Becton Dickinson and Co

NYSE:BDX

Earnings Call Transcript 2018-Q4

[Operator]

Hello, and welcome to BD's Fourth Fiscal Quarter and Full Fiscal Year 2018 Earnings Call.

At the request of BD, today's call is being recorded. It will be available for replay through November 13, 2018 on the Investors page of bd.com, or by phone using 800-585-8367 for domestic calls and area code 404-537-3406 for international calls using confirmation number 3197559. I would like to inform all parties that your lines have been placed on a listen-only mode until the question-and-answer segment.

Beginning today's call is Monique Dolecki, Senior Vice President of Investor Relations. Ms. Dolecki, you may begin the conference.

[Monique N. Dolecki, Becton, Dickinson & Co.]

Thank you, Crystal. Good morning, everyone, and thank you for joining us to review our fourth 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 fourth 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.

In the fourth quarter, the company recorded $58 million in non-cash charges to write down the carrying value of assets primarily within our Diabetes Care business. Following a limited launch of our insulin infusion sets in fiscal 2017, and a product redesign in early FY 2018, the product did not deliver the differentiation we were seeking. As a result, we made the decision to discontinue the sets and focus on accelerating other key innovations.

During the quarter, we also wrote off other investments related to a production facility in our Diabetes Care business. These items, along with the details of purchase accounting and other adjustments 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 reminder, to provide additional revenue visibility into the new BD, inclusive of Bard, we will speak to our fiscal 2018 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 the revenues associated with divestitures as detailed in the financial schedules in our press release. Our fiscal 2019 guidance also includes an estimate of the impact of adopting ASU 2014-09, Revenue from Contracts with Customers, as of October 1, 2018.

Before I turn the call over to Vince, we would like to comment on the leadership change that we just announced last month. We are very pleased to have promoted Tom Polen effective October 1 to Chief Operating Officer of BD. As President and COO, Tom's responsibility has been expanded to include global operations and supply chain in addition to his current oversight of BD's three global operating segments: Innovation and R&D.

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 Administrative Officer; Tom Polen, 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.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Thank you, Monique, and good morning, everyone. Before we discuss the company's performance, I would like to comment briefly on the organizational change Monique just mentioned. Tom's promotion to COO reflects the leadership role he has played developing and implementing BD's strategy and vision over the past 18 months. Since Tom was named President in April 2017, BD has made great progress on the Bard integration, named three strong leaders to the segment President roles, and appointed a dedicated Chief Technology Officer. These key leadership appointments position the company well and increase Tom's capacity to focus on driving our strategy, advancing our culture, and accelerating BD's growth and impact. I look forward to continuing to partner closely with Tom, as we take BD to the next level and fulfill our potential as the partner of choice for the global healthcare industry.

Now, turning to slide 4, the combination of BD and Bard has significantly accelerated our strategy and has already delivered measurable results, which we will speak to throughout the presentation. Turning to slide 5, I'd like to highlight some of our key achievements in fiscal year 2018. As I look back on last year, I feel incredibly proud of what our organization was able to accomplish. As you already know, earlier this year, we brought C. R. Bard into the BD family. As we exit 2018 and enter fiscal year 2019, it's evident to me that we are truly better together.

As expected, we finished the year with a very strong performance and momentum across our businesses. We saw this in both our core legacy BD and Bard portfolios. For the full year, we grew revenues 5.8%, we also drove approximately 210 basis points of margin expansion, and delivered double digit EPS growth. And we achieved all of this while overcoming significant headwinds and making strategic business investments.

Our organization has demonstrated just how agile we can be, concurrently executing on both the CareFusion and Bard acquisitions while continuing to drive our strategy forward and simultaneously delivering strong performance. Fiscal 2018 marked the third year of the CareFusion deal, and as we previously announced, we achieved our targeted $350 million in annualized CareFusion cost synergies. At the same time, we are delivering on our Bard commitments. The integration and synergy capture are on track, and we are well on our way to reducing our leverage to below 3 times in three years.

Also, our new product innovation is continuing to fuel growth, from the new Alaris Pump and Pyxis ES in our Medical segment, to BD MAX, BD FACSLyric and continued expansion of our BD Horizon Brilliant dyes in Life Sciences, and Lutonix AV and Covera in the Interventional segment, just to name a few.

There are also a number of things in the pipeline that we are equally as excited about, and I'll touch on those later in the presentation. And as we have shared with you previously, we successfully completed the transformation of the U.S. Dispensing business model, delivering more value to our customers as evidenced by our share gains.

In fiscal 2018, we continued to strategically focus our portfolio, and we divested several assets, including our remaining interest in the Vyaire Medical joint venture, and select product lines related to the regulatory approval of the Bard transaction. We also announced the divestiture of our Advanced Bioprocessing Business, which closed late last month.

On the acquisition front, we were very excited to announce the acquisition of TVA Medical. This is a great example of our continued strategy to pursue tuck-in acquisitions to advance our category leadership and enter into additional high-growth segments. All-in, we feel really good about our business performance and strong execution.

Moving to slide 6, you will see our initial guidance for fiscal year 2019, which reflects continued momentum across our businesses and strong revenue growth of 5% to 6% in line with the Bard deal model. On the bottom line, we expect to deliver adjusted EPS between $12.05 and $12.15. We expect to drive strong underlying currency-neutral earnings in excess of our deal model of 16% to 17%, which will partially mitigate the macro headwinds that can continue from fiscal 2018. All-in, we expect to drive earnings growth of about 10%.

Our outlook is based on our current view of the environment. As is normally the case, there are a number of items that could bring us to the top or bottom end of our guidance range, including: a stronger or a weaker flu season than expected; the performance of new product launches; emerging market growth and pricing; as well as an improving or worsening situation around tariffs.

We are also pleased to share with you that we anticipate achieving approximately $250 million in Bard revenue synergies by fiscal 2022. I'll provide some more color on where we expect to achieve those synergies later in my remarks.

I will now turn things over to Chris for a more detailed discussion of our financial performance in the fourth quarter and full year along with additional details about fiscal year 2019 guidance.

[Christopher R. Reidy, Becton, Dickinson & Co.]

Thanks, Vince, and good morning, everyone. I'm also extremely proud of what our organization achieved in 2018 and the strong momentum we carry into 2019. On slide 8, I will review our fourth quarter revenue and EPS results, as well as the key financial highlights for the quarter and the total year.

Fourth quarter revenues grew 8.4% on a comparable currency-neutral basis, driven by broad-based strength across all three segments. As we communicated to you last quarter, our confidence in achieving our increased full year fiscal 2018 revenue outlook was based on continued momentum in the fourth quarter with particular strength in our MMS and Pharmaceutical Systems units, and some re-acceleration in Surgery, all of which we achieved. 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.

Fourth quarter adjusted EPS was $2.93, growing 22.1% over the prior year, or 24.6% on a currency-neutral basis. For the total year, revenues grew 5.8% on a comparable currency-neutral basis. As a reminder, our full-year results include the impact in the first half of the year from the U.S. Dispensing change, as well as the impact from the hurricane in our first fiscal quarter, which lowered total company revenue growth approximately 60 basis points. Excluding these impacts, we drove full-year revenue growth of approximately 6.5%. This includes approximately 1% of growth related to acquisitions, flu revenues, and timing that benefited the fourth quarter.

We also significantly expanded our margins in fiscal 2018. As we previously disclosed, we achieved our targeted $350 million in cumulative annualized CareFusion cost synergies. In addition, we realized approximately $75 million in Bard cost synergies in fiscal 2018.

Full year adjusted EPS of $11.01 grew 16.1% or 12.3% on a currency-neutral basis. Growth was driven by strong performance from both legacy BD and Bard businesses, which helped to offset notable headwinds in fiscal 2018. I'll provide more color on fiscal 2018 EPS growth later in my remarks.

