Becton Dickinson and Co (BDX) 2016 Q2 法說會逐字稿

Hello, and welcome to the BD's second quarter FY16 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through May 12, 2016 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 83710101.

(Operator Instructions)

Beginning today's call is Ms. 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 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.

As a reminder, until we annualize the acquisition of CareFusion in the third quarter of FY16, we will speak to our revenue results on a comparable currency neutral basis, which includes BD and CareFusion in the current and prior year periods. We believe this provides additional visibility into the new BD. The comparable current period revenues are adjusted to exclude a small impact related to a purchase accounting adjustment to record CareFusion's deferred revenues at fair value as of the acquisition date. In addition, comparable prior year revenues are adjusted to exclude sales related to the terminated agreement with CareFusion for the sale of Fisher & Paykel's respiratory care products.

The FY16 comparable revenue guidance provided today will also exclude the year-over-year impact of this contract termination. The impact to the bottom line is not material, and is included in our EPS guidance. 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.

Leading the call this morning is Vince Forlenza, Chairman, Chief Executive Officer and President. Also joining us are Chris Reidy, Executive Vice President, Chief Financial Officer and Chief Administrative 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 second quarter growth profile. Our results this quarter highlight our consistent performance, and the benefit of our diverse geographic and product portfolio, with both segments contributing to revenue growth. We continued to drive strong underlying margin expansion through the achievement of operational efficiencies and continuous improvement, coupled with the positive impact of cost synergies.

As many of you already know, in March we celebrated the one year anniversary of the closing of CareFusion, and we are extremely proud of our achievements over the past year. We have been acutely focused on the integration, and a significant amount of work has been driven by the integration teams across the businesses. In terms of talent retention, we have a strong team that's in place, is comprised of both legacy CareFusion and legacy BD associates. They've been helping drive the Company through our next phase of growth as a combined entity.

In terms of our customers, we are becoming increasingly more relevant, as they are looking for providers that can really help them improve the quality, efficiency and safety of processes. We have made good progress on this front 12 months post close, and feedback from our customers has been extremely positive. Also, we have been actively working to create new growth opportunities for CareFusion products, and expanding their global reach by leveraging BD's global infrastructure. We are well into the registration process with dozens of products across multiple geographies. I will provide more details on this later in the presentation.

Lastly, we are seeing strong productivity, as we are over-delivering on our initial cost synergy capture commitments. As you already know, we have increased our total cost synergy target by about $100 million over the deal's horizon. We are clearly advancing our strategy to improve medication management. The value we bring to customers around the world has become increasingly evident, as we make progress integrating these two great companies.

We're also pleased to inform you that the annual strategic review of our portfolio is now complete. In March, we announced that BD and Apax Partners, a private equity firm, will form a joint venture with the respiratory solutions business. Apax will establish and stand up a newco, enabling more strategic focus and investment to build a leading global respiratory company. And more recently, we announced the divestiture of our Vertebral Augmentation Solutions business. This product line was not aligned with the our strategy, and we believe it can see more robust investment and growth under a different owner. The completion of our current strategic review process enables the Company to remain focused on the areas we believe are high growth and aligned with our core capabilities.

In addition, during our last call, we let you know about our intent to reinvest the savings from the suspension of the Medical Device Tax that went into effect in January. Since that time, we have already allocated increased R&D dollars to highly strategic initiatives. Not only will this help to fund -- drive future growth for the Company, but it will also enable better outcomes for our customers and their patients.

Looking forward to the total year, we are confident in our outlook, and are maintaining our FY16 currency neutral revenue and EPS guidance. We are also increasing our adjusted guidance to reflect lower currency headwinds due to the weakening of the US dollar, relative to the euro and other currencies.

Moving to slide 5, I will review our second quarter revenue and EPS results, which I will speak to on a currency neutral basis. Total Company revenues grew 5.3%, or 5.2% on a combined organic basis. Adjusted EPS of $2.18 was ahead of our expectations, as the quarter benefited in part from some timing within the year. Now I'd like to turn things over to Chris, for a more detailed discussion of our second quarter financial performance and our updated FY16 guidance.

Thanks, Vince, and good morning, everyone. As Vince just mentioned, the breadth and geographic diversity of our portfolio contributed to a very solid second quarter results. Total second quarter revenues of approximately $3.1 billion grew 5.3% on a comparable basis, or 5.2% on a combined organic basis. This was slightly ahead of our expectations, as the quarter benefited by about 50 basis points from the timing of revenues which occurred earlier than expected. I'll discuss this, as I take you through the business results.

BD medical's second quarter revenues increased 6.1%, reflecting solid growth across the segment. Medication and procedural solutions growth was 4%, which reflects strength in infusion therapy, safety engineered products and infection prevention. Medication management solutions revenues grew 6%, driven by strong dispensing capital installations with our Pyxus platform. Pyxus ES demand was strong in the quarter, driven by several large customer conversions, and we saw a positive impact from our efforts to simplify the installation process.

