productline. The Diabetes Care and Pharmaceutical System units were partly impacted by the aforementioned difficult comparison to the prior year. The US Life Sciences segment grew by 6.1%. This reflects strong growth in Diagnostic Systems of 7.5% driven by clinical microbiology sales. Biosciences growth of 7.7% was driven by strong research, reagent and instrument sales.

Moving onto international, revenues grew 5.2% currency-neutral. The Medical segment grew 6.9%, reflecting strong growth across the business and in international safety sales. The Life Sciences segment grew 3.2%, reflecting very strong growth in Diagnostic Systems of 8.1%. This was partially offset by the aforementioned impact of the timing of government funding in Japan in Biosciences.

On slide 10, you'll see that emerging markets accounted for approximately 25.2% of our total revenues. Emerging market revenues grew 7.6% currency-neutral over the prior year, bringing our total growth year-to-date to 10%. In the second quarter, emerging market revenue growth was negatively impacted by the timing of orders in China, as well as in EMA. We also experienced a deceleration of growth in Brazil due to a slowing in government orders as we expected. We indicated to you on our first-quarter earnings call that we would keep an eye on Brazil given the macroeconomic conditions there. We expect our growth in that region to improve in the second half of our fiscal year. For the total year, we expect growth in emerging markets of about 10% with growth in China expected to be in the 18% to 19% range. Safety revenues grew 10.8% in emerging markets due to the aforementioned items in China and Brazil.

Moving to global safety on slide 11, currency-neutral sales increased 8.7% and grew to $550 million in the quarter. Safety revenues in the US grew 2.2% while international sales grew 16.3% currency-neutral. Medical safety growth was 11.6% with strong international growth driven by all three businesses. Life Science safety growth was 5.8% in the quarter.

Turning to slide 12 and our gross profit margin for the second quarter, on a performance basis, margin expansion was driven by favorable product mix and continuous improvement initiatives. These contributions were slightly offset by higher pension expenses and other items. Raw materials were about flat in the quarter. Also, you will see that currency did not have an impact on gross profit. This was driven by translation adjustments recognized in the quarter due to the timing of inventory movements otherwise known as profit in inventory.

Slide 13 recaps the second-quarter income statement and highlights our foreign currency-neutral results on an adjusted basis. As we discussed, revenue and GP were in line with our expectations. SSG&A increased about 4.5%, which reflects increased investments in emerging markets, higher pension expense and an unfavorable comparison to the prior year. R&D increased 3.7%. This remains in line with our expectations at 6.3% of revenues as we continue to invest in new product development and innovation.

Operating income grew 6.5% in the quarter, reflecting solid P&L leverage. Our tax rate declined by 90 basis points, which benefited from favorable geographic mix. In the quarter, adjusted earnings per share were $1.61, which is an 8.2% increase versus the prior year, reflecting a difficult comparison to the prior year period.

On slide 15, I would like to provide a little more color on the revenue growth phasing for BD and CareFusion, which operated on different fiscal years. Most of you may already be familiar with CareFusion's publicly disclosed fiscal year 2015 revenue growth guidance of 5% to 7%. As illustrated, the results for CareFusion's fiscal year 2015 are in line with that guidance, which we expect to land at about 6%. We expect a revenue decline in CareFusion's fourth fiscal quarter of 5% to 7% due to a very tough comparison versus the prior-year period in the infusion business, which grew at about 40%.

Growth is also unfavorably impacted by a voluntary recall in the Respiratory Solutions business, which I will touch on in just a moment. We expect growth to normalize in CareFusion's first fiscal quarter of 2016 and returned to 3% to 5%. This will result in BD's organic revenues growing 1% to 2% in the third quarter and about 4% to 5% in the fourth quarter, driving ratable earnings in the back half of the year. As Vince and I mentioned earlier, BD has maintained a consistent revenue growth profile of about 5%, which we expect to continue for the balance of BD's fiscal year.

To summarize and to arrive at BD's NewCo organic revenue growth, we have combined BD's full fiscal year with CareFusion's second and third quarter and our expectations of CareFusion's fourth quarter and for what would have been their first quarter of fiscal year 2016. The result is pro forma organic revenue growth of approximately 4.5%.

