Becton Dickinson and Co (BDX) 2015 Q4 法說會逐字稿

Hello and welcome to BD's fourth fiscal quarter and full fiscal year 2015 earnings call. At the request of BD today's call is being recorded. It will be available for replay through November 11, 2015, on the investors' page of the BD.com website or by phone at 800-585-8367 for domestic calls and 404-537-3406 for international calls using confirmation number 51724857.

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 Miss Monique Dolecki, Vice President of Investor Relations. Ms. Dolecki, you may begin.

Thank you, Christy. 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.

As a reminder, our fourth fiscal quarter results reflect the new BD which includes the results of CareFusion for the full quarter. To provide additional visibility into a new BD, we will speak to our revenue results this morning on a comparable currency neutral basis which includes BD and CareFusion in the current and prior year periods. The comparable basis presents current period revenues on an adjusted basis that excludes a small impact related to a purchase accounting adjustment to record CareFusion's deferred revenues at fair value as of the acquisition date.

Details of the purchase accounting and other smaller adjustments and the comparable basis revenue results can be found in the reconciliations to GAAP measures, in the financial schedules, in our press release or the appendix of the investor relations slides.

In addition, we would like to note a change in the distribution agreement effective in the fourth quarter of fiscal year 2015. Fisher & Paykel terminated its agreement with CareFusion for the sale of F&P's hospital respiratory care products which has an unfavorable impact to revenues of approximately $12 million in the fourth quarter of fiscal year 2015 and approximately $90 million in fiscal year 2016.

The fiscal year 2016 revenue guidance provided today will exclude the year-over-year impact of this contract. The impact to the bottom line is not material and is included in our EPS guidance.

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 and President of the Medical Segment; and Linda Tharby, Executive Vice President and President of the Life Sciences segment.

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 very pleased with our results this quarter and our great finish to the year. Many of you already know that this was a unique year for BD in which we successfully completed the largest acquisition in the Company's 118-year history. The powerful combination of BD and CareFusion has already delivered measurable results which we will speak to throughout this presentation.

As we continue to make progress with the integration of these two great companies, I become increasingly confident in our ability to deliver end-to-end solutions that increase efficiency, reduce medication errors and improve patient safety in all healthcare settings.

Turning to slide four, I would like to highlight some key achievements in fiscal year 2015.

First, our results reflect our consistent performance and the benefit of our diverse geographic and product portfolio with revenues growing at 5.3% this year. Our core remains strong and our product pipeline continues to drive growth across the portfolio.

Second, we moved into two highly strategic areas. Through the acquisition of CareFusion, we significantly expanded our presence and are now the global leader in a $20 billion medication management industry. We also entered into the high-growth area of genomics through our strategic acquisitions of Cellular Research and GenCell. We believe that BD is well-positioned to add long-term value in these spaces by providing researchers and clinicians with leading technologies that are scalable, high quality, efficient and cost-effective.

Third, we have continued to invest in higher growth emerging markets. Emerging markets grew over 9% this year and continued to be a key driver of growth for the Company. We are also working to create new growth opportunities for CareFusion products in these markets and expanding their global reach by leveraging BD's international infrastructure. We currently have numerous products in the registration process across multiple geographies.

Fourth, we have continued to refine our operating effectiveness and efficiency initiatives which have generated accelerated margin expansion. Together with CareFusion, we drove approximately 100 basis points of underlying margin expansion year-over-year which includes approximately $50 million in cost synergies demonstrating our ability to deliver on our synergy capture commitments.

Our synergy cost savings have largely been driven by G&A and we have already made good progress with our optimization of our manufacturing footprint with six plant closures this fiscal year.

Over the deal horizon, we have detailed plans to continue our plant network optimization and drive increased automation across the network.

Lastly, we completed our 43rd consecutive year of dividend increases in addition to paying off the $1 billion term loan used to partially fund the acquisition which highlights our effective deployment of capital. As we look back, we closed our first combined year with broad business strength. We exceeded our financial and operating goals then we are successfully executing on our acquisition of CareFusion.

As we look forward, we will continue to build on our strong foundation and our acquisition of CareFusion helps us significantly accelerate our ability to deliver effective healthcare solutions for customers around the world.

Moving to slide five, you will see the guidance for fiscal year 2016 on a currency neutral basis. For fiscal year 2016, we expect currency neutral revenue growth of 4.5% to 5% based on our current view of the environment and various economic -- macroeconomic factors. Of course we have contemplated a number of items that could bring us above or below that range including pricing, a stronger or weaker flu season than expected, the performance of new product launches and emerging market growth.

On the bottom line, we will continue to drive accretive high quality earnings growth. For fiscal year 2016, we expect adjusted EPS of $8.73 to $8.80 currency neutral. On a reported basis, we expect adjusted EPS of $8.37 to $8.44 while overcoming significant FX headwinds. This reflects operational accretion from the CareFusion acquisition of about 22%, an increase from our previously stated deal accretion target of high teens.

In addition, we are pleased to announce that we have increased our cost synergy target from $250 million to $325 million to $350 million as we exit fiscal year 2018.

Now I would like to turn the call over to Chris who will walk you through our financial performance in the fourth quarter and full year along with additional details about our fiscal year 2016 guidance.

Thanks, Vince, and good morning, everyone. I would like to begin by discussing our fourth-quarter revenue and EPS results as well as the key financial highlights for the quarter and total year.

Total fourth-quarter revenues of approximately $3.1 billion grew 49.1% or 5.1% on a comparable basis. Fully diluted adjusted earnings per share came in ahead of our expectations at $1.94, growing at 21.8% over the prior year. Top and bottom line growth was driven by broad-based over performance versus our prior expectations from both the BD and CareFusion legacy businesses.