We also saw a solid growth in the infusion business, where we continue to expand our leadership position. Growth in diabetes care was 3.6%, driven by pen needles and syringes. Pharmaceutical systems growth of 11% reflects a strong growth in SAIS. Performance in this business also reflected the favorable timing of customer orders that occurred one quarter earlier than we initially anticipated. Respiratory solution revenues increased 10.9%, reflecting the timing of capital placements, which similarly benefited the quarter as the placements were expected to occur later in the fiscal year

BD life sciences second quarter revenues increased 3.4%, driven by solid growth in pre-analytical systems and diagnostic systems units. Pre-analytical systems growth of 5.7% was driven by safety engineered products in the US, and solid growth in Europe and emerging markets. Diagnostic systems growth of 4.6% was a result of strong growth in core microbiology, including IDAST and BD MAX Assays. Growth was also aided in part by an increase in flu activity in the US. While the flu season is still mild in comparison to the prior year, the timing of the late flu season had a positive benefit year-over-year in the quarter of 10 basis points.

Biosciences revenues were about flat, when compared with last year's second quarter. Strong double-digit growth in US was driven by continued increased demand for high parameter instruments and growth in research reagents. This was offset by a 7% decline in Europe, due to a difficult comparison related to timing of orders in the prior year. In addition, growth was negatively impacted by clinical tender delays in Africa, associated with our HIV monitoring business related to the World Health Organization guidelines.

Moving to slide 8, I'll walk you through our geographic revenues for the second quarter on a currency neutral basis. US revenues increased 5.7%. This was primarily driven by strength in medication management solutions, medication and procedural solutions, biosciences and diagnostics, and was aided in part by the aforementioned timing of revenues. BD medical's performance reflects strong dispensing capital installations, and solid growth in the infusion business, as well as strength in infection prevention and interventional specialties. BD life sciences growth reflects continued strong performance in the biosciences business, driven by demand for high parameter research instruments and reagent sales. Diagnostic systems had strong growth in microbiology, including Kiestra and blood culture, BD MAX, as well as a benefit from the increase in flu activity during the quarter.

Moving on to international, revenues grew 4.8%. This is below our normal growth rate, and primarily reflects the aforementioned clinical tender delays in Africa. I'll provide more details on this in a moment. The medical segment grew 6.9%. This reflects solid performance in medication and procedural solutions, driven by sales of safety engineered products particularly in China, and strong dispensing installations in medication and management solutions. Growth was aided in part by the aforementioned timing of customer ordering patterns and capital placements.

The life sciences segment grew 1.4%. This reflects strong growth in pre-analytical systems in Western Europe and Asia Pacific, and strong growth in Western Europe and Latin America in diagnostic systems, driven by core microbiology. This was partially offset by the aforementioned tender delays in Africa, and a difficult comparison in Europe in biosciences.

On slide 9, emerging market revenues grew 5.1% currency neutral, with developed markets growing 5.3%. The second quarter growth rate in emerging markets reflects solid growth in China and Latin America, partially offset by a decline in EMA. China growth for the second quarter was 9.4%. Double-digit revenue growth in our medical segment was driven by continued strong demand for consumables across all of our businesses in the segment.

Within our life sciences segment, strength in pre-analytical systems was offset by the slow down of capital spending in diagnostic systems, as communicated on our call last quarter. For the total year, we continue to expect China to grow in the low double-digit range. We now expect total emerging markets to grow in the high single-digit range, compared to our previous guidance of 9% to10% growth. This was offset by stronger performance in developed markets, growing between 4% and 4.5% for the second half of the year. Our revised guidance for emerging markets reflects the aforementioned impact in Africa to our biosciences unit from the WHO guidelines.

In addition, since we last provided guidance in February, the government of Saudi Arabia announced a new austerity measures, which affect the healthcare industry. This has begun to impact our business in that particular region, and we saw a small impact in the second quarter. We view the situation in Saudi Arabia as temporary, though the timing of reversal may not occur within this fiscal year. Our new guidance range contemplates emerging markets growing between 10% and 12% for the second half of the year.

Moving to global safety on slide 10, currency neutral sales increased 6.7%. Safety revenues in the US grew 4.5%, and international sales also grew 9.9% currency neutral, with continued strength in Europe as compliance with safety legislation continues. Safety revenues grew 15.6% in the emerging markets. Medical safety sales grew 8%, primarily driven by safety catheters. Life sciences safety sales, which are driven by our pre-analytical systems unit grew 4.6% in the quarter.

Slide 11 recaps the second quarter income statement, and highlights our currency neutral results. As I mentioned a few moments ago revenues grew 5.3% on a comparable currency neutral basis. Pricing was slightly positive in the quarter.

Moving down the P&L, I will focus on the comparable basis figures which include CareFusion's results in the prior year, in order to give a better indication of our performance. Gross profit improved by 7.9%. I'll provide more color on gross profit on the next slide, when we look at the underlying performance, and the impact of currency.

SSG&A as a percentage of revenue was 24.5%. We are very pleased with the leverage we are getting, which includes the benefit of cost synergy capture. R&D as a percentage of revenue was 5.9%. Our expenditures in the quarter were slightly lower than our full year expectation of 6% to 6.5% of revenues due to the timing of spending. We continue to invest in new products and innovation, and expect to further reinvest the benefit from the Medical Device Tax suspension in the back half of the year.