For transparency, I would like to take a moment to provide some color on CareFusion's third quarter of fiscal year 2015. Tomorrow, we will issue our 10-Q. The filing will show revenues, net income and earnings per share for BD and CareFusion for the period ending March 31. Due to the numerous adjustments for both companies, there will be limited visibility into CareFusion's underlying business performance in their third fiscal quarter. While we do not plan to discuss their third-quarter results at length, we wanted to share some of the key insights into the business performance in the quarter.

CareFusion's revenue growth was solid at 5.4% currency-neutral. Revenue growth was impacted by about 240 basis points from unfavorable currency translation. While CareFusion has a relatively small international presence, FX has been very volatile and has negatively impacted their results. There are number of items that negatively impacted operating margin in the quarter, which we estimate would have been about 18% to 19% of revenues on an underlying basis, or at about 19.5% year-to-date.

Prior to our completion of the acquisition, CareFusion recorded a charge related to a recall in Respiratory Solutions. We are anticipating lost revenues in addition to the remediation costs associated with this recall. This was not contemplated in our original forecast for CareFusion and has an unfavorable impact of about $0.05 to earnings per share for BD's fiscal year. We expect to be able to start shipping again by the end of our fiscal year.

On the dispensing side of CareFusion's business, we are pleased with the traction of Pyxis ES. As the CareFusion management team indicated previously, there is a healthy demand for this product, which also comes with a lengthier implementation process. This is in line with our expectations and duet o the more complex implementation process, there has been and will continue to be a more significant investment in resources dedicated to Pyxis ES. CareFusion's third-quarter results reflect a more significant investment here, in addition to lower revenue growth, which was impacted by a pullforward into the second quarter.

On the infusion side of the business, CareFusion delivered strong results as the team worked to continue to install the record number of committed contracts it had coming into the quarter, as well as to realize the benefit of the strong capital placements it had over last year.

As CareFusion's previous management team shared with you, strong capital placements in the infusion business results in pressure on the overall company's margins in the short term. We expect to see higher-margin consumables in the long run.

Lastly, we are pleased with the performance in the former Procedural Solutions business, which lapped the Vital Signs acquisition last quarter and continues to leverage its clinically differentiated product portfolio. As a reminder, these businesses will be reported in BD's new reporting structure going forward.

Now moving on to slide 16, there are a number of moving parts that impact earnings per share in fiscal year 2015. For modeling purposes and to ensure consistency, I would like to provide more color on EPS guidance. Starting with BD's legacy business, adjusted earnings per share for fiscal year 2014 was $6.50. In fiscal year 2015, we expect to grow earnings by about 9% to 10% on an underlying basis. This is very consistent with the earnings growth profile we have communicated for some time. The unfavorable impact of foreign currency is about 10%, which is an incremental 100 basis point headwind to the guidance we provided in February. This contemplates a euro to dollar exchange ratio of about $1.11 and brings our current adjusted earnings per share to $6.43 to $6.50. In addition, we expect underlying currency-neutral accretion from the CareFusion acquisition of about 11%. As I just mentioned, we also have an unfavorable impact from the respiratory recall of about $0.05.

From an investment standpoint, we plan to accelerate our product registration process in international markets and this is dilutive to earnings by $0.02. The net of these items results in 10% accretion. Due to the volatility of FX movements, we anticipate an additional currency headwind to CareFusion's earnings of about 100 basis points. This results in NewCo earnings of $7 to $7.10, or growth of 19% to 20% on a currency-neutral basis.

While it is still too premature to talk in detail about fiscal year 2016, we think that it's important to be clear on the new baseline in which to calculate future earnings for BD. As I just mentioned, our new fiscal year 2015 EPS base for BD standalone is $6.43 to $6.50. Starting from this point, you can apply BD's traditional earnings growth profile of about 10% and then add our guidance of high teens earnings accretion on top of that. We hope this provides more clarity around the base earnings assumption to help in calculating the accretion from the transaction.