As Vince mentioned earlier, we are very pleased with our strong finish to the year as a combined entity. For the total year, revenues grew 5.3%. We significantly expanded our margins and captured approximately $50 million in synergy cost savings. EPS of $7.16 exceeded our expectations driven by stronger revenues and margin expansion.

We were also pleased to announce that we have continued to deleverage as we reduce the debt associated with the acquisition of CareFusion. We have successfully paid off the $1 billion term loan facility and remain on track to achieve our commitment of 3 times gross debt leverage within 24 months of close.

On slide eight, I will review our revenue growth by segment on a currency neutral basis. Fourth-quarter revenue growth was 5.1% for the total Company. In the quarter, pricing was about flat on a legacy BD basis. BD Medical fourth-quarter revenues increased 5.2%. Medication and Procedural Solutions growth was 5% which reflects strength in Flush, ChloroPrep and Safety Engineered Products.

Revenues in Medication Management Solutions or MMS grew 11.1%. This was driven by strong infusion capital installations which can vary quarter to quarter and disposables.

On the dispensing side, we continue to gain traction with the Pyxis ES platform as we place focus on the continuous improvement of the installation process.

Respiratory Solutions revenues declined 12.4% as expected. This reflects timing of orders that occurred in the third quarter which negatively impacted the fourth quarter, the loss of the F&P distribution agreement, and the AVEA ship hold. After adjusting for these items, revenues would have been about flat. The AVEA ship hold has been released and we began shipping again last month.

Growth in diabetes care was 5.8% driven by solid growth in pen needles. Pharmaceutical Systems growth of 9% reflects favorable timing of ordering patterns as expected in conjunction with strong safety sales. For the total year, BD Medical grew 5.5%.

BD Life Sciences fourth-quarter revenues increased 4.8% primarily driven by growth in Diagnostic Systems and Preanalytical Systems. Diagnostic Systems growth of 5.9% reflects solid core microbiology growth driven by increased installations of our KIESTRA Lab Automation system and continued core blood culture strength. We saw continued strength on the BD MAX platform which grew double digits in the quarter.

Pre-analytical systems growth of 5.8% was driven by Safety Engineered Products and growth in emerging markets in Western Europe. BD Biosciences growth of 2.2% reflects strong research instrument placements and reagent sales in the US partially offset by delays in government funding in Japan and some operational management changes in Japan. For the total year, Life Sciences grew 5%.

Moving to slide nine, I will walk you through our geographic revenues for the fourth quarter on a currency neutral basis. US growth was strong at 4.6%. This was comprised of BD Medical growing at 5.1 and BD Life Sciences growing at 3.3%. BD Medical's performance reflects broad portfolio strength including Flush, ChloroPrep and infusion systems.

BD Life Sciences growth reflects strong performance in the US Biosciences business driven by research instrument and reagent sales. In our US Diagnostics business, we saw continued growth in our BD MAX Molecular platform as well as seasonal distributor stocking related to the flu offset by continued declines in our ProbeTec Viper platforms.

Moving onto international, revenues grew 5.5%. This is below our normal growth rate which primarily reflects the aforementioned challenges in our respiratory business and a moderation of growth in China in the fourth quarter. I will provide more color on China in just a moment.

The Medical Segment grew 5.4% driven by strong performance in Pharmaceutical Systems and Safety Engineered Products. The Life Sciences segment grew 5.8% which reflects strong growth in Diagnostic Systems driven by solid performance in microbiology including KIESTRA installations.

Preanalytical Systems was driven by double-digit growth in emerging markets and strength in safety engineered devices and in Europe.

On slide 10, emerging market revenues grew 5.9% currency neutral bringing our year-to-date growth to 9.2%. The fourth-quarter growth rate in emerging markets reflects a tough comparison to the prior year coupled with some moderation in China and Brazil. China growth for the fourth quarter was 8.5% bringing the total year growth to 15.4%. This was primarily due to longer purchasing cycles and softness in instrumentation sales consistent with what we shared on our last earnings call.

In addition, we took proactive steps to align inventories in our distribution channel. On an underlying basis, China grew about 12% in the quarter.

In Brazil, the challenges are largely macroeconomic which we expect to continue into fiscal year 2016. Despite softness in Brazil, the rest of Latin America was strong growing double digits.

Looking into fiscal year 2016, we expect emerging markets to grow at about 10% driven by a diversified base with China growing in the low to midteens, continued strength in Latin America outside of Brazil, fewer headwinds in EMA and strength in India.

With CareFusion revenues predominantly in developed markets, emerging markets will be a lower percentage of total Company revenues on a combined basis at about 16% with China accounting for about 5% of total revenues.

Moving to global safety on slide 11, currency neutral sales increased 8.2% and grew to $744 million in the quarter. Safety revenues in the US grew 4.4% while international sales grew 13.4% currency neutral with continued strength in Europe which grew double digits as compliance with safety legislation continues. Safety revenues grew 10% in emerging markets.

Medical safety sales grew 9% driven by a range of safety engineered products including infusion disposables, catheters and a range of products and pharmaceutical systems. Life Sciences safety sales which are driven by our pre-analytical systems unit grew 6.8% in the quarter.

Turning to slide 12 and our gross profit margin for the fourth quarter, on a performance basis, margin expansion was driven by continuous improvement initiatives and favorable raw material prices. These contributions were slightly offset by higher pension expenses and other items.

Currency had a positive impact on gross profit in the quarter. This was driven by translation adjustments recognized in the quarter due to the timing of inventory movements otherwise known as profit and inventory. In addition, our gross profit margin reflects the impact of a reclass from SSG&A to cost of goods sold associated with the alignment of accounting policies in connection with the acquisition integration.

Slide 13 recaps the fourth quarter income statement and highlights our currency neutral results. Since we have already discussed revenue and gross profit, I will move down to the income statement to SSG&A.