Operating income grew 24.8%, reflecting strong P&L leverage. In addition, as we have previously discussed, there were a number of items that negatively impacted operating margin in the prior year in the CareFusion business. I'll address the underlying growth and operating profit in more detail on the next slide.

Our tax rate declined 70 basis points to 20.6%, below our full year expectation of 21% to 22%, as the quarter included some timing benefits. As Vince discussed earlier, adjusted earnings per share were $2.18, which is a 44.7% increase versus the prior year. This reflects our solid growth profile, and strong underlying margin expansion. In addition, growth benefited from the timing of revenues earlier in the year than expected, as well as timing within the year related to R&D expenditures and tax as we just discussed.

Slide 12 illustrates our gross profit and operating margin for the second quarter presented on a comparable basis. Strong gross profit margin performance of 170 basis points was primarily driven by robust operational performance and continuous improvement initiatives, and to a lesser extent from favorable raw material prices. Strong operating margin performance of 370 basis points was primarily driven by gross margin expansion, combined with the achievement of operational efficiencies, and the positive impact of cost synergies.

In addition, timing of R&D expenses and the benefit of the Medical Device Tax suspension aided operating margin in the quarter. Also you will recall several items drove lower second quarter operating margins for CareFusion in the prior year. Currency had a slightly negative impact on both gross profit margin and operating margins.

Moving on to slide 14, since we provided guidance in February, the US dollar has weakened against the euro and other currencies. As a result, we are raising our adjusted EPS guidance by [2] percentage points or $0.13, from a range of $8.37 to $8.44 to a range of $8.50 to $8.57. We are maintaining our currency neutral adjusted EPS guidance of $9.01 to $9.08, as we expect the second quarter tax timing to reverse, and R&D spend to ramp over the back half of the year, which includes reinvestment of the Medical Device Tax. We remain extremely pleased with our performance, and our ability to execute and deliver on our commitments.

Turning to slide 15, I'd like to walk you through the additional elements of our guidance for the full FY16. In summary, we continue to expect comparable organic revenue growth of 4.5% to 5% on a currency neutral basis, with the back half of the year growing between 5.5% and 6.5%. This contemplates the third quarter growth rate to be slightly lower than our full year guidance range, and the fourth quarter to be well above the full year guidance range.

On a reported basis, revenue growth for the total year is expected to be between 21.5% and 22%, which reflects a currency headwind of about 300 basis points, an improvement from our prior guidance of about 450 basis points of currency headwinds. The US dollar has weakened against the euro and most currencies, since we last provided guidance in February. While our guidance assumes a euro to dollar exchange rate of $1.13 for the rest of the year, which is better than the actual rates in the second half of last year, we see some remaining FX headwinds over the second half, as non-euro currencies remain unfavorable year-over-year.

We continue to expect growth of 4.5% to 5% in BD medical, and 4% to 4.5% in our life sciences segment. Based on our current view of the environment, we continue to expect pricing to be about flat for the year. Beyond revenue and EPS, all other P&L guidance from February remains unchanged. Now I would like to turn the call back over to Vince, who will provide you with an update on our key initiatives and product portfolio.

Thank you, Chris. Moving on to slide 17, and our updates on new product innovation, strategic and business initiatives, and partnerships and collaborations. Starting with new product innovation, within our life sciences business, our pre-analytical systems business launched two new products this quarter. The UltraTouch Push Button Blood Collection Sets will deliver significant improvements in patient outcomes and lab efficiency. The BD Barricor tubes use gel-free technology which significantly improves sample quality and lab turnaround time. The initial market feedback on both these products has been extremely positive.

In our bioscience business, as evidenced by our US growth rate this quarter, we have seen very positive market uptake of our high parameter instrumentation, the FACSSymphony X50 and X20. In our genomics business, we anticipate launching our GenCell CliC library preparation platform, and our FACSseq Cell Sorter designed specifically for genomics applications later this year -- this fiscal year

Within strategic and business initiatives, as we discussed earlier, we have completed our current portfolio review, having recently announced the respiratory solutions joint venture and sale of the Vertebral Augmentation Solutions business. We remain focused on the areas we believe are high growth, and aligned with our core capabilities.

We have also made progress with our product registrations, having successfully registered more than 50 CareFusion products in over 20 countries. In addition, we have submitted registrations, and are awaiting approval for an additional 25 products. This is consistent with our plans to achieve revenue synergies, and we remain on track for them to begin to materialize in FY17.

And in the areas of partnerships and collaborations, we remain excited for the launch of our infusion set, which we expect we'll move to broad commercial release with Medtronic in early FY17. We believe this product will improve the consistency of insulin delivery, by significantly reducing flow interruptions, simplify the user's experience, and increase the patient's overall satisfaction with insulin pumping. We recently entered a strategic partnership with the Parker Institute for Cancer Immunotherapy, and will play a part in the Institute's vision of reducing cancer to a manageable disease. Support from the Parker Institute will help us advance our new Cell Sorter program, while bringing our high parameter cell analysis solutions to these researchers, as they work to discover the next breakthrough in cancer immunotherapy.