We also continued to delever during the fourth quarter, paying down approximately $700 million of debt. For the full fiscal year, we paid down a total of $1.2 billion, slightly ahead of our initial expectations. As a result, our gross leverage ratio declined to 3.9 times as of September 30. We continue to be on target to achieve our commitment to deleverage to below 3 times over three years. Additionally, we are also very pleased to have continued our long-standing record of delivering an increasing dividend. Fiscal 2018 marked our 46th year of consecutive dividend increases.

Moving on to slide 9, I'll review our Medical segment revenue growth on a comparable currency-neutral basis. BD Medical fourth quarter revenues increased 10.1%. For the full fiscal year, Medical revenues grew 5.6%, which includes an estimated 80 basis point headwind from the U.S. Dispensing change. Revenues in Medication Delivery Solutions, or MDS, grew 5.9% in the fourth quarter, driven by strength in vascular access and infusion disposables. For the full fiscal year, MDS revenues grew 5.6%.

Revenues in Medication Management Solutions, or MMS, grew 21.3% in the fourth quarter. Growth in MMS was driven by strong capital placements in both infusion and dispensing, as expected. Additionally, growth in the quarter was aided by placements that occurred earlier than originally anticipated. For the full fiscal year, MMS revenues grew 6.6% including a headwind of approximately 280 basis points from the U.S. Dispensing change. Fiscal 2018 was another year of strong performance in MMS, driven by new product launches and continued share gains in both dispensing and infusion.

Diabetes Care revenues grew 1.7% in the fourth quarter. Strength in pen needles in the U.S. was partially offset by a tough comparison to the prior year. For the full fiscal year, Diabetes Care revenues grew 2.9%.

Revenues in Pharmaceutical Systems grew 9.4% in the fourth quarter, as expected, driven by strong demand for core products and continued growth in SAIS. For the full fiscal year, Pharmaceutical Systems revenues grew 6.4%. As we move forward, we are well positioned to take advantage of market trends towards biologics and prefilled vaccines.

Now, turning to slide 10 and the BD Life Sciences segment, fourth quarter revenues increased 6.9%, with strong performance across the segment. For the full fiscal year, BD Life Sciences revenues grew 6.8%, including approximately 90 basis points of growth related to flu revenues. Revenue in Diagnostic Systems grew 8.2% in the quarter. Performance was driven by our instrumented microbiology platforms, including blood culture, TB, and IDAST, strong Kiestra installations and our BD MAX molecular platform. For the full fiscal year, Diagnostic Systems grew 9.6%, which includes approximately 270 basis points of growth related to flu.

Preanalytical Systems revenues grew 6.1% in the quarter, driven by push button collection sets, where recent capacity additions have eased constraints on supply. For the full fiscal year, PAS grew 4.1%. Biosciences revenues grew 6.4% in the quarter. Growth was driven by research reagents as well as growth in new instruments, such as the FACSymphony and FACSLyric. For the full fiscal year, Biosciences grew 6.8%.

Turning to slide 11, I'll review our Interventional segment revenues growth on a comparable currency-neutral basis. Fourth quarter revenues increased 6%. For the full fiscal year, revenues grew 5.2%, which includes an estimated 90 basis point headwind from the impact of the hurricane in Puerto Rico in our first fiscal quarter.

Revenues in Peripheral Intervention, or PI, grew 7.6% in the quarter. Performance reflects strong growth in oncology products, particularly in emerging markets and China, as well as continued strength in ESRD. For the full fiscal year, revenues in PI grew 9.3%, reflecting our cadence in new products and geographic expansion.

Fourth quarter growth of 3.3% in Surgery reflects an acceleration from last quarter's growth rate, as the business continues to regain share following the hurricane. For the full fiscal year, Surgery grew 1.3%, which includes an impact of 240 basis points from the hurricane, and 120 basis points from the hold on Progel. Excluding these items, we estimate Surgery would have grown approximately 5% for the full year. We relaunched Progel last month and are pleased with our early results.

Urology and Critical Care, or UCC, revenues grew 7.4% in the quarter, driven by new products and strong performance across the Acute Urology portfolio. For the full fiscal year, UCC revenues grew 5.3%.

Moving to slide 12, I'll walk you through the geographic revenues for the fourth quarter on a comparable currency-neutral basis. U.S. revenues grew 8.7% in the fourth quarter. This was above our normal growth rate, and primarily reflects very strong growth in the MMS and Pharmaceutical Systems units within the BD Medical segment, as previously discussed. For the full fiscal year, U.S. revenues grew a strong 5%, which includes an estimated 100 basis point headwind from the U.S. Dispensing change and the hurricane.

Moving on to International, revenues grew 7.9% in the fourth quarter. Growth was driven by strong performance in all three business segments, particularly in Asia Pac, Latin America and EMA. For the full fiscal year, International revenues grew 7%.

Developed Market revenues grew 7.7% in the fourth quarter. Growth in Developed Markets was driven by strong performance in the U.S. For the full fiscal year, revenues in Developed Markets grew 4.8%, which includes an estimated 70 basis point headwind from the U.S. Dispensing change and the hurricane.

Fourth quarter Emerging Markets revenues grew 11.8% currency-neutral, bringing our full year growth to 11.6%. Growth in China was a strong 13.6% in the fourth quarter, bringing the total year growth rate to 13.2%. This was driven by double-digit growth across all three segments.

Turning to slide 13, which recaps the fourth quarter income statement, as discussed, revenues were strong, growing 8.4% in the quarter on a comparable basis. Moving down the P&L, gross profit improved during the quarter, increasing 47.6% year-over-year, and gross profit margin was a strong 56.5%.

SSG&A as a percentage of revenues was 25%, which reflects Bard's higher SSG&A spend profile, partially offset by the achievement of synergies. In addition, strong revenue growth resulted in additional selling commission expenses in the fourth quarter. R&D as a percentage of revenues was 6.2%, which reflects our continued commitment to invest in innovation.

Operating margins increased 350 basis points or 380 basis points on a currency-neutral basis. We continue to deliver significant operating margin expansion, which reflects strong P&L leverage as the new BD. Our tax rate was 15.3% in the quarter, bringing our full year tax rate to 16.7%, which is just below our guidance range. As expected, we paid preferred dividends of $38 million in the quarter. As we discussed last quarter, the preferred shares are not included in the shares outstanding calculation.

In the quarter, adjusted earnings per share were $2.93, which is a 22.1% increase versus the prior year, or 24.6% on a currency-neutral basis. Very strong revenues were partially offset by the headwind by currency, increased raw material costs, and increased selling commission expenses.

Turning to slide 14 and our gross profit and operating margins for the fourth quarter, gross profit margin was a strong 56.5% in the fourth quarter. On a performance basis, gross profit margin improved 360 basis points. This reflects the inclusion of Bard's more robust gross margin profile, as well as our continuous improvement initiatives and cost synergies. These items were partially offset by headwinds from raw materials. Currency had a negative impact of 30 basis points on gross profit margin.

Operating margin grew 350 basis points in the quarter, or 380 basis points on a currency-neutral basis. Margin expansion was driven primarily by gross margin improvement, combined with synergy capture. For the full fiscal year, we delivered significant margin expansion of 210 basis points on a currency-neutral basis. We're very pleased to have delivered approximately 700 basis points of underlying operating margin expansion over the past four fiscal years, which highlights our strong execution and also demonstrates that our strategy is sound.

Moving to slide 15, I'd like to walk you through our fiscal 2018 EPS growth. All-in, we delivered EPS growth of 16.1%, 12.3% on a currency-neutral basis. This reflects EPS growth which was in line with the deal model. EPS also benefited from stronger revenue performance, was partially offset by a number of macroeconomic headwinds and business investments. Currency had a positive impact on fiscal year 2018.

