Becton, Dickinson and Company (BDX) Q2 2017 Earnings Report, Transcript and Summary

Hello and welcome to BD's Second Fiscal Quarter 2017 Earnings Call. At the request of BD, today's call is being recorded. It will be available for replay through May 9, 2017, on the Investor's page of the bd.com website or by phone at 800-585-8367 for domestic calls and area code 404-537-3406 for international calls using confirmation number 3838563. I would like to inform all parties that your lines have been placed in a listen-only mode until the question-and-answer segment. Beginning today's call is Ms. Monique Dolecki, Vice President of Investor Relations. Ms. Dolecki, you may begin. Monique N. Dolecki - Becton, Dickinson & Co.: 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 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 the press release and its related financial schedules and in the slides. A copy of the release, including the financial schedules, is posted on the bd.com website. The second quarter comparable revenue growth rates and fiscal year 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. The details of the purchase accounting and other smaller adjustments and the comparable basis revenue results can be found in the reconciliations to GAAP measures in the financial schedules in our press release or the appendix of the investor relations slides. As a result of the changes related to the transformation of our U.S. dispensing business model, we expect to record a onetime non-cash charge of approximately $400 million during the third fiscal quarter of 2017. More complete details can be found in our 10-Q, which will be filed later today. Please note that all fiscal year 2017 guidance provided is on a BD stand-alone basis. As we move closer to our anticipated closing of the C. R. Bard acquisition, we will provide more explicit guidance on the pro forma financials for the combined company. Leading the call this morning is Vince Forlenza, Chairman and Chief Executive Officer. Also, joining us are Chris Reidy, Executive Vice President, Chief Financial Officer, and Chief Administration Officer; Tom Polen, President; 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. Vincent A. Forlenza - Becton, Dickinson & Co.: I thank you, Monique, and good morning, everyone. Turning to slide 4; as many of you know – already know, last week was a very exciting time for us and a pivotal moment in BD's history as we announced the acquisition of C. R. Bard. The combination of BD and Bard represents another major milestone in the strategic transformation of our company. As a combined company, we believe we will further accelerate and broaden our strategy, create new growth opportunities for both companies, and deliver meaningful long-term value for shareholders. Together we will be uniquely positioned to deliver innovative healthcare solutions that improve both the process of care and the treatment of disease. We continue to expect the transaction to close in the fall of 2017 and we look forward to updating you along the way as we prepare to welcome Bard's team of talented associates to BD. Last week, we had the opportunity to meet with many of the Bard associates at some of their major locations and we were impressed by the collaborative spirit of Bard's leadership team, who is already generating ideas for what we could accomplish as a combined company. Turning to slide 5 and the second quarter highlights; we entered the Bard transaction with very strong momentum. Performance from both the Medical and Life Science segments contributed to strong revenue growth over the first half of fiscal year 2017. Our results continued to demonstrate the benefit of our diverse product and geographic portfolio and our ability to drive strong underlying margin expansion through the achievement of synergies, operational efficiencies, and continuous improvement. In addition, we achieved our commitment of 3 times gross leverage within two years of close, exactly as we planned and originally stated. We continue to make excellent progress and remain on track to achieve our CareFusion cost and revenue synergies. The integration of CareFusion has laid the foundation for the integration of Bard, providing a road map for the creation of a detailed execution plan. As I just mentioned, we expect this transaction to close in the fall of 2017, subject to regulatory and Bard shareholder approvals. Later in the presentation, Chris will update you on some changes we are making to our dispensing business, as we reinvent the Medication Management process. We will transform the dispensing business model from capital placements to a value-based software and solutions model, and we believe this further demonstrates our ability to execute on our vision to create a more robust and customer-focused business. As we look to the total year, we are very confident in our outlook. The strength of our year-to-date performance allows us to reaffirm our fiscal year 2017 revenue and adjusted earnings guidance, which includes the impact of the accounting change from this new business model. Of course, with this accounting change, there is minimal change to cash flow. I will now turn things over to Chris for a more detailed discussion of our second quarter financial performance and our fiscal year 2017 guidance. Christopher R. Reidy - Becton, Dickinson & Co.: Thanks, Vince, and good morning, everyone. Like Vince, I'm also very excited about the combination of BD and Bard and the value created for our customers, patients, and shareholders globally. We are very pleased with our performance in the first half of fiscal 2017, with revenues growing 5.6% and EPS growing 16.2%. You can see, we are entering the Bard transaction with strong momentum. Moving on to slide 7, I'll review our second quarter revenue and EPS results, which I'll speak to on a currency-neutral basis. Total second quarter revenues of approximately $3 billion grew 5.2% on a comparable basis, which was ahead of our expectations. Adjusted EPS of $2.30 also exceeded our expectations, growing at 12.8% over the prior year. We're also pleased that we continued to de-lever and reduce the debt associated with the acquisition of CareFusion. We paid down approximately $3.5 billion in debt in the two years since the acquisition, including approximately $700 million in the second quarter of this fiscal year. We are very pleased that we achieved our commitment of 3 times gross leverage by the end of this past March, as we had anticipated. Moving on to slide 8, I'll review our revenue growth by segment on a comparable currency-neutral basis. Performance from both segments drove second quarter revenue growth of 5.2%. Growth was ahead of our expectations, driven by strength in Medication Management Solutions, Diagnostic Systems, including a stronger than expected flu season, and Preanalytical Systems. In the quarter, pricing declined slightly. Moving on to revenues growth by segment, BD Medical's second quarter revenues increased 4.8%. Medication and Procedural Solutions, or MPS, growth was 5.6%, which reflects strength in infusion disposables. Revenue growth in Medication Management Solutions, or MMS, up 7%, was driven by strong capital installations in dispensing in the U.S. and Europe. Growth was positively impacted by increased installation efficiency and the timing of placements that occurred in the second fiscal quarter earlier than originally anticipated. Diabetes Care revenues