As you can see, we are executing on our strategy, and continue to have strong opportunities that -- to drive growth in innovation. We look forward to updating you, as we continue to make progress.

Moving on to our business update on slide 18. We continue to make progress with our cost synergy capture. Our G&A functional transformation continued in the second quarter, and we made progress with our back office functions, and with harmonizing our IT infrastructure. We remain on track to achieve our FY16 cost synergies, and continue to expect $325 million to $350 million in total cost synergies as we exit FY18.

Contributing to our operational efficiencies is the benefit of sustained lower oil prices on raw material costs, as we discussed earlier. The consistent solid performance of our businesses, combined with operating efficiencies, cost leverage and cost synergy capture is driving continued underlying operating margin expansion. In addition to the 100 basis points of operating margin expansion we achieved last year, we expect another 170 to 190 basis points of expansion this fiscal year.

Now I would like to reiterate the key messages from our presentation today. First, this was a solid second quarter. Both segments performed well, and our performance highlights the benefits of our diverse portfolio, both from a product and geographic standpoint. Second, we have made significant progress on the acquisition of CareFusion. The value we can bring to customers around the world has become increasingly evident, as we integrate these two great companies.

Third, we have taken steps to optimize our portfolio. In doing so, we are positioning ourselves in higher growth areas, which are aligned with our core capabilities. By taking these actions, we are delivering the most value to our customers.

Finally, we are confident in our outlook for the full fiscal year. We're maintaining our currency neutral revenue guidance, and raising our adjusted EPS. We believe we are well-positioned to continue our track record of delivering value to our customers and shareholders. I look to the future with optimism. Thank you. We will now open the call to questions.

Thank you.

(Operator Instructions)

Thank you. Your first question is coming from David Lewis of Morgan Stanley.

Good morning.

Good morning, David.

Vince, two questions, maybe one for you, and one for Chris. I guess, the first one is -- the theme that you're showing the last several quarters, is one that the whole device industry is showing this quarter, which is this polarization between better US performance and slightly softer ex-US performance, specifically in emerging markets. Talk to us about how much of this in your mind, is the quarter, or just trend that BD has been seeing for several quarters, and what's driving that strength in the US in your opinion?

Well, I think there's a couple of things driving the strength in the US. Number one is, I think, you have seen a stabilization in the US marketplace in terms of healthcare, and I think there's a benefit out there from the people that do have healthcare coverage, especially the expansion of Medicaid. But the other thing that you are seeing, is that our businesses are performing quite well.

You heard us talk about in the bioscience business, the launch of those new products. We have a whole series of new products coming out. And I mentioned, and specifically the high parameter work that's going on. So yes, that showed up in this quarter right now, but that's going to continue as we move through the year. You also saw good performance in diagnostics because we're getting some traction, blood culture and Kiestra, that is moving forward, Kiestra moving forward in the US. And then good performance across the medical businesses where we -- we're improving our competitive position in MMS. And so, you'll see all of that coming together.

Europe, I think once again, I think has stabilized. And it's really, of course, you have to drop out the CareFusion factors. But there was negative timing in biosciences, but you've got the same product launches that are occurring there. And quite frankly, Japan is performing better for us as well.

Now on the other side of the coin, the situation in China seems to have stabilized. We're seeing good performance on the medical device side of the business, and the situation really hasn't changed all that much on diagnostics on the capital side, but it has stabilized. And so, we're getting good growth in China. We didn't mention it, we continued to get good growth in India, we're getting good growth in Latin America. There was some one-time events this quarter, which you heard in terms of Africa and Saudi Arabia, and Saudi Arabia is more of an impact to the back half of the year. So yes, is it slightly less in emerging markets, yes? But the mix is quite good.

Thank you. Your next question is coming from Mike Weinstein of JPMorgan.

Thank you, and congratulations on the quarter. Let me start, if we went back a quarter, the Street was concerned about the performance in the fiscal first quarter, revenues grew 1.8% organic, and the Street was worried, just about the ability to see the acceleration now. We're three months later, and you grew 5.3% organic this quarter, so essentially what you said would happen happened. Could you just talk a little bit, as you go into the back half of the year, I just want to make sure I understand the commentary on the cadence of the quarter. I know the comp, and some different respects for the fourth quarter is easier than the third quarter. But I just want to understand, just the commentary relative to third quarter being a bit below the full year guidance, and the fourth quarter being materially above? Thanks.

Yes, Mike, I'll have Chris walk you through that, because there is some complications here. You've got to go back to last year, to understand what was happening, but Chris will walk you through.

Yes, so the best way -- the key to understanding the second half growth trajectory, is really to focus on the absolute dollars of revenue that we're achieving this year versus last year. We're actually up against a tough comparison in the third quarter, because in terms of absolute dollars, that was our highest quarter last year. So you've got to really look at those absolute dollars.

Looking at growth rates is a little misleading, because the growth rate last year was negative in CareFusion in the third quarter. But that was more about the comparative prior year. But the absolute dollars are the grow over. And then, as you model out the year, based on the guidance that we just gave you in terms of growth rates for third and fourth quarter, you'll see steadily improving sequential revenue dollars for all four quarters this year. So we really feel good about the trajectory, particularly on a sequential basis this year. It's all about the compare to last year revenue dollars.