SSG&A as a percentage of revenue was 24.4%. We are very pleased with the leverage we are getting which includes the benefit of cost synergy capture as previously discussed.

R&D as a percentage of revenue was 6.4% which is slightly higher than normal due to the timing of spend as anticipated while full-year R&D as a percentage of revenue was 6.1%. Operating income grew 52.3% in the quarter on revenue growth of 49.1% reflecting strong P&L leverage as the new BD.

Our tax rate increased by 160 basis points as expected due to the inclusion of CareFusion's US-based results. In the quarter, adjusted earnings per share were $1.94 which is a 21.8% increase versus the prior year. This reflects operating profit growth driven primarily by strong revenues and continued margin expansion.

Now turning to slide 15, I would like to walk through our expected revenue guidance for the full fiscal year 2016.

In summary, we expect revenue growth of 4.5% to 5% on a currency neutral basis. This is comprised of legacy CareFusion growing at about 4% and legacy BD growing at about 5% on the top line. This is very consistent with our long-term growth profile of BD growing mid-single digits and our objective of accelerating CareFusion's topline growth profile to reach BD's average over time.

From a phasing perspective, we expect currency neutral revenue growth in the first quarter to be well below this range. This is primarily due to a tough comparison to the prior year period in which legacy CareFusion grew 9.9% and legacy BD grew 5.3%. This will result in currency neutral revenue growth of about 1% to 2% in the first fiscal quarter. After adjusting for the tough comparison as well as the loss of F&P, growth would be roughly in line with revenue guidance for the total year.

On a reported basis, revenue growth for the total year is expected to be between 23% and 23.5% reflecting a currency headwind of about 150 basis points. This assumes a euro to dollar exchange rate of $1.13. The depreciation of the Brazilian real year-over-year as well as other currencies such as the euro and the Canadian dollar results in a significant impact to our performance. We expect this unfavorable impact to be the most acute in the first quarter with a headwind of approximately 450 basis points. We expect the currency impact to moderate through the rest of the year.

We expect growth in both BD Medical and BD Life Sciences of 4.5% to 5% driven by continued growth in the core in conjunction with new products in both segments. BD Medical growth will be driven by dispensing, pen needles and infusion infection prevention-related disposables. Life Sciences anticipates continued growth in biosciences, instruments and reagents. Microbiology, including expansion of the KIESTRA platform as well as growth in molecular driven by BD MAX. Both segments expect continued growth of safety engineered devices and solid growth in both developed and emerging markets.

Based on our current view of the environment, we expect pricing to be flat to slightly negative for the year.

Moving on to slide 16, there are number of moving parts that impact earnings per share in fiscal year 2016. For modeling purposes and to ensure consistency, I would like to provide more color on EPS guidance.

First, we are very pleased with the strong performance from legacy BD growing 9% to 10% on an underlying basis. In addition, we now expect to deliver a significantly lower tax rate which results in 3 percentage points of improvement to the bottom line. We are particularly pleased with our execution on operational synergies and expect to outperform our high teens target by driving accretion of 22%.

As Vince mentioned earlier, we have also increased our cost synergy target to a range of $325 million to $350 million over the deal horizon. As a result, we expect to achieve very strong earnings of $8.73 to $8.80. This enables us to overcome an unfavorable impact from pension expense and a significant headwind from foreign exchange. We expect to deliver adjusted earnings per share of $8.37 to $8.44 for fiscal year 2016.

Turning to slide 17, I would like to walk through additional elements of our guidance for the full fiscal year 2016 but first I would like to make some comments on the phasing of earnings.

Similar to revenue, the impact of unfavorable currency will be most acute in the first quarter and we expect EPS to be between $1.80 and $1.85. This reflects a currency headwind of approximately 1500 basis points and a euro to dollar exchange rate of $1.13 versus $1.26 when compared with the prior year period. In addition, the Brazilian real has declined 55% and the Canadian dollar has declined 15%.

Moving on to the total year guidance, we have provided comparable fiscal year 2015 results which include BD and CareFusion for the full year. We expect gross profit margin to be between 52% and 52.5%. Performance improvements are partially offset by negative currency translation and pension.

SSG&A as a percentage of sales is expected to be between 24.5% and 25%. Our guidance also reflects continued investments in emerging markets as well as costs related to new product launches and registration costs.

We expect our R&D investment to be in line with fiscal year 2015 at about 6% of revenues as we continue to invest in new products and platforms. As a result of the items I just detailed, operating margin is expected to be between 21% in 22% of revenues. Excluding the unfavorable impact of foreign currency, we expect our underlying operating margin to improve by 130 to 150 basis points. This also excludes slight pension headwinds.

We expect our tax rate to be between 21.5% and 22.5%. For fiscal year 2016, we anticipate our average fully diluted share count to be approximately $217 million. Cash flow is expected to remain strong with operating cash flow of about $2.6 billion in fiscal year 2016. Capital expenditures are expected to be about $650 million to $700 million.

In summary, we have strong momentum exiting fiscal year 2015 and looking forward into 2016, we are building off a very solid foundation. Our core remains strong and we have moved into new adjacencies. We are outperforming on our synergy and accretion targets as well as delivering earlier tax efficiencies.

As we continue to execute and deliver on the factors that are under our control, I am confident that fiscal year 2016 will be another year of strong performance positioning us well for continued success.

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. Moving on to slide 19, we have been discussing our pipeline for some time now and in fiscal year 2015, there were a number of product launches. I will not review them in detail but they are highlighted on slide 19.

We are committed to the successful ramp up of these products while we also look to the future and continue to expand our portfolio.

Moving on to slide 20, we have some new product launches that we would like to share with you.

