Monique Dolecki - VP, IR Vince Forlenza - Chairman, CEO and President Chris Reidy - CFO and EVP, Administration Tom Polen - EVP and President, Medical Alberto Mas - EVP and President, Life Sciences

David Lewis - Morgan Stanley Andrew Hanover - JP Morgan Brian Weinstein - William Blair Larry Keusch - Raymond James Vijay Kumar - Evercore ISI Doug Schenkel - Cowen Jonathan Gorberg - UBS Derik de Bruin - Bank of America Bill Quirk - Piper Jaffray Brandon Couillard - Jeffries Rich Newitter - Leerink Partners

Hello and welcome to BD's first fiscal quarter 2017 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through February 09, 2017, on the Investors page of the BD.com website or by dialing 1800-585-8367 for domestic calls and area code 404-537-3406 for international calls, using confirmation number 51388884. [Operator Instructions]. Beginning today's call is Monique Dolecki, Vice President of Investor Relations. Ms. Dolecki, you may begin.

Thank you, Crystal. Good morning, everyone, and thank you for joining us to review our first 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 first 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 schedule is posted on the BD.com website. The first quarter comparable revenue growth rate and fiscal 2017 comparable revenue guidance provided today excludes the revenues of divestitures, most notably the respiratory solutions business that was divested in October of 2016 just after our 2016 fiscal year end. In the first quarter, the company recorded a reversal of certain reserves related to a court decision which among other things reversed an unfavorable anti-trust judgment in the RTI case This item along with the details of purchase accounting and other smaller adjustment in 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 slide. Leading the call this morning is Vince Forlenza, Chairman, Chief Executive Officer and President. Also joining us are Chris Reidy, Chief Financial Officer and Executive Vice President of Administration; Tom Polen, Executive Vice President and President of the Medical Segment; and Alberto Mas, 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 and Happy Groundhog Day. Let’s get started on slide 4, most of you participating on today’s call attended our analyst day back in November and more recently the JP Morgan Healthcare Conference. At these events you heard us detail our strategy for sustainable growth with a pathway to a target of 5% plus revenue growth and 10% plus earnings growth. At analyst day, you were also able to see first-hand, many of the exciting products and solutions that we believe will help us drive more sustainable healthcare globally. As we partner with healthcare systems to address their key priorities, we are broadening our served markets through our focus on major healthcare challenges, where we believe we can have the greatest impact. To achieve our objectives, we laid out a comprehensive plan centered on three key components. First, it’s the broad array of new products that we are either launching now or we plan to launch over the next two years. Second, it’s our move to solutions. As we do that and move in to adjacencies, we are becoming more impactful across our businesses on these major healthcare issues. And third, is our geographic expansion including revenue centered synergies from CareFusion. I’m pleased to say that we’re on track with that plan that we laid and we are off to a strong start in fiscal year 2017. Moving to the first quarter highlights, performance from both the medical and life science segments contributed to revenue growth that was ahead of our initial expectations. Our results this quarter continued to demonstrate the benefit of our diverse product and geographic portfolio. We continue to drive strong underlying margin expansion with the achievement of synergies, operational efficiencies and continuous improvement. Looking forward to the total year, we are reaffirming our fiscal 2017 currency-neutral revenue guidance. Our first quarter performance along with our current outlook for the total year, gives us confidence to raise our currency neutral EPS guidance. Since we provided guidance in November, the dollar has strengthened broadly relative to the euro and other currencies and a negative impact from foreign exchange is now more pronounced. Chris will give you more details on this in just a moment. In summary, we are delighted with our strong start to fiscal year 2017 and are confident in our outlook for the full fiscal year. I’ll now turn things over to Chris for a more detailed discussion of our first quarter financial performance and our updated fiscal year 2017 guidance.