Another important element to note is that while we expect to deliver about 10% FX and accretion in fiscal year 2015, we are reaffirming our guidance of high teens accretion in fiscal year 2016. Some of the anticipated accretion benefits have been accelerated into this fiscal year as we are able to reduce duplicative public company costs quickly. From a phasing perspective, this means that we expect to achieve approximately $40 million to $50 million in synergies in fiscal year 2015 with the balance being fairly ratable. We are committed to fully realizing $250 million in cost synergies in fiscal year 2018, but as Vince mentioned earlier, we will update you on our synergy expectations as we make progress.

Now turning to slide 17, I would like to walk you through the additional elements of our guidance for the full fiscal year 2015. We expect revenue growth for NewCo to be 28% to 29% with BD Medical growing at 48% to 49% and Life Sciences growing at about 5%. Gross profit as a percentage of revenue is expected to be approximately 52% to 52.5%. BD and CareFusion have similar gross margin profiles when reclassifying certain items consistent with BD's legacy reporting structure. As expected, we do not anticipate material incremental synergy improvement in GP in fiscal year 2015 beyond the operational efficiencies in the Company's base plans.

SSG&A is expected to be about 25%. The dilutive effect of CareFusion's SSG&A profile is offset by our expected synergies resulting in a spend profile similar to BD's historical average. As I just mentioned, we continue to see a significant opportunity leveraging our global infrastructure to sell CareFusion's products and we are accelerating our product registration process in international markets.

We expect our R&D investment to be in line with fiscal year 2014 at about 6% of revenues. As a new company, we will continue to invest in new products and platforms, including incremental R&D investments in emerging markets. As a result of the items I just detailed, operating margin is expected to be between 20.5% and 21% of revenues. Similar to SSG&A, the dilutive impact of CareFusion's margin is offset by synergy achievement as we anticipate seeing an acceleration of operating margin expansion in the back half of this fiscal year. Excluding the unfavorable impact of foreign currency and pension expense, we expect our underlying operating margin to improve by about 60 to 80 basis points for the total fiscal year.

As you can see, we expect our tax rate to be between 23% and 24% with a rate of 21.2% in the first half of BD's fiscal year and a higher blended tax rate for the second half of the year. This reflects a new geographical mix of profits. Please keep in mind this higher tax rate is reflective of the six-month impact from CareFusion.

Next, while we normally don't provide guidance for these line items, for clarity and for consistency, we anticipate interest other to be about $250 million and an average fully diluted share count to be 207 million for fiscal year 2015. In fiscal year 2016, we are expecting an average fully diluted share count of 218 million. In a sizable acquisition like this, the success of the integration is of critical importance. We are very comfortable that we are off to a great start and feel confident in our ability to deliver on the financial guidance we provided. Of course, we will continue to keep you updated as we move forward.

Now I'd like to turn the call back over to Vince who will provide a brief update on our progress around our key initiatives.

Thank you, Chris. Moving on to slide 19, I would like to review the program and product launches in our Medical segment. As we announced in March, we closed our acquisition of CRISI Medical Systems following FDA approval for Intelliport. It gives BD access to the injection safety market with a differentiated platform that we believe, when combined with our new CareFusion portfolio, will significantly enhance our growing end-to-end IV medication safety offering.

Also, we recently received 510(k) clearance on our insulin infusion sets. We continue to expect a product launch in fiscal year 2016. This product will improve the consistency of insulin delivery, simplify the user's experience and increase patient's overall satisfaction with insulin pumping.

Turning to slide 20, you'll see the various product launches in Life Sciences. Within the Diagnostics business, our BD MAX molecular instrument continues to gain traction with customers in Western Europe where our expanded menu is enabling increased placements. We remain focused on menu expansion on that platform and in the second quarter, we launched the new CE marked GC/CT and GC/CT/Trich assays on the instrument.

Within Biosciences we continued to anticipate the launch of two additional BD Horizon dyes based on the Sirigen technology. As we have been sharing with you, these dyes are enabling significant gains in multi-parameter flow cytometry analysis. We also anticipate the launch of two instruments, the X-14 high parameter multicolor research instrument and the BD FACSVia clinical instrument aimed to enable increased market adoption in emerging markets, particularly in China.

In addition to these new product launches, we are also focused on successful commercial launches of our many recently launched products. As you can see, we continue to have strong opportunities in our pipeline and we look forward to sharing our progress with you throughout the year.