Now, moving on to slide 17 and our full year fiscal 2019 revenue guidance, we expect currency-neutral revenue growth of 5% to 6% on a comparable basis. This is in line with the expectations we have been communicating since the deal announcement. From a phasing perspective, we expect fiscal year 2019 to align with fiscal year 2018 with revenue and EPS growth weighted towards the back half of the year. In addition, the headwind from FX will be most pronounced in the first quarter.

By segment, we expect BD Medical revenues to grow between 5% and 6%, we expect BD Life Sciences revenues to grow between 4% and 5% which includes a headwind of approximately 90 basis points related to the flu, and we expect the BD Interventional revenues to grow between 6% and 7%. Similar to fiscal 2018, we expect revenue growth to be driven by recent product launches across all three segments and strength in both Developed and Emerging Markets.

We anticipate Developed Market growth of around 4% to 5% in fiscal 2019. In Emerging Markets, we expect growth of about 10%, driven by a diversified base with low-double digit growth in China and strength in EMA and Latin America.

Now moving on to slide 18 and our full fiscal 2019 EPS guidance, as there are a number of moving parts that impact earnings per share in fiscal 2019, I would like to provide more color on our EPS guidance. Starting on the left-side of the chart with our fiscal 2018 adjusted EPS of $11.01, we expect strong underlying growth of approximately 16% to 17% on a currency-neutral basis. This is in excess of our deal model and is driven by revenue growth and robust operating performance.

Moving to the right on the slide, we expect a lower effective tax rate to contribute approximately 3% to EPS growth, bringing our total underlying EPS growth to approximately 20%. We expect an effective tax rate of 14% to 16% in fiscal 2019.

Continuing to the right on the slide, you will see, we are facing a number of headwinds in fiscal 2019. On the macro front, raw material pressures increased throughout 2018 and accelerated into fiscal 2019, primarily due to additional resin price increases driven by a supply-constrained market. In addition, the round of tariffs that was enacted in late September will result in an incremental headwind to the round one impact we previously discussed with you. We are actively working with our partners to minimize the unfavorable impact to the company going forward.

Our guidance also assumes a normal flu season in contrast to the severe flu in fiscal 2018, which results in a headwind in fiscal 2019. We also have a headwind related to the sale of Advanced Bioprocessing that closed last month and the annualization of the divestitures to Merit Medical.

On a currency-neutral basis, our strong underlying performance is expected to drive adjusted EPS growth of 13% to 14% despite these headwinds and divestitures. While currency was a benefit for the first nine months of fiscal 2018, it became a headwind in the fourth quarter. And based on current rates will be a sizable headwind of about 3.5% in fiscal 2019. This assumes a euro to dollar exchange rate of $1.16.

All-in, we expect to deliver adjusted EPS of $12.05 to $12.15, which represents reported growth of approximately 10%. From a phasing perspective, we expect to achieve approximately $100 million in cost synergies in fiscal year 2019. We are committed to fully realizing $300 million in annualized cost synergies over the three-year deal period.

Now turning to slide 19, I'd like to walk you through the balance of our guidance expectations for the full fiscal year 2019. On a reported basis, revenue growth for the total year is expected to be between 8.5% and 9.5%. This reflects a currency headwind of approximately 200 basis points. Adjusted gross profit as a percentage of revenue is expected to be approximately 56.5% to 57.5%. This is an increase of up to 100 basis points from fiscal 2018, and is due to strong underlying performance, partially offset by higher resin costs and the impact of tariffs.

Adjusted SSG&A is expected to be 24.5% to 25.5% of sales. This is about flat when compared to fiscal 2018, and is primarily due to cost synergy achievements, partially offset by Bard's higher SSG&A profile. We expect our R&D investments to be in line with fiscal year 2018 at about 6% of revenues, and reflects our continued commitment to invest in new products and platforms.

As a result of the items I just detailed, operating margin is expected to be between 25.5% and 26.5% of revenues. On a currency-neutral basis, operating margins are expected to grow 100 basis points to 150 basis points. This represents strong underlying margin expansion, partially offset by the impact of the fiscal 2019 headwinds we just discussed on the previously slide. As we also just discussed, we expect our tax rate to be 14% to 16%.

For fiscal 2019, we anticipate our adjusted average fully diluted share count to be approximately 275 million shares. For modeling purposes, I would like to remind you that net income reflects the deduction of approximately $152 million of preferred dividends. The preferred shares are excluded from the adjusted diluted shares outstanding. Cash flow is expected to be strong, with operating cash flow of about $4.2 billion in fiscal year 2019. Capital expenditures are expected to be approximately $900 million.

In summary, I'm excited about the strong momentum we have across our businesses, and I'm confident that we'll deliver 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 Bard revenue synergies and product portfolio.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Thank you, Chris. Moving on to slide 21 and Bard revenue synergies, as we have been discussing with you since the deal announcement, we expect measurable revenue synergies from Bard starting in fiscal 2019. Our investment toward achieving these revenue synergies began in fiscal 2018, and we are pleased to announce that over the five-year deal period, we expect to drive total revenue synergies of approximately $250 million. As we expected, this is significantly larger than our CareFusion revenue synergy target of $150 million to $175 million, given the hundreds of products already in the registration process.

There continue to be three key areas where we expect to achieve synergies: First, as a combined company, we have the broadest and deepest portfolio of vascular access devices in the world. The combination of BD and Bard enables us to become a partner of choice for our customers' vascular access management needs. As part of our initial investment in revenue synergies, this summer we cross-trained the sales force in MDS, where we brought together the BD and Bard vascular access portfolios. Our team is focused on helping our customers optimize their catheter selection and drive adoption of best practices around the world. This will reduce catheter complications and improve patient satisfaction, safety and outcomes, while enhancing procedure efficiency and reducing cost.

Second, with our new combined surgical portfolio, we have been able to further leverage our combined footprint to better serve patients and providers across our hernia, biosurgery and infection prevention portfolios. In addition, we have made revenue synergy investments to expand our direct sales presence in Europe for our biosurgery and ChloraPrep platforms, where we have now trained and activated new surgical sales hires. With a broad surgical portfolio and a dedicated sales team, we now have the opportunity to expand our surgical sales channel in international markets.

And third is geographic expansion. Bard did a great job investing outside the U.S., particularly in China. However, they had a limited presence in Latin America, EMA and the rest of Asia. We see opportunities where Bard started registering products, but had just begun investing in the channel where BD has substantial scale in those markets today.

Turning to slide 22 and our planned product launches by segment, as you can see on this slide, we have a rich pipeline of planned product launches in fiscal year 2019 across our segments. There are a number of things we're excited about. I'll touch on just a few of those here. Starting with the Medical segment, in fiscal year 2018, we continued to gain share in both our infusion and dispensing medication management platforms, and we also launched our new BD HealthSight platform for connected medication management. In fiscal year 2019, we look forward to continuing our cadence of innovation and developing our platform to deliver even more value to customers. We expect to release a new version of Pyxis ES, which delivers new enhancements and applications. We're excited about the innovation pipeline in our infusion platform which includes higher patient safety features and functionality as we build upon our leading interoperability position.

Additionally, in 2019, we are looking forward to adding to the HealthSight platform with the launch of BD HealthSight Data Manager which simplifies the management of multiple BD device formularies. As we mentioned earlier in the call, a strategic decision was made to discontinue our insulin infusion sets with FlowSmart technology in our Diabetes Care business. Following our assessment of strategic options, a decision was made to discontinue the infusion set product and focus on supporting other key inventions, such as our Type 2 Patch Pump. Regarding the Type 2 Patch Pump, we're on track to submit our regulatory approvals for the U.S. and the EU in the coming months, and we anticipate our initial limited launch will occur in late calendar 2019. We continue to be excited about bringing this differentiated solution to the market for people living with Type 2 diabetes.