Thanks Vince and good morning everyone. As Vince said we are off to an excellent start to fiscal year 2017. Moving on to slide 6, I’ll review our first quarter revenue on EPS results, which I will speak on a currency-neutral basis. Total first quarter revenues of approximately $2.9 billion grew 6.1% on a comparable basis which was ahead of our expectations. Adjusted EPS of $2.33 also exceeded our expectations, growing at 19.4% over the prior year. EPS growth was driven by revenue outperformance, coupled with strong operating performance. We are also pleased that we have continued to de-lever as we reduce the debt associated with the acquisition of CareFusion. During the first quarter, we paid down a $500 million debt maturity and are currently at approximately 3.1 times gross leverage. We remain on track to achieve our commitment 3.0 times gross leverage by March of this year. Looking forward to the total year as Vince mentioned, we are reaffirming our fiscal 2017 currency neutral revenue guidance. Our first quarter performance along with our current outlook for the total year gives us confidence to raise our currency neutral EPS guidance to a range of $9.70 to $9.80, which represents growth of 13% to 14%. Since we’ve provided guidance in November, the dollar has strengthened broadly relative to the euro and other currencies and a negative impact from foreign exchange is now more pronounced. We expect to be able offset about half of the increased currency pressure and now expect adjusted EPS to be in the range of $9.35 to $9.45 which represents growth of 9% to 10%. Moving on to slide 7, I will review our revenue growth by segment on a comparable currency-neutral basis. Performance from both segments drew first quarter revenue growth of 6.1% which was ahead of…

Thank you Chris. Moving on to slide 17, I’ll walk you through updates on new product innovation and strategic and business initiatives, starting with a few quick updates in our recent product launches. Some of you already know that as part of our pilot launch, we temporarily paused shipments for our insulin infusion sets. The customers who have already received the product have been told they can continue to use it. During our initial pilot, we received a moderately higher than anticipated rate of complaints associated with insertion. If you recall, we initiated a limited launch to gather customer insights prior to broad commercialization and to detect opportunities for improvements like this. These early learning’s which are not unusual are invaluable to ensure that patients ultimately realize the full benefits of BD FlowSmart technology. We are continuing to work closely with Medtronic towards full commercialization. In Life Sciences, we have received very positive feedback from customers on our Barricor blood collection tubes since launching in September this past year. We’re also pleased that we continue to see strong growth in BD Max across our portfolio of assays including CT, GCTV and our extended Enteric Bacterial Panel in Europe, both of which launched in the fourth quarter of fiscal year 2016. Our menu expansion continued in the first quarter with a MAX vaginal assay launch in the US. The vaginitus panel is the first FDA cleared PCR based panel in the US. We have over a dozen accounts in various stages of validating the new assay. We also anticipate the launch of extended Enteric Bacterial Panel in the US later this fiscal year. Moving on to our more recent new product launches, within our medical business, we recently launched the BD Neopak 2.25 ml pre-filled glass syringe. This syringe is specifically…

[Operator Instructions] Your first question is coming from the line of David Lewis with Morgan Stanley.

Vince and Chris, I wonder if we could just start with the outlook for the year. I think there’s two elements people are focused on, your strong first quarter revenues, but maintaining currency neutral revenue guidance and lowering earnings by $0.10 despite much stronger quarter, better underlying margin strength. So can you walk us through these two dynamics and your confidence in the remainder of the year? Thank you

So I’ll start-off David. From a revenue standpoint, we are delighted with the start that we had and we feel very good about the outlook for the year. We just thought it was a little early to take up the revenue guidance. Now looking at the underlying markets, they do seem to have stabilized, so we’re feeling good about that. We just think that from a much broader perspective we are in to an uncertain environment. So, it was the first quarter, we feel good about it, we have confidence in the year, and we’ll come back in the second quarter and take another look. Now in terms of the impact of currency and what now, I’ll turn that over to Chris.

