Becton Dickinson & Company (BDX) — Q2 2016 Earnings Call Transcript

Thank you, Christie. Good morning, everyone, and thank you for joining us to review our second fiscal quarter results. As we referenced in our press release, we are presenting a set of slides to accompany our remarks on this call. The presentation is posted on the Investor Relations page of our website at bd.com. During today's call, we will make forward-looking statements, and it is possible that actual results could differ from our expectations. Factors that could cause such differences appear in our second fiscal quarter press release and in the MD&A section 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 schedule is posted on the bd.com website. As a reminder, until we annualize the acquisition of CareFusion in the third quarter of fiscal year 2016, 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 fiscal year 2016 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 schedule 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 continue to drive strong underlying margin expansion through the achievement of operational efficiencies and continuous improvements, 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 that is comprised of both legacy CareFusion and legacy BD associates. They've been helping to drive the company to 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've 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 new company, 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 our strategy, and we believe it can see more robust investment in 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 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 fiscal 2016 currency-neutral revenue and EPS guidance. We are also increasing our adjusted guidance to reflect lower currency headwinds due to the weakening of the U.S. dollar relative to the euro and other currencies. Moving to slide five, 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 fiscal year 2016 guidance.

Thanks, Vince, and good morning, everyone. As Vince just mentioned, the breadth and geographic diversity of our portfolio contributed to 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 installation. 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 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 the 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 Solutions 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. Preanalytical Systems growth of 5.7% was driven by safety engineered products in the U.S. and solid growth in Europe and emerging markets. Diagnostic Systems growth of 4.6% was a result of strong growth in core microbiology, including ID/AST and BD MAX assays. Growth was also aided in part by an increase in flu activity in the U.S. 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 the U.S. was driven by continued increased demand for high-parameter instruments and growth in the 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 eight, I'll walk you through our geographic revenues for the second quarter on a currency-neutral basis. U.S. 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 the benefit from the increase in flu activity during the quarter. Moving onto 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 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 Preanalytical 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 nine, 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 EMEA. 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 Preanalytical Systems was offset by the slowdown 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% to 10% growth. This is 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 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 U.S. 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 emerging markets. Medical safety sales grew 8%, primarily driven by safety catheters. Life Sciences safety sales, which are driven by our Preanalytical 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 from 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're 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've 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 being 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, the 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 margin for CareFusion in the prior year. Currency had a slightly negative impact on both gross profit margin and operating margins. Moving onto slide 14, since we provided guidance in February, the U.S. 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 fiscal year 2016. 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 the currency headwind of about 300 basis points, an improvement from our prior guidance of about 450 basis points of currency headwinds. The U.S. 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'd like to turn the call back over to Vince, who'll provide you with an update on our key initiatives and product portfolio.

Thank you, Chris. Moving onto 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 Preanalytical 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 Biosciences business, as evidenced by our U.S. growth rate this quarter, we've seen very positive market uptake of our high-parameter instrumentation, the FACSymphony X-50 and X-20. 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 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've 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 fiscal year 2017. And in the areas of partnerships and collaborations, we remain excited for the launch of our infusion sets, which we expect will move to broad commercial release with Medtronic in early fiscal year 2017. We believe this product will improve the consistency of insulin delivery by significantly reducing flow interruptions, simplifying the users' experience, and increasing the patients' overall satisfaction with insulin pumping. We recently entered into 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 to drive growth and 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 FY 2016 cost synergies and continue to expect $325 million to $350 million in total cost synergies as we exit fiscal year 2018. 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 basis points to 190 basis points of expansion this fiscal year. Now, I'd 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 that 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.

Good morning.

Morning, David.

Vince, two questions for you, 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 U.S. performance and slightly softer ex-U.S. performance, specifically emerging markets. Talk to us about how much of this, in your mind, is the quarter or just the trend that BD has been seeing for several quarters. And what's driving that strength in the U.S. in your opinion?

