Becton, Dickinson and Company

Hello and welcome to the BD second fiscal quarter 2019 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through May 16, 2019 on the investors page of the BD.com website or by phone at 800-585-9000. for domestic calls and area code 4045373406 for international calls using confirmation number 1284128. 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 Dolecky, Senior Vice President of Investor Relations. Ms. Dolecky, you may begin.

Thank you, Darla. 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. Reconciliations to GAAP measures can be found in our press release and its related financial schedules and in the slides. A copy of the release, including the financial schedules, is posted on the BD.com website. Our second quarter results include a non-cash charge in the period related to product liability matters of $331 million pertaining to certain legacy barred surgical products. In addition, in April, we notified customers of a recall expansion of the Larus pump to include all pumps with a certain molded component that was manufactured between April 2011 and June 2017. We have recorded a cumulative charge of $65 million related to the recall to reflect the estimated costs of the remediation efforts that will occur over the next three years. We are working closely with our customers and the FDA, and our remediation actions are guided by our proactive commitment to patient safety and minimizing the disruption of patient care. These items, along with the details of purchase accounting and other adjustments, can be found in the Reconciliations to Gap Measures in the financial schedules in our press release or the appendix of the investor relations slides. As a reminder, to provide additional revenue visibility, we will speak to our fiscal 2019 second quarter revenue results and fiscal 2019 revenue guidance on a comparable currency neutral basis. The comparable basis includes BD and BARD in the current and prior year periods and excludes intercompany revenues, revenues associated with divestitures, and an adjustment to the prior year related to customer rebates and incentives, as detailed in the financial schedules in our press release. Leading the call this morning is Vince Forlenza, Chairman and Chief Executive Officer. Also joining us are Chris Reedy, Executive Vice President, Chief Financial Officer and Chief Administrative Officer, Tom Poland, President and Chief Operating Officer, Alberto Mas, Executive Vice President and President of the Medical Segment, Simon Campion, Executive Vice President and President of the Interventional Segment, and Patrick Kaltenbach, 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. At BD, our strategy is driven by our purpose, advancing the world of health. We are confident that our strategy is working, our core remains strong, and we continue to invest in innovation to deliver even more impactful, comprehensive solutions for our customers. Turning to slide five and our second quarter highlights. Our performance in the second quarter was broadly in line with our previously communicated expectations. Strong performance in our core combined with our continued focus on driving operational efficiencies and barred cost synergies drove revenue growth of 3.4% and earnings per share value, earnings per share in line with our guidance range for the second quarter. Our results through the first half are right where we expected them to be. As we've been discussing with you, we plan for revenue growth in the second quarter to be below our full year guidance range. This was driven by our expectation for strong underlining core business growth, partially offset by a tough flu comparison, and timing within the year in pharmaceutical systems. There were two additional items that impacted our growth this quarter. The market reaction to the FDA letter regarding DCVs and timing in the medication delivery solutions business in the U.S., When we factor in these items, underlying revenue growth was in line with our expectations year-to-date. In addition, we remain pleased with the integration of BARD. We are on track for our cost and revenue synergy capture targets, and we have gained momentum on the investments that we made last year. In addition, notable progress has been made on IT systems integration and in planning for supply chain initiatives. We are reaffirming our full fiscal year 2019 currency neutral revenue guidance despite near-term pressure to our DCB business. Our updated EPS guidance reflects strong underlying performance partially offset by the headwind to our DCB business as well as additional foreign currency pressure due to broad strengthening of the U.S. dollar. Looking forward to the remainder of fiscal year 2019. We have confidence in our planned back half acceleration. There are a number of growth drivers across our segments, which we will review later in the presentation, in addition to easing comparisons. I'll now turn things over to Chris for a more detailed discussion of our second quarter fiscal performance and our fiscal year 2019 guidance.