In BD Medical, we continue to make progress with our insulin infusion sets with an expected product launch in the middle of the fiscal year 2016. This product will improve the consistency of insulin delivery by significantly reducing silent occlusions, simplify the user's experience and increase the patient's overall satisfaction with insulin pumping.

Also launching in 2016 is the new Pyxis Mini tabletop medication management platform. This is a unique system that supports customer needs in non-acute care setting such as ambulatory care centers, long-term care and surgery centers. Leveraging the Pyxis ES platform, the Pyxis Mini extends the value of the ES server and the hospital's IT infrastructure by providing safe and secure medication management. We look forward to sharing further details on the newly combined medical segment with new product portfolio launches later in fiscal year 2016.

While there has been a strong focus on the medical segment due to the CareFusion acquisition, I would like to note that our Life Sciences segment remains an important growth driver for BD. It was an exciting year for BD Biosciences which includes our new genomics business. In the fourth quarter, we acquired Cellular Research and launched the BDFACSseq, a high throughputs cell sorter which targets solving significant unmet needs in single-cell analysis. The combination of Cellular Research's molecular indexing technology paired with cell sorting allows researchers to choose which cells to study and enables the correlation of cell surface markers with genetic data. The combination is intended to enable a more simplified workflow, time reduction to isolate cells and all of this with higher accuracy.

Also in the fourth quarter we launched the new X-50 research flow cytometer. The X-50 represents a significant advancement in technology enabling simultaneous measurement of up to 50 unique characteristics at the single-cell level. The X-50 single-cell analyzer enables superior resolution of rare cell populations providing richer scientific insights to advance the understanding of human disease and intervention strategies.

In fiscal year 2016, we expect to launch our GenCell library preparation system. This platform will consolidate and automate NGS library preparation workflow at a reduced total cost position.

In our Diagnostic Systems business, we anticipate launching four new assays in the next year including CT/GC and Vaginitis as we continue to drive menu expansion on the BD MAX platform. We are also on track with our launch of the next generation Veritor point of care instrument which incorporates smart features to enable connectivity.

In our Preanalytical Systems business, we anticipate launching two new products during 2016, the UltraTouch push-button blood collection sets will deliver significant improvements in patient outcomes for patients with challenging venous access. The BD Barricor tubes are an innovative technology which will enhance sample quality as well as lab turnaround time. As you can see, we continue to have strong opportunities in our pipeline and we look forward to sharing our progress with you as we make progress throughout the year.

On slide 21 before we conclude and open the call to questions, I would like to take a moment to discuss a leadership change within the organization. BD announced this morning that after 41 years of outstanding service to BD, Bill Kozy, EVP and Chief Operating Officer, has decided to retire effective April 1, 2016. Bill has had an exemplary career at BD and his accomplishments are too numerous to mention them all.

As we all know, he has spent the past year leading the successful integration of CareFusion at BD. While we believe this process is well underway and Bill will stay on until March to ensure a successful transition of these duties to Chris Reidy, who will lead the current integration team.

I would like to make a special mention of Bill's relentless commitment to operational excellence to our customers and to our associates. They are highly valued and have made a tremendous difference for all of us and for the Company. We would like to express our sincere gratitude and also congratulate him on reaching this milestone.

Now I would like to reiterate the key messages from our presentation today.

First, this was a pivotal year for BD in history and we are pleased with our strong results. We have exceeded our financial and operational goals for this year and our increased synergy and accretion targets are evidence that we are successfully executing on our acquisition of CareFusion.

Second, our core remains strong. Our investments drive robust revenue growth of 5.3% and we continue to deliver high quality double-digit earnings growth. We expect to deliver a similar growth profile in fiscal year 2016 with topline growth of 4.5% to 5% and earnings accretion of about 22%. We are pleased with our financial performance and we continue to deliver and believe we have built a strong foundation for future growth.

Third, we expanded into new areas of medication management and entered the genomic market. We are excited about the value that CareFusion brings to BD and our customers as we execute our medication management strategy.

We are also very pleased with the progress we have made in Life Sciences with our acquisition of GenCell and Cellular Research which underscore BD's commitment to drive value through our genomics strategy.

Finally, I would like to say thank you to all of our associates around the world. It is a testament to the hard work that BD and CareFusion employees that we are here today with what I believe is a tremendous opportunity to create a true industry leader. As we embark on this next phase of growth, I look to the future with enthusiasm and confidence.

Thank you. We will now open the call to questions.

(Operator Instructions). David Roman, Goldman Sachs.

Thank you and good morning everybody. Hopefully I can just sneak two in here along the same lines. Vince, maybe you could start with the pipeline. The list of products that you are laying out for FY16 is probably one of the deeper pipeline benches that you have presented in some time. Can you help us think about the contribution from that pipeline and how that squares with the growth rates that you are presenting here in your guidance because it would seem like given that breadth of product launches we would see an acceleration in the base business. So could you maybe help us think about some of the gives and takes with respect to product launches versus the performance of the base business.

Yes, David, we feel really good about the guidance that we have given on revenue of 4.5% to 5% and you are right, there is a strong breadth of products across the entire portfolio. I think the one business you might have noticed in the guidance that we hadn't talked about before was PAS with the new launches of the Barricor tube in there and the new push-button product.

But I think what you haven't taken into account is it is just going to take a while to ramp up those new products as we get the automated manufacturing in place. So not as much of an impact that would take us above the range. Now if they go faster as I said in my remarks, okay, there is some potential upside and I'm not just talking about the PAS products but the Pyxis Mini and others, the infusion sets which is in a similar situation.

So I think across the board we are feeling good, we are feeling good about the base business as well. There is little puts and takes as I mentioned from a geographic standpoint that we are still going to get about 10% in terms of the emerging markets.