On slide 21, before we open the call to questions, I would like to reiterate the key messages from our presentation today. First, we're proud of our final standalone quarter. We have built a strong foundation for future growth while delivering on our financial and operational goals. Second, we continue to evolve into a customer-focused provider of complete solutions. The combination of the two companies will further enable us to deliver end-to-end solutions from drug preparation through dispensing and administration that increase efficiencies, reduce medication errors and improve patient safety in both hospitals and pharmacies. Based on our visits with customers, early feedback has been extremely positive as they see the value we can deliver by improving both cost and outcomes. We very much look forward to growing our business together with CareFusion.

Third, we are pleased with our solid NewCo financial performance. Given our proven track record of success, we are confident in our ability to integrate this sizable acquisition. We believe we can continue to deliver on our commitments and further leverage our capabilities as we strengthen this new company.

Finally, we are well-positioned for continued success in fiscal year 2015 and beyond. We look forward to the future with confidence. Thank you. We'll now open the call to questions.

Thank you. The floor is now open for questions. (Operator Instructions). David Lewis, Morgan Stanley.

I was going to try to slip in two quick ones here, I apologize. The first one, thanks for the earnings bridge you provided into 2016. Just for clarity, I think, in light of some other competitive reports, if you think about fiscal 2016 and the bridge you provided, that kind of sticks you in the mid-$8 range for fiscal 2016. I just wonder if you could comment on whether that's a reasonable range.

And my second question is just digging in deeper, Vince, on CareFusion, two specific elements. You talked on the deal announcement about Pyxis and the tailwind of Pyxis. Can you talk about, in light of the sequential change in growth rates, how you are thinking about that Pyxis tailwind across multiple quarters and any updated thoughts on the backlog? And then on the respiratory recall, are we still talking about EnVe and ReVel? And maybe you could quantify perhaps the impact on revs or growth that that recall is having. Thank you very much.

Well, let's do the CareFusion side first. What I would say and then I'll ask Tom to comment is we really don't have any change in our perspective on the growth rate around Pyxis. We see solid customer demand. We see a continued strong backlog. The thing was quite lumpy as we went through the transition in terms of ownership, but in terms of fundamental demand, I don't think we see any changes. Tom.

Certainly, on Pyxis, we still are at a record high in terms of the backlog itself. And I think as prior management had talked about in CareFusion, the installation is a more complex installation than the predecessor product and now that we own CareFusion, we are very, very focused on driving forward to improve our ability to install the systems in a fast and more efficient manner. And so a lot of those core BD process improvement strengths, we actually have now our lean and Six Sigma teams engaging very deeply with that ES organization to help lean that out and hopefully shorten that cycle time as we move forward.

On 2016, I think that's why on chart 16 we gave the basis of $6.43 to $6.50 and then you would grow that at around the 10% that we normally guide to and then grow that by the high teens accretion and it puts you right into that range that you mentioned in the mid-$8s. So I think we are comfortable with that, but what I would point out is that there's still models out there that aren't getting the number of shares right and so that's why we actually gave the 16 shares of the 218 million.

I would also caution on tax rate, the tax rate we are giving for 23% to 24% this year only has the 27% to 29% CareFusion impact for a half year. So when you annualize that next year, you get another tick up or so of a percent in the tax rate, so I would caution on that. And then interest expense is always difficult to calculate going forward, so we gave the base for this year and should be able to use that going forward. So those are the three that I think a number of models out there aren't getting right, but in terms of the general neighborhood, it is right on.

So I will turn it back over to Tom and he'll come back to the recall for you, David.

So the recall is not on ReVel, it's on AVEA and just maybe a little bit of comments on that further to those that Chris and Vince had made. So prior to completion of the acquisition, CareFusion had initiated the process for that AVEA ventilator recall. We have since notified the FDA and applicable customers. We're not aware of any patient injuries resulting from the defect and are doing this proactively. As Chris mentioned, a liability was recorded on the CareFusion opening balance sheet for the cost to remediate. We have identified the root cause. We are actively handling the remediation. However, during that remediation period, we are going to be unable to ship the new AVEA ventilators for a period of time here in the second half. We do expect to begin reshipping this summer and so will see some sales growth headwind in that business unit while that product is on hold, which will alleviate as we begin to ship again in the second half of this fiscal year.