In the Life Sciences segment, we recently launched our BD MAX multidrug resistant TB panel in Europe. Each year, close to 2 million people die from TB, making it the leading cause of death from a single infectious agent. MDR-TB remains a critical hurdle in the fight to eradicate TB. We continue to focus on improving the diagnosis of TB so that we can provide clinicians with the best tools for identifying effective treatments for their patients. This new test is a big step forward for clinical practice, as antimicrobial resistance has made this identification more complex. With the BD MAX MDR-TB panel and the BD BACTEC MGIT products, BD is able to offer laboratories a suite of tools for effective and accurate patient diagnosis and management. We remain committed to continuing to expand our BD MAX menu of assays, including the launch of the Enteric Viral Panel in the U.S. in fiscal 2019.

In addition, Kiestra has been growing very well in the U.S. and we continue to drive the platform towards being a total solution for management of the clinical microbiology lab. The launch of BD Kiestra IdentifA planned for the second half of 2019, will extend the capabilities of the BD Kiestra system to include the automation of sample preparation and sample identification.

In the Interventional segment, we are excited to announce clinical trial data for our Lutonix 014 Drug Coated Balloon with a below-the-knee indication, will be presented as a late-breaking presentation tomorrow at the 2018 Vascular Intervention Access Advances (sic) [Vascular InterVentional Advances] Conference in Las Vegas. We also recently submitted the PMA for BTK.

We're also pleased to announce that WavelinQ, our new solution that provides a minimally invasive non-surgical option for creating critical AV fistulas for hemodialysis procedures, received reimbursement late last week. We were given a c-code and assigned (37:55) to clinical APC 5193. Reimbursement was in line with our expectations, and will support our plans to drive adoption of this new technology. As we discussed with you last quarter, we have already begun training our sales reps and clinical teams in preparation for a Q1 fiscal 2019 launch in the U.S.

We're also looking forward to launching our Venovo venous stent and OptiFix AT articulating mesh fixation products later this year. The launch of these products will also enhance growth in the Interventional segment. 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 the information useful in understanding BD's commitment to this important topic.

Moving on to slide 23, I would like to reiterate the key messages from our presentation today. I'm extremely proud of what our organization accomplished in fiscal year 2018 as the new BD + Bard. First, we finished the year with very strong performance and momentum across our businesses.

Second, we overcame significant headwinds and continued to drive strong operating performance while concurrently executing on both the CareFusion and Bard acquisitions.

Third, our Bard integration and synergy capture are on track. We are well on our way to reducing our leverage to below 3 times in three years, and we are confident in our ability to achieve approximately $250 million in Bard revenue synergies as we exit fiscal 2022. Fourth, our new product innovation is continuing to fuel growth, and there are a number of things in the pipeline that we are excited about as we look ahead to fiscal 2019 and beyond.

Lastly, looking forward, I have increasing confidence in our outlook as we successfully execute on our strategy as the new BD. We will continue to deliver even more comprehensive solutions for our customers and value to our shareholders around the world.

Thank you. We will now open the call to questions.

[Operator]

Thank you. Our first question is coming from the line of David Lewis with Morgan Stanley.

[David Ryan Lewis, Morgan Stanley & Co. LLC]

Good morning. Just two quick ones for me. I'll start with Chris or Vince. So, guys, the headwinds are consistent with our model, but clearly the magnitude of each is a little greater. So I think from our emails this morning, the questions that I think investors want to get answered is does fiscal 2019 earnings reflect any change in the underlying fundamentals of the business with a rate of progression of the Bard deal model? Or is this just a perfect storm of macro headwinds? And then I have a quick follow-up.

[Christopher R. Reidy, Becton, Dickinson & Co.]

Sure, David. And this is Chris. Thanks for the question. I think you look at the momentum that we had in fiscal year 2018, we were driving 6.5% revenue growth and 16% earnings per share growth, and that momentum actually accelerated in the fourth quarter with 8.4% revenue growth, 25% increase in EPS, and 350 basis points of gross margin improvement.

So clearly the fundamentals of the business are very strong, and we carry that forward into 2019. If you refer to the waterfall chart that we went through, you can see that we're driving 16% to 17% underlying into 2019. And then on top of that, we're adding another 3% from tax synergies that we had talked about potentially developing, and we now see our way clear to get those from tax synergies and some geographical mix. So the combination of those two are driving underlying improvements of around 20%.

Now, when you issued your note a couple of weeks ago, you had rightfully called out some significant headwinds of around 800 basis points. It turns out that it's closer to 1,000 basis points, so the magnitude, as you mentioned, is stronger. And the new news there is all around macro items, and I'd start with resins. In the fourth quarter, we saw a double-digit growth in the price of resins. And we had talked about resin prices going up last year, and the impact was about $35 million in 2018 or about 1% of EPS. That doubles to over $60 million of impact based on that double-digit growth in the fourth quarter of the price increases, primarily driven by supply constraints. Typically, it's impacted by oil prices, but it's mostly supply constraints at this point.

In addition, after your conference, I think it was a day after your conference, the second round of tariffs hit. And the impact of that, we had said it was about $15 million in round one. In total now, we're looking at about $45 million of impact from round one and round two. We can offset about $10 million of that in-year through working with our suppliers and other things, so the impact we expect to be about 1% or about $35 million.

Between those two items, resins and tariffs, we have just about $100 million of pressure. Then on top of that, we have FX going the wrong way, and basically reversing what you saw in the benefit that we got from FX this year. And so we expect it to be about 350 basis points of pressure. I would note that most of those pressures are one-time in nature. We wouldn't expect resins to continue at that same pace in terms of headwinds.

Tariffs, we're going to be working with our suppliers to resource the base. Now, that takes a while. We wouldn't expect to see much more impact in 2018, but that would help mitigate the impact in 2019 and, perhaps, whatever we can mitigate actually becomes a tailwind for us. Flu is the flu, divestitures go away, and FX could flip next year, just like this year flipped from last year, so more one-time in nature.

So, all-in all-in, we're offsetting about half of these significant pressures, and I would point out that we're still going up on an FXN basis from 12% in 2018 to 13% to 14% in 2019. So that's still an increase, despite the headwinds we laid out. So the fundamentals are really strong, to your point, and we feel extremely good about the underlying business and the momentum. And if anything, the deal model, we're exceeding the deal model.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

The only thing I would add, David, is, from a geographic perspective, we had strong performance across all regions. And as you know, looking back a couple of years, that wasn't always the case. But this year, we've seen it across all geographies and all businesses. So we feel really good about it.

[Christopher R. Reidy, Becton, Dickinson & Co.]

David, you said you had a two-part question, so we'll go back to you.

[David Ryan Lewis, Morgan Stanley & Co. LLC]

Oh, sorry. That was very, very detailed. So, I'll make this one quick. Vince, people expected 7% this quarter. You did closer to 8%. So momentum in the business, we saw several hundred basis points of acceleration. So the question is, look, it would not have been prudent to guide anything different than 5% to 6%, and that's what investors expected. Can you just talk about how good you're feeling about the 5% to 6% number for 2019? And I'll jump back in queue. Thank you.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Yeah, I'm feeling very good about the 5% to 6% number. And yes, we had a very strong fourth quarter. You saw real strong performance out of Pharm Systems. And if you look back across the year, Pharm Systems, it's not just a one-quarter issue for them (46:57). We've seen some fundamental changes in that marketplace on the vaccine side and more of a longer-term shift to prefills. That's something we've been working out for years. It's going well.