So when we put all of that together we are kind of saying look, developed world up a little bit; emerging markets still a strong growth driver. And when you put it all back together it gets you to the 4.5% to 5%. So anyway, that was the first question.

Yes, and then the second one just on emerging markets. In your prepared remarks you talked about product registrations on the CareFusion side. Can you maybe just walk us through the steps and timeline associated with product registration to commercialization and then financial impact just to maybe just frame up how we should think about the progression of that opportunity on a go-forward basis?

Sure. Tom Polen will do that for you.

David, this is Tom. So as we have discussed in the past, we are pursuing a number of opportunities for revenue synergies in the combined portfolio. We have begun investment work on those registrations and actually submitted several dozen registrations in FY15. Of course that process does take some time and as I have said in the past, we expect it to take up out two years to start seeing the benefits of those pull through in sales. So more of an FY17 effect than a 2016 and that is right in line with what we have said since the deal announcements.

And we really haven't changed our view on the revenue synergies from the start of all of this. The geographies may have moved around a little bit, but in total it is looking like the same opportunity.

David Lewis, Morgan Stanley.

Good morning. Chris, just one quick question on first-quarter guidance, and then I had another question for you on tax rate and synergies if I could. So just on first-quarter guidance just reviewing, the 1% to 2% constant currency, I'm assuming that just reflects CareFusion numbers year on year which were, I don't know, 11% in dispensing and 8% in procedure solutions, so an unexpected CareFusion quarter.

Is there anything else going on in the first quarter we should be aware of besides that harder comp?

Yes, you got that piece right in terms of infusion. So as we pointed to the overall CareFusion was 9.9%. If you remember, that was the quarter that was their closing quarter, so that comes into play. You also have the F&P contract loss that we talked about.

And then on the legacy BD side, we have the normal pharmaceutical sales, timing of orders, and so that tends to be weaker in the first quarter. And then last year you said diagnostic system with a strong flu season. We are just calling it a normal flu season this year. So that could vary, but you put all of those things together and it makes for a tough comp in the first quarter.

Okay. And then maybe two questions about the long-term outlook. While on tax, you signaled that the tax rate continue to move down maybe to the upper teens over time but the 2016 guidance is coming in stronger than we expected. So do you have greater tax opportunities before 2018 than you thought and can we get down to upper teens maybe quicker than we thought?

And then on synergies, just help me understand with the 30% raise, what are the principal drivers and what is the pacing of synergies across these three years and any update on revenue synergies? Thank you.

That is about four questions, David, but they are all good ones. So on the tax, I think we have said from the beginning that we do expect to get tax synergies but we thought that when you put two big companies like ours together, it will take a while to get those structures in place and see through that. We have done a lot of that work and we do see those synergies coming sooner than expected and so you are seeing that in 2016.

We do say that ultimately we want to be at the high teens which is where we have been driving for a number of years but I wouldn't say past 2016, 2016 is in that 21.5 to 22.5 range. After that I wouldn't ramp it much more than 50 basis points a year after that.

We will provide more insight into that going forward obviously but that wouldn't get you down to the high teens by 2018. So I wouldn't say it is an acceleration of the ramp to the high teens but we are getting it earlier than we had originally anticipated and it's showing up in 2016.

In terms of the synergies, what is driving the increase from $250 million to $325 million and $350 million -- as we have been saying all along, we needed to see some traction. Initially you get out of the box kind of synergies early on so a reduction of public company costs and we had good visibility to that. What we needed to see is visibility to the next wave which is things like IT synergies, putting the combination of the two companies together and getting system synergies and system synergies throughout all of the functions and so we have now seen some of that traction.

We have also even seen some traction in the manufacturing area. As we mentioned in the remarks, we have had six plant closures so we have started to see some visibility and traction along those lines and that is what gives us the confidence to raise it to the $325 million to $350 million.

Now in terms of the timing that you talked about, we mentioned that we had about 50 in the first six months. We see that turning into about 100 for next year on a full-year basis. Then you get about an extra 40 incremental and it turns into a full-year impact the following year of 80. We see about 40 incremental kind of ratably over the next couple of years and if you roll it out that way, you get to the $325 million to $350 million.

Mike Weinstein, JPMorgan.

This is actually Robbie Marcus in for Mike. I was wondering if you could talk a little more about your 10% growth target from emerging markets and how you see that rebounding off the fourth quarter particularly in China and Latin America? And then also if you don't mind touching on hospital budgets for 2016 given how poorly some of the facility reports have been lately and what you are considering in your guidance for budgets next year?

I think you are talking about the US from a hospital budgeting standpoint and we are assuming pretty much status quo in terms of the US marketplace, not a lot of improvement but continued consistent demand and we feel good about where we are from a capital standpoint in the backlog that we have. So I think we are in good shape there.

In terms of the emerging markets as we mentioned in the quarter, in China we did some proactive work with the distributor community. Remember, we don't give credit to the distributor so we wanted to make sure we had the right amount of inventory and so we completed that work, so underlying growth I think was closer to 11% in the quarter -- 12% excuse me.

So we see China continuing to grow in the low teens and of course, it has become quite large at this point in time. It is about 5% of BD sales.

We expect India to do well and we saw good performance this year in India. If you look at Latin America, Latin America did well with the exception of Brazil and we continue to expect weakness in Brazil this year. But the rest of Latin America has grown quite nicely and so we are getting good growth out of that.

We think EMA is going to be okay as we move forward and we are projecting Russia to be soft and when you add all that up, you get to our guidance.

Kristen Stewart, Deutsche Bank.