were about flat. Revenue growth was impacted by the timing of customer orders in the U.S. which occurred in the first quarter, earlier than initially anticipated, as well as the timing of tenders in emerging markets that we now expect to occur later in the fiscal year. Pharmaceutical Systems revenues grew 2.6%. Results were impacted by the timing of customer orders in Europe that occurred in the first quarter, earlier than originally anticipated, in addition to a tough comparison to the prior year in the U.S. due to the geography of customer ordering patterns. BD Life Sciences' second quarter revenues increased 5.8%. Growth was driven by strong performance in Preanalytical Systems and Diagnostic Systems. Revenues in Diagnostic Systems grew 10.5%. This reflects a strong quarter for flu-related sales, as well as the continued strength of core microbiology, including blood culture and Kiestra. In addition, we saw solid growth in BD MAX, driven by the recent introductions of new enterics and other assays. Preanalytical Systems growth of 7.5% was driven by safety-engineered products in both the U.S. and emerging markets. Biosciences revenues declined slightly due to the timing of instrument installations, as well as the impact of temporary fulfillment delays related to certain research reagents as a result of damaged inventory. In addition, we recorded a charge primarily related to the write-off of the inventory, which you will see in a few moments when I take you through the second quarter income statement. Moving on to slide 9, I'll walk you through our geographic revenues for the second quarter on a comparable currency-neutral basis. U.S. growth was strong at 4.0%. This was comprised of BD Medical growing at 3.2% and BD Life Sciences growing at 6%. Performance in BD Medical reflects strong growth in capital placements in our dispensing business and MMS and a wide range of infusion disposal products in our MPS business.BD Medical growth in the U.S. was impacted by the aforementioned customer ordering patterns in our Diabetes Care business and a tough comparison to the prior year in our Pharmaceutical Systems business, as previously mentioned. BD Life Sciences growth reflects strong performance in Diagnostic Systems and Preanalytical Systems. Growth in our U.S. Diagnostics business was driven by a strong flu season, continued strength in blood culture, Kiestra, and BD MAX. Revenues in Preanalytical Systems were driven by safety-engineered products across all platforms. Revenues in our Biosciences business in the U.S. were about flat, as strength in our Advanced Bioprocessing business was offset by the impact of the aforementioned research reagent fulfillment delays. Moving on to internationals; international revenues grew 6.5%. The Medical segment grew 7.1%. Growth was driven by performance from infusion disposables and the MPS business and strong capital instillations in our dispensing business and MMS. Pharmaceutical Systems revenue growth reflects the timing of customer orders, as previously mentioned. Growth in Diabetes Care reflects the timing of tenders in emerging markets, as previously mentioned. The growth in Life Science segment was 5.6%, driven by sales of safety-engineered products in emerging markets and strong sales in our Core Microbiology and BD MAX in Diagnostic Systems. Within Core Microbiology, we saw continued strength in blood culture as well as growth in ID/AST that was driven in part by the recent introduction of the Phoenix M50. Biosciences revenues declined due to timing of instrument sales in certain geographies that are now expected to occur later this fiscal year. On slide 10, developed market revenues grew a strong 4.5%, and emerging markets revenues markets grew 8.7%. The second quarter growth rate in emerging markets reflect strength in sales of safety-engineered products as well as core products in Diagnostic Systems in EMA and Latin America; and strength in MPS, particularly in China. China growth for the second quarter was ahead of our expectations at 11.9%. Revenue growth was driven by continued strong demand for consumables in both segments. For the total year, we continue to expect China to grow in the low double-digit range. We continue to anticipate emerging markets growth of high-single digits. Now, moving on to global safety on slide 11, currency-neutral sales increased 6.3%. Safety revenues in the U.S. grew 3.7%. International sales grew 10.3% currency-neutral, driven by strength across emerging markets, which grew 13.4%. Medical safety sales grew 4.7%, driven by a range of infusion disposables. Life Sciences safety sales, which are driven by Preanalytical Systems unit, grew 9% in the quarter, with strong growth across emerging markets as well as in the U.S. Slide 12 recaps the second quarter income statement and highlights our currency-neutral results. As discussed, revenues grew a strong 5.2% in the quarter on a comparable currency-neutral basis. As we move down the P&L, I'd like to point out, similar to last quarter, that 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 2016. BD's ownership interest in the Vyaire joint venture is recorded within other income in our second fiscal quarter results. Starting with gross profit, the decline of 0.8% year-over-year reflects the loss of gross profit related to the Respiratory Solutions business and the impact of the aforementioned damaged research reagent inventory. On a comparable currency-neutral basis that adjusts for these items, gross profit would have grown in excess of revenue growth. I'll provide additional details on gross profit in just a moment. SSG&A as a percentage of revenue was 24.3%. We're very pleased with the continued leverage we are getting as SSG&A continues to grow at a slower pace than revenues when adjusting for Respiratory Solutions in the prior year. R&D as a percentage of revenue was 6.3% as we continue to invest in innovation to drive future growth. As you'll recall, with the suspension in the medical device tax last year, our ability to ramp R&D spending did not occur until after the second fiscal quarter. With a more normalized level of R&D spend than the prior year and also adjusting for Respiratory Solutions, R&D would have grown in line with revenue growth in the second quarter. Operating income grew 0.9%. As I just mentioned, there are a few one-time puts and takes this quarter. On an underlying basis, P&L leverage remains strong with estimated double-digit growth in operating income. Our tax rate declined to 12.5% in the quarter, which is below our full-year expectations of 17% to 19%. The effective tax rate in the second quarter was lower than expectations, largely due to an incremental benefit from the stock compensation accounting rule change and other discrete items. In the quarter, adjusted earnings per share were $2.30. This represents a 12.8% increase versus the prior year, which reflects our solid growth profile, strong underlying margin expansion, and a lower tax rate that offset approximately $0.06 of the pressure in the quarter related to the inventory write-off in Biosciences. Now, turning to slide 13 and our gross profit and operating margins for the second quarter; on a performance basis, gross profit margin improved by 90 basis points. Gross margin includes the impact related to the damaged reagent inventory and a slight decline in pricing, offset by growth that was driven by continuous improvement initiatives, cost synergies, and favorable