Well, I think there's a couple of things driving the strength in the U.S. Number one is, I think you have seen a stabilization in the U.S. 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 Biosciences business, the launch of those new products. We have a whole series of new products coming out, and I mentioned specifically the high-parameter work that's going on. So yeah, 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 U.S., and then good performance across the Medical businesses where we're improving our competitive position in MMS. And so, you see all of that coming together. Europe, I think, once again, I think has stabilized. And this 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 continue to get good growth in India. We're getting good growth in Latin America. There were some one-time events this quarter, which you heard in terms of Africa and Saudi Arabia. And Saudi Arabia is more of an impact in the back half of the year. So yes, this is slightly less in emerging market share, but the mix is quite good.

Thank you, and congratulations on the quarter. Let me start if we went back a quarter and 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. Can 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 quarters. I know the comp in some different respects in the fourth quarter is easier than the third quarter. 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.

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

Yeah.

Yeah, so the best way to—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 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 the third quarter 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 compared 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 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 quite smooth, but the growth rates jump around because of that. Thanks for your question, Mike.

Thank you, and good morning, everybody.

Good morning, David.

Vincent, I wanted to follow up on your commentary regarding some of the registrations that you're getting outside of the U.S. I guess, firstly, could you maybe give us a little bit more flavor on what those products are, which businesses those fit 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 uplift in profitability associated with the change in rates?

Sure. So let me ask Tom to comment first. I mean, 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 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 some 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 in fiscal year 2017. But we do see sales now, and obviously, on 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, and 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 little bit of a drag in the second quarter on both the gross profit cover—10 basis points of currency drag and 30 basis points on operating margin, and the dynamic there is a couple of things. One is, although the euro hasn't 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 phenomenon of the profit and inventory that we've talked about in the past. So it 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 phenomenon, but it certainly lightens up in terms of headwinds.

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've 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.

Yeah. Sure, Larry. This is Tom. So let me start off with the good Pyxis question, and then, I'll address infusion pumps. So we are actually quite pleased with the progress that we're making on Pyxis. 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. So as we've shared in the past, we were really focused on improving the installation process. We've shared that there was quite a large backlog at the time of the acquisition. And to really address that backlog, we need 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 workload 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 an incremental way, really based on that interoperability and the power of one to be able to do all of their infusion needs across both large-volume infusions, syringes, and narcotics, all in one product, 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 U.S., that was largely driven by growth 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.

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 can you just elaborate on that? Thanks.

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

Sure. Just a reminder that we raised the 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, 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 led 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 execute on those synergies.

And then, for China, growth is going to be driven by the Medical side of the company. And there are multiple businesses on the Medical side that are doing well in China. And then, in addition, there were 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 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 them. We're seeing some good traction in some of those items, particularly as we think about connectors and some of the oncology products coming out from CareFusion.

And 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.

Good morning, Vince. Hi, Chris.

Hi, Rick.

I guess, I'll ask sort of a two-part question. Maybe first big picture, Vince, maybe you can talk a little bit 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 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 fiscal 2017 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 get really good at your single questions. So the two-part is really fantastic. Let me just say from a capital deployment standpoint, of course, short run, we're still working to get down to the three 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 at our ability to provide solutions to the marketplace and have a broader impact, that's what's going to drive our strategy. It'll be a mix of both internal development and continued looking on the upside, 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. Chris?

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 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 in that quarter last year. So you won't expect 370 basis points. In fact, we expect about 170 basis points to 190 basis points for the year on the operating margin basis. I'd remind you that's on top of 100 basis points 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 basis points 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 basis points to 50 basis points. That's a few years out.

Hi. Good morning.

Good morning.

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

Yeah, 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 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 businesses 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.

Good morning. Congratulations on a good quarter. So can I ask you just a timing question on a few items? I guess, one, the infusion set, do you have kind of a specific launch for that, because this is the diabetes infusion set? And then, on the BD Simplist in 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.

Yeah, 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 closed.

Simplist is done. And as we 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 FY 2017. We are tracking towards, by the end of this fiscal year, within this fiscal year, we will be doing a limited launch 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 FY 2017.

And this is Chris. The only other thing I'd add is, as we said with the Respiratory announcement, the impact is 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.

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 teams 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 Sciences business today; there weren't that many questions, but with BD MAX, with Kiestra, all of these things happening over there; very, very exciting, and of course, new products on the Medical side. So thank you very much for your time, and we look forward to updating you next quarter.