So looking at our EPS guidance, we feel really good about the performance in the first quarter as well, and we think a portion of that is going to flow through to the year. As you see we raised the FX and guidance which is what we control and we feel really good about where that stands. We don’t control the currency. Now we did do all of this based on a 30 day average which is what we’ve always done and that was $1.06. As you saw over the last couple of days, it’s moved up to a $1.08. It’s been very volatile, we haven’t adjusted for that so clearly there’s some upside effect continues and it would be a pleasant surprise to see currency finally moving in the other direction and being at our back instead of in our face. So, our guidance does not take that in to consideration, because whatever it is its going to flow through. So we feel good about the fact that we raised the FX and guidance and then currency is going to be what currency is and we’ll walk through that as we go forward, as we it settle out. But wasn’t too long ago that people thought the dollar was going to go to parity, now it seems to be heading the other direction. Who knows, we hope for the best.

Your next question comes from the line of Michael Weinstein with JP Morgan.

Hey this is Andrew Hanover in for Mike, thanks for taking the question. I just wanted to follow-up on that specific question just to understand the cadence based on what guidance is today. And obviously you had the one-time items in this quarter that were pulled further, came in earlier than expected. But anything that would change what you were expecting for the rest of the year, and how should we think about the cadence for the second to fourth quarter? And the as a follow-up I just wanted to get an idea on the status of the Barricor launch and how that is going?

On the first piece of that I would say, clearly ahead of expectations in the first quarter. If you remember we said that going to have a little bit more of a difficulty comparing the first quarter primarily because they grow over in the Middle Eastern and Africa. Middle East was about what we expect; Africa was just actually a little bit better because of the timing of some contracts. But clearly we blew that 4% kind of guidance in the first quarter out of the water. I’d say about two-thirds of the revenue over achievement was timing related. You can look at pharm systems growing 15.5%, that’s a lumpy business, it’s not a 15% grower, but it’s a good grower, but it’s mostly timing or a chunk of that is timing. So we about two-thirds, one-third breakout at this point. So clearly revenue is moving up in the range, and as Vince said it’s a little bit up early in the year we still have things like flu ahead of us, it’s still not clear where that’s going to go, although it’s somewhat encouraging but that could turn on a dime. So we’ll see where that goes, pricing is still a bit ahead of us. So it’s early in the year, but clearly feel a lot better about our revenue guidance and a lot more confident in that guidance range. So we’ll see how it goes, but we’re off to a great start.

And for Barricor?

Yes, as Vince mentioned we do feel very positive about the feedback that we’re getting from our customers. We’ve seen some early wins around 30 accounts have now converted to Barricor. We have a healthy pipeline of just over 150 accounts; they are validating and evaluating the product. It is a product that takes quite a long time to validate between three and five months. So although all the signs are positive, this is going to be a slow conversion process that we’re going to see.

Your next question comes from the line of Brian Weinstein with William Blair.

Just coming back in to FX a little bit, last year you guys were very successful at offsetting all of the FX headwind that you had. It sounds like you’re thinking you can offset about 50% of them this year. Can you be a little more specific on where you’re able to offset those FX headwinds this year and did you sort of fully exhaust some of those options last year. And I guess as part of that, can you just talk about where we are specifically in the 325 million to 350 million in cost synergies that you guys are targeting from CareFusion, thank you?

If I take you back 12 months ago, we were getting the same kind of questions in terms of had we exhausted what we could do at the end of the first quarter, you can’t do anymore and then of course we actually exceeded and overcame the FX. So this is early in the year. We were expecting some volatility in FX, we were very careful in our expense in terms of how we role that out in the first quarter and I think we did an excellent of managing. But we’re feeling very good about the P&L as we look across the rest of the year. Chris anything else you’d add to it?

Yeah I just did on that before I get to the second part of your question. That it’s our job to offset as much of that FX headwind as we can, and I think we’ve done a great job with that last year. We continue that with our first quarter guidance raising the FX and neutral. So that’s our job to do that, and its - basically the cost synergies, the continuous improvement, all of those things go in to our ability to do that. We feel really good about where we are in cost synergy. We have the 325 to 350, we feel very good and confident with that. As you know some of the cost synergies come towards the backend and as we get increasing visibility towards that we’ll address where the total cost is going come out. But the traction that we have is terrific and it’s still a little bit early to give any more specificity to where we’ll ultimately end up, but we feel really good about the synergy progress that we’ve made and continue to expect that to be strong.