Mike, if you think about it, there were two events at CareFusion, two different compensation events that caused the pattern to be -- highly fluctuate, with the first quarter being very high, the third quarter being very high, and then we had the flu. So you've got to go back and look at those absolute numbers as Chris was saying, and then you'll see that our growth this year, actually as we look at the whole year is actually quite smooth. But the growth rates jump around because of that. Thanks for your question, Mike.

Thank you. Your next question is from David Roman of Goldman Sachs.

Thank you, and good morning, everybody.

Good morning, David.

Vince, I wanted to follow-up on your commentary regarding, some of the registrations that you're getting outside the US. I guess firstly, could you maybe give us a little bit more flavor on what those products are, which businesses those sit in, and then how we should start to evaluate the impact on a go forward basis? And then for Chris, can you maybe help us understand why, given the change in currency, there's not a positive impact on the margin profile? Looks like you've just flowed the dollars right down to EPS at the corporate margin guidance that you previously provided, so why wouldn't we see an up lift in profitability associated with the change in rates?

Sure. So let me ask Tom to comment first, and we'll give you more transparency in terms of the sales and sales impact next year. But why don't you talk to the products that are getting registered, and which geographies we're talking about?

Sure. Hi, David, this is Tom. So as Vince mentioned before, we registered more than 50 products over 20 countries, got about 25 additional registrations submitted and awaiting approval. Essentially all of those products fall within either MPS or MMS, the two businesses that are -- came from legacy CareFusion, and the majority of those products are actually within MPS, so think disposables. And this is right in line with what we had talked about over the last several quarters that, as we think about the first products that would be able to help drive incremental revenue growth, it would be things like infusion sets, ChloraPrep, the consumables that fit very well with BD's traditional sales channels and market approaches and presence in the marketplaces, and those are the products that we focused on getting registrations for first.

So I would say we're seeing early signs of success, as we've been launching these products, which is very consistent with our plans to achieve revenue synergies, and really remain on track to start seeing them materialize more in 2017. But we do see sales now. And obviously, a Company the size of BD and a segment of medical, we'll see those start showing up more materially as we roll into 2017, but they have started. And I would just say that, obviously we're going to continue those product registration work. We're continuing the sales and marketing investments to support those initiatives, but overall we're on track. And to your second question, David, we did still see a drag in the second quarter on the gross profit. It's 10 basis points of currency drag and 30 on operating margin, and the dynamic there is a couple of things. One is, although the euro has improved, the non-euro currencies year-over-year are still providing a bit of a drag. And then secondly, and probably more importantly, is the phenomena of the profit and inventory that we've talked about in past. So didn't quite catch up in the second quarter -- certainly, not much of a drag, and it's starting to level off. And that in my prepared remarks was the commentary for the second half of the year, it doesn't really turn positive because of that phenomena, but it certainly lightens up in terms of headwinds.

Thank you. Your next question comes from Larry Keusch of Raymond James.

Hi, good morning. I guess, for Tom, would you mind talking a little bit about infusion pump, sort of the growth, the competitive landscape, kind of where you think you're going for the year? And then, also as alluded to in the prepared comments, it sounds like the installation process for MedStation ES is improving. I know there have been a number of software tweaks for that ES system over the past couple of years, and just also want to understand if you're kind of getting to a point where that system is now stable?

Yes. Sure, Larry. This is Tom. So let me start off with the Pyxis question, and then I'll address infusion pumps. So we are actually quite pleased with the progress that we're making on Pyxis, as we actually just released another new version of the software, which we think really makes some very significant progress, and actually addresses -- will make a big step forward in terms of installation efficiency. And so, as we've shared in the past, we were really focused on improving the installation process.

We shared that there was a quite large backlog at the time of the acquisition. And to really address that backlog, we needed to improve the installation efficiency process. And we've been working on that, applying some of our lean expertise, as well as making some adjustments in the software that would automate a lot of that, and simplify the work load in the field. So we're seeing a lot of those efforts come to fruition. We did have very strong placements in Q2. That was part of the driver of MMS growth. We continue to see strong demand for the Pyxis ES platform, and we're equally looking forward to continued strong growth in the second half of the year, in that as Vince alluded to earlier.

So on the infusion side, we also are very pleased with the growth that we saw in the quarter here, and have similar expectations for the back half of the year. As you know, we are the market leader in that space. We've continued to strengthen our position over the last several years. We expect to continue to strengthen our position in the market by about the same amount this year, as we have over the last couple of years.

We do see customers continue to select the BD Alaris pumps in a incremental way, really based on that interoperability and power of one, to be able do all their infusion needs, across both large volume infusions, syringes, and narcotics, all on one products, the only item that can do that. So we're happy there. I would point out as well, that as you look at our safety sales, particularly in the US, that was largely driven by growth in our -- in some of the connectors that are associated with our dedicated sets in the infusion category. And that's really a reflection of that strong performance in that infusion category, and that renewing consumable stream that comes as we place pumps incrementally.