I think while in MMS, you saw tremendous performance, and, yes, some, as Chris mentioned, was customers requiring installation a little earlier than we expected, but fundamentally, we're gaining share in both the pump side and on the Pyxis side. And I talked about some of the new products that are going there. So I think we're going to see good, strong, continued performance across the entire BD portfolio. I walked you through all of the new products. I won't repeat all of that.

And then from a geography standpoint, as I was saying, we feel good about the geographies. Feel good about what's going on in Asia. I mentioned a slight moderation in China, and that's just the continued cost controls. But we expect to have good performance across all of our business segments in China, so feel good about that. Where we've seen some improvement in 2018, certainly with India, much, much better performance than historically, but strong across the board. What we're going to have to jump over, quite frankly, is the flu. And we'll just have to take what happens in flu up and down. So I feel good about the 5% to 6% guidance range that we gave you.

[David Ryan Lewis, Morgan Stanley & Co. LLC]

Great. Thanks, guys.

[Operator]

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

[Brian David Weinstein, William Blair & Co. LLC]

Hey, guys. Thanks for taking the question.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Sure.

[Brian David Weinstein, William Blair & Co. LLC]

Just a follow-up on David's question there, obviously, a very strong year-end with the 8.4% growth, but maybe, Tom, can you talk about the sustainability of the trends that you're seeing, and specifically the drivers. Vince, you mentioned a little bit in Medical, but specifically maybe the Interventional and Life Sciences side as we head into 2019?

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Yeah, I'll let Tom do that. I kind of overviewed that in the remarks, but Tom, maybe you can get into a little more detail.

[Thomas Polen, Becton, Dickinson & Co.]

Sure. Hey, Brian, this is Tom. So, I think, as you heard from Vince, what we were most pleased about is, is that there was strong growth across all three segments, and it was both in the core across all three segments as well as what you saw where new products starting to fire in each of the three segments. And so as we think about Medical, again, we've got core strong underlying businesses with Pyxis ES as a new product really gaining traction and share this year. We saw the new Alaris Pump M2 (49:44) really be widely positively received in the marketplace. We expect about 2 points of share gain in FY 2018 on the pump side, and that continuing into 2019.

And then the momentum in Pharm Systems, as you heard Vince mention, driven by both the trend in vial to prefill, but also around biologic and self-injection and some of the portfolio investments we've made over the last couple of years really positioning us well as a strategic partner of choice with top pharma. There is a trend that we expect to continue the growth going forward, and we're adding capacity very actively actually in that space to make sure that we're in a position to continue to capitalize on that.

Same thing in Life Sciences, right? So, we look at core businesses are strong. DS, we see – BD MAX continuing to grow north of 20% for the year. Kiestra really taking off now in the U.S. It's been strong internationally over the past few years. I'd say, we're seeing a really nice trajectory uptake in the U.S. and that trend is just starting. And, of course, Veritor had a great year. And one thing I'd point out is that while we expect we're modeled a lighter flu season, we did pick up share in the Veritor space and for flu, and so we've got a larger footprint of instruments. Regardless of what flu season happens, we'll be able to capitalize on it further given the penetration that happened in 2018.

And then in PAS, we've got new capacity coming online. For Push Button, which is a bit of the driver of the uplift you saw there, that's only going to benefit us as we go into 2019. And Bioscience, a lot of growth driven by new high-end instruments and reagents. And then finally, just on Interventional, you had every business there grew north of 6%, obviously led by the Peripheral Intervention business, but – I'm sorry, the segment grew at 6% with two of the three businesses growing north of 6%. Obviously, WavelinQ, we're positive about and are very positive on the reimbursement, which will be a momentum as we go into 2019.

Clearly the BTK data will come out tomorrow, I think just overall reflecting the depth of the portfolio there. And Progel is another thing that we really saw limited impact of in 2018. But as we've gone even just this month – last month in October and as we go into November, customers are ordering Progel. We're seeing sales start to ramp up. And we're seeing good momentum very much in line with our expectations. So, overall across the businesses, we're feeling well about both the core business as well as the value of the portfolio starting to really take off.

[Brian David Weinstein, William Blair & Co. LLC]

Okay.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

One piece of information I might add, we get asked this question a lot, and we probably won't do this going forward anymore. But going back to legacy Bard, legacy BD, legacy Bard we see grew in 2018 by about 7% and legacy BD grew over 6%.

[Brian David Weinstein, William Blair & Co. LLC]

Great.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Okay, thanks, Brian.

[Brian David Weinstein, William Blair & Co. LLC]

Thanks.

[Operator]

Our next question comes from the line of Isaac Ro with Goldman Sachs.

[Isaac Ro, Goldman Sachs & Co. LLC]

Good morning, guys. Thank you.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Good morning.

[Isaac Ro, Goldman Sachs & Co. LLC]

Hey, guys. So, just a question on a couple of key pipeline items, maybe on the Medical side. Vince, you mentioned a little bit about status on the T2 Patch Pump. Can you give us a little bit more detail as to the initial strategy for rollout at the end of 2019? And then secondly, for Patrick on the Life Sciences business, BD MAX has been doing pretty well for a while now. Can you give us a sense of where we are in the life cycle for that product? I think competition in molecular is getting a little bit thicker, so I'd be interested in where you go from here.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Sure. Alberto will take the first one and then Patrick will do the second.

[Alberto Mas, Becton, Dickinson & Co.]

Yeah. Well, on the Type 2 Patch Pump, we are – continue to be very excited about the potential of the product. We are making good progress on the program. We are learning through our clinical trials and the interactions with our customers. And we expect to be preparing for a submission in the next few months both in U.S. and Europe. Our production lines are getting up to speed, and we are working our evidence generation programs as well. So the program is progressing well, and we're expecting – depending obviously on the FDA approval process and timing we expect towards the end of the calendar year to be able to launch in the U.S., so good news to report there.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

And Patrick?

[Patrick Kaltenbach, Becton, Dickinson & Co.]

Yes. Hi, Isaac. This is Patrick. Well, let me first report a little bit on BD MAX, and as you've heard, we've really had very strong growth in the year, we grew about 35% worldwide with BD MAX, and a lot of that is driven, of course, by the new panels we rolled out. We will continue to roll out new panels next year like the Enteric Viral Panel here in the U.S., so that will give us continued momentum. So I'm very, very positive on BD MAX as a molecular solution moving forward.

That said, on the slide for new products we had BD COR for next year, which is a higher throughput molecular platform as we go through an early access launch towards the end of next year, and moving forward, I think that will accelerate our growth in molecular as well. So, overall, very positive on the growth opportunities in this space.

[Isaac Ro, Goldman Sachs & Co. LLC]

Great. And just a follow up with Chris on the CapEx, I think in the past you guys had talked about doing about $3 billion over the 2016 to 2019 period. If I look at the guide for next year, it looks like you're going to come in a little bit above that number, if not much, but I'm curious kind of in the capital budgeting, what's going on there? Are there items that maybe roll off if we look over the next few years that could release a little more free cash flow growth? Thank you.

[Christopher R. Reidy, Becton, Dickinson & Co.]

Sure, Isaac. It really is more about capacity which comes from the stronger revenue growth in reality. So that's what's driving the CapEx up.

[Isaac Ro, Goldman Sachs & Co. LLC]

Okay. Thanks.

[Operator]

Our next question comes from the line of Robbie Marcus with JPMorgan.

[Robbie J. Marcus, JPMorgan Securities LLC]

Great. Thanks for taking the question. Chris, just to follow up on the capital allocation question there, you've hit your payback targets. You're now less than 4 times as of September.

[Christopher R. Reidy, Becton, Dickinson & Co.]

Right.

[Robbie J. Marcus, JPMorgan Securities LLC]

In a year where there are a number of headwinds, how do you balance maybe using some of the money allocated for debt paydown to help cover some of the macro headwinds? And in that, are there any other rooms, levers or ways that you can offset some of those macro headwinds that maybe isn't built into guidance here?