mix, which includes the positive impact of divestitures. On an operating margin basis, we are pleased to have delivered 80 basis points of margin expansion. We continue to drive cost synergies, which were partially offset by the timing of the R&D spend in comparison to prior year. Year-to-date, we have achieved approximately 180 basis points of underlying margin expansion and remain confident in our ability to drive 200 basis points to 225 basis points of margin expansion for fiscal year 2017. Now, moving on to slide 15, I'd like to take a few minutes to provide an update on our progress in transforming our U.S. dispensing business. As you may recall, discussions regarding this change have been ongoing since prior to BD's acquisition of CareFusion, and we have been actively working on this for the past two years. Over that same time horizon, we have been successful in stabilizing and improving the installation process of the Pyxis ES system. We believe our success is evident by the continued robust growth we have seen in the U.S. dispensing business. As we better align with customer goals, we see a strategic opportunity to change the way we engage with our customers. The business is evolving from one-time hardware installations towards providing lifetime solutions, software, and ultimately, value. With Pyxis ES, the business is shifting towards smart, connected dispensing devices with incremental software enhancements over time. This results in reducing medication errors and drug waste while improving drug availability and hospital cash flow. This also enables customers to benchmark their Medication Management performance versus other hospitals across the country. From a financial perspective, this requires us to match our accounting with the new business model by moving from capital leases to operating leases, which results in recording revenues ratably over the contract term versus recognizing the entire contract value upfront. The impact of the change will be determined by customer acceptance and finalized by the end of this month. We anticipate a headwind of approximately $50 million to $60 million to revenues and $0.20 to $0.25 to EPS in this fiscal year. This accounting change results in a difficult comparison, which will be limited to the second half of this fiscal year and the first half of fiscal year 2018, but it creates a more predictable recurring revenue stream going forward. Now, due to the strong momentum we have seen across the company and the over-performance we have delivered year-to-date, we are pleased that we're able to offset this accounting change and maintain our previously communicated revenue and earnings guidance. This business model change creates substantial value for our customers and we will keep you updated as we make progress with this transformation. Moving on to slide 16 and our full fiscal year 2017 guidance; with strong performance year-to-date, we are reaffirming our full fiscal year 2017 adjusted EPS guidance of $9.70 to $9.80, or 13% to 14% growth on a currency-neutral basis. Foreign exchange rates have not moved meaningfully since we last provided guidance in February, and as such, we continue to expect achieving earnings of $9.35 to $9.45, including the impact of currency, which represents growth of 9% to 10%. Our guidance assumes a euro to dollar exchange rate of $1.07, and as a reminder, includes dilution of approximately 1.5% from the Respiratory divestiture. Turning to slide 17, I'd like to walk through the balance of our guidance expectations for the full fiscal year. We continue to expect total company revenue growth to 4.5% to 5% on a comparable currency-neutral basis with 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. We now expect our tax rate to be between 16% and 18%. All other P&L guidance from February remains unchanged. Now, I would like to turn the call back over to Vince, who will provide you with an update on our key initiatives and product portfolio. Vincent A. Forlenza - Becton, Dickinson & Co.: I thank you, Chris. Moving on to slide 19, I will walk you through our updates on new product innovation and strategic and business initiatives. Starting with new product innovations, within our Medical business, we recently launched BD Enterprise Pharmogistics 1.0, which is a pharmacy inventory management software that integrates with the Pyxis ES platform to provide enhanced medication availability and patient safety across even the largest multifacility healthcare networks. Within our Life Science business, we received 510(k) clearance for the new BD FACSVia flow cytometry system, which provides blood banks and clinical laboratories with an easy-to-use cell analysis solution to help determine and quantify the presence of residual white blood cells in their blood products. The addition of the BD FACSVia system follows our larger strategy of making flow cytometry easier to use with improved efficiency, simplified sample analysis, and higher quality diagnostic results. Within strategic and business initiatives, we recently completed the acquisition of CME, a manufacturer of ambulatory infusion pumps. The acquisition of CME further strengthens our strategy and portfolio of Medication Management Solutions across the healthcare continuum and enables an even broader impact on patient outcomes. Moving on to our business update on slide 20, we continue to make progress with our cost synergy capture through our G&A functional transformation. We continue to remain focused on ongoing supply chain optimization in our distribution network. In addition, our manufacturing-related synergies remain on track and we continue to expect the majority of these to be achieved over the remainder of the deal horizon through fiscal year 2018. We continue to expect $325 million to $350 million in total cost synergies related to the CareFusion acquisition as we exit fiscal year 2018. Turning to operating margin, as you can see here, we are continuing to drive significant operating margin expansion over a multi-year period. The consistent performance of our businesses combined with operating efficiencies, cost leverage, and cost synergy capture is driving continued underlying operating margin expansion. We move forward with strong momentum and continue to expect to deliver over 500 basis points of cumulative margin expansion over the three-year period through fiscal year 2017. Moving on to slide 21, I would like to reiterate the key messages from our presentation today. First, we are very excited about the powerful combination of BD and Bard and our ability to deliver innovative solutions that position us to improve both the process of care and the treatment of disease. Second, both segments continue to perform ahead of our expectations and our results highlight the benefit of our diverse portfolio, both from a product and geographic standpoint. We continue to execute on our strategy and the progress we are making in transforming Medication Management is a good example of this. Third, operating efficiencies, cost leverage, and cost synergy capture continue to generate significant operating margin improvement. And finally, we are moving forward with strong momentum, are confident in our outlook for the full fiscal year, and in our ability to drive revenue and earnings growth. We are very optimistic about BD's prospects for the future and our ability to continue to drive shareholder return. Thank you. We will now open the call to questions.