Thanks for taking the question. I was just wondering if you could I guess talk to the longer-term outlook. I know when you originally did the CareFusion deal you had talked about CareFusion being about a 3%, maybe 4% growth company. It sounds like it is coming in little bit better with the cost synergies talking about like bottom line growth being more around the 10%. It sounds like things are going better on the cost synergies, certainly the legacy BD business is doing much better. How should we think about sustaining the growth? Would you let the higher cost synergies flow through, would you think about reinvesting those or just looking to do more acquisitions to kind of further fuel the topline growth?

Let me start on the top line and if I go back to the beginning, what we said was that CareFusion was about a 3.5% grower, BD was growing at about 5% and our long-term goal was to get CareFusion up to about the 5% and that would come through both the geographic expansion and new product opportunity as we synergize with CareFusion across the medication management process.

That is still the strategy and you are right, the base business in both CareFusion and BD is performing well. We had a strong quarter with about 4% underlying I think Tom was trying to tell me.

Correct and we expect CareFusion -- well you said, historically about 3.5%, we expect them to be about 4% in FY16.

Yes, 4% in this year. Long-term we would like to get them to 5% is what we said. That is still our goal and we still have work to do to get there but we are pleased at where we are at.

Now in terms of letting this all -- how we think about this, Chris has laid out what the financial characteristics are going to be for the next couple of years. What Chris has said in the long-term was 5% and 10% and we haven't come off that. Chris may want to add some color to that but that implies that we will be investing for the future and also returning value to the shareholders.

Chris, I don't know if you want to add?

The only other thing I would add is as you think about 2017 and 2018, you have that base model of 5% on the top and 10% on the bottom but then you do get some incremental pick up from the synergies. And as I answered earlier, we see that incremental amount per year to be about $40 million then annualizing into the following year. And so if you run that math, you pick up a couple of percentage points on the bottom on top of that 10% so that is the way to think about it.

So you would be inclined to let that fall through to the bottom line for shareholders and then kind of think about it growing more traditionally 5% to 10% thereafter?

Yes, I think once you get out and you are past the synergies, you kind of go back to that base model.

Past 2018.

Yes, past 2018.

Okay, perfect. And then just on BD Simplist, are we getting to the point where that is sort of breakeven or is that still dilutive overall to the P&L?

BD Simplest is still dilutive at this point in time. It did grow, it is still not all that big. We still haven't gotten the approvals on the two drugs that we have been talking about for some time.

Tom, is there any update on those two drugs in the pipeline?

Hi, Kristen, this is Tom. I think as we have shared in the past we have been realigning our portfolio. We are on track for the next two launches in the high alert drugs, hydromorphone and heparin, we do expect to launch in FY16. And so as we add those to morphine, which is our current high risk drug that is doing very well in the marketplace, we expect those sales to continue to accelerate.

Brian Weinstein, William Blair.

Thanks for taking the question. Maybe a question for you on genomics in general. Can you kind of just talk about what the longer-term plan is here? Are you looking to add additional assets or are you looking to add things like bio informatics or kind of go deeper in next gen sequencing? Just talk about what the overall strategy looks like in genomics at this point. Thanks.

Hi, Brian. This is Linda. So over the long-term we are focused on building a leading genomics position in next-generation sequencing from sample preparation to sample collection to sequencer ready. So it will be platforms that are ubiquitous and can be used with any next-generation sequencer. So today those platforms involve our PAXgene sample collection and stabilization products. They involve our library preparation platforms from GenCell and of course now the combination of our BD flow cytometry with Cellular Research's molecular indexing technology.

So all of these in combination again we think we will have technologies that allow researchers and clinicians as we move to the clinic more scalable, high quality, efficient and cost-effective so you will see us continue to build franchises in that whole up front sample collection process.

Brian, certainly we will continue to look for assets in the space. We are very excited about the cellular research deal that we just concluded because we think it is such a great fit with the flow cytometry business and really does give researchers a new process and a better way of understanding cells.

I mentioned in my remarks you can look at the cell surface markers and you can look at the DNA and this is where we are really enabling that for the first time. So it is pretty exciting so Linda will continue to build that business. Thanks for your question, Brian.

Bill Quirk, Piper Jaffray.

Great. Thanks, good morning, everyone. First off, Chris, the reclass from SSG&A to cost of goods, should we think about that as a recurring charge or is this more one-time in nature?

And then secondly, I guess kind of question on the pricing assumption, the flat to slightly negative for the coming year I guess could you give us a little more color into some of the underlying assumptions there given that it generally kind of outperformed on an incremental basis this year? Thanks.

Sure. So the accounting adjustment, there is nothing unusual when you put two companies together you do see sometimes a difference in the way certain expenses are accounted for. So the adjustment kind of brought costs from SSG&A mostly related to things like quality and up into cost of goods sold. So it doesn't affect the bottom line, it is just within the P&L itself.

When you look at our chart 17 and we talk about the guidance, we've kind of done the comparable basis for you. So there are two things going on when we adjust for comparable basis. One is these accounting adjustments. The other is the fact that CareFusion had a half a year before us so their percentages were different so we wanted to put it on an apples-to-apples basis. And chart 17 does that.

So if you look at for example SSG&A or gross profit on chart 17, what we are showing in 2015 actual on a comparable basis is equivalent on an apples-to-apples basis with our 2016 guidance. I forgot what your second question was.

Second question pricing.

Pricing, I'm sorry. So pricing, the way to think about that is over the last couple of years essentially pricing has been relatively flat. Last year it was down slightly in 2014. This year it is relatively flat and so that is really indicative of the guidance that we are going forward with, flat to slightly down. So it is very consistent with what we have seen over the last two years.

Doug Schenkel, Cowen.

Good morning. Just a couple of quick questions. First on R&D. R&D spend increased notably sequentially and on an absolute and percentage of sales basis. Would you be willing to share if there are areas where you are proportionately directing more money that we should be thinking about as we look forward and how we think about this in the context of you driving synergies over the next few years?