Thanks, Vince, and good morning, everyone. Moving on to slide seven, I'll review our second quarter revenue and EPS results. as well as the key financial highlights. Second quarter revenues grew 3.4% on a comparable currency-neutral basis. As Vince mentioned, our second quarter performance was broadly in line with our expectations, driven by strong underlying core business growth. There were two items in the quarter that brought the revenues slightly below our expectations. First, in our medication delivery solutions business in the U.S., Our results reflect the impact of distributor inventory adjustments in our hypodermic business. Inventory levels are now normalized, and we expect strong demand for the remainder of the year. Second, our results this quarter also reflect an impact to our DCB business. The FDA's mid-March update regarding the use of all paclitaxel-coated devices has negatively impacted companies that manufacture and sell these products. 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 $2.59 grew 7.2% on a currency-neutral basis. This was in line with our previously communicated expectations for the quarter. We also continued to deliver during the second quarter, paying down approximately $500 million of debt. We remain on track to achieve our commitment to deliver to below three times over three years. Moving on to slide eight, I'll review the medical segment revenue growth. BD Medical's second quarter revenues increased 3.8%. Revenues in medication delivery solutions, or MDS, grew 1.3%. As expected, our second quarter results reflect a tough comparison to the prior year in the U.S., The inventory adjustments previously discussed also impacted growth in the quarter. However, we expect strong demand and growth in this business in the second half of the fiscal year. Outside the U.S., growth in MDS was driven by strength in Europe across vascular access management and vascular access devices. Revenues in medication management solutions, or MMS, grew 7.3%. Growth in MMS was driven by strong performance in infusion and and strength in retail dispensing. Diabetes care revenues grew 4.7%. As expected, revenue growth rebounded from lower growth in the first quarter, with strength in both the U.S. and international businesses, aided by timing of orders. Revenues in pharmaceutical systems grew 3.9%. Performance in farm systems reflects the timing of customer ordering patterns which benefited the first quarter and negatively impacted growth in the second quarter, as we expected. Now, turning to slide 9 in the BD Life Sciences segment, revenues increased 2.7% in the second quarter. As expected, this growth reflects a headwind of over 200 basis points related to the strength of last year's flu season in comparison to a more typical flu season this year. As you're aware, the timing and severity of the flu season can impact our year-over-year comparisons. As a result, revenues in diagnostic systems declined 1.6%, reflecting a headwind of approximately 550 basis points from the tough flu comparison. Underlying performance was solid and driven by double-digit growth in IDAST and our BDMAX molecular platform. Pre-analytical systems revenues grew 3.5%. Growth continues to be aided by recent capacity additions that have improved the supply of of push-button collection sets. As expected, partially offsetting this growth was the timing of distributor orders that benefited the strong first quarter. Biosciences revenues grew 7.9%. Growth was driven by research reagents, our FACS symphony and FACS lyric platforms, and strength in emerging markets. Now turning to slide 10 in the BD interventional segment. Second quarter revenues increased 3.5%. This reflects an unfavorable impact of 170 basis points from the hurricane and DCBs. On an underlying basis, growth was approximately 5.2%. Revenues and peripheral intervention, or PI, grew 3.8%. Our results this quarter reflect the previously mentioned impact to our DCB business. On an underlying basis, PI revenues grew approximately 6%, driven by strong global growth in end-stage renal disease and growth across the entirety of the business and emerging markets. I'll provide our updated assumptions for DCB growth over the remainder of the fiscal year later in my remarks. Second quarter revenue growth in surgery was 1.2%. As expected, this reflects a tough comparison to the prior year in our hernia business when we released supply for back orders following Hurricane Maria. Growth in the surgery unit includes strong performance in biosurgery and infection prevention, where we continue to see the benefit from our revenue synergy investments. Revenues in urology and critical care, or UCC, grew 6%. Performance in UCC continues to be driven by products in acute urology, as well as continued strength in our home care and targeted temperature management businesses. And moving on to slide 11, I'll walk you through our geographic revenues for the second quarter. U.S. revenues grew 2.2%. This is below our normal growth rate and reflects the impact of DCBs and the distributor inventory adjustments within MDS. In addition, this reflects a tough flu comparison as expected. Moving on to international, revenues grew 4.9%. This reflects solid performance from all three segments with strength in emerging markets and across the medical segment in Europe as previously discussed. Developed market revenues grew 2.4%, driven by solid performance in Europe, partially offset by lower growth in the U.S. Revenues in emerging markets grew 9.2%. Performance was driven by growth of 11.8% in China, which reflects strong performance across all three segments. In addition, emerging markets benefited from double-digit growth in EMA. Turning to slide 12, which recaps the second quarter income statement. As discussed, revenues grew 3.4% in the quarter on a comparable basis. Moving down the P&L, gross profit grew 2% year over year, excluding the impact of currency. I'll provide additional details on gross profit in just a moment. SSG&A as a percentage of revenues was 25.9%. This reflects additional deferred compensation expense due to stock market performance in the quarter. For your reference, deferred compensation expense is fully offset in other income expense. SSG&A was also impacted by unfavorable timing from the harmonization of BARD's compensation and benefit plans as expected. On an underlying basis, expenses are growing slower than sales and reflect our ongoing focus on disciplined spending and the achievement of BARD cost synergies. R&D as a percentage of revenue was 5.8%, which reflects our continued commitment to invest in innovation. As a result, operating margins decreased 150 basis points, or 50 basis points on a currency-neutral basis, which was in line with our expectations. Our tax rate was 16% in the quarter, which was also in line with our expectations at the high end of our four-year guidance range. As expected, we paid preferred dividends of $38 million in the quarter. As we have been discussing, the preferred shares are not included in the share's outstanding calculation. In the quarter, adjusted earnings per share were $2.59, which is a decline of 2.3% versus the prior year, or an increase of 7.2% on a currency-neutral basis. I'll turn it to slide 13 in our gross profit and operating margins for the second quarter. Gross profit margin was 55.3% in the quarter. On a performance basis, gross profit margin was flat year over year, in line with our expectations. This reflects margin improvement driven by our continuous improvement initiatives and cost synergies, offset by unfavorable mix driven by lower flu and DCB revenues, as well as headwinds from raw materials and pricing. Currency had a negative impact of 90 basis points on gross profit margin, which was greater than anticipated due to the broad strengthening of the U.S. dollar against other currencies. Operating margins declined to 150 basis points in the quarter, or 50 basis points on a currency-neutral basis. The decrease in operating margin was driven by increased SSG&A in the quarter, as previously discussed. Moving on to slide 15 in our full fiscal year 2019 revenue guidance. As we discussed, our underlying performance is strong. Through the first half, we are right where we expected to be. Looking to the second half of the fiscal year, beyond easing comparisons such as the flu, there are a number of drivers across our segments that give us confidence in our planned acceleration. Within the medical segment, these include continued momentum in share gain and MMS, and revenue synergy capture in MDS driven by our leading vascular access portfolio. In life sciences, we expect continued strong growth in BD Max and DS and the timing of instrument sales and reagents to benefit growth in BDB. Within BD Interventional, we recently launched several new products such as the four French Wavelink, Covera, and Venovo, which are performing as anticipated and are being well-received in the market. and we anticipate several more product launches across BDI in the second half. We also expect continued double-digit growth in China in the second half of the year. While we now expect revenue growth of 4.5% to 5.5% for the BD interventional segment due to anticipated DCB headwinds, we have reaffirmed our total company revenue growth guidance of 5% to 6%. Our updated guidance reflects a reduction in DCB sales of approximately 50% over the remainder of the year. We continue to expect BD medical revenue growth of 5% to 6% and BD life sciences growth of 4% to 5%. We also continue to anticipate developed market growth of 4% to 5% and growth of about 10% in emerging markets, driven by a diversified base with low double-digit growth in China and strength in EMA and Latin America. Now moving on to slide 16 in our full fiscal year 2019 EPS guidance. Our EPS guidance reflects our expectation for continued strong underlying performance driven by revenue growth and solid operating performance partially offset by near-term headwinds. On a currency-neutral basis, we expect adjusted EPS growth of about 12%. This reflects a headwind of approximately 150 basis points related to DCBs. Based on current rates, we expect currency will result in additional headwinds of approximately 200 basis points. This is driven by a broad strengthening of the U.S. dollar against other currencies. Our current forecast reflects a euro-to-dollar exchange rate of $1.12 versus our original expectation of $1.16. In addition, our updated forecast also reflects incremental pressure attributable to profit and inventory. All in, we expect to deliver adjusted EPS of $11.65 to $11.75. Now, before we move on, I'd like to take a moment to walk you through the additional information we've provided on slide 16 this quarter. In response to questions we've received this fiscal year, we thought it was prudent to provide investors with a snapshot of our ability to offset headwinds to the business. This year, the magnitude of the headwinds we are facing is significantly greater than the headwinds we've encountered in recent years. The total headwinds this year amount to approximately $400 million. We have the ability to offset approximately $150 million this year, which is 50% more than we've offset in each of the past few years. To summarize, this chart demonstrates that our core is strong, the integration of the bar deal is very much on track, and together we have an even greater ability to offset headwinds by driving robust operating performance. Turning to slide 17, we have also updated our detailed P&L guidance to reflect the headwinds from DCBs and FX. We now expect reported revenue growth of 8% to 9% as a result of approximately 50 basis points of incremental FX pressure. Gross margins are expected to be between 56% and 57%, and operating margins between 25% and 26%. Our margin guidance is approximately 50 basis points lower than our previous guidance as a result of both DCB and FX headwinds. We expect operating cash flow to be approximately $4.1 billion. The balance of our guidance expectations for the full fiscal year 2019 remain unchanged. In addition, we continue to expect to achieve approximately $100 million in cost synergies in fiscal year 2019. We are on track to fully realizing $300 million in annualized cost synergies over the three-year deal period. We feel good about the momentum we have across our businesses. While we're facing some near-term headwinds, we are confident that we'll deliver on our commitments in fiscal year 2019 and beyond. Now I'd like to turn the call back over to Vince, who will provide you with an update on our product portfolio.