Thank you. The floor is now open for questions. In order to allow for broad participation, please limit your question to one. Thank you. Your first question is coming from David Lewis with Morgan Stanley. David Ryan Lewis - Morgan Stanley & Co. LLC: Good morning. Vincent A. Forlenza - Becton, Dickinson & Co.: Morning, David. David Ryan Lewis - Morgan Stanley & Co. LLC: Just a couple questions this morning, if I could; just first for Chris then maybe a follow-up for Vince. So, Chris, this accounting change for Pyxis transitioning from capital to operating type leases, we've talked about this for years. Maybe just kind of walk through, we know it's neutral to cash flow, but in terms of why do this now, the advantages it poses to the business, and the magnitude of a revenue or EPS hit for 2018 relative to 2017. And then I have a quick one for Vince. Thank you. Vincent A. Forlenza - Becton, Dickinson & Co.: Sure, Vince will start it out, David. Thanks a lot for the question. As you mentioned, this is something we've been working on for two years. And the first phase was improving the base software, the Pyxis ES, the installation process. And you can see in our results we've made great progress there. We're now moving into a different phase where we're adding new capability to Pyxis. And as we do that, we have to make sure that we're organized in the field to support this new business model. The last thing we want to be doing is putting new capability into a system and not bringing the customer along with us. This is a matter of customer satisfaction. And so, while there's more complexity, there's a tremendous ability to optimize Medication Management. Tom will give you a little more details on that, but this is really about a tremendous advantage for the customer base and utilizing the capability. Tom will mention that he has to change kind of how we support in the field and what people are doing there. So, Tom, maybe you want to make a few comments, then we'll come back to the financial aspect. Thomas Polen - Becton, Dickinson & Co.: Sure, Vince, and good morning, David. I think, as Vince mentioned, obviously, you have been asking us about this change from pretty much I think the first week of the CareFusion acquisition and when we came together, and we've basically saw the same opportunity that you had described and have been working on this for the past two years, and then all of that preparation has led to this point where we're ready to transform the business model. I think, as Vince described, Pyxis ES is really the catalyst, because it's now this smart, connected dispensing system where we're shifting from a onetime installation event and then really the touch point with the customer was five years later, when there was another capital requirement, to where there needs to be a much more ongoing consultative related relationship with the customer where the focus is all on delivering outcomes for improving Medication Management, right, every month, every quarter, every year. And so, this change in the – what is a accounting or business model change, right, really shifts us more to be able to deliver that business model, which I just described. As part of and in tandem with this accounting change, we are concurrently increasing, actually, the number of resources in the field that are working as consultants with our customers to maximize their use of Pyxis ES and to drive benefits from all of the features, particularly, really around how to use data to improve outcomes. As Vince mentioned, we've been concurrently investing in the new software modules which can help our customers do things like optimize inventory, reduce med errors or drug waste, benchmark themselves versus peers. And this change also tees us up to be able to not only better deliver and engage customers in those solutions, but also allows us flexibility going forward to be able to capture value from innovations delivered via software. And so, we see all of these things coming together. We recognize, obviously, the timing never necessarily a good timing at all, but we thought now is the right time from the business perspective as well as it's the right time for our customers. And all the feedback that we've gotten from customers as we've begun discussing this with them has been extremely, extremely positive. Christopher R. Reidy - Becton, Dickinson & Co.: So, this is Chris. And so, for all the reasons that Tom and Vince mentioned, this makes all the sense in the world from a customer standpoint and really positions us well going forward. But as you know, the trick when companies – other companies have done this, is how do you keep it from being death by a thousand cuts, because other companies did this in a way that you waited for the contract to come due and that could take three years for it to be a headwind. We've been able to do this in one fell swoop across substantially all of our customer contracts, and that limits the impact to a year, a one-year impact. The other positive is we're – because of the business momentum that we currently have, we're going to cover the impact of that, both on the top and the bottom line, which really mutes the impact of this. And the fact that we're able to do it six months in really helps to compare year-over-year that you were talking to from a fiscal year 2018 versus 2017, because we'll have six months this year and six months next year. So, the timing actually feels really good and we're able to accomplish this, get it behind us. As you mentioned, it has no impact on cash flow because now the revenue will be recognized as the cash is received. So, the timing seems to work out for a lot of reasons, particularly because we can cover it. And so, that felt like the right timing to us. David Ryan Lewis - Morgan Stanley & Co. LLC: And then – that's very, very clear, guys. Thanks for the color. And then, Vince, just for you; there's a lot of moving parts in the quarter, but based on your guidance versus consensus, it seems like underlying growth coming up about 50 basis points and maybe earnings coming up something close to $0.12. So, just real quickly, where is the underlying strength coming from you this year so far in, kind of, a broad perspective? And given the strength in the business and where the equity capital markets sit, how should we think about the equity-linked capital raise for Bard consideration? I'm assuming we should think about that as coming very, very soon. Thanks so much. I'll jump back in queue. Vincent A. Forlenza - Becton, Dickinson & Co.: Yeah. Sure. Thanks, David. We're seeing strength in both segments and we've seen the stabilization in emerging markets as well, and stabilization in developed markets. So, where geography was an issue last year, it's not an issue this year; strong performance you saw in China, good performance in Latin America, and then stabilization in Saudi and that sort of thing. So, we're feeling very good about emerging markets now. We continue to guide in the high single-digits. So, that is looking good and China is looking at double-digits. Both Medical and Life Sciences are performing well. I think you saw MMS doing extremely well; MPS doing well. Pharm Systems had a good first half. There's just some timing for the first half. And Diabetes Care we expect to be more robust in the second. So, Medical is doing well; Diagnostics is knocking it out of the park, quite frankly, with what they're doing with Kiestra, the launch of the Falcon 50 this quarter. That's going extremely well. And, of course, flu was a positive. And so, the only piece that has been a little soft has been Biosciences. They're doing well in the high end of the marketplace. They had this inventory situation this quarter and we expect to get that behind us quickly. Christopher R. Reidy - Becton, Dickinson & Co.: And to the second part of that question around the equity offering, as we said last week, we intend to move quickly on that. The process would be filing our Q, which should happen today. Then we have to file pro forma financial statements. You can expect us to move on that quickly. Once those are filed, we can really address the timing. But as we said last week, we expect to move very quickly on that, so don't blink or you'll miss it. David Ryan Lewis - Morgan Stanley & Co. LLC: Okay. Thank you very much. Vincent A. Forlenza - Becton, Dickinson & Co.: Yeah. Thanks, David.