Okay. Thanks, Tom. Thanks, David.

Mike Weinstein, JPMorgan.

So I've got a long list of questions; I'm going to try and narrow it down. Let me start with the CareFusion portfolio. The ventilator business is giving you -- or at least the respiratory business -- is giving you a little bit of a headache with the recall, but can you just talk more broadly how you are thinking about some of those assets, respiratory and other, some of the lower margin consumable pieces within the CareFusion portfolio and whether those will stay with the Company longer term?

Sure, Mike. So as we previously said, we're going through a strategic review process with those businesses. We've actually tied that process into our normal strategic planning process now, which I think you are familiar with, goes on basically during the summer and wraps up then. So we are working hard to get to a decision. We want to go through this and look at it both strategically and financially in terms of the value that we can create and so we want to get to answers over the next few months. We do see some opportunities in those businesses, so we want to be thoughtful about this, but we haven't made a decision yet.

Okay. It sounded like, from the BD side, that growth actually should get better in the second half of the fiscal year. Japan in the Biosciences business sounds like it will start to improve off of what was obviously a very difficult quarter for that piece. The Latin American business sounded like it was going to get better. China sounded like it was going to get better. So are there any offsets that we should be aware of relative to what was basically a bunch of positive comments for the second half relative to the second quarter?

I don't think there's any significant negatives, Mike, that we are talking about. We do think that Mexico is going to get a little better. I think getting into a little bit more detail that we are not expecting Brazil to get better. We expect that to be continued softness for the balance of the year. You're right about Japan coming back because we know that the funding has been released in Japan, so we are confident on that piece. Coming back to China, we do expect that it was really timing within the quarter and China is going to grow around, what, 19% or so, Chris, if I remember --?

18% to 19%.

18% to 19%.

So yes, I would say that's a pretty good picture. For the most part, most of those items that you talked about we contemplated in the last call and pointed towards. I think the only watchout is still Brazil. We do expect that to rebound a little bit based on timing of orders. But, as you know, the economic environment there is still under a lot of pressure, so that is still a watchout.

Okay. And then two more real quick for you, Chris. So one, the accelerated paydown of some of the debt is positive and it looks like there's the opportunity for the debt load to reduce faster than what we originally were assuming, so could you talk about that? And then second, on the pro forma tax rate, just want to push back a little bit. BD's pro forma tax rate was basically running at 22% plus or minus. CareFusion's was coming down due to a number of initiatives they had, but even if we look backward and assume that their rate stayed where it was, you guys shouldn't be at 25% plus. You guys should be probably more in the 24% to 25% range before any tax strategies. So can you just talk a little bit about that and whether there's some conservatism there on the guidance? Thanks.

Sure, so let me address that piece first. That's what I was implying. We gave guidance for next year of around 23% -- I'm sorry -- the remainder of this year of 23% to 24% and the point that I made that next year -- they still are 27% to 29% based on their own previous guidance and so when you put the full weight of that in next year, you are in that range of 24% to 25%. So I didn't mean to imply we are over 25%, but it's a little bit up from the 2015 guidance that we gave of 23% to 24% just based on the weighting. But that brings you to the zone that you talked about.

In terms of the paydown of the debt, this was in line with what our expectations were as we described. If you recall, in the 8-K and in November, we talked about that and what we were guiding to is committing to being below 3 times leverage within a couple of years and so the $650 million of paydown was right in line with that.

David Roman, Goldman Sachs.

I wanted to start on the BD Diagnostics business, which showed very strong performance in the quarter, particularly in the US and I was hoping you could go into a little bit more detail into the underlying drivers there and what we are seeing from some of the new product launches that you introduced a number of years ago, whether it is Veritor or BD Max or something going on in the underlying business.

Sure, I will turn it over to Linda Tharby.

So yes, good strength in our business in the US. That was driven by our core blood culture business, so a number of placements there and increased share position and the pullthrough on that and also as you noted on our flu business, continue to gain share in both our Veritor platform and then a strong early flu season, which we saw the tail on that in the second quarter.

It was really core microbiology that drove it. Thank you, David.