[Christopher R. Reidy, Becton, Dickinson & Co.]

Yeah, I don't see it being a cash-driven issue in terms of offsetting the headwinds. I think we're investing significant cash in the business in a number of ways, as we just talked about, CapEx for capacity purposes. And so, we feel good about that, and we're generating a lot of cash, as you see.

So we think we can do both. We think we can invest in the business to continue to grow the business, as you would expect, and to still make our commitments on the debt paydown. And so we've got about 1 point left or 1 times left, and I would expect that to be ratable over the next two years. So another 0.5 point this year and another 0.5 point next year, and we'll be down below 3 times. So we think we can do both of those items.

[Robbie J. Marcus, JPMorgan Securities LLC]

Okay, great. And maybe to stay in that vein, I don't want to jump the gun, but you've now had a fairly successful CareFusion integration. Bard looks to be going ahead of plan. How do you think about now with the very broad hospital platform that you have, how do you think about continued M&A? And are there any areas that stand out to you that you think need the most adding to, or could be bulked up here?

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Yeah, thanks for the question. And we're really focused on integrating what we have right now. We're just finishing up. As we said, pretty much just finished CareFusion. We're focused on the Bard integration. And we know from a strategic standpoint that we have an excellent portfolio. We're going to continue to do small plug-ins. It's the nature of the business. You saw it with TVA. So you should expect that our focus is going to be debt paydown and continuing to enhance the portfolio in ways that really build up what we'll call category management.

We think we've positioned ourselves to be one of the strategic partners of choice within the industry. That doesn't require us to get much, much bigger and broader. It's about playing out what we have and becoming the partner of choice as we drive – as we're driving these synergies, you should think about this as also driving the customer experience. We're going after simplification, making BD easier to do business with, that's the phase we're in right now.

In the long run, we know we'll have the capability if we ever desired to make another larger move, but it's great to have strategic flexibility. But as Tom and Chris and I are always discussing, that's not what you want to base your strategy on. It's great to have capability. We're going to drive our innovation system, do our plug-in acquisitions. That's what we're focused on – and process simplification – getting our synergies. And thanks for the question.

[Operator]

Our next question comes from the link of Bob Hopkins with Bank of America.

[Bob Hopkins, Bank of America Merrill Lynch]

Oh, thank you, and good morning. Just two quick questions. First, just to clarify on resin costs, can you just talk a little bit more about the supply constraints and when do those ease, and when they ease, do the cost come down? Thank you.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Sure. So the issue is the supply constraint on propylene which is actually a byproduct of ethylene, and ethylene production has significantly reduced. So it's a byproduct of that. And we saw that happening just from a supply standpoint. We are seeing a little bit of capacity coming in from outside the U.S. You may recall, there was a supplier that went bankrupt in the propylene area. We had some hurricane issues over the last year or so. So the combination of all those factors are what's driving the capacity constraints.

There is some positives of capacity coming in from international sources, but at the same time you have oil price impacts as well. So we think that the impact that we're seeing in the fourth quarter of that double-digit increase will kind of hold for this year. But we don't see that continuing to go up in the future. We think it will be fairly stable over the course of the year.

[Bob Hopkins, Bank of America Merrill Lynch]

Okay, great. And then the follow up, I just wanted to ask a question on MMS because that's obviously very exceptional growth in that business this particular quarter. So maybe if you could just kind of quantify where you are in terms of pump market share, how much share you think you're gaining. And then I'd just be curious as to – if you could explain a little bit more about your comment that you're seeing placements earlier than expected. What are the dynamics around that? Thank you.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Sure. Alberto will take that.

[Alberto Mas, Becton, Dickinson & Co.]

Yes. Well, obviously, great performance in the quarter. We saw 20%-plus growth rate in both sides of the business, both dispensing and infusion. A lot of these dynamics – well, in terms of the actual timing, it's timing of infusion pump placements and installations. But also on the Pyxis side, on the dispensing side, the variability especially after trades comes more – (01:02:00) there's a component of our business that continues to be capital purchases, cash purchases, if you like. This is affected by timing. And in terms of the timing, it's a combination of customer expectations and when they're ready and readiness, as well as our own preparedness, availability of service and installation, and resources at the same time. So that combination drives some of the timing.

What I would emphasize is more of the underlying growth rate of the business overall, which we – we expect the momentum to continue. The market share is – we estimate around 2 percentage point share gain on the infusion side, and 1% on the dispensing. A lot of that – and then Tom mentioned some of the investments in the core, or our anchor products like the M2 (01:02:53), like Pyxis ES and so on. But what really is driving a lot of these conversions and momentum in the business is our integrated and connected strategy through our interoperability capabilities. We now have over 350 sites that are now live there as well as our HealthSight platform, analytics that really enables that integration and capability that is unique from our perspective.

[Bob Hopkins, Bank of America Merrill Lynch]

Great. Very helpful. Thank you.

[Alberto Mas, Becton, Dickinson & Co.]

Okay.

[Operator]

Our next question comes from the line of Larry Biegelsen with Wells Fargo.

[Lawrence Biegelsen, Wells Fargo Securities LLC]

Oh, good morning. Thanks for taking the question.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Good morning, Larry.

[Lawrence Biegelsen, Wells Fargo Securities LLC]

One on the fiscal 2019 revenue guidance and one on Lutonix, and I'll start with the revenue guidance. So you exited the year growing 8.4%, and as someone mentioned earlier, it's prudent I think to guide to 5% to 6%. But my question is, Chris, you talked about it being more back-end loaded. So just trying to understand why that would be the case. Q1 is the easiest comp I think in the year. That's my first question, and then I had a follow-up.

[Christopher R. Reidy, Becton, Dickinson & Co.]

Yeah, so there's two things. The flu grow over (64:12) is in the first half of the year, and then as we talked about MMS, that 23% growth in MMS in the fourth quarter with these earlier placements that – some of that's going to come out of the first quarter, and that's on the revenue side. And as I mentioned in the prepared remarks, FX will hit us on the bottom line in the first quarter. So that's the reason for the comments on phasing.

[Lawrence Biegelsen, Wells Fargo Securities LLC]

Thank you. And then on Lutonix, assuming a positive outcome tomorrow, I think Bard estimated that the BTK opportunity was about $250 million. So my question is, assuming a positive outcome tomorrow, do you agree with that? And is reimbursement in place and sufficient to kind of drive that opportunity? Thanks for taking the questions.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Simon?

[Simon Campion, Becton, Dickinson & Co.]

Yeah. So nothing has materially changed from the Bard projections with respect to the market opportunity for BTK, and it's going to – the expectation is it will be continued to be reimbursed as any traditional DCB.

[Lawrence Biegelsen, Wells Fargo Securities LLC]

Thank you.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

So, very much in line with what we expected. Okay, thanks for the questions.

[Operator]

Our next question comes from the line of Kristen Stewart with Barclays.

[Kristen Stewart, Barclays Investment Bank]

Hi. I have two questions. The first one, I know you touched a little bit on this, but I was wondering if you could just go in a little bit more in terms of the opportunity relative to the Patch Pump. I know you discontinued the sets. How did you frame that opportunity relative to the Patch Pump? And then I have a second question for Chris.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Okay. Tom?

[Thomas Polen, Becton, Dickinson & Co.]

Hey, Kristen. This is Tom.

[Kristen Stewart, Barclays Investment Bank]

Hey, Tom.

[Thomas Polen, Becton, Dickinson & Co.]