Thank you, Chris. Turning to slide 19 in our planned product launches by segment. As you can see by this slide, we continue to have a rich pipeline. There are a number of things we continue to be excited about. I'll touch on just a few of the recent launches here, starting with the BD Medical segment. We are excited about the consistent cadence of innovation within BD Medical and and are seeing strong uptake from recent launches. Notably, adoption of our new Alaris M2 pump is aiding the strong growth and infusion. Also, the recent additions of our HealthSite platform have continued to gain great interest and positive feedback from customers. Another good example is in our diabetes care business, where we are seeing good uptake of our new best-in-class pen needle, NanoPro. Within MDS, we also launched two new products during the second quarter that strengthened our vascular access product family, the PowerGlide Q and BD Provena PIC. Regarding the type 2 insulin patch pump, we recently received feedback from the FDA in our 510K submission. We're in the process of evaluating and responding to the agency's feedback, which was more comprehensive than we expected. Given the FDA's comments, we are considering a variety of options and strategies, but do expect a launch delay. We plan to provide you with an update on our August conference call. In the BD Life Sciences segment, we recently launched the BD FACTS Duet, a new automated flow cytometry sample preparation instrument with CED IVD certification. The BD FACTS Duet system raises the bar on flow cytometry automation and offering a fully integrated sample-to-answer solution with the BD FACS Lyric clinical flow cytometer. This is a new fully automated sample preparation instrument, enables clinical laboratories to improve their efficiency by reducing errors and limiting the manual user interactions required to run assays on the BD FACS Lyric. We also started shipping the new 12-color FACS Lyric, further enhancing the capabilities of this platform. In the BD interventional segment, we receive 510K clearance from the FDA for the BD Wavelength Q 4 French Endovascular AV Fistula System. We're excited to add the 4F system to our portfolio of technologies that create, restore, and or maintain AV access for patients on hemodialysis. With its slim profile, the 4F system increases the fistula location options by enabling wrist access points to be created. This provides increased procedural flexibility for clinicians while reducing the risk of scarring or arm disfigurement for patients compared to open surgical AV fistula creation. We also received approval from the FDA for the Venovo venous stent, which is the first venous stent indicated to treat obstructed or narrowed blood flow specific to the iliac and femoral veins located near the groin. Most importantly, it is engineered to address the special challenges of venous lesions that are very different than those posed by arterial narrowing. As you can see, we have a very rich pipeline of new products across our businesses, and we look forward to sharing additional updates with you along the way. Before I move on, I would like to remind you that we have again included a slide in the appendix of today's presentation that provides an update on our sustainability initiatives. We hope you find this information useful in understanding BD's commitment to these important initiatives. Moving to slide 20, I would like to reiterate the key messages from our presentation today. Solid revenue and EPS growth this quarter was driven by strong underlying growth in our core across our businesses and regions. Through the first half, our results are right where we expected them to be. The integration of BART is on track, and we are confident in our ability to achieve our cost and revenue synergy commitments. Looking forward to the remainder of fiscal year 2019, there are a number of drivers across our segments that give us confidence in our planned back half acceleration. In summary, we are confident that our strategy is working, our core remains strong, and we have a significant opportunity to continue to deliver even more impactful, comprehensive solutions for our customers and their patients around the world. So thank you. We will now open the call to questions.