Brian Weinstein, William Blair.

Vince, you had mentioned some acceleration in spending for product registrations. Maybe Tom can speak a little bit to specific products that you are talking about and does this change the timing of expected revenue synergies that might come from those products? Thank you.

Tom, do you want to talk to that?

We are specifically focused right now on -- we have talked a lot about China obviously being a high area of interest for us from a synergy perspective and so that's, right now, the primary area that we are focused on registrations in. There are other geographies. So as we have shared in the past, we are looking at the revenue synergy opportunities being more in the 17 plus window and as you know, registrations in China typically can be up to a two-year process. So we don't see that changing, but we see us just getting a jumpstart on moving forward with what we've already shared.

Brandon Couillard, Jefferies.

Quick one for Chris. In terms of the operating cash flow outlook for the year, are there any discrete cash outlays related to the acquisition to be aware of either in the back half or as it relates to next year?

I wouldn't say anything specific to point to. Obviously, we have impacts of the costs that we are driving to get synergies, so that is obviously cash, but that's one of the reasons why we wanted to give some guidance on what the combined company was and that would be about $2.1 billion on that NewCo basis for the remainder of the year. If you remember, we were at about $1.85 billion and about half of the CareFusion operating cash flow runs around $250 million or thereabouts, so on a combined basis, so nothing really to point to there.

Rick Wise, Stifel.

Maybe just to start with a bigger picture question, Vince, for you. Just reflecting again on the strategic rationale for CareFusion, I know it's early in the process, but, Vince, do you feel like you are seeing any early indications that putting together CareFusion and Becton is having just an impact on the kinds of conversations you are having with hospitals about your concept of continuum of care? I am asking less about new business won, but is it changing the conversations? Do you feel more optimistic that it's going to change your dialogue with these customers?

Rick, absolutely. I had the opportunity to go out in the field and visit quite a few customers. In fact, we had a number of people from the management team out with CareFusion and BD sales reps and I would say it is a very full and deep conversation around the process. It's not just about the product; it's about the integration of that product into the process and the IT components. And so it is a very different conversation with the management team at these hospitals. So I was very encouraged by the feedback that I got directly in person from these accounts. So yes, I would say so, feel real good about it. Tom was out there with me. He was on a second team and we hit quite a few large customers.

Kristin Stewart, Deutsche Bank.

Just wanted to talk through I guess for clarification I guess you mentioned that the US benefited from in the Diagnostic business with a stronger flu season. Any way to quantify that from a broader top-line perspective?

Yes, I think the comment was really back about the previous quarter, not so much this quarter. It was very small in this quarter. We are talking like $3 million, so negligible.

Vijay Kumar, Evercore ISI.

So Vince, I just want to go back to the earlier question on having this breadth of product portfolio. I think in your prepared comments, you sort of touched upon it. We certainly see consolidation being a (inaudible) within the whole med supplies channel. Now I am just curious, do you feel like, from an asset perspective, do you have the right mix of assets, do you have the right breadth as you go after these larger accounts in a changing healthcare environment? Sort of what are your longer-term thoughts on the mix of assets?

So I think in terms of the medication management space, if you go back and look and remember that chart we showed you about medication management being a $20 billion industry and the breadth that we have across that. I think we feel very good about that breadth. I would say what was new for me in the field was the excitement that combining BD and CareFusion was bringing as customers saw both the concept of Intelliport and CRISI added to what CareFusion already had. And so I think with that, we are in very good shape in terms of the portfolio.

I think that we are also excited about the small pump from [Cesar Medical] and including that in the portfolio, we see opportunity there. We do think that we will have to do more work in the long run as we think about expansion in emerging markets. And as Tom mentioned earlier, we started the whole registration processes for the products that [fit], but we do believe over the long run, it's not so much an asset purchase as it is market development and it is strategic marketing to understand the needs in those areas and how we can drive that further. Tom, would that be consistent with your thinking?

Absolutely. I think one of the other things is maybe, Vijay, to answer your question around longer term is how we, in the longer term, leverage now the strength that we have in the hospital and begin to follow that into new care settings that are being driven by payer changes as patients are moving into lower cost settings. And we think we have optionalities going forward that maybe we didn't have in the past.