Thank you.

Thank you. Your next question is from Bill Quirk of Piper Jaffray.

Great, thanks.

Good morning, Bill.

Good morning, everyone.

Good morning.

Vince, you and the team have done a really nice job in terms of executing on some of the identified cost synergy opportunities with CareFusion. Can you talk a little bit about the pace of identifying new opportunities, either in terms of additional cost synergies or on the revenue side, and obviously you alluded to some of the products and registration? And then secondly, just on China, looks like based on the numbers, we're going to need about some sort of teens acceleration, easier comps, but could you just elaborate on that? Thanks.

Yes, okay. So I'll ask Chris to talk about the cost synergies.

Sure. So just a reminder, we raised the cost synergies fairly recently -- (technical difficulties).

Ladies and gentlemen, please stand by. The conference will resume momentarily.

Is anybody able to hear us?

Yes, we can hear you now.

Okay. So let me start again to that question. So on -- in terms of cost synergies, we did I would remind you, improve cost synergies fairly recently up to the $325 million to $350 million, and that was identification of some new synergies from our recent or our original model. I would also remind you that we increased the overall synergies from the standpoint of the tax rate improvements that we saw, that we originally didn't contemplate, and that's another 3% accretion that we had mentioned.

Really the -- when you think about the synergies we get, initial synergies of duplicate public company costs, and then you move into the integration of systems and infrastructure, and we've gotten good traction on that, and that lead to the last increase. And then towards the end, are the more difficult synergies to get, which are the distribution centers and manufacturing plants, and we actually saw some good initial improvements in that area or traction in that area, that led to our last increase. So we really feel great about what we're driving. All-in all-in, it's significantly higher than our original expectations, particularly when you add the tax synergy. You see this year, the EPS quarter-over-quarter was over 44%, I think is an indication of that. So we really feel good about our ability to drive those synergies, and executing on those synergies.

And then for China, growth is going to be driven by the medical side of the Company, and they're multiple businesses on the medical side that are doing well in China. And then, in addition, there was several million dollars of inventory that came out of the chain last year. So there is a favorable comparison in the fourth quarter. But Tom, do you want to comment on any of the product lines?

I think as you said, we see on the consumables across the board are holding in strong. And we do have again, while it may not be overly material for the Company, China is one of the lead markets in which we launched some of those new products from CareFusion into, and we're seeing some good traction, in some of those items, particularly as we think about connectors, and some of the oncology products coming over from CareFusion.

We don't talk about it much, but we also have launched Flush in China. So that's another piece that has been growing quite nicely for us.

Thank you. Your next question is from Rick Wise with Stifel Nicolaus.

Good morning, Vince, hi Chris.

Good morning, Rick.

I guess, I'll ask a two part question. Maybe first big picture, Vince, maybe you can talk a little about your latest thoughts, evolving thoughts on capital deployment? You're through the post CareFusion portfolio review, maybe what's next, and what you're thinking about? And maybe just one for Chris, on the operating margin expansion, you've addressed a little bit, but this acceleration in operating margin expansion can't go on forever. How do we think about the -- not for guidance, but how do we think about FY17 and beyond, what's possible in terms of further operating margin expansion just directionally? Thanks.

Okay, that's fine. I'll start out, and you guys are getting really good at your single questions. (laughter) So these two-parters are really fantastic.

Let me just say, from a capital deployment standpoint, of course, short run, we're still working to get down to the 3 times leverage, and we're making excellent progress there. And so, in the short run, we still have the flexibility to do plug in acquisitions. And then as we have been stating, we're going to be really strategy-driven. And we challenge both segments to look at their strategies, and as we look the -- our ability to provide solutions to the marketplace and have a broader impact, that's what's going to drive our strategy. It will be a mix of both internal development and continued looking on the outside, and we'll be very balanced there. But ultimately, it's about strategic impact, plus value creation for shareholders, and that's how we're thinking about it.

Good. And then on the margins, Rick to your point, the second quarter was really rich margin performance, on operating margins 370 basis points. That was driven again, by the very strong gross profit margin, which is really going around operational efficiencies and continuous improvement. A little bit of benefit from raw material prices as we've talked in the past from oil, but then on the operating side, SSG&A really reflective of hitting on the synergies.

It was a little bit of an easier compare in the second quarter, because of the operating margin challenges in CareFusion, that quarter last year, so you wouldn't expect 370. In fact, we expect about 170 to 190 for the year on the operating margin basis. I'd remind you, that's on top of 100 basis of margin improvement last year, so really improving the margins as you point out.

As we think about going forward, as we execute on synergies, you would expect to see above normal. So we usually think 40 to 50 basis points of margin improvement. You're going to get more of that, as we execute on the synergies in 2017 and 2018. You would also get a little bit of a lift from the fact, that as we exit respiratory which had challenging margins, you get a little bit of a lift. So not to give guidance on 2017, but you're absolutely right directionally, we're going to see improved margins going forward in 2017 and 2018. And then as you start lapping those synergies, I think somewhere beyond that, you start going back to that 40 to 50 basis points, but that's a few years out.