Thank you. Your next question comes from Mike Weinstein of JPMorgan.

Thanks. Kind of clarify a couple financial items related to the accounting change. So, the $50 million to $60 million in revenues tied to the $0.20 to $0.25 in EPS, $50 million to $60 million of lost revenues isn't $0.20 to $0.25. So, is there some additional costs to doing this that we should understand? And then, second, if I just focus on slide 17, which is the fiscal 2017 guidance change. The only item that's changing is the tax rate moving down 100 basis points. Is there an offset that we're missing that EPS doesn't move up for the year with the tax rate moving down 100 bps? Thanks. Christopher R. Reidy - Becton, Dickinson & Co.: Sure. So, just a little bit of color on what creates the revenue drag. It's really, over the next six months, we're going to be recognizing just this year's amount of revenue, whereas in prior years, we would have done a full five years of revenue as you book the contract. The impact of that is about $50 million to $60 million. That goes entirely down to the bottom line. There's no margin impact, or whatever. It flows directly through. So, the $50 million to $60 million is $0.20 to $0.25 on the bottom line that we're covering. Then, as you think about the change in the tax rate, as one of the slides showed, I think it's slide 16, that change down is one of the ways that will offset some of that $0.25. I think that's like an $0.08 to $0.09 benefit by moving down to the 16% to 18% kind of range. So, we're overcoming the remainder of that $0.20 to $0.25 operationally. So, we just want to be clear that we're jumping over the accounting change in 2018 as well, partly because of the six months this year versus the six months next year. So, we set the base and go from there.

And so, what is it you have to go to your customers for existing installed systems and do? So, if you have an installed system, you've already recognized the revenue. What is it you're going to those existing customers and doing? Vincent A. Forlenza - Becton, Dickinson & Co.: Yeah, Tom will tell you. Thomas Polen - Becton, Dickinson & Co.: Yeah, again, (36:38) this is Tom. We literally just communicate via a letter and they have the opportunity to opt out or automatically are opted in. There's nothing specifically that has to happen at the customer's site. And then, of course, as I described before, concurrently we are deploying, as part of our business model transformation, all the other parts of that transformation including additional resources in the field to provide consultative services to help optimize the use of the software with the platform and generate outcomes. And so those things are happening concurrently. But there's nothing hardware change or from a service implementation that has to occur. Christopher R. Reidy - Becton, Dickinson & Co.: And those letters went out earlier this year. Thomas Polen - Becton, Dickinson & Co.: Correct.

And what about, Tom, the compensation for the reps. Reps were getting paid on the installs before. How does their compensation change? Thomas Polen - Becton, Dickinson & Co.: No changes this fiscal year, and obviously, we'll be evaluating how to best continue to align our sales force compensation with creating customer value as we go into FY 2018.

Okay. Perfect. Can I ask one? Yeah, Vince, I want to ask one last, just a Bard question. Vincent A. Forlenza - Becton, Dickinson & Co.: Sure.

One of the kind of questions that came up a lot last week from people was just the difference in the pace of product iteration at Bard versus other companies, include Becton, Dickinson. And as much as it and people asking, how do you maintain that model at Bard with this kind of very accelerated rate of what I would call modest iteration at Bard over the last several years that they've gotten this model down correct and that's been successful for them? How do you keep that – as you pull the company into Becton, Dickinson, how do you maintain that model and that culture? Vincent A. Forlenza - Becton, Dickinson & Co.: Yeah, Mike. Sure. I think that as we traveled around, we got a strong sense of that. And by setting this up as a separate segment, number one, and number two, keeping that system in place, and we've made that very clear. In fact, we're interested in taking that system to other BD businesses where it could apply. We were excited because, as we got together with their teams, as I mentioned in my remarks, they were already talking about things that we could do together. And so, we're going to resource it. We're not going after any synergies in terms of R&D and that – so, we'll maintain that system, is basically what I'm going to tell you

Understood. Thanks, Vince. Vincent A. Forlenza - Becton, Dickinson & Co.: Yeah.

