BDX
#Thanks, Vince, and good morning everyone
Like Vince, I'm also pleased by the progress we are making with our integration planning for the Bard acquisition, and the value the combination will create for our customers, patients, and shareholders globally
Moving on to slide 7, I'll review our third quarter revenue and EPS results, which I'll speak to on a currency-neutral basis
Total third quarter revenues of approximately $3 billion dollars grew 2.4% on a comparable basis, which was slightly below our expectations
We estimate that the U.S
dispensing change lowered total company revenue growth by approximately 100 basis points, in line with our previously-communicated expectations
As Vince mentioned, our underlying performance is strong
Accounting for the dispensing change and the timing of items within the year, our third quarter results would have been in the low end of our full-year guidance range of 4.5% to 5%
I'll provide more color on revenue growth in the quarter in a moment, when I take you through the results by segment and geography
Adjusted EPS of $2.46 grew 7.7%
As expected, EPS was impacted by the divestiture of the Respiratory Solutions business, as well as the U.S
Dispensing business model change, which resulted in a combined headwind of approximately 600 basis points to EPS growth
We're very pleased with our performance year-to-date
Revenue growth is strong at 4.5%
Accounting for the approximate 40-basis-point impact from the U.S
dispensing change, we estimate that the revenue growth year-to-date would have been near the high end of our 4.5%-to-5% guidance range
Year-to-date EPS growth of 13.1% reflects our ability to grow over the dilution from the Respiratory divestiture and the U.S
dispensing change
Moving on to slide 8, I'll review our revenue growth by segment on a comparable currency-neutral basis
In the quarter, pricing declined about 20 basis points
BD Medical third quarter revenues increased 1.3%
Revenues in the Medical segment was slightly below our expectations in the quarter
Year-to-date, Medical revenues grew a strong 4.5%, which includes an estimated 50-basis-point headwind from the U.S
Dispensing change
Medication and Procedural Solutions, or MPS, growth was 3.7%, which reflects strength in infusion-related disposables and infection prevention
Growth in MPS in the U.S
was below our expectations, due to the normalization of inventory levels across several major distributors
Revenues in Medication Management Solutions, or MMS, declined 4.2%
We estimate that the U.S
dispensing change lowered MMS revenue growth by approximately 550 basis points
MMS revenue growth was also impacted by strong capital insulations in dispensing in the first half of the fiscal year, as previously communicated
In addition, within our International Infusion business, certain customer orders planned for the third quarter are now expected to occur in the fourth fiscal quarter
On an underlying basis that accounts for these items, we estimate that MMS would have grown in the mid-single digits
We continue to be pleased as we gain momentum in the market in our MMS business
Diabetes Care revenue growth of 2.7% was driven by 4.2% growth in the U.S
and double-digit growth in emerging markets
International growth was impacted by some softness in Europe, primarily in the U.K
, where we are seeing increasing pressure from government payers as part of austerity measures
Pharmaceutical Systems revenues grew 3.9%
Results were impacted by the timing of customer orders that benefited growth in the first quarter
Year-to-date, Pharmaceutical Systems grew 6.1%
BD Life Sciences third quarter revenues grew – increased 4.8%
Growth was driven by strong performance in Biosciences and solid growth in Diagnostic Systems and Preanalytical Systems
Revenues in Diagnostics Systems grew 3.8%
Strength in Core Microbiology was driven by blood culture and IDAST partially offset by the timing of BD Kiestra installations which we expect to occur in the fourth quarter
In addition, we saw strong accelerated growth in our BD MAX molecular platform driven by the recent introduction of new enteric's and women's health assays
Preanalytical Systems growth of 3.9% was driven by strength in wing sets, including the recently-introduced BD UltraTouch
Biosciences revenues grew a strong 7.1%
This reflects continued strength in research reagents driven by our Sirigen dyes and growth from new recently-launched research instruments such as the FACSMelody
Moving on to slide nine I'll walk you through our geographic revenues for the third quarter on a comparable currency-neutral basis
growth was about flat with BD Life Sciences growing at 5.2% and BD Medical declining 1.3%
We estimate the U.S
dispensing change lowered BD Medical U.S
revenue growth by approximately 270 basis points and total company U.S
growth by approximately 200 basis points
Performance in BD Medical in the U.S
reflects growth in the MPS and Diabetes Care units