The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your touchtone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. In order to allow the broad participation, please limit your question to one-on-one follow-up. We ask that while you pose your question, please pick up your handset to avoid optimal sound quality. Thank you. Your first question is coming from David Lewis with Morgan Stanley.

Good morning. Thanks for taking the questions. Just two for me, one on revenue and one on currency. Just starting with revenue here for a second, you know, our sense is the DCB update probably reflects a 50% reduction in that business in the back half. And I just guess the question is, is that worse than the existing trend or how risk-adjusted is that for the June panel? And just given the quarter and DCB, within that 5% to 6% range, should we be thinking towards the lower half of that range? And then a quick follow-up.

Yes, David, this is Chris. You got that right. Fifty percent is what we're projecting for the remainder of the year, and that is, in fact, what we're seeing through the month of April and late March. So we're calling it as continuing along those lines. Obviously, we'll see what happens when the FDA talks at the end of June, but right now we're calling it as we're experiencing it. What we are also assuming is that BTK, while we continue to talk to the FDA about BTK, but we would expect that launch to be in the next fiscal year as well. So it's a combination of those two impacts. And when you take that impact against our original guidance range of 5% to 6%, it does bring us down to the low end of the guidance range.

Your next question is from Kristen Stewart with Barclays.

Hi, thanks for taking my question. Hi, Kristen, and happy birthday.

Happy birthday.

I won't make you guys sing or anything.

We'll do that later.

That sounds good. Just in terms of, Chris, you had mentioned the ability to kind of offset some of this. What are some of the actions that you have generally taken year to year as you think about kind of offsetting some of these headwinds? There's obviously... concerns out there just with next year with the Gore royalties coming off and then some questions I guess on how to think about DCBs going forward with BTK maybe being a potential offset I guess next year to a degree helping the trend if you get approval. How should we just think about the flexibility that you have and the levers that you can pull?

Sure. So I'm going to start just to put things in perspective then I'll turn it over to Tom. As we showed on the waterfall chart, we're driving, you know, 19% to 20% underlying growth. And that, you know, clearly 3% of that comes from the year-over-year tax rate. But we're driving 16% to 17% growth as well. And we've been able to do that kind of growth in the past. And so that, you know, I would point you to the fact that 12% FXN growth, despite the $400 million of pressure that I'm talking about, is evidence of our ability to still drive good, strong FXN growth despite that kind of pressure. And so Tom is going to talk a little bit about the kinds of things we did to get there.

Sure. Sure. So, hi, Kristen, and again, happy birthday. As we think about the NFY-19, I'd say all the businesses are very tightly managing expenses. So if you look at our underlying SSG&A growth, you know, we're 3% or less year-to-date in the core businesses that reflect that level of discipline that we're driving across the organization. And, of course, as we plan for 2020, And we're deep into planning there. Of course, we're way ahead of where we normally would be given the situation with the Gore Royalty. Again, very, very disciplined expense management across the board, both G&A and obviously the selling and marketing, as well as continued management of our R&D lines. We continue to drive a number of efficiency programs across all of those organizations where appropriate, moving, for example, sustained engineering to lower-cost locations. or we can be doing that. That's a trend that we've been accelerating actually within the BART organization, substantial progress this year. And when it comes to Paclitaxel specifically, of course, you know, and we can comment on this later through Simon, but, of course, as we dig further in, you know, all we see is becoming more and more confident in our data on Paclitaxel that we do not have, you know, we're very, very confident in the safety of Lutonix. And, again, we can comment on that further later on. So we're looking forward to the FDA discussion in June. We're not doing any restructuring of that organization at this point in time. Remember, we're going to be hiring for the launch of BTK. And so one thing that we'll be monitoring very closely is how we come out of the FDA session and then making a decision after that. And as was mentioned before, we are still in active discussions with the FDA on the BTK product. It's a very unique new solution in the marketplace. There are no valid treatment options other than amputation for patients suffering with below-the-knee blockages. And so we're still hopeful that while that won't occur in FY19, that it will occur later on. And we'll get a better sense of that, we think, after the June meeting as well, too. So more to come. We're planning behind the scenes, but we think it's prudent to see where that evolves to.