Thank you. Your next question comes from Larry Keusch of Raymond James. Lawrence Keusch - Raymond James & Associates, Inc.: Thanks. Good morning. Vincent A. Forlenza - Becton, Dickinson & Co.: Morning. Lawrence Keusch - Raymond James & Associates, Inc.: So, I just want to circle back and make sure I'm understanding some of the mechanics here on the change here in the dispensing strategy. Vincent A. Forlenza - Becton, Dickinson & Co.: Sure. Lawrence Keusch - Raymond James & Associates, Inc.: So, maybe, Tom, if you could just touch on this. So, if you're an existing customer, as you indicated, you get a letter suggesting that you're moving to this new business model. They've already paid upfront for their installation and they've got some modest back-end stuff that I think comes through. So, it sounds like they don't have to do anything. So, again, is this really in terms of the accounting associated with the new installations? Christopher R. Reidy - Becton, Dickinson & Co.: Larry, this is Chris. Just to be clear, the way the contracts currently work is they have not paid. They pay – let's say, you're doing a five-year contract, 60 months. They're going to pay a little bit every month for 60 months. The accounting was that we recognized revenue upfront for the entire five years under capital lease accounting. Now, what we'll do is we'll just match the revenue growth – the revenue that we book to the actual collection of the cash. So, it matches the cash. It's actually a very positive way of accounting from a recurring revenue standpoint because once you book – once you get the contracts that now you've got 60 months of revenue that's just basically contractual as opposed to the lumpiness of the capital lease model where everything would have been booked upfront. Thomas Polen - Becton, Dickinson & Co.: So, no change to the customer in terms of how they're paying. Christopher R. Reidy - Becton, Dickinson & Co.: That's right. Lawrence Keusch - Raymond James & Associates, Inc.: Okay. Perfect. That's very clear. And then just, I was hoping to just get a quick update on two of the sort of newer products. Any thoughts around the infusion set, the diabetes infusion sets and some of those kinking issues that were going on? And then separately, any update on the progress for the insulin patch pump? Vincent A. Forlenza - Becton, Dickinson & Co.: Yeah. Sure. Tom can take both of those questions. Thomas Polen - Becton, Dickinson & Co.: Yeah, hi. So, we are continuing – we do have, as you mentioned, the temporary pause on shipments of the new infusion set and we're working on bringing that product back to market in collaboration with our partner, Medtronic. As you mentioned, and as we've discussed, we've had feedback on the set that was overall extremely strong. We had some complaints during launch and we're – the heavy focus is now working on optimizing the on-boarding process for patients, so that they properly learn how to use the set and can do so safely and optimally. So, we're in the process of actually running a – starting a trial to confirm that that training will help make sure that we get the right outcomes and then move forward in relaunching that. And so, that's progressing as planned. On the pump, nothing to comment other than it remains on track with the date for the second half of FY 2018 that we had shared at the Analyst Day meeting, but we're seeing very good progress on that price development initiative. Lawrence Keusch - Raymond James & Associates, Inc.: Okay. Terrific. Thanks, guys.

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

Hi. Good morning. A couple of questions. So, can you talk a little more about the Bioscience issues with the reagents this quarter? Just a little bit more clarity on that. And also, how do you think about sort of like the implications for the stock-based accounting tax changes for the rest of the year? I mean, is there any good – I know it's going to be variable from quarter-to-quarter, even a full-year basis, but is there any way to sort of help figure that out, (42:48) a little better? Christopher R. Reidy - Becton, Dickinson & Co.: I can take the last part of that first and then we'll move to damaged inventory.

Yeah. Christopher R. Reidy - Becton, Dickinson & Co.: So, in calculating this at the beginning of the year, we got a little more benefit in this quarter than we had anticipated. That really shouldn't affect the rest of the year. Now clearly, stock-based compensation is kind of a mark-to-market kind of thing going forward, depending on the stock price. So, it adds a little volatility for every company, but I think we're very comfortable with the guidance that we have for the rest of the year, and that 16% to 18%, which takes into consideration the favorability that we saw in the second quarter. Okay, and Alberto? Alberto Mas - Becton, Dickinson & Co.: And in terms of the – we did have some damage to inventory. The damage was caused when we relocated Resurge reagents to new a warehouse as part of a network optimization. And we conducted a full investigation and determined that we needed to initiate a field action and write-off the affected inventory. Christopher R. Reidy - Becton, Dickinson & Co.: So, it was exposed to some conditions that were outside of what normally it should be exposed to. Anyway, you'll be back... Alberto Mas - Becton, Dickinson & Co.: And we'll be back – we expect to restore supply – complete supply by... Christopher R. Reidy - Becton, Dickinson & Co.: This quarter. Alberto Mas - Becton, Dickinson & Co.: ...during the quarter; in Q3. Christopher R. Reidy - Becton, Dickinson & Co.: Yeah.

And did I catch that you that that was a $0.06 hit, you said, on the quarter? Alberto Mas - Becton, Dickinson & Co.: $0.06. Christopher R. Reidy - Becton, Dickinson & Co.: Yeah. It's a $0.06 impact to the quarter.

Great. Thank you very much.

Thank you. Your next question comes from Brandon Couillard with Jefferies.

Thanks. Good morning. Just curious if you could quantify the flu impact in the quarter, and as well on the Biosciences side, the impact to revenues from that inventory disruption. Vincent A. Forlenza - Becton, Dickinson & Co.: Okay. Christopher R. Reidy - Becton, Dickinson & Co.: So, the first is about 30 bps of... Vincent A. Forlenza - Becton, Dickinson & Co.: I'm sorry, 30 bps of revenue growth in the quarter from the flu. And do we have a revenue impact or we have to do some work? Do you have that? Alberto Mas - Becton, Dickinson & Co.: Yes. The revenue impact from the reagents is $6 million in revenue for the quarter. Vincent A. Forlenza - Becton, Dickinson & Co.: Thanks, Alberto.