Your next question comes from the line of Larry Keusch from Raymond James.

Chris perhaps for you, the 3.1 times gross leverage obviously impressive in tracking right to the three times that you were targeting by the end of March. I guess the question is, and I sort of will wrap in the billion dollars of stranded cash that you have overseas. To the extent that you to get that money back and you leverage comes down to that three times target, how do we think about the cadence of broadly capital deployment and specifically share repurchase and dividend. And then the second question is and it’s sort of been touched on, but given the outperformance in the first quarter on sales on a constant currency basis, how we specifically think about the cadence of the remaining quarters, given some of that timing pull forward. Does that imply that the 2Q would not be below the 4.5% to 5% outlook for the year?

On that last point, I think in terms of the cadence I think somebody else asked that too. As we look out, it’s going to be pretty ratable. I don’t think there’s going to be any spikes in the second, third, or fourth quarter, and so it will be within the range that we had provided for the year. And obviously because of the timing, it’s probably towards the low-end of that range to keep us within the 4.5 as you do the math. The other part of the question capital deployment, sure, my favorite. So the way to think about that, one of the things you said Larry was the billion dollars of stranded cash. Remember that a company our size needs certain amount of working capital, so I don’t see all of that as a billion dollar, some of that is just normal working capital needs. As we pay down to the 3.0, we’re going to get down to vey historically low levels of cash. It will take a little while to kind of go back up to normal working capital levels. And then a little while longer to actually start accumulating the cash that you need for further deployment. So as I look out, the impact this year of any share buybacks would be de-minimus because of what I just subscribed in building back up the cash balances. But clearly we’re not going to let cash build upon the balance sheet and we will deploy that as that cash starts building up again. But the way you should think about it for this year is that the impact of any share buybacks which would occur later in the year would be de-minimus to the year.

Your next question comes from the line of Vijay Kumar with Evercore ISI.

So maybe just one housekeeping question on the guidance here. It looks like FX was an incremental $0.17- $0.18 headwind, but the reported EPS was only lowered by $0.10. So could you maybe just walk me through on where you’re getting the offset from, I think that would be helpful.

Yeah, we’re actually seeing a little bit strength in the revenue side, and our margins as you can see were very strong in the first quarter as well. So the combination of those two things, the beat in the first quarter some of that’s going to flow through. So we see about a third of the revenue, about a third of the bottom line flowing through and that’s where we’re seeing it.

And maybe one more for Chris. What is the net impact of corporate tax reform and border tax? Is that a net neutral, net positive?

Well on the border tax we certainly - we are a net exporter. So that’s positive, certainly as the lowering of the US rate would be positive. It all depends on all of the other factors that go in it, and that’s very volatile in terms of what other factors there might be such as the interest expense and the price of repatriation of unremitted foreign earnings. So it’s too quick and too soon to know because it’s anybody’s guess as to what will actually end up in the ultimate rules, and we still got a way to go. But there’s some positive, there’s some negative, we’ll see where they come out. But the one thing that I would want you to take away is that we are a net exporter. We do have over 30 plants in the US, so we feel good about that aspect of it.

Your next question comes from the line of Doug Schenkel with Cowen.

My first question is on China and I just want to have a quick circle back to Brian’s question from a couple of minutes ago. So first on China, you grew over 9% in the quarter against a difficult compare. You didn’t call out CareFusion contribution specifically. So with that in mind, I was just hoping you could comment on how much products that have completed the registration process contributed to growth and what’s the right way to think about ramping over the coming quarters. And then just to go back to Brian’s question, one area of clear focus today seems to be the concern that you may be reaching a limit on your ability to keep offsetting FX with operating discipline without cutting into bone over the next several quarters. I’d say it’s a bit more pronounced that I would have expected largely because you didn’t reiterate reported EPS and I think a lot of folks thought that you maybe could have. Could you just comment more directly on how you feel about how much dry powder is left and kind of back that up with some data that tells us that there is or there isn’t a lot of operating discipline left to be had in offsetting some of the FX headwind thank you?