Thank you. Your next question is coming from Derik de Bruin of Bank of America.

Hi, good morning.

Good morning.

Another long single question (laughter) but you've done a number of portfolio reviews lately with respiratory and the Simplist portfolio. Could you talk about -- is this is a 2017 organic growth revenue growth question, and sort of like what the impact of all these moving parts on it? And do you still feel good about a 4% to 5% longer term organic revenue growth rate for the Company?

Yes, when we did the deal and we discussed what our revenue aspirations were, we said legacy BD was growing at around 5%, and that CareFusion was at about 3.5%, and our goal was to bring the entire Company up to about 5%. I think we're making excellent progress. I think you see the performance of the CareFusion business is quite strong. I think that the portfolio moves that we have made, have been the right ones. So that still is our goal, and I think we're making excellent progress.

Thank you. Your next question comes from Jon Groberg of UBS.

Good morning, Jon.

Good morning. Congratulations on -- yes, can you hear me? Congratulations on a great quarter. So can I ask a tiny question on a few items. I guess, one, is the infusion set, do you have kind of a specific launch for that, because it's a diabetes infusion set? And then on the BD Simplist and the respiratory, I guess, when exactly do you expect all those to close, and if you have any updated views on the EPS, and that kind of impact from an EPS standpoint for those initiatives? Thanks.

So Tom can talk to those things, but respiratory I think we're expecting to close at the end of this fiscal year. And then Simplist is done.

Simplist is closed. And as we've shared in the past on Simplist, we don't expect any impact on sales from that at all. It was small, and the other opportunities will make up for that.

In terms of the infusion set launch, as Vince mentioned, we expect broad commercialization in early FY17. We are tracking towards, by the end of this fiscal year, within this fiscal year, we will be doing a limited launch. And we've talked about this in past, in which Medtronic will start providing the product to a set group of patients, so that they can really understand the user insight at another level, before they do the full scale launch. And so, we're moving forward, preparing to ship out the first product for that limited scale launch in the back half of this fiscal year that will occur. And then, it would open up for a full commercial launch we expect, at the start of FY17.

And this is Chris. The only other thing I'd add is, as we said with the respiratory announcement, the impact to 2017, because it closes at the end of our fiscal year, there's no impact to 2016. But for 2017, it's $0.10 to $0.14.

Thanks very much.

Thank you. Your next question comes from Brian Weinstein with William Blair.

Hey, guys. Good morning. Thanks for taking the question. On R&D, it did step down sequentially. You said that obviously, you'll get the benefit of the device tax and reinvest that. So can you talk a little bit more specifically about the priorities within R&D? Is at about accelerating kind of current projects, is it really putting that money to work at new projects, and any specific areas of focus that you would like to focus on with those dollars? Thanks.

Yes, sure, Brian, and thanks for the question. First off, in this quarter there was some timing in the R&D spending, it was that. We knew it was going to happen and of course that timing, that money is going to get spent -- I'm talking before the Medical Device Tax in the back half of the year, it's the timing of things like clinical trials and whatnot.

And so, but in addition, the money that is being spent on the Medical Device Tax is being spent in both segments, and it is a combination of some new things that we are doing. But mostly, it's current strategies where we are accelerating those strategies, where we had platforms where we could push them faster. And part of that, which is a bit new for us, is moving the informatic side of things quicker. So you can think of major platforms going faster, and an informatics piece on top of that, both sides of the Company.

Thank you. Your next question comes from Richard Newitter with Leerink Partners.

Hi, thanks for taking the questions. This is kind of like an innings question, what innings are you in, for two parts of your business that we frequently talk about? For Pyxis ES, just can you update us on where you are with the kind of the opportunity there, to kind of get upgrades for that product cycle? And then, the second innings question, just in your cytology business, your liquid-based pap testing, can you just tell us what the trend is there? Are we through the interval expansion impacts mostly at this point, and just comment on any pricing or volume trends for that business? Thank you.

Sure. Let's start with the pap first, and Linda can talk to you about that.

Yes, so good morning. So if you look at the liquid cytology business in the US, as you mentioned we're really starting to see a flattening of that business. So the interval testing, we think we're mostly through. Outside the US, we're actually seeing strong double-digit performance. And then the entire platform, both in the US and ex-US is being helped by the total automation we're doing across both our FocalPoint and our Totalys system, so complete control of the sample from collection through the result. So that's driving a lot of growth, both in the US and ex-US for us.

Thanks, Linda.

And on Pyxis ES, so we're about 25% of our base business has been converted over to ES. And so, we continue to see strong demand there, and we still do have certainly quite a wide runway ahead.

Okay, thanks for the question.

Thank you. Your next question comes from Doug Schenkel of Cowen and Company.

Good morning. So I don't have a multi-part question, but I do have two questions. (laughter) One for Chris, and one for Tom. The good news is, I think they're quick follow-ups.

So for Chris, you reiterated full year revenue guidance, you reduced expectations for emerging market growth, that would seemingly imply there's a positive offset for developed market growth. I believe this change in mix should benefit operating margin. It doesn't seem like your guidance reflects that margin mix dynamic. Am I wrong, and if not why?