So, Christian, you can get a strong sense that we're doing everything we can, as Chris said, to offset those headwinds. We're being prudent around the DCB situation. And then 2020 is a whole different work stream in line with what we have been communicating all along in terms of how we will offset that. We're making good progress in all of these things. We'll see how the DCB situation comes out. One thing that I would add is that we have done – we've taken our data to a third party and had them take a look and actually do the analysis for us. We're feeling very good about those results and the safety results that they show. And Simon and his team are looking to get that published. So we look forward to getting our data out there. So thanks for the question.

Your next question is from Larry Bickleston with Wells Fargo.

Good morning. Thanks for taking the question. One on FX and then one on the P&L guidance. So starting with FX, I think initially it was a 2% top line hit, was about a 3.5% EPS impact from currency. And now I think it's 2.5% of the top line, but 5.5%. EPS hit. So could you just help us understand why it seems like the ratio from the top line hit to the EPS hit is greater now? And I'll ask my second question on the P&L guidance right now. Chris, can you help us bridge kind of from the first half operating margin of about 24% to the applied second half operating margin of about 27%? Hopefully I'm doing the math right at the midpoint there. Thanks for taking the questions, guys.

Great, Larry. Two good questions. So let me step back on FX a little bit. And as you pointed out, we had estimated about a 3.5% EPS impact or about 40 cents thereabouts. Our new guidance is 5.5%. And we have certainly seen since November a broad strengthening of the U.S. dollar against the euro, but also more directly against all other currencies around the world. Through the first half, we're already experiencing the 40 cents or 3.5% of FX pressure, and the Q2 was slightly worse than we had expected. We had thought it would be 20 to 22 cents, and we saw it 25 cents. As far as the remainder of the year goes, we had expected FX pressure in Q3, but we're now expecting that to be worse than anticipated as the dollar continues to strengthen. And as we looked at Q4, we had originally thought that that turned around and offset the impact of Q3 to essentially be neutral in the second half. That doesn't look like it's going to happen now as the dollar continues to strengthen. And the Q4 is neutral, but certainly not an offset to Q3. So when you put all that together, it drops about 20 cents more in the third quarter, and then the fourth quarter would be relatively flat. And some of what's making that happen, as well as the profit and inventory, that as the dollar continues to strengthen, that comeback from profit and inventory that we expected in the fourth quarter is lessened. And so that's what makes the fourth quarter neutral. One thing to consider in terms of the drop-through is, as we've seen in past years, when the pressure comes from currencies other than the euro, and of the 60-cent pressure that we're seeing this year, Only 15 cents of that is from the euro, so the rest is all other currencies. When the pressure comes from other currencies, the drop-through tends to be greater than it was in prior years. So that's the story on FX. In terms of your other question, in terms of the way to think about margin from where we are, the first half margin is, as you said, about 24%. We're guiding 25% to 26%. which implies it's about a 27% second half. And a number of things go into that, very much consistent with what we said on the call last quarter. FX does abate in Q4 as we annualize headwinds. The cost synergies that we have ramp in the second half, particularly on a year-over-year basis. We also have additional SSG&A leverage on higher second-half sales, and we feel very good about the acceleration of revenues in the second half that generate that as we went through in the script. So we feel real good about our ability to get to that 25 to 26 operating margin improvement despite the headwinds.

Your next question is from the line of Bob Hopkins with Bank of America.

Hi, good morning, and thank you for taking the question. Good morning. So I wanted to start out maybe with a little bit of a longer-term question. And on the upcoming Paco Paxil panel, if we just hypothetically say that that doesn't go well, are you guys still comfortable that that 5% to 6% that you've talked about is still doable even if Paco Paxil panel goes poorly and you have to kind of really draw down your thoughts on what the below-the-knee opportunity might look like?

So we think that by the time the panel meets, there's not much time for there to be a substantial impact in this year. And so if it doesn't go well, then we would have to take a look at this business and look at the expense structure and how we would manage that. We actually believe that the industry, from talking to other companies that All of us have good data. As I mentioned, we want to get ours out there and published. So we're actually looking forward to that June meeting. We wish it was coming sooner. Simon, anything else you would add to that?

No, just once more, as Vince said, we have reaffirmed the safety profile of our product with an independent group of physicians that involve all the interventionists that would use our product and oncologists. and we said we'd do that back in the Q1 earnings call. We've done that, we've reaffirmed it, and we're going through the publication process. The other thing to note, while DCB is undoubtedly a headwind for us, there are many other legs to the peripheral intervention stool, and indeed the BDI stool that can help mitigate some of those headwinds. So as we break down our business, we can see good growth in the other segments on a global basis, or the other parts of PI on a global basis. So DCVs is very important, but it's not the only positive story that we have to express as we serve patients globally.

Our next question is from the line of Robbie Marcus with J.P. Morgan.

Hello, Robbie. Thanks for taking the question. Good morning. Maybe just to follow up on Kristen's question a little bit, you know, I think a lot of us are sitting here looking at some of the headwinds, some of them going into fiscal 20, some of them not. I know it's still pretty early in the year and we won't get full 20 guidance here, but maybe you could just help us think about, you know, the street has 13% EPS growth going into fiscal 20. You know, is that still something that's achievable off these new lower numbers? And any tips and tips you could help us out with? you know, early in the year here with all the headlines.