Okay, lets start with China first. And we did have a strong performance in China and a lot of it was on the medical side. So Tom why don’t you talk about a little bit about that and the CareFusion impact?

Sure. Hey Doug, this is Tom. As Vince mentioned earlier we have made really good progress on the registration as we were after revenue synergies up to 160 plus either approved or under active review. As we had always shared, of course China has one of the longest registration time, and so as we think about our synergies, we do have synergies coming in China but that’s certainly not the main source of them at this point. We’ll see those coming in over the next couple of years. As you think about revenue synergies overall, it was a good contributor to the segment in the quarter. Think about it in tens of basis points impact on BD Medical revenue growth in the quarter on a global basis.

Okay. So we’ll come back to this question about where do we get potential offset as we look forward through the P&L? And you’ve mentioned operating discipline and of course we will continue that. But Chris we have other levers that we can fall to?

We do, certainly as we talked about the synergies. In our ability to drive more synergies, we’ve gotten a lot of traction on that, there’s still a lot to come and so there’s potential to continue to drive more synergies and that would be a potential. We feel good about the fact that we are able to offset a good chunk of the FX headwinds in our guidance. As we go down to 106, its now 108, there’s certainly some upside there as well. It’s somewhat out of our control where FX goes, but our job as I said before is to offset as much of that as we possibly can and I think we have some options and opportunities particularly around synergy acceleration and those kinds of things that we would be pushing up.

And the only other thing I would add Chris is that, if we continue with a strong revenue, we saw a very good margin on that incremental revenue. So we have that as a looking forward as well. So those are the elements.

Your next question comes from the line of Jonathan Gorberg with UBS.

Can you give us, Vince I know one of the things from a new product standpoint investors had been anticipating was that insulin infusion set, and just maybe a little bit more color on what should investors be expecting given early feedback that you’ve gotten either from a timing or what you’re going to do from a product standpoint?

Yeah Tom can talk to that.

Hi Jonathan, this is Tom. So as Vince mentioned in October we began the initial pilot launch with Medtronic in the US to collect customer insights and inform about the rollout. As we said, we did put out a safety notification a few weeks ago and it stated that although the majority of customers are using the product successfully and we’re getting great feedback on that, there was a small percent that had reported some issues. And so we had an agreement with Medtronic temporarily pause the shipment so we could review that customer feedback. We also indicated that any customers who have the product, it’s okay to continue to use it. Again we’re getting overall very good feedback, and we recognize that it’s a new and different technology and we need to make sure that we’re rolling out the right training so that we’re getting our customers the right instructions for use a 100% are having that right experience. So we’ve been analyzing that feedback, we’re finding some of the training practices etcetera. Obviously we’re disappointed with the shipment pause, but as Vince also mentioned, we view this as part of a learning critical to maximize the potential of this over both the near and long term. It doesn’t change at all our outlook for the product. We continue to be very positive on the opportunity and extremely positive on the benefit of the flow-smart technology. We also don’t see any impact of this on the guidance for the medical segment of the company.

So we’re still working towards full commercial launch changing some of the training materials. Thanks Tom. Thanks John.

Your next question comes from the line of Derik de Bruin with Bank of America.

A couple of question, first, when you look at the respiratory JV on that other income line, how should we think about that for the rest of the year. And going forward on that is a low single digit sort of growth estimate for that a reasonable assumption on that business or in that contribution?

It’s not going to be very material and we’re not counting on it being very material for the rest of the year. And its’ on a lag just because of the reporting piece which is not unusual. So I wouldn’t expect too much there. I don’t think it’s going to really be a driver.

And then just one follow-up, you call that flu several times and historically flu has been anywhere if I think what 12 million to 15 million in a good flu season for you. Could you call up the contribution in Q1 and then sort of expectations for Q2?

Yeah, I don’t know that we can give you an expectation for Q2, but Alberto can comment on what we’ve seen so far and what happened in this quarter. Alberto?