Thanks.

Thank you. Your next question is from Doug Schenkel of Cowen. Doug Schenkel - Cowen & Co. LLC: Good morning and thank you for taking the questions. Actually, just quick follow-ups on that last question. Was that 30 bps for flu across the entire business? And what does that $6 million impact translate into in terms of gross margin impact across the business? Christopher R. Reidy - Becton, Dickinson & Co.: So, the first is right, that's 30 bps across the business in the quarter, so at the BD level. And at the second, it's about 40 bps or so of gross margin headwind from that impact on the damaged inventory. Doug Schenkel - Cowen & Co. LLC: Okay. Christopher R. Reidy - Becton, Dickinson & Co.: And it's more than just the $6 million, it's the write-off as well. Doug Schenkel - Cowen & Co. LLC: Okay. Got it. That's very helpful. And then, I guess, a broader follow-up on Biosciences. Recognizing the impact of the fulfillment delay that we've talked about a bit here, it did still look like Biosciences came up a little bit light of expectations. I'm just wondering if you saw anything that surprised you during the quarter more broadly, either in the pharmaceutical end market or in the academic end market. The latter I mentioned because of NIH funding uncertainty in the U.S. and because some of your peers have commented that European academic was a bit weaker relative to expectations. And, you've also had some tender challenges within Biosciences, I think, related to CD4 in Africa. Was that still an issue in the quarter and any insight on when that will headwind will subside? Thank you. Alberto Mas - Becton, Dickinson & Co.: No, we don't see any underlying change in the market or basic change in the market. It's actually pretty much as we expected and no major changes. We don't see any changing behaviors from our customers because of the NIH budgeting. In fact, obviously, as has happened during the weekend, if anything, the NIH budget was increased by $2 billion. So, that was actually good news. And in terms of the CD4, that has stabilized. We're seeing about half the impact that we saw last year and that's beginning to stabilize. We'll see some erosion of that over time, but at a much more paced approach. The impact on the quarter, if anything, was mostly a timing of instrumentation in Asia and Europe but we expect – we have visibility and we expect that to be regained in the second half. Vincent A. Forlenza - Becton, Dickinson & Co.: Yeah. If you had normalized for that timing issue and a little bit of the impact of the fulfillment delay, it should be in the 4% range of growth. Doug Schenkel - Cowen & Co. LLC: Okay. Super helpful, guys. Thank you.

Thank you. Your next question is from Vijay Kumar of Evercore ISI.

Hey, guys. Thanks for taking my question. And maybe, Chris, a couple of ones for you and I had one follow-up for Vince. So, just maybe on the gross margins, right, so I think you mentioned 40 bps on the reagent impact. It looks like margins missed consensus by about 100 basis points. So, I'm wondering, one, did the accounting rule adoption have any impact in the quarter, or did Alaris pump, I know you had some charges for the center recall, did that have any impact in the Q? Christopher R. Reidy - Becton, Dickinson & Co.: Yeah, no, not at all. There's no impact from the accounting change until next quarter. But what you're seeing is the impact of FX. So, most analysts, I think, modeled the impact of FX to gross margins ratably over the year. Half of the impact of the FX hits you in the second quarter or hits us in the second quarter. And so, that was the difference that flowed through to the gross margin.

That was helpful, Chris. And then, on the EPS side, it's interesting. So, the accounting rule, was a $0.20, $0.25 hit on the EPS, but we maintain the EPS guidance, right. And the math I'm doing here, you get about $0.12 to $0.13 benefit from the lower tax rate, and revenues coming in better as maybe another $0.05 to $0.06. It implies an underlying benefit of $0.05 to $0.06. Where is that coming from? Is that better margin pull-through in the back half? Christopher R. Reidy - Becton, Dickinson & Co.: Yeah. Thanks. So, you did the math pretty correctly. I think the tax impact is probably a little lighter than what you said in terms of coming down. But it really is just the performance of the business in the first half of the year that we see continuing. I think when you look at 5.6% revenue growth year-to-date and the kind of EPS growth that we see year-to-date, as well, up 16% or thereabouts, that is flowing through and will flow through to the second half of the year, enabling us to offset between that and the tax rate coming down that $0.20 to $0.25. So, we feel really good about that.

Got you. And then one quick one for Vince or maybe Tom. A lot of questions here on Bard acquisition and maybe potential revenue synergies. I guess, maybe can you walk us through on the kind of due diligence you guys did on Bard and why you felt so comfortable that that is the right asset? Thank you. Vincent A. Forlenza - Becton, Dickinson & Co.: Yeah, Tom can walk you through that. And, as you know from our previous conversation, we started way back in June on some really deep diligence across the entire product portfolio. But, Tom, why don't you give them some color on that? Thomas Polen - Becton, Dickinson & Co.: Yeah. Hi, Vijay. Good morning, this is Tom. I think as we discussed, obviously, our diligence, like with the CareFusion acquisition, included not only deep dives into each of the markets but also that includes primary research with end users and customers as well as those who are innovating in the space. And so, we performed that diligence across actually several hundred end user customers to understand the opportunity, not only of the base business momentum, but also the opportunity for new innovations and the dynamics of those innovations versus competition and the likelihood of – and the trajectory of those being successful. And obviously, as a result of that analysis, we became very comfortable. Obviously, some of those areas we knew very well already because they're close to home, like the vascular access space, PICCs and midlines, urology also not that distant, and then other areas like DCBs, which are newer to us. You can imagine, we even took additional time and did even more thorough end-user research and evaluations to get comfortable with. And, of course, then we also had exposure to other information during the diligence process. So, yeah, we're excited and see opportunities certainly on revenue synergies as we move forward and I think as we've noted, as Chris and Vince have identified, we think that they'll be sooner than what we saw with CareFusion, just given the very strong momentum of Bard in registering products internationally over the last couple of years. Vincent A. Forlenza - Becton, Dickinson & Co.: Yeah. So, as we did our own due diligence, and we were seeing 500 registrations and a really strong pipeline. So, at the end of the day, we were even more comfortable when we finished up. But thanks for your question.