This growth was offset by the timing and geography of orders in Pharmaceutical Systems and the U.S
dispensing change
Performance in the Medication Management Solution unit also reflects the timing of capital placements that occurred earlier in the fiscal year, revenues in MPS were driven by strength across a wide range of infusion disposables and infection prevention, partially offset by the normalization of inventory levels
BD Life Sciences growth reflects strong performance in Biosciences and Preanalytical Systems
Diagnostics business was driven by strong core Microbiology and BD MAX partially offset by the timing of revenues in some platforms
Revenues in Preanalytical Systems were driven by growth in wing sets and also reflect strong performance across all product platforms
Revenues in our Biosciences business in the U.S
were driven by strength in research reagents and growth from research instruments such as the FACSMelody and the FACSymphony
Moving on to International, revenues grew 4.7%
The Medical segment grew 4.9%
Growth was driven by customer ordering patterns in Pharmaceutical Systems and by performance from infusion-related disposables in the MPS business
Diabetes care revenues reflect strength in emerging markets partially offset by softness in Europe, as previously discussed
Performance in MMS reflects the impact of strong capital insulations in the first half of the fiscal year as well as certain customer orders planned for the third quarter within our infusion business that are now expected to occur in the fourth fiscal quarter
Growth in the Life Sciences segment of 4.4% was driven by performance in Diagnostic Systems and Biosciences
The Diagnostic Systems growth reflects strong sales in Core Microbiology including IDAST where we continue to see demand from the recently-launched Phoenix M50 and strength in BD MAX
Biosciences revenues reflect strong research instrument sales that partially benefited from an easy comparison due to the prior-year funding delays in certain geographies
On slide 10, developed markets revenues grew 0.9% and emerging markets revenues grew 10.9%
We estimate the U.S
dispensing change lowered developed markets revenue growth by approximately 130 basis points
The third quarter growth rate in emerging markets reflects double-digit growth across the Medical segment and also in Diagnostic Systems
By geography, China, greater Asia and EMA grew double-digits and sales in Eastern Europe and Latin America were up high-single digits
China growth for the third quarter was strong at 12%
Revenue growth was driven by continued strong demand for consumables in both segments as well as the Phoenix M50 and MALDI-IDAST instruments and diagnostic systems, and research instruments in Biosciences
For the total year, we continue to expect China to grow in the low double-digit range
With year-to-date growth of 9.1%, we are confident in our high single-digit emerging market growth outlook for the full fiscal year
Now, moving on to Global Safety on slide 11. Currency-neutral sales were flat year-over-year
Tough comparisons to the prior year in both segments and across all geographies were the primary driver of lower Safety growth across the portfolio
By geography, Safety revenues in the U.S
grew 1.5% and international sales declined 2% currency-neutral
Emerging Market Safety revenues were about flat due to a tough comparison to the prior year in which EM Safety grew approximately 20%
By segment, Medical Safety sales declined 2.1% and Life Sciences grew 3.7%
In addition to the tough comparisons to the prior year, U.S
and Medical Safety growth this quarter was impacted by distributor inventory levels in MPS as discussed earlier
International and Medical growth were also impacted by customer orders, planned for the third quarter within our infusion business that are now expected to occur in the fourth fiscal quarter as mentioned previously
Slide 12 recaps the third quarter income statement and highlights our currency-neutral results
As discussed, revenues grew 2.4% in the quarter on a comparable currency-neutral basis, including approximately 100 basis points negative impact from the U.S
dispensing change
As we move down the P&L, I'd like to point out that similar to prior quarters our results in the prior-year period include the Respiratory Solutions business, while the current period does not as the business was divested in October of 2016. Starting with gross profit, the decline of 1.3% year-over-year reflects the loss of gross profit from the Respiratory Solutions business and the U.S
dispensing business model change
On a comparable basis that accounts for these items, gross profit would have grown over 100 basis points faster than revenue growth
I'll provide additional details on gross profit in just a moment
SSG&A as a percentage of revenues was 23.7%, and we are very pleased with the leverage we are getting year-to-date
R&D as a percentage of revenues was 6.1% as we continue to invest in innovation to drive future growth