And then the second question is for Tom. Regarding your plans for the 25 or so additional care fusion product registrations, what's the time line for those? And can you walk us through why those products take a bit longer to get registered? I'm just trying to get a better handle on the profile of those products, versus the first 50 that are close to, or have been registered. Thank you.

Okay, Chris?

Yes, just you're not wrong, but at this point in the year, the impact that it has is still within the range of guidance that we gave. So we had a fairly broad range, and it's still in that range, so arguably it's the higher end of the range.

Okay, and Tom?

And Doug, this is Tom. So the 25 is not kind of a straightforward answer, and the fact that it's really a combination of -- just think about -- of course, we couldn't submit all files simultaneously so it just takes time to work through those. So think about those just being ones that we submitted more recently, and didn't work through certain regulatory processes.

In other cases, it's a combination of, they're in certain countries that have longer registration. China has longer registration processes than most of Europe, as an example. And then, the other one is that certain product categories, so ChloraPrep for example, is registered as a drug in many markets, particularly let's say, Latin America, it's registered as a drug. Those typically sit in the regulatory process longer than medical devices. So it's a combination of those three items, not one thing specific, and not unexpected at all. It's right in line with our projections.

And you have to pull together the data for these files. And so, certain product lines that may not have done that kind of clinical trial work for China, so we had to do some pre-work to get them into the funnel. So that's all that is. Okay, thanks very much.

Thank you. Your next question comes from Vijay Kumar with Evercore ISI.

Hey, guys. Congrats on a nice beat.

Thanks, Vijay.

Just maybe one housekeeping question on the guidance, Chris. You beat the quarter pretty handily, $0.16, and looks like FX came in better by 150 bips, with the overall guidance up $[0.13] by the mid point. Just want to make sure, is that a little bit of conservatism, on the part of management just because FX has been moving all over the place? When you think about Medtronic put their [Q] in context of FX improving in the back half? Thank you.

Sure, VIjay. So what I'd say is you really have to look at the EPS guidance in two buckets. One is the FX inside, and then the FX impact. So what we did, is we did flow through everything on the FX impact, and that was the $0.13. On an FX end basis, you're right. We were up around $0.14 to $0.16, but we see that as timing. And the timing buckets are the Medical Device Tax spending, which we know where we want to spend it, but because of the timing don't forget it, happened in January, and we couldn't ramp that quickly. So that past quarter, we really got a lift from that, but we fully intend to spend that in the back half of the year.

And then you had timing on the tax rates. So the tax rate was lower than our 21% to 22%, and that's just lumpy throughout the year. We expect that to fall back within the rest of the year. So you had that piece. And then we had the pull forward of some of the revenues from the third quarter to the second quarter, and the impact of that. So all of that accounts for the bulk of that $0.14 to $0.16 on an FX end basis. The other thing I'd point out, is we actually raised the FX and EPS guidance last quarter by $0.28. It was lost from the standpoint, that at that point FX was getting worse across the world, and it offset that, but the FX end was raised prior. So you really got to think about it in those two buckets.

Thank you. Our final question is coming from Matt Taylor of Barclays.

Good morning, Matt.

Thanks for taking the question.

Sure.

I wanted to see if you could touch on a couple of interesting projects that you've talked about in the last couple quarters. One is the solutions you're bringing in with the swap of the Simplist business, and then the other is the diabetes partnership with Medtronic. Can talk a little bit about those opportunities, and maybe help us quantify the upside there?

Sure. So Tom will address those. Tom, do you want to start with diabetes?

Sure, this is Tom. So we haven't specifically sized the opportunity on infusion sets. But I think as we've said all year, we were expecting to get the product into some early stage release in a controlled patient group this fiscal year, and see more of the impact in the diabetes care business in FY17. That remains unchanged. So we remain very excited about that opportunity.

It's of course our first venture outside of the pen, needles and syringes for the diabetes care business, moving into a fast growing market with a market leader, Medtronic. And we're equally excited about the product technology and what it can do to help patients, and the partnership and what the power of us working together can do, to make an impact there.

So think about solutions, so as we've, of course, shared before, we have announced a solutions partnership with Fresenius. We are looking at launching that, not necessarily now in Q4 of 2016, but more in early FY17 just based on regulatory approval time lines there, but that does continue to move forward. And again, we had not shared a specific number there, but we said it would certainly make up for any reduction in BDRX sales that we had planned over the coming horizon, and that remains right on track.

Thank you. I'll now turn the floor back over to Vince Forlenza for any closing remarks.

Okay. Thank you very much for your participation on the call today. It was a real pleasure to talk about a very solid quarter, and to raise our EPS guidance. It was also a pleasure to talk about the progress we're making on the CareFusion integration, and progress with those businesses, the synergies, the team's in place. And then, lastly the strategic partnerships that we're doing including the Parker Institute relationship, the new products that are being launched. We didn't spend a lot of time on the life science business today. There weren't that many questions, but with BD MAX, with Kiestra, all these things happening over there, very, very exciting, and of course, the new products on the medical side. So thank you very much for your time, and look forward to updating you next quarter.

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