My second question is really I guess really just a clarification on guidance. Why did you assume $1.13 versus the current spot rate of $1.09 for the euro? And would you be willing to quantify what the assumption is for new product contributions that are factored into revenue growth? Thank you.

This is Vince. In terms of R&D, there is nothing unusual going on in R&D at all. We are not shifting funding or anything and we haven't changed our outlook in terms of 6% of sales. So there is some timing going on in projects and nothing to really report there. And Chris, on the $1.13?

Yes, the $1.13 is the last 30-day average, it is actually the last 90-day average too. The euro was at $1.13 about 10 days ago so there has been a lot of volatility. We have set our budget up at the $1.13.

What I would point to the fact that as we look forward, the euro really had a big impact in the current year going from the $1.26 for example in the first quarter down to $1.13 and that was the biggest impact on FX in the current year. As we look forward to next year, that $1.16 down to the low $1.10 to $1.13 is much less of an impact going forward than some of the other currencies that we pointed to. So if you looked at our prepared remarks, we point to things like the Brazilian real as well as the Canadian dollar, those are huge drivers going forward into the 2016 guidance.

We did decide we didn't want to mark to market for example on a euro basis and we are comfortable with the guidance we gave given the full basket of FX currencies.

Rick Wise, Stifel.

Good morning, Vince. A couple of questions. First, just a general question. Vince, you said early on in your comments that you are increasingly confident about delivering end-to-end solutions. Just curious what does that mean exactly, what is giving you more confidence, are you seeing larger contract system wins? Is that what is driving that statement or just how do we think about that?

So if I start on the medication management side of things, as we have proceeded with the integration including the product lines, the work that Tom and his team have done with Cato and [Crisi] is actually expanding the solution set there. And that seems to be well received by the customer base. I mentioned also in my prepared remarks that the Pyxis Mini, we are in the process of launching that and we see that as very important as integrated delivery networks start to think about how they coordinate care across the entire network.

So we see ourselves doing quite well from a product standpoint to support that solution going forward and the more conversations Tom and I have with the customer base, that seems to be the right strategy. So that was the reason behind my remark on the medication side.

On the Diagnostics and Life Science side of the business, Linda can speak to this a little more. I will ask her to in a second. But the ramp up that we are seeing in KIESTRA is quite strong and so a full automation solution on the microbiology side is really coming along and we also add to that with Bruker. So Linda, you might want to mention how we did with KIESTRA especially in the US this year and how that is ramping.

Sure, thanks. So as Vince mentioned the total solution and if you look at the microbiology lab today, many of the labs look like they looked 50 years ago so the opportunity with KIESTRA and the opportunity to automate that lab from sample in to full now with our connectivity to MALDI's ID system and RAST solution you really see a full solution.

So we saw great traction. One of key growth drivers in the fourth quarter was BD KIESTRA, great traction in Western Europe but also very exciting for us is traction we are seeing in now China, Saudi Arabia, Japan, South Africa and we ended the year with a significant number of new orders for the US market. So this really is a tremendous opportunity for us.

And then just maybe one other solution I will speak about on the Life Sciences side, a great growth driver for us with some resurge in the research market is the high perimeter research solution that we are offering now in combination with our high perimeter flow cytometers, with our X-30 and X-50 but also our Sirigen platform so really enabling activity at the cell level and understanding that has never existed before.

So, Rick, just to add to that and take it up to a different level here at the 50,000 foot level, the informatics capability as we understand it now and the way we can leverage that capability across the Company not just on the medication management side but we believe also into the Life Science side we think is going to be a real enabler of solutions going forward.

Now we are not going to get into detail about that today but as we evolve that strategy, that is something we will be talking to you about as we go forward.

Matt Taylor, Barclays.

Thanks for taking the question. I wanted to just delve into a couple of things a little bit deeper that you talked about earlier on the call. I guess one, I think people will definitely focus on emerging markets and I know you talked a little bit about macro in Brazil. I guess I want to understand what are the macro factors that you are talking about? Is it currency, are you seeing flagging demand? Could you characterize that a little bit more in more detail?

Then I guess in terms of your EM sales, can you talk a little bit about just the visibility in terms of working with distributor partners and really how you are able to see the end market demand versus what you are selling into?

Sure. So in terms of Brazil what we were referring to really is the timing of tenders in Brazil. So that is related to government funding and how aggressively they ramp that up. So we generally have a good sense of what the timing of those tenders would be as we put together our budget. And so my remarks reflected that knowledge base from the team down in Brazil and also what they are seeing in the other countries in Latin America where they see government funding continuing to ramp up, continued build of those systems. And so that is the macroeconomic factors that I'm talking about. It is mostly government funding.

Now if you go over to China, it is a situation where the government is continuing to build out the healthcare system, it is growing somewhat slower, a couple of percentage points slower than it was in the past and we have reflected that in our guidance. It also reflects what we mentioned last quarter and this quarter which was a slowdown of action on diagnostic instrumentation tenders. And that is driven by a desire of the hospitals not to get audited as part of the anti-corruption process that is going on there. Doesn't mean the hospital did anything wrong. It is an added burden on the hospital. And if they can avoid that in the short run, they would like to do that. We have taken all of that into account as we guide.

Now in terms of working with our distributors, we work with them very closely on what their inventory levels are. We have our own salesforce calling on the accounts so we have a view to the pipeline. We do not leave that to the distribution community. So those are the factors that we look at as we take this all into account.

I would just add that we feel real good about the China growth if you look at this year over 15% and next year low to mid-teens. That is really strong growth, continues to be strong growth and outpaces our peers from a growth standpoint.