The decline in R&D spending year-over-year is due to the divestiture of Respiratory Solutions business, as well as the comparison to prior year where we ramped R&D spend in the third quarter as a result of the medical device tax suspension
Our tax rate declined to 16.5% in the quarter, which is in line with our full-year guidance
In the quarter, operating income was flat and adjusted earnings per share grew 7.7% compared to the prior year
Both operating income and EPS include 600 basis points of negative impact from the Respiratory Solutions divestiture and the U.S
dispensing change
Now, turning to slide 13 and our gross profit and operating margins for the third quarter
On a performance basis, gross profit margin improved by 150 basis points as continuous improvement initiatives, cost synergies and favorable mix, which includes the positive impact of divestitures, were partially offset by a slight decline in pricing
On an operating margin basis, we delivered 100 basis points of margin expansion
Year-to-date, we have achieved approximately 160 basis points of underlying margin expansion
We expect the fourth quarter margin performance to significantly improve, largely driven by the comparison to the high level of R&D spend in the prior year
We remain confident in our ability to drive 200 to 225 basis points of margin expansion for fiscal year 2017. Moving on to slide 15 and our full fiscal year 2017 EPS guidance
We are particularly pleased that the strength of our performance year-to-date is driving our ability to offset headwinds from the Respiratory Solutions divestiture, the U.S
dispensing change, and FX pressure
As a result, we are reaffirming our full-year fiscal 2017 currency-neutral adjusted EPS guidance of $9.70 to $9.80, which represents underlying growth of 15% to 17% and a 2% to 3% headwind from the U.S
dispensing change
As you're aware, foreign exchange rates have moved since we last provided guidance in May, and the foreign currency headwind has moderated slightly with one quarter to go
As such, we are raising our adjusted EPS guidance to $9.42 to $9.47. Our guidance assumes a euro-to-dollar exchange rate of $1.15. Turning to slide 16, I'd like to walk through the balance of our guidance expectations for the full fiscal year 2017. As we discussed, there are a number of puts and takes within the year, but our underlying performance is strong
<UNK>spite a headwind of approximately 50 basis points from the U.S
dispensing change, we continue to expect total company revenue growth of 4.5% to 5% on a comparable currency-neutral basis
This was comprised of growth of 4.5% to 5% in BD Medical and 4% to 5% in Life Sciences
Based on our current view of the environment, we continue to expect a small amount of pricing pressure for the year
All other P&L guidance from May remains unchanged
Now I'd like to turn the call back over to Vince, who will provide you with an update on our key initiatives and product portfolio
Sure, Mike, be happy to do that
So, if you think about the 2.4%, the underlying growth is 4.5%, and the way to get there is about 100 basis points related to the U.S
dispensing business we had articulated on the last call
Then we had timing factors
If you think about the first half of this year, we were running 5.6% year-to-date, and so we said that wasn't indicative
There was a lot of timing in there, and what was in there, particularly was, in MMS, they had a very strong first half, and so did Pharm Systems
Pharm systems grew over 7% in the first half, and we knew that is a lumpy business
Then on top of that, we saw some timing this quarter
In MMS International, we saw some orders that we expected to see in the third quarter that we now expect to see in the fourth quarter
And there was some Kiestra installations that moved from the third quarter to the fourth quarter
So when you normalize for all those items, you get to the 4.5% underlying growth
Now we did say we saw some softness in MPS related to normalization of inventory levels and a little bit of softness in Diabetes care in the U.K
But if you added those back, that would have brought us more to the 5% kind of level in the quarter
So that's where we saw a little bit of softness, going from 5% down to 4.5%
Sure
So, since we're at 4.5% year-to-date through the third quarter, we're implying in the 4.5% kind of range for the fourth quarter, and we do think that the inventory levels was a one-time adjustment within the third quarter, so we don't expect to see any hangover from that in the fourth quarter
We do see emerging market strength across the board
If you look at what we did in emerging markets this quarter, 9% year-to-date, 11% in the quarter, that's the best quarter in two years
China grew 12%, 11% year-to-date
So we're seeing – emerging market growth is very strong, so we see that continuing
Life Sciences, we see strength across (31:26 – 31:31) quarter bounce back