Thank you. Your next question comes from Bill Quirk with Piper Jaffray. William R. Quirk - Piper Jaffray & Co.: Great. Thanks. Good morning, everybody Vincent A. Forlenza - Becton, Dickinson & Co.: Good morning. Christopher R. Reidy - Becton, Dickinson & Co.: Good morning. William R. Quirk - Piper Jaffray & Co.: So, I guess, last question, a little segue way from there on the CareFusion, product registration o-U.S.... Vincent A. Forlenza - Becton, Dickinson & Co.: Yeah. William R. Quirk - Piper Jaffray & Co.: ...can you give us an update there? Thank you. Vincent A. Forlenza - Becton, Dickinson & Co.: Sure. Happy to do that. Tom will do that. Thomas Polen - Becton, Dickinson & Co.: Hey, Bill. This is Tom. Good morning. So, we're seeing great progress across our product registration efforts and we're continuing to see actually revenue synergies this year. I think you can see that in both our MMS and MPS performance year-to-date. We're on track with about 190 active or in-process product registrations in new markets. And that's towards an ultimate target of a little over 200 registrations. So, we're making really good progress there and we're starting to see the impacts of that come through on the revenue side. Christopher R. Reidy - Becton, Dickinson & Co.: Okay. Thanks very much.

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

Hi, thanks for taking the question. Wanted to follow-up on the capital operating lease situation. I'm just wondering, does this allow you to innovate and then to change the model through which you, kind of, bring additional software updates to Pyxis and to sell that to the customer? Is there any change there, and should we expect any, kind of, more iterative kind of innovation on that front? Vincent A. Forlenza - Becton, Dickinson & Co.: Yeah, the answer to that is yes. This is foundational that allows us to do that over time. Absolutely.

Thank you. Your next question comes from Brian Weinstein with William Blair. Brian David Weinstein - William Blair & Co. LLC: Hey, guys, good morning. Question for you on Microbiology. Can you talk about what was the Core Microbiology growth in the quarter? And also, bioMérieux put up some very strong core micro growth as well. What's going on in the underlying microbiology markets that we're seeing nice acceleration from both companies lately? Thanks. Alberto Mas - Becton, Dickinson & Co.: So, we're carrying a lot of momentum on Core Microbiology, primarily on our vac tech (54:44) business where we think we have a very strong value proposition in terms of recovery rates and time to detection. Kiestra continues to be a growth – a significant growth factor for us, which also allows us to provide complete solutions to customers. And outside the Core Microbiology, we talked about the M50 from an ID/AST perspective. The launch was very successful, very well received, especially in emerging markets where it's the ideal throughput and size for that. And finally, BD MAX is really doing well for us, especially as we see the momentum for enterics gaining ground.

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

Hi. This is Ian Mahmud on for Matt. Good morning. Can you hear me okay? Christopher R. Reidy - Becton, Dickinson & Co.: Sure. Yes, we can. Good morning.

Okay, great. Great. Good morning. So, on the acquisition of Bard, you haven't – or you didn't include tax synergies in your synergy estimates, but Bard does have a meaningfully higher tax rate. How quickly do you think you could bring that down? Christopher R. Reidy - Becton, Dickinson & Co.: So, we – just to give you kind of a background on that, their tax rate is about 21.5% to 22% and ours is now the 16% to 18%. On a combined basis, we said 18% to 20%. That takes into account both those tax rates as well as some of the shield – the tax shield from the additional debt that we're offering, plus some other puts and takes. So, there's a bunch of things that go in there that kind of net out so that it's their rate plus our rate. Having said that, we did say that we do see the potential for tax synergies going forward beyond that. Obviously, we've got to get the two companies together, but – and really, there's a lot of blocking and tackling that goes on in looking at legal entities in their structure and our structure. But based on the due diligence that we did, we're very comfortable that some of the structures that we have in place for a long time we'll be able to take advantage of, as well as some of the things that they have in place we should be able to leverage as well. So, on a combined basis, we think we will be seeing tax synergies above and beyond what we've put in the model. And we probably need – the rest of this year, we'll start to have some conversations, but really, once we close, which is very similar to what happened on the CareFusion transaction, once we close, we can really get our arms around that and get all of our tax advisors looking at the various puts and takes and then more to come. So, I would say sometime right after we close, which would be the fall of this year, so about a few months after that we'll have a better understanding of that. And you can look to us to start quantifying that at that point.

Thank you. I will now turn the floor back over to Vince Forlenza for any closing remarks. Vincent A. Forlenza - Becton, Dickinson & Co.: Thank you, operator, and thank you, all, for participating on the call this morning. We look forward to updating you on the rest of the year. We feel really good about the momentum as we go into the second half of the year, and we look forward to updating you on the progress with C. R. Bard. And together, as we put this together, we do believe we're uniquely positioned to deliver innovative healthcare solutions that improve both the process of care and the treatment of disease and that's going to be unique in this industry. Thanks very, very much. Christopher R. Reidy - Becton, Dickinson & Co.: Thanks, everyone.

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