So, first off, just to speak to FlowSmart a little bit more, certainly the type 1 insulin pump market, it's continued to evolve over the last few years. And as was mentioned earlier on the call, the latest product redesign for FlowSmart didn't deliver the level of differentiation that we were seeking. And so, look, we could have continued to invest in FlowSmart. If you would ask us that, yes, we could have continued to invest in that. But given the economics of that as more of an OEM product and the number of more attractive investment opportunities we now have in our R&D pipeline, as part of our portfolio process we made a decision to stop that product and redirect the investments into more attractive opportunities both within DC and outside of DC.

And certainly within DC, the number one product there that we're investing behind and put some further funding behind is Swatch (66:37). And as you heard from Alberto, we continue to be – very positive outlook on that product. It's gone through and continues to go through clinical trials. We continue to get additional patient and physician feedback on it which is all at or above our expectations. And so, we're doubling-down on the final stage of bringing this to market this year.

[Kristen Stewart, Barclays Investment Bank]

Perfect. And then not to jump too, too far ahead, but it looks like the Gore royalty has been running a lot higher than where it was trending with Bard. And I was just wondering if you could kind of just give us your perspective on ability to grow through that. I know that's not really a big impact for fiscal 2019, just given the timing of when the royalty ends, but how should we just think about longer term? Clearly, this year, you had mentioned it sounds like you're running a little bit ahead of the deal model. Does that give you increased confidence to offset some of those headwinds, or just how should we think about kind of Gore? I know that's a little bit out, but...

[Christopher R. Reidy, Becton, Dickinson & Co.]

So, yeah, Kristen, this is Chris. And you're right that the Gore royalty is running a little bit hotter. But fundamentally, it's no change from what we talked about when we announced the deal, that the biggest impacts in reducing that is the paydown of the debt and the corresponding decrease in interest expense, coupled with now we talk about revenue synergies, and they start in 2019 and ramp-up a little bit more in 2020. So, that helps. The cost synergies again mitigate that, and then the conversion of the preferred dividend helps a little bit as well. So, fundamentally, it's the same offsets, and so that's what we would expect to see.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Thanks for the questions, Kristen.

[Kristen Stewart, Barclays Investment Bank]

Thank you.

[Operator]

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

[Vijay Kumar, Evercore ISI]

Hey, guys.

[Christopher R. Reidy, Becton, Dickinson & Co.]

Good morning, Vijay.

[Vijay Kumar, Evercore ISI]

Thanks for taking the questions. Morning, Chris. Just maybe back on that margin question, so if you look at the deal model, Chris, that we had, 200 basis points of annual margin expansion right through 2020. I'm just looking at the guidance here. What would cause this to get to low end of the operating margin guidance for the year? Because I can understand some of the headwinds getting to the high end of the margin guidance, maybe even at the midpoint, but the low end, I'm having a tough time. So, can you just walk us through versus the deal model...?

[Christopher R. Reidy, Becton, Dickinson & Co.]

Sure. So, you're talking about 2019?

[Vijay Kumar, Evercore ISI]

Yes.

[Christopher R. Reidy, Becton, Dickinson & Co.]

Yeah. So, on an underlying basis, the operating margin expansion would be over 200 basis points, which is right in line with what we expected. You get about a 80 basis point, somewhere in there, 50 to 100 basis point drag from the raw materials, resins, tariffs and the divestitures. So, all-in all-in, we've got about 100 to 150 basis points of margin expansion, which is right in line with what we had originally announced.

And just as a reminder, I mean, we say this. We're really proud of the fact that we've driven 700 basis points through to-date from FY 2015. And then with 100 to 150 next year and more than likely the same kind of amount in 2020, over a five-year period, we'll have driven about 1,000 basis points of margin expansion. So, we really feel good about margin expansion, including next year.

[Vijay Kumar, Evercore ISI]

Got you. And then one on tax rate, so it's down year-on-year. Is this now sustainable, Chris, or were there any one-off assumptions for the tax guide for 2019?

[Christopher R. Reidy, Becton, Dickinson & Co.]

Yeah, so it's not one-off. It's really driven by the normal geographical mix and the synergies of bringing BD and Bard together and the tax structures we talked about. And we said that would take the better part of a year to sort through, and the 14% to 16% is a reflection of that.

[Vijay Kumar, Evercore ISI]

Thank you, guys.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Okay. Thank you.

[Operator]

Our next question comes from the line of Richard Newitter with Leerink Partners.

[Richard Newitter, Leerink Partners LLC]

Hi. Thanks for taking the questions. Vince, my first one, just on the $250 million Bard revenue synergies by 2022, I might have missed it, but can you just talk through how to think about the cadence there over that time period, and if you can talk to the different buckets, which ones materialize at which times?

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Yeah. So, I'll start and then Tom can add a little bit more color to it. But first thing to think about is the vascular access portfolio. We've put the sales forces together in the U.S. We've got that as one business in MDS. And that we're able to go in and starting right now sell an optimized portfolio of products, including the PICCs. And so we think that when you look at 2019, we're talking about tens of basis points for fiscal year 2019 and then things ramping up from there.

The other thing that's contributing to that in the short run is, we've hired the sales force in Europe, and on the Surgery side, and that's around biosurgery and ChloraPrep. And so we've brought them on. We're activating those sells reps. So those are two good things that are going on. And the third piece is the geographic expansion piece. China, they already have the organization in place. We're continuing doing that. But in places like Latin America and Asia, they come on stream and then they accelerate the growth once you get past 2019.

Tom, you want to add anything else to that?

[Thomas Polen, Becton, Dickinson & Co.]

That was a great summary. The only maybe two things to mention from the other third pillar, so Vince talked about vascular access, the channel expansion in Europe, as you know, Bard had really invested heavily in China, and we're also continuing to invest now in areas where they hadn't got to invest yet, like Latin America, EMA, and the rest of Asia.

From a timing and phasing over the five-year window that we've talked about, we think about obviously very limited synergies this last year; 2019, it does step up. And then 2020, it kind of doubles off of where we were in 2019 and then it stays relatively at that level, maybe modest increases of those additional gains for the next two years after that. So, certainly, 2019 is a step-up, but then 2020 continues to step up more ratably.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Yeah.

[Richard Newitter, Leerink Partners LLC]

Okay. That's really helpful. Thank you very much. And then if I could just ask, I think I heard a comment earlier on in the call that China growth moderated, and maybe I'm just looking at the wrong numbers. But it looked like 13% growth constant currency for China this quarter, last quarter, roughly the same. What was that comment about specifically?

[Vincent A. Forlenza, Becton, Dickinson & Co.]

That was me. Yeah, I actually said it grew 13% in the quarter. But looking forward, I said we expected it to be low-double digits next year. And all I mentioned was that we had very strong performance across the board. We expected that to continue, that the whole industry had seen a little bit of cost control that was put in place. This is no new news. We had exceptional performance in our Life Sciences side of the business. So we expect basically the same performance, maybe a tick lower, that's all.

[Richard Newitter, Leerink Partners LLC]

Okay.

[Christopher R. Reidy, Becton, Dickinson & Co.]

Yeah, I would say, most of that tick lower was related to math because we're growing about the same amount of revenue dollars off a bigger base. And so it steps down a point or two from that alone.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Yeah. But thanks for the chance to clarify that.

[Richard Newitter, Leerink Partners LLC]

Okay. Thank you.

[Operator]

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

[Unknown Speaker]

Hey. Good morning.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Good morning.

[Unknown Speaker]

This is Chris (74:49) on for Doug today. Thanks for taking my questions. As a follow up to your previous question, could you just provide a breakdown of the key drivers to margin expansion in 2019? Now, how do cost synergies, core execution and the inclusion of Bard contribute to the 100 to 150 bps of target expansion?

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Sure. Hold on one second.

[Christopher R. Reidy, Becton, Dickinson & Co.]