Yes, flu seasons specifically in Asia. So Japan and Korea were earlier than last year as well as in the US, the last year’s flu season was late. So we saw strong demand in Asia in Q1, and very, very late in December. There was a little bit of a spike in the order from distributors in anticipation of what we’ve seen an increase in flu for the last three weeks or so. We don’t know exactly obviously how that’s going to, going forward how that’s going to evolve. But there was a very late buy-in of inventory by distributors in the US moderate still. It contributed about just over 1.5% growth rate to the DS growth rate for the quarter.

Your next question comes from the line of Bill Quirk with Piper Jaffray.

Couple of question I guess for Vince or Tom, just curious as there was a broadening of an EU sharps directive that might get expanded in scope to some non-healthcare workers like police and lab workers and such. Just kind of thinking about the potential size of this opportunity, I’m guessing this is more of an ’18-’19 sort of event, but would love any colors there. And then just a quick one for Chris share count, you got it to 219 for the year. We’re comfortably under that at this point, so just kind of help us think about some of the puts and takes there?

Tom do you want to comment?

Yeah, this is Tom. Certainly we see Europe is about 50% of the way through their safety legislation. I think the add-on that you’re talking about is not something that we see as fundamentally being a significant scale to move the needle beyond kind of the current trajectory. So we will continue to be very positive overall on safety growth in Europe and as well as in emerging markets.

And on the share count, so that assumes - and we’ve seen since we’re not buying back any shares we got a little bit of a lift from conversion of options, and we’ve seen that over the last several quarters. So it’s just a continuation of that and no assumption of share buybacks for the remainder of the year.

The next question comes from the Brandon Couillard from Jeffries.

Just curious if you could elaborate on the US safety weakness in the first quarter and whether or not that we should think that’s about the normalizing in 2Q, and then secondly, curious if the International Biosciences experience was actually in line with plan?

So first safety, and in the US there was a little bit of an impact on the Life Science side because we had some capacity constraints on one particular product in PAS and we’re working to add that capacity. So that’s what you saw there. We’re adding some capacity and we’re going to be tight for the balance of the year. But Tom?

We saw a pretty solid performance from a medical perspective in the US in the quarter, no change in that. I think as we think about safety overall in the quarter, we recognize that at the BDX level it was maybe a bit more of an impact from international safety, so also some headwinds in the Middle East and Asia, but we see those basically moderating as we go forward for the year as those annualize and overall see a positive outlook for safety to the balance in FY’17.

And Alberto international safety I think you did pretty well too.

Yes, and we did particularly well and above average because some of the supply in some of the constrained product and push-button recollection went outside the US. So we saw particularly high safety numbers.

So little less growth in the US, but more international. Okay, great.

And emerging markets over 18% growth asset.

Your last question comes from the line Rich Newitter from Leerink Partners.

This is Robby in for Rich. Just one on price, you mentioned the pricing environment a couple of times. How should we think about and how you are thinking about that. It sounds like you’re taking a little bit more of an incremental cautious approach there? And just a follow-up, could you just highlight what US growth would have been X the order pull through thank you?

So on the pricing piece, I think it’s very consistent with the way we always approach pricing. There’s no question that there is pricing pressure in different parts of the business. We tend to be able to offset a lot of that, and so we started this year opening guidance with tens of basis points of pressure. The first quarter was about flat as I mentioned and so we’re still having our guidance, the tens of basis points coming from the remainder of the year, that’s got some room for upside. If we’re able to outperform, but right now it contains that tens of basis points of pricing pressure.

Well thank you very much. May be to then go on and just wrap up the call. We are very pleased with the strong start to the year. We’re implementing our strategy that we laid out for you at analyst day. That whole plan is on track, we’re excited about the new product launches. You saw the increased performance on the margin as well. So when we step back and look at this in totality we’re viewing very good across the continuum of the entire P&L. So thank you very much for your questions and look forward to updating you next quarter. Thanks everyone.

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