Thanks. Sure, Ravi. So you're right. We're not going to give guidance for 2020 this early in the year. But I would say that the deal model is very intact. Obviously, we have to keep our eye on DCBs and the impact next year. But, you know, we still have strong performance and momentum across the business and continued synergy capture. And so everything we talked about in offsetting the Gore royalty is clearly is still in place. Now, the grower royalty, as clear, is running a little hotter than the original deal model, and so that's something we're clearly working towards to getting to. So as we look at the significant headwinds that we have in the short term, you know, clearly there is some like you wouldn't expect the kind of pressure we're getting in FX If the dollar stays right where it is, there would be about a push next year, so no 5.5% kind of headwinds, and so that is great. And obviously, the divestiture was a one-time item, and you wouldn't have that again. Flu kind of normalizes. We had a normal flu season this year. We would plan for a normal flu season, so you don't have that headwind going forward. Resins – You know, we had a spike in resins just before we gave guidance last year. That's gotten slightly favorable, and it's kind of held right there. So we'll have to watch that. Oil prices are going up, but, you know, it seems like the pricing there has more to do with supply right now than oil prices as it had in the past. So we'll certainly watch that, but no indication that there's additional pressures there. And your guess is as good as mine on tariffs. And so we'll see. We'll do everything we can to offset tariffs and, you know, do what we can to move sources, et cetera. But, you know, that remains to be seen whether that's a headwind going forward or not. So, you know, clearly an indication that the level of headwinds that we had this year tend to abate. And so we'll address more of that going forward as we go throughout the year.

Your next question is from the line of Ron Weinstein with William Blair. Hey, guys.

Thanks for taking the question. Just wanted to talk about the DCB reduction here, the $57 million. It seems like the EPS impact is greater than what we would have expected there. Can you talk about the margins on that business? And am I right to think that nearly 100% of that is falling through to the bottom line? And if so, why would that be? Thanks.

Well, first, the margins in that business are very high. You know, it's a very attractive product line, one. Two, we're continuing to manufacture the product, but, of course, at significantly lower volumes. So then we have, you know, the variances that go along with that. And Chris can give you more detail.

Yeah, so it's clearly not 100%, but they're really good margins, and we don't like for competitive reasons to give the specifics, but it's but it's very strong. I think what you might be missing in your model is our assumption on below the knee. So you're right about the 57 at strong margins, but then you've got below the knee coming out of our numbers as well, which certainly has an impact of about $20 million to revenue or thereabouts. So that would get you in the ballpark.

Thanks for the question, Brian.

And our next question is from one of B.J. Kumar. Evercore ISI.

Hey, guys. Thanks for taking the time. Morning, Chris. So just a couple of on guidance. And I'll roll it into one question. When you think about the back half step up, you know, it looks like a couple of hundred basis points on the revenues. You know, I just want to make sure that step up in the back half, there's nothing changed, you know, versus, you know, three months ago. And then... You know, we know it looks like it's a first-in-class product, right? Maybe some, you know, color on what it means. And then a follow-up on margins. You know, gross margins down sequentially, is this all FX or maybe just some, you know, comments on what happened on gross margins? Thank you.

Sure. So a couple of comments in there. So first of all, on the confidence on the second half revenue, it is exactly as we called it last quarter as well. And the things that go in there are, you know, the Telfluke comp in the first half. So if you look at life sciences year-to-date, it's 3.7. Clearly, we're calling it much higher than that in the second half. And so you've got, you know, that benefit sticking in life sciences. You've got the EMA tender timing in biosciences that we talked about. We continue to see strong performance in BDMAX. So we're very confident on that acceleration. On BDI, you mentioned Venovo. We also have the 4French Wavelink. You saw that we got approval for 4French. So we have that and Covera, and as I mentioned in my prepared remarks, a number of other product launches in the second half. And then moving to surgery within an interventional, we have ProGel back, and that's accelerating nicely. So And surgery essentially won't have the impact of the hurricane that we were fighting in the first half of this year. So that returns to normal. And then on the medical side, we mentioned that we expect MDS to accelerate based on the strong hypo demand that we're seeing. And that was a supply issue in the past. And so that's writing itself. And so we expect strong demand there. And then MMS, as you see the performance at MMS, we continue to see that performing well in the second half of the year. Don't forget revenue synergies also build. You know, the timing is we haven't seen too much revenue synergy in the first half. We've seen some, but we have strong confidence in seeing that build in the second half. So we're very, very confident on the revenue build in the second half. And so when you think about it, we're about – 4.3 year-to-date, which is about where we expect it to be for the first half of the year, even though Q2 was a little lighter. You know, we were actually a little bit better in Q1, as you might remember. And so the back half of the year implies kind of a 5.5% to 6% growth, which we feel very, very comfortable with. In terms of your comment on margins, you know, the Most of that is the FX impact, and so that's what's driving that. On an underlying basis, FXN, the margin was right where we expected it to be. You know, the bigger driver of that is SSG&A, as you can see, was a little bit hotter in the second quarter. That's just a timing issue. When you normalize for the integration of BARD, so BARD wasn't in the first quarter, so you saw a big – first quarter last year. So in the first quarter, you saw a big change. In the second quarter, that comes back in. What you see happening is things like comp and benefit plans. You're taking two companies that are on different year ends, fiscal year ends, and normalizing that. So you're getting some hits in the second quarter that normalize over the course of the year. Those benefit plans aren't incremental. They're the same as they were. It's just out of quarter. The best indication of that is something that Tom mentioned earlier, is that for the first half of the year, on a comparable basis, SSG&A is running about 2.9%. That's about where we expect it to be for the year, which is showing that we're able to drive down costs through synergies and continuous improvement. So we feel good about the gross margin, and that will improve to the second half of about 57%, on average, to get us to the 56% to 57% guidance range we mentioned.