We continue to out-index our peers in emerging markets by a substantial amount too. And of course it has become so big even though if you take something like China where the growth rate has come down, the actual absolute number is still about where it was. So it is still a big impact and a big growth driver. And if I look out over the long-term, we still see a very long ramp there.

Derik De Bruin, Bank of America.

Good morning. This is Juan Avendano filling in for Derik. I had a couple of questions quick. I was wondering if you could provide a little bit more color on the diagnostic volumes outside of the United States and competition in DX in general and also if you could quantify your revenue exposure to Brazil?

We haven't broken out Brazil anytime in the past so I don't think we will do that. All I would say is as I was mentioning that we have taken that softness into account and that the rest of Latin America has become a much bigger piece of Latin America. Chris, anything you can add to that?

Just to put it in perspective though if you look at China one thing that we have said is 2% decline in China for example and their growth rate is only worth a 10th of a point of growth on the BD level and Brazil is much smaller than China. So just kind of put things in perspective.

Just in terms of overall diagnostic volumes in emerging markets, we continue to see strong growth in those areas driven primarily by our BACTEC business; SurePath, we also see strong double-digit growth in TB. So continuing to see increases in rollout of our platforms in all of our emerging markets.

Vijay Kumar, Evercore ISI.

Congrats on a nice quarter. So maybe first question on the guidance, so if I look at the operating margin improvements at the midpoint, it looks like about 50 bps. So that is about a $65 million uplift to your EBITDA. I guess you had legacy as a standalone BDX you had margin improvements and I think CareFusion they had their annual margin improvement targets. So I'm just trying to think -- and plus you add in about the synergies, it feels like at the midpoint it should be slightly better, the absolute dollar increase in EBITDA so I am wondering if you could sort of help us walk through especially given their pricing is kind of flattish.

So just there is a lot of ins and outs because of the fact that CareFusion had lower operating margins for the first half of last year and so if you look at that, we are giving guidance of 21 to 22 versus the 20.7 last year. That is about 130 basis points to 150 basis points of underlying growth. And we mentioned that in the script and you have about 40 basis points of FX headwinds in there.

So we feel good about the fact that we are driving that operating margin improvement both next year in gross profit so you can see that we are up year-over-year on the GP line again overcoming about 40 basis points of FX. So what about 50 basis points of improvement operationally. And we are continuing the SSG&A performance with another 30 basis points to 40 basis points of operating margin improvement.

Now if you look at SSG&A, if you went back to a combined basis in 2014, you are looking at like 25.7% of revenue and we are now looking at that down over 100 basis points so we obviously got a lot of synergies in year on the SSG&A line and we are doing better on top of that going into next year.

So the combination of all of those things point to the increase that we had and if you look back at the chart that we had chart 16, you can see that the accretion we talked about being 22% versus the high teens, but the thing that I would point to is that excluding FX, we are driving $8.73 to $8.80 in terms of EPS on an FX and neutral basis. So really doing extremely well on the operation accretion. We've got the tax rate efficiencies kicking in and overcoming that FX headwinds which are significant with about 5% headwinds from FX.

Just one quick follow-up on the synergies. Raised their total target to $325 million to $350 million. Does that include I guess legacy CareFusion had about 100 basis points of annual expansion -- does that include or exclude $75 million by my math over a three-year period?

And I guess Bill Kozy, congratulations to you. A long successful career and he was leading the charge on the integration so now with him sort of transitioning I'm curious who is going to lead the integration now?

So as Vince said, that would be me and I have been working hand in hand with Bill over the last year and now we are down to the execution phases as we said. We have seen those synergies, the traction on those, our ability to use shared service centers, some of the end-to-end process improvements that we have, some of the plans that we have in place on manufacturing. So those are well underway and hopefully in good hands as Bill retires. So we feel real good about our outlook forward.

In terms of your math, Chris, he was asking about the 100 basis points that CareFusion had in their plan.

Sure so as we have said from the beginning, our synergies are truly incremental so you can see what we did on slide 16 that those synergies are on top of the 9% to 10% that we would have normally driven on the BD side. And as we said from the beginning, CareFusion had indicated operating margin improvements that we haircutted from 100 down to about 70 basis points and what we are driving in these $325 million to $350 million are on top of those underlying improvements that they would have done on their own anyway. So it really truly is incremental.

Just one other point on the integration. So think about as Bill transitions, Bill is transitioning the manufacturing operation side. He has been working with Steve Sichak of course who runs all the relocation and all of that. Success is getting it into that process, getting it into the business and executing on it. And what we are indicating is that we are already doing that with the six plants that we started.

So we put it into our normal process. The other big bucket is the G&A side and of course who has been driving that but Chris. So we are well aligned on this. Bill has done just an absolutely fantastic job and I can tell you he won't go out the door until he gets this thing buttoned up because that is just his nature. But anyway, thanks for the question.

Jon Groberg, UBS.

Good morning. This is actually Harris on behalf of Jon. Appreciate the question. First one, can you talk about (inaudible) recent initiatives to accelerate the Pyxis installation process? I think -- I know mentioned you putting into place the Lean Six Sigma teams so maybe any update on impact of these moves and how backlog is now trending?

Tom Polen can take that as soon as he turns on his mic.

So as we have discussed as you said, we have been working on the process improvement. We are quite pleased at the progress that we have been making there. We are seeing that process improve over the last six months in particular and so we still have more work to do but we have been applying some of our operational systems and lean approaches to make that better and we will be continuing that over the balance of FY16.

What I would say as well is that while we are improving the installation process, we are continuing to see very strong demand for customers for ES. So we do not expect any change in that going forward.

I would now like to turn the floor back over to Vince Forlenza for any closing remarks.

I would like to thank all of you for your participation today on the call. I look forward to reporting on FY2016 and once again I would like to thank all of the BD Associates around the globe for their tremendous work in 2015. Thanks very much.

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