Yeah. So, the base plan initiatives are up about 150 basis points. The synergies add about 50 and then the Bard portfolio is about another 10 or 20 basis points. That gets you up to about 200 basis points. And then, as I mentioned, the resins, tariffs, flus and the divestiture pressures are in the 80 to 100 kind of range, which brings you to total of about 100 to 150 basis points.

[Unknown Speaker]

Great. Thank you. Then maybe just a unrelated follow-up. You ended 2018 with about 7% growth in Life Sciences business, guidance for next year is 4% to 5%. I think you called out flu as being 90 basis points headwind, so guidance for next year still implies a moderation in growth beyond just difficult flu comparisons. I mean, with that in mind, what else is impacting Life Sciences' growth next year? And can you just comment on the underlying sustainable revenue growth rate for that business? Thank you.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Yeah, Patrick will take that.

[Patrick Kaltenbach, Becton, Dickinson & Co.]

Yes. I'm happy to take that. First and foremost, if you look at this year's growth rate, of course, we had also a tailwind from the flu. So if you take flu out, we had been growing between 5% and 6% as well this year, so that's my first point. And forward-looking, I think what we are looking at is an underlying market growth somewhere between 4% to 5% in overall Life Sciences. If you take the flu headwind this year out and say we will grow between 5% and 6%, we will actually achieve that goal to grow at the high end, if not above the market with our product portfolio.

I'm very confident that with the product portfolio we will roll out next year and what we did this year, we have a strong momentum in the Life Sciences market. We see a lot of opportunity in the immunology space, diagnostics base, and new solutions we have in the Preanalytical portfolio as well. So, again, the fundamentals are strong and I think we are positioned well. The 4% to 5% are really based on the fact that we account for the 90 basis points in flu.

[Christopher R. Reidy, Becton, Dickinson & Co.]

Yeah. Yeah, the only other thing I'd point out is we had the FlowJo acquisition in the current year, and that was worth probably 40 basis points.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Yeah, so that kind of tricks up the comparison a little bit.

[Christopher R. Reidy, Becton, Dickinson & Co.]

Yeah.

[Unknown Speaker]

Okay. Great. Thank for taking my questions.

[Operator]

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

[William R. Quirk, Piper Jaffray & Co.]

Great. Thanks, and good morning, everyone.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Good morning.

[William R. Quirk, Piper Jaffray & Co.]

Two questions, I guess, first, Vince, just following up on Rich's question about the pacing of revenue synergies, can you speak to the pacing for CareFusion kind of – or maybe, Tom, in the next couple of years? And then, secondly, for Patrick, regarding the changes to Medicare reimbursement around the respiratory and GI panels, it strikes us that BD is in a pretty good position here given how you've set your panels up, so I would just love a comment on that changing dynamic and I suppose the potential for commercial payers to follow Medicare? Thanks, guys.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

All right. So, Tom is going to talk to the CareFusion.

[Thomas Polen, Becton, Dickinson & Co.]

Okay. Hey, Bill. This is Tom. So, on CareFusion, we continue to be very much on track to realize the $175 million in cumulative CareFusion synergies by FY 2019. And so we're coming to the tail end of that process of course now. As we've talked about before, we've seen the tens of bps impact, and I think you're seeing that across the Medical segment, which is where that's all focused, and it's specifically within the MDS International business and MMS, which I think you've seen really the acceleration from what – remember when we started the journey there, was an underlying CareFusion growth rate of 3% to 3.5% growth that obviously based on what you saw in 2018 we're exiting and going into 2019 at a number well north of 5%. And so, we see that clearly contributed to the revenue synergy impact that we've seen and look forward to bringing that home in a strong way in 2019.

Maybe a comment from Alberto as well.

[Alberto Mas, Becton, Dickinson & Co.]

Yeah. I also want to emphasize that our international product registration efforts has really continued and we registered a total of 300 product registrations in new markets as we expected. And just to give a little bit more color on the Medical segment, a lot of it's driven by CME, infusion pumps and Rowa dispensing solutions, ChloraPrep and the Pyxis IV Prep are some of the items that are driving some of these revenue synergies.

[Thomas Polen, Becton, Dickinson & Co.]

Maybe Patrick on MAX?

[Patrick Kaltenbach, Becton, Dickinson & Co.]

Yeah. I can answer that. I mean, referring to Tom on (79:54) Medicare changes, I think we do not really expect it to have a big impact on our portfolio overall. As you know, we have some exposure, but most of our tests are not paid according to CFLS (80:07) because they fall outside of the Medicare population. So, we don't really expect a big impact there.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

It hasn't been a big impact. We don't expect it to.

[Operator]

Our final question comes from the line of Amit Hazan with Citigroup.

[Amit Hazan, Citigroup Global Markets, Inc.]

Oh, hey. Good morning. Thanks. Hey. Good morning. Thanks. Let me ask my first one on the Bard synergies on the cost side. Just wondering, now we're kind of nearing almost a year since the close, what's your visibility now versus the year ago as to whether your cost synergy target has room to improve over the original guide?

[Christopher R. Reidy, Becton, Dickinson & Co.]

Yeah. So, thanks for the question, Amit. I think one thing I would point to is the tax synergies, which were not included in the initial amount. We typically don't show them, but did come to fruition. We did about $75 million in 2018 and those were the types of synergies that you get from the duplication of public company costs and some procurement. So the visibility to those typically is very high.

The next bucket that you would think of the next $100 million is the integration of systems and processes and functions. And we are in the execution stage of that. I feel really good about it, but you want to see that. And then, the third bucket is distribution centers and plants, et cetera, and that takes a while. So, we're just coming into the phase where we'll see the execution of those two buckets, which are really the ones that are the more difficult to get and takes a lot of execution. So, nothing that we see at this point would enable us to call an increase to that $300 million beyond the tax, but that's something that we're right in the middle of execution on, so a while longer before we can predict it for 2020.

[Amit Hazan, Citigroup Global Markets, Inc.]

Thanks. And just last one, then on Interventional business and Surgery and actually hernia in particular, even if I exclude Progel and the hurricane, it seems to be trending slower than what Bard was doing pre the acquisition. Obviously, a big part of Bard's success in recent years was coming from share gains in hernia, so I'm just wondering if you can give us some color on growth trends in your hernia platform and what you expect there in the coming year.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Sure. Simon will do that for you.

[Simon Campion, Becton, Dickinson & Co.]

So, I think, as you said, we've just come off the hurricane and Progel and we're in the process of regaining some of the share that we've lost. You saw a reacceleration in Q4 for us. We do expect that to continue, but clearly there remains work to be done. So that's what we're looking at moving forward. And then, as Vince said earlier on, we are looking at geographic expansion here now as well, and we expect to – for that to be able to accelerate our momentum moving forward too. So, we're pretty happy with where we sit right now, and we're looking forward to executing on the synergies that we've rolled up.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

Yeah. All in all, the overall Interventional segment is doing very, very well. And the recovery program from the hurricane was not just getting the production back in place, but of course, there was a lot of competitive inventory in the channel that we had to go and deal with. The team has done a fantastic job on that in getting that back. And we expect that to continue in 2019, but the overall business is doing well. So, we expect that recovery to continue in 2019, but thanks for the question.

[Operator]

At this time, there are no further questions. I will now turn the floor back over to Vince Forlenza for closing remarks.

[Vincent A. Forlenza, Becton, Dickinson & Co.]

So, thank you very much for your participation and your questions. Let me just finish with some final thoughts. We had a very strong finish to the year, and I feel incredibly proud of our performance and what this team has done. The combination of BD and Bard continues to deliver exceptional value to our customers and our shareholders. And lastly, we have good momentum going into fiscal year 2019, and we look forward to updating you next time. Thank you very much.

[Christopher R. Reidy, Becton, Dickinson & Co.]

Thanks, everyone.

[Operator]

Thank you. This concludes today's conference call. You may now disconnect, and have a wonderful day.