Next question is from Larry Kirsch with Raymond James.

Thanks. Good morning. I was just hoping that you guys could talk a little bit about the pump market. Obviously, competition is certainly set to increase over the next 12 months or so. So I just want to get a sense for sort of what you're seeing out there in the market, you know, lots around your market share gains and You know, what really is the differentiator that you think that you have for the Alara system at this point as the competitors come in?

So Tom's going to kick that off, and then we'll go from there. Tom, you've got to turn on your mic.

Hey, Larry, this is Tom. And I'll make a couple comments and then turn it over to Alberto for anything further there. So we feel really good about our position in fusion pumps. Of course, another great quarter from MMS here and certainly a very strong year-to-date performance. Customers continue. We continue to gain share in that one to two points. We're on that exact same trajectory this year as we have been for the last several years. And certainly the power of the system is not just in the pump itself. Obviously, the integration of the LVP, the syringe, and the PCA, the interoperability, we're at over 400 interoperable sites, which is multiples higher than, I think, all the rest of the market combined. And Now, the Power of Health site in particular as well, where we're leveraging data across not just the infusion platform, but across dispensing and our other solutions around compounding and inventory management to help provide outcomes for the customer, right? Leveraging that data to do things such as reducing inventory costs or preventing diversion of drugs, improving patient safety. And those are things that that we alone are uniquely positioned to provide because of the breadth of our portfolio. And we see a lot of excitement from customers there. The majority of our deals, north of 50% of our deals, when we close them today are not just pump deals. They're deals that include multiple elements of our portfolio. And, again, that's quite unique to us and not something that those who are in the space can offer. So, Alberto, anything else to add to that?

No, I think you summarized it well. We continue to develop our core platforms nicely on PIX's side, adding, for example, PIX's logistics, IV prep. So we continue to invest in our core platforms. And interoperability on the ELIRIS is really a significant differentiator for us. And then the wraparound for really the integration of all our core platforms to provide really unique analytics for our customers. is really where we're seeing the big winners. We do obviously have visibility into the future and some of these upcoming contracts, and we feel very confident that we'll continue that category share game, consistent to what we've always said and that Thomas highlighted.

Our next question is from Ryan of Rick Wise. What's day four?

Good morning, everybody. Two quick questions. Maybe Vince said A high level, your emerging market business continues to do well. You call that China specifically. Maybe talk to us about how sustainable it is given the trade issues, economic uncertainties, the back and forth, and just now more specifically on the type 2 diabetes pump delay because of complex feedback and you're reflecting on options. Does this diminish your confidence in the product to make it to the market in the next year or so? How quickly would you hope to work it through and make a go, no-go kind of decision? Thanks so much.

All right. So let me start out, you know, on emerging markets. And thanks for the questions, Rick. So you're right. We saw very strong performance in China, good performance in Asia, good performance along Asia. EMA as well, too. So we're actually confident that we're going to continue to see that. I would tell you, you know, my experience with the China team is that the trade situation is being kept very separate from what's happening in our business. And, you know, it just remains so important to China to continue to develop that health care system. It's foundational to their strategy. and the stability, of course, that they're always seeking. So we're seeing strong performance across all three of our business segments, and as we look forward, we continue to see that. One of the reasons why is that the funding of the Chinese health care system is actually improving over time, and most people don't know and understand that, but our team walked us through that about a month ago or so. So we're feeling very good on that side. On the diabetes pump, We did get the feedback from the FDA, and we're in a situation where we're really assessing the options that we have, the technical pathways that we have in responding to them. Some can be simple. Some can be longer term. And so that's why we said, hey, listen, we've got to call that out for you. We've got to do that work before we can assess exactly where we end up in terms of launch date with that. And so that's where we stand, and that's why we think it's going to take us another quarter or so to really understand, you know, how those potential solutions play out. Tom, is there anything else you want to add to that? No, I think you did very well. Okay. So that's where we stand, and we'll talk to you, you know, later in the summer about it.

The next question is from the line of Dan Leonard with Deutsche Bank.

Thank you. So first question on slide 16, appreciate all the heavy lifting to offset the headwinds, but can you clarify, have you taken incremental actions to offset the incremental worsening foreign currency in DCV troubles? That's my first question. And then my second, just the housekeeping. Did you quantify the distributor inventory adjustments in medical delivery? And if not, is it possible to quantify those? Thank you.

So this is Chris. On the first question, what I would say is the incremental FX impact, we're already driving 19% to 20% underlying growth, and we're not going to offset FX by cutting into muscle at that point. And that was the point of saying we're already driving $150 million of offsets. As it relates to DCB, we're not assuming any offsets at this point, as we talked about But if things went negatively, which we don't expect in June, but if they did, we would clearly take actions to offset the impact of that. So, you know, the actions that we're talking about are things like sales incentives or whatever. And we're not going to take short-term action to hurt the sales force that we need when things come back. But if things got materially worse – After June, we certainly would look at that and manufacturing, et cetera.