Yes, I think that's a great point. Thanks, Vijay.

Bill Quirk, Piper Jaffray.

So on microbiology, we certainly noticed a trend over the past couple of years where we are seeing a relatively dearth of new products coming out of the chemistry and the immunochemistry side of the market. On the other hand, we are seeing a lot of innovation coming out of microbiology, broadly speaking. So can you comment a little bit on the drivers here for BD and I guess specifically help us think about how sustainable this increase that you saw in the quarter is maybe over the year and over the next couple of years? Thanks.

Yes, I think Linda can talk to that.

Sure, so let me maybe handle the second part of the question first, which is the sustainability of the growth. So certainly for the US market, we have been seeing improvements in that platform broadly on our core blood culture business. bioMerieux had some issues in the front half. We see them coming out of that now in the back half. So we will see some stabilization back to more normal market growth rates in the back half. But more broadly for our microbiology business, we have been focused very much on improvements in our IDASP platform and also in our lab automation. So our KIESTRA platform now, we are very excited. We're really starting to see increased placements now in the US, which we will start to see in the coming years. So a lot of evolution in the core micro lab that BD is really driving.

Yes, we are just getting started with KIESTRA in the US. We're just making our first placements. We think that we have a long way to go, as Linda was indicating, with lab automation there. As Linda also indicated, we have gained some share in that business because -- both from competitive difficulties, but some new products and new resins we've had out in the marketplace in blood culture. So we are performing very well in that core business and of course, on top of that then, we are looking to continue to drive BD Max and get that menu done. But I think the business is doing a good job.

Larry Keusch, Raymond James.

I was wondering if you could just go back into the emerging markets growth, which, as you pointed out, was slower than we have been seeing in the past and I think you called out some timing of orders and some other things, but I am wondering if you could dive back into that and help us understand why those businesses, particularly China, comes back. And then also just so I understand, the gaining of the synergies, are you basically saying what is left over, the $40 million to $50 million that you get this year, what's left over from that out of the $250 million is ratable through fiscal 2018?

Let me start with that one. So the way I would talk about the synergies is if you think about the $250 million over a 3.5 year period kind of implies $70 million in a year and about half of that in a half year would be $35 million. That's why we are saying we've really got a little bit more than that from a ratable standpoint. In the initial six months. But as we look out, we see that as more of a pullforward, so the remainder of the next three years kind of gets you to that $250 million on a ratable basis.

Moving to your other question, I think what we were pointing to in the timing, particularly in an area like China, is the fact that it is not an indication of the underlying growth, and China has been growing very nicely now, as you know, for a number of years and we are not seeing a tickdown that is significant, particularly in the dollar increase. Clearly, the bigger the base that we have will have an impact on the growth rate going forward. But right now, we are seeing the China business in that area of 18% to 19% and we wanted to point to the fact that this quarter was an anomaly of order timing.

The same is actually true in EMA where we had some order timing issues, so we wanted to make it clear that that was not systemic. Now, in Brazil, a little bit different story. We had some order timing based on government orders and government tenders, but a little bit more of an issue there in terms of the economic environment, but we do expect that to come back a little bit in our second half of the year, but not as robust as it has been in the last couple of years. So we just want to give you that kind of flavor.

And just to add a little bit more detail on China, that was mostly pharm systems order timing. We are not talking about the government delaying orders. This is the normal lumpiness that we have globally in pharm systems, clearing customs (multiple speakers). This was the normal stuff that happens there, not a Chinese-driven situation.

Rich Newitter, Leerink Partners.

Just a quick one on buybacks. Can you just remind us what and when you might resume buybacks?

Sure, so we mentioned that we would be committed to paying down the debt and so that's our first order of priority and we are committed to getting under 3 times leverage in the next couple years. That will be the priority, so we don't envision any share buybacks during that period of time.

Doug Schenkel, Cowen & Co.

I guess I have a question for each of you. Vince, in one of the opening lines to your prepared remarks, you indicated that CareFusion was performing largely in line with your expectations. Did you use that language specifically and solely because of the AVEA recall? And then Tom, what is the criteria you are using to evaluate potential divestitures and what is the associated timeline? Chris, your comments on tax rate for fiscal 2016, just to be clear, that guidance is based on weighting of geographic exposure solely and doesn't seem to incorporate assumptions for further tax optimization efforts. And then, Linda, any update on Viper LT? It has been quiet on that front for a little while. Thank you.