Until (31:33) we see strength in the fourth quarter, we see Diabetes Care rebounding, primarily driven by the U.S
, as we do think that the U.K
pressure will continue
MMS has the International Q3/Q4 timing, so we'll get a little benefit from that
MPS will actually have a tough compare in the fourth quarter, but we already had that baked in to our guidance
So that's how we get to a good solid fourth quarter, and to the 4.5% to 5% for the year
So that's why, as we said at the second quarter, we felt we were at the high end of our guidance range, and the pressure from the dispensing brought us down to the lower end of our – but still within our guidance range
So, as you said, when we gave guidance the last time, we were at $1.07. We use the 30-day running average, as you know, so that would be $1.15. Today, we are sitting at $1.18. So the $0.08 between the $1.07 and $1.15, if you think back to the rule of thumb that we've given in the past, 1 point of euro move is worth about $0.02. So the $0.08 move is worth about $0.16 cents for a full year, but we just have one quarter to go
And, really, where you saw the move was in the month of July, so it's truly an impact of just one quarter
So that'd be about $0.04 for the quarter
Then when you look at all other FX currencies, we actually are still seeing pressure from the pound, the yen, and the yuan, which really haven't moved at all in the past quarter, and so we still see pressures
All other currencies, there's about $0.01 of benefit since May, and so that's the $0.01 there and $0.04, so we see about $0.05 running through, and that's how much we increased the guidance by
In terms of your comment around next year, we use the 30-day average because the volatility in FX has been dramatic over the last year or so, and we like the direction it's going
So if it stays at $1.18, we certainly will see a benefit
The average for this year, if it holds at $1.18 for the rest of the year, the average for this year will be about $1.10. So $1.18 for full next year would be about $0.08. If you use the rule of thumb, that's about $0.16 of benefit
And then, you would expect to see a little bit of benefit from all other foreign currencies, where there was a little bit of pressure this year
So that's a way to think about next year, if things hold at $1.18, and we hope they do
So, <UNK>, as we said, the impact of the dispensing change would bring us from the high end of our guidance range of 4.5% to 5% for the year, down to the low end
So year-to-date, we're at 4.5%
So what that really implies for the fourth quarter is 4.5%
We do have some timing within the third and the fourth quarter, as I mentioned
The MMS International orders have slipped
We got some Kiestra installations that slip into the fourth quarter
So the combination of those things give us the confidence, and we see good strength across the rest of the business
The core is strong
Emerging markets growth, as I said, is looking very good, and Life Sciences is looking solid as well
So we feel good about the fourth quarter
I should just add, too, that as we preliminarily look at the work on cost synergies, we feel real good about the $300 million of cost synergies that we articulated and we also feel equally as confident in having revenue synergies that are measurable in fiscal year 2019. So we're really reaffirming everything we said at the time of the transaction that we feel good about the cost synergies, the revenue synergies and the potential for those
So we've made good headway in the last couple of months on those issues
And certainly Pharm Systems year-to-date is 6.1% growth so we feel good about that, so
So let me take the cost synergies
As you remember, we talked about those being relatively ratable over the three-year period, and that's what's playing out
So through 2016, we had about $170 million
We run about $80 million more per year on top of that
So that's what you would expect by the end of this year, and then the balance to the $325 million to $350 million would be in 2018. So that's pretty much on track, and you can see the benefit of that as we look at the margin growth
As we talked about in our prepared remarks, we expect this year to drive 200 basis points to 225 basis points of operating margin improvement
That brings us to over 500 basis points of margin improvement in the last three years through 2017. And then, as you think about it, we're talking about the Bard transaction driving an average of 200 basis points over the next three years
That's a lot of basis points of operating margin improvement over a five-to-six-year period
So we feel real good about that, and that's what we're seeing
The first part of that is driven by the CareFusion synergies
And I also mentioned in the prepared remarks the UltraTouch showed some benefit this quarter
So, as we mentioned before, if you really peel back the on the underlying performance for the year, year-to-date we're 4.5%, but that's in the face of significant headwinds from this U.S