And maybe, Dan, this is Tom, just to add to Chris's comment. I would say, so as you heard from Vince and Chris, of course, our core business is very much on track, is on budget for the year across the board. With that said, we have taken above-budget actions to manage expenses. So we have done things such as there are hiring freezes on non-manufacturing, non-sales-related roles. We have launched initiatives. to more aggressively manage, particularly indirect spend, as an example, right? And so every one of the businesses and parts of the organization are driving expense initiatives to reduce expenses below budget, and we are, you know, implementing those very actively, I would say. So, again, that's driving that base, you know, 19%, 20% number that you heard Chris talk about.

Your next question is from Richard Newitter.

Hi, this is Jamie on for Rich. I was just wondering if we could go back to kind of the barred revenue cost energies. Any additional progress that you guys made in the second quarter and how we should be thinking about some of the things that you've highlighted in the past around the surgery sales force expansion as well as geographic expansion in the back half contributing? Then just the second part of that question, relative to the deal model, is it still fair to assume that if upside were to materialize, it would primarily be from the revenue synergies? Thanks for taking my question.

Okay, so there's a bunch in there. Let me start with the cost synergies. So we're right on track with the cost synergies, as we said. The most recent achievements – we pointed to are kind of in the IT infrastructure space as well as in the supply chain. And so some of those things are like, you know, moving data centers and collapsing data centers and moving off of older IT systems like MFG Pro and beginning to move those kinds of items. We did close down the Murray Hill office, including the data center, and moved it there. So those are the kind of synergies that you start achieving. This is on top of last year's achievements, which included duplicate public company costs and some of the procurement savings. As we look out into 2020, we would be looking at more of the operational kind of synergies like plants and distribution centers and that kind of thing. So we're right on track where we expected to be from a cost standpoint. The same is true on the revenue synergies. As we said, we invested to get some revenue synergies. And I'll pass it over to Simon to talk a little bit about the surgery component of that.

Yeah, good morning. It's Simon here. So I think we mentioned again last time on the biosurgery and infection prevention sales organization within Europe. We invested heavily there. And that sales force is performing as expected and actually above our plan. Now, we did something similar in the U.S., where we combined the same two sales forces that were getting good leverage, and between the legacy BARD, Biosurgery Sales Force, and the legacy BD, Infection Prevention Sales Force. And the other point I think is important to note here is that, you know, the investment profile and the investment agenda that BARD had set forth has been fully supported by BD. An example of that is the acquisition of TVA Medical to fill out our end-stage renal disease our portfolio, and that acquisition has gone to plan. As Chris noted earlier, we got FDA clearance for the four French. We've rolled that out, and the progress in that business continues to be very good. And then on a global basis, across all three businesses, we continue to do very well, particularly in emerging markets and China. So overall, all the investment plans are on track, and the investment agenda that we set forth has been fulfilled by BD.

Your next question is from Matthew Michon with KeyBank.

Great. Thank you for taking the questions. I'm going to ask my first one, then I'm going to have a follow-up. On the surgery side and interventional, you guys talked about a tough comp, especially in hernia. Maybe talk a little bit about the biosurgery piece of that. You probably have a very easy comp around the ProGel ramp, and I'm also just curious about the performance of the Hemostat or Rista powder where there's increasing competition. Go ahead.

Yes, hi, Simon again. Indeed, Progel, we reintroduced back to the market. I think it was in the October-November timeframe, and we're really pleased with how that has performed. I would say we're slightly ahead of where we thought we would be with that. As you rightly mentioned, we have seen increased competition on the Hemostat side, and the evaluations have certainly eaten in a little bit into our business there. But I think, you know, from a clinical perspective, we feel really comfortable with where we stand with the performance of Arista versus some of the competitors that have entered the market. So I think while there's some short-term pain as their products are evaluated, a lot of institutions and clinicians have come back around to Arista. And the final point I'd like to make about that business is, you know, as you may have seen, we have received approval for First there, our chloroprep, which further differentiates us in the infection prevention business, and we are getting ready to roll that out over the summer months, and we've seen great growth on that in the past two quarters, and we expect that profile to continue as we roll out a further differentiated product in that category.

Okay. And then on to the continued strength that you're expecting in MMS. Yes. You're running up against some very serious back half comps. I'm just trying to understand how much visibility you have there to new placements. Or maybe there's a lag from the increase in placements to the benefit you're going to get on the consumables part of that business.

Okay. So, yes, we do obviously have visibility of some of the contracts that are coming up. There's two variables here. There's contracts and then installation or placements. placement at timing and we have a sense for the placement can sometimes change because it's not depending on us and we have to accommodate the customer as well, but we we feel fairly we're more than confident that We're going to see the same similar type of trajectory the second half than than in the first half so we're and the dynamics as Tom mentioned that I mentioned before are basically the same and because we're not trying to compete like with like, but more a comprehensive approach to our portfolio and putting in front place some of the differentiators such as interoperability and some other, the health site analytics and so on. Great. Thanks, Alberto.

There are no further questions at this time. I would now like to turn the floor back over to Vince Fortalenza for closing remarks.

Well, thanks to all of you for joining us today on the call. Let me make a couple of remarks here. Our performance year to date with some puts and takes is right in line with our expectations. We expect a strong back half and have confidence we will deliver it, consistent with our proven track record and historical performance. Even in the face of significant headwinds, we continue to weather the storm. Our core remains strong. The deal model is tracking in line with our plan. Yes, we have to handle DCVs, and we will do that. And together, BD and Bard have the ability to deliver robust operating performance. So, having said all that, we look forward to updating you again next time. Thanks very much.

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