There you go, a good five-part question that you asked. It's funny because when I read that line, I was wondering if somebody would ask me that question. But the answer is yes, it was the AVEA recall that I was referring to specifically when I said that. So that is part number one.

Part number two was around I think the timing in terms of the portfolio, if I remember correctly and what we are working on is a process that is integrated with our strategic planning process. So in terms of making the decisions, we said that process is going to continue through the summer. But we are looking to try to get to a real conclusion around that in that kind of timeframe.

And with regard to the tax issue, from the very beginning, we were saying that tax optimization is something we would expect to be able to get to, but was not in our model because it takes a while to do that. That's a lot of pick and shovel work. So what I was referring to is that, in the early years, it's going to be 27% to 29% of their rate, our rate of 21.5% to 22.5%, you get some shield for the interest, obviously. That would be in that 50 to 75 basis point kind of range. That's a complicated calculation that has implications on foreign tax credits and a number of other things that offset it.

So when you put all of that in the mix, you would expect to be in the 23% to 24% this year and 24% to 25% next year, but not contemplating any tax optimization because it won't come that quickly, we wouldn't expect. And we would expect that to be something a couple years down the road that we will be able to, as we did with the BD tax rate, to drive that down through optimizing tax structures. We would expect to be able to do that, but it will take a little while to get there.

And Linda, on the Viper LT.

Yes, so on the Viper LT platform, of course, that's replacing our ProbeTec platform. We are seeing some gains in Western Europe, particularly with the CT/GC assay that we talked about earlier on that platform and we're beginning to see traction in the US market on the platform.

Derik de Bruin, Bank of America Merrill Lynch.

So just sort of thinking about the CareFusion organic revenue growth rate of the business going forward, you are talking about exiting, in your Q4, their first quarter, in that 3% to 5% range. Is that a good basis to think about the long-term organic revenue growth rate characteristics of that business, assuming we're not talking about the synergies coming from international sales, just your base assumption for the core?

Yes, the way I would say -- that starts getting back into the range. We have been saying all along that we see it more as a 3.5% underlying organic and I think that is about right. If you notice on my chart 15, we said for the pro forma fiscal year 2015, it was around 3%, but they had a particularly difficult compare in their fourth quarter, which we pointed to of 5% to 7% down against a very significant quarter they had the prior year. So if you normalize for that, it takes you up to that 3.5%, so that's probably the way to be thinking about that going forward.

Mark Massaro, Canaccord Genuity.

You guys called out good performance in Western Europe on BD Max. Would be curious if you could describe the competitive environment in the US and what you are seeing and if that increased year-over-year in the United States. And then secondly on Veritor, could you update us maybe on your install base and thoughts on what the next-gen Veritor will have that the existing platform does not have? Thanks.

Sure.

Okay, so on the MAX platform, specific to the US, what we are seeing there is we have got -- now we are seeing increased placements, but leveled off in terms of quarters and we are really working on the efficiency of that platform and the reliability of that platform, as well as the expanded menu. So we are encouraged by what we see in Western Europe, it's just going to take us time to get those assays through the FDA. So look for more to come towards the back half of 2016 and 2017 on that platform.

And then the second part of the question is on the Veritor. We continue to see expanded share placements on that platform. I don't have the total number of placements now in the US market, but continue to see expanded placements, particularly in physician offices and in the retail setting. The second generation we're really going to be working on. As Tom mentioned earlier, as we see care shifting to new environments, it's really important for us on the interconnectivity of IT on those platforms, so that's what the next generation of Veritor will bring in 2016. So total placements now on Veritor, just over 15,000 placements globally.

Okay. Thanks for your questions. Any more questions? That's it. Okay, so thank you very much for being with us today. It was an exciting start to bringing these two companies together. As I mentioned in my remarks, we look forward to the future with a lot of confidence. We are excited about the solution that we have pulled together and look forward to talking to you about it as the year progresses. Thanks very much.

Thanks, everyone.

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