dispensing change that we had of about 50 basis points
That puts you right at the 5% level, so we feel really good about that
Clearly, the headline is depressed by the dispensing model
We knew that was the risk
We tried to communicate that, that that would be a pressure in the second half of this year
You're going to see that same kind of pressure year-over-year in the first half of next year
And that's to be expected
It's the right thing to do
It positions us extremely well competitively in that business
And it actually helps us better focus on our customers and their needs
So, we're doing it for all the right reasons, but it clearly is going to depress the headline
We also knew that the timing was going to be a headwind in the second half of the year, because of the fact that we were running so hot in the first half of the year, 5.6%
So that had an impact as well
So, as I said earlier, the underlying for the quarter was 4.5%
It would have been 5%, except for the little bit of pressure we saw in MPS in normalization of inventories in the diabetes piece
So that would have been a strong 5% in the quarter as well
As we look out into the fourth quarter, we're very confident by a number of things that we see; the timing coming back to us a little bit on some of the things that moved from the third to the fourth quarter, but the strength of the core business is the most important
And look at the emerging market growth; that's the strongest it's been in a couple of years
We really feel good about that
The rest of the business is solid
So we really feel good about that as well, so it really hasn't changed from what we were talking about, in terms of the momentum of the business and the underlying business, when we talked at Analyst Day
And then, going forward into next year, we feel that same strength continuing again, albeit with the pressure of the headwinds of the dispensing change in the first half of the year
But for the full-year, that will normalize, because it'll be six months versus six months this year
So on the top line, we feel very good about the momentum that we have
And then, the ability to take that up to the 5%-to-6% level with the Bard transaction as that occurs
So, from a top-line basis, we're feeling like the momentum is there
And then, we haven't really talked about the EPS line, but when you look at that chart 15, we're driving 15% to 17% underlying EPS, FX and growth, and that's overcoming the Respiratory dilution of about 1.5%
That's really strong growth
Then you got the headwinds from the dispensing change that we have, which is real
That $60 million dollars of revenue that drops to the bottom line, there's some cost related to that as well
We're overcoming that
We're overcoming the headwinds that we saw in FX this year, which, although it's abated a little bit, that's still 3.5% of headwinds from year-over-year FX pressure
Hopefully, that turns around next year
So from a bottom line, we're feeling really good going forward as well
So, hopefully that addressed your question
Well, let me see if I can get some of those questions
I think your timing is about right in terms of Q3 to Q4; that feels about right
And we feel good about the ability to hit the 200 basis points to 225 basis points of margin improvement, you mentioned abnormal
The only thing abnormal is that we are driving 200 basis points to 225 basis points of margin improvement this year, and 500 basis points over the last 3 years
So, we feel really good about that
There is say a little bit of easier compare in the fourth-quarter as I think I mentioned, because R&D ramped so much in the fourth-quarter of last year as a result of the medical device tax repeal
And so that makes it a little bit easier
The operating margins this quarter are a little misleading because of the fact that Respiratory really had an impact in there
When you peel back the Respiratory piece, you see really good margin growth
The gross profit margin in the quarter was 100 basis points faster than revenue growth
And both OIBT and EPS were very strong in the quarter when you back out the overhang from respiratory
So feel real good about that
I have nothing to add
The year-to-date is 9.1%
That is a very high-single digits, and the momentum continues
And as I mentioned earlier, it was our best performance in two years in emerging markets
So we feel good about the momentum there
So there was about 20 bps of pressure in the quarter
Year-to-date, it's about 20 bps in total after the first quarter being flat, and the second quarter, actually, was down about 30 bps, so it's actually moderated a little bit from that
That's the kind of plus and minus we have seen for a while now, is 20 bps to 30 bps, up, flat, down, somewhere in that range
We did mention that we are seeing pricing pressure in the U.K in diabetes care from the austerity measures and the government payers
So that's continued, but pretty much in that range