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CareFusion (NYSE:CFN)

F1Q11 Earnings Call

November 02, 2010 8:00 am ET

Executives

Carol Cox - SVP, IR

Dwight Winstead - Chief Operating Officer

David Schlotterbeck - Chairman and Chief Executive Officer

Edward Borkowski - Chief Financial Officer

Analysts

Nikhil Hanmantgad

David Turkaly - Susquehanna Financial Group, LLLP

Michael Weinstein - JP Morgan Chase & Co

Kristen Stewart - Credit Suisse

Ben Andrew - William Blair & Company L.L.C.

Frederick Wise - Leerink Swann LLC

David Lewis - Morgan Stanley

Thomas Kouchoukos - Stifel, Nicolaus & Co., Inc.

Lennox Ketner - BofA Merrill Lynch

Amit Bhalla - Citigroup Inc

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 CareFusion Earnings Conference Call. My name is Stephanie, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Ms. Carol Cox, Vice President, Investor Relations. Please proceed.

Carol Cox

Thank you, Bethany, and good morning, everyone. Thank you for joining us on today's call as we provide an overview of CareFusion's results for the three months ended September 30, 2010, and provide an update to our guidance for fiscal 2011.

Our press release was issued this morning at 7:00 a.m. Eastern Time and posted on our website at www.carefusion.com, and filed on Form 8-K with the Securities and Exchange Commission. We also filed and posted several slides to accompany today's webcast, which may be found on the Investor Relations homepage with the earnings materials. While we will not review each slide on today's call, these slides should be used as a reference guide by investors. The slides include comparisons of the results for the three months ended September 30, 2010, to the prior year period, as well as financial outlook for full year fiscal 2011 and definitions of our non-GAAP items and reconciliations to GAAP.

Joining me on today's call are Dave Schlotterbeck, our CEO; Ed Borkowski, our Chief Financial Officer; and Dwight Winstead, our Chief Operating Officer. Before I turn the call over, I'd like to make a few remarks.

In today's call, we will be presenting our results on a GAAP and an adjusted basis. Our adjusted results exclude restructuring and acquisition, integration charges, nonrecurring spinoff-related costs, nonrecurring tax items and discontinuing operations. We believe that adjusted financial measures can facilitate a more complete analysis and greater transparency into CareFusion's ongoing results of operations, particularly in comparing underlying results from period to period. Our management team utilizes adjusted financial measures internally in financial planning to monitor business unit performance and in evaluating management performance. We've included reconciliations of these non-GAAP measures with today's release.

I would like to remind investors that during today's call, we will be making statements that are essentially forward-looking and consequently are subject to risks and uncertainties. Examples of these statements include statements regarding our fiscal '11 guidance; our expectations regarding hospital capital spending; expectations related to our restructuring program, including anticipated timing, costs and expected savings; our expectations regarding acquisitions and divestitures and statements regarding business and revenue growth and anticipated foreign fluctuations, as well as any other statements regarding matters that are not historical facts.

You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's press release and those set forth in our Form 10-K and our other filings with the SEC. We urge you to consider these factors, and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances.

With that, I will turn the call over to Dave.

David Schlotterbeck

Thanks, Carol. Let me start by talking about our results in the quarter and then make comments about my planned retirement. Overall, I'm pleased with our performance during the first quarter. Our earnings were in line with our expectations and highlighted a strong quarter for the Infusion, Dispensing, Infection Prevention and Medical Specialties businesses.

These businesses all saw continued momentum from the fourth quarter, giving me confidence to reaffirm our revenue and EPS guidance for the year. With an adjusted EPS for Q1 of $0.30, we are on track with the full year guidance we provided in August of $1.58 to $1.68 and 11% to 18% year-over-year increase, as we indicated when we reported our Q4 results. Earnings were projected to decline in the first quarter due to the strong Q1 we had last year, where we shipped an unusually large amount of infusion pumps following a ship hold and had strong Respiratory sales associated with H1N1.

We continue to expect revenue growth in the mid-single-digit range we provided in August. We overcame nearly all of the $60 million in benefit we saw in the first quarter of last year from H1N1 and our Alaris System coming off a ship hold. Our Respiratory revenue was lighter than we anticipated. We expect this impact through the remainder of the year will be offset by strength in our other businesses and upside to our budgeted foreign currency rates.

Let me take a minute to discuss the factors that affected Respiratory sales during the quarter. Coming off a record year due to H1N1, many hospitals had adequate capital equipment to meet their needs. This was complicated by an overall lower census, including the lowest birthrate in 100 years, according to recent CDC data, and a mild start to the flu season. This combination of what we now understand to include forward buying by our customers during the last fiscal year and lower admissions to start this fiscal year led the softness in Respiratory capital sales and associated disposables.

On the Capital Equipment side of the business, we performed better in the U.S. market but saw a greater shortfall to our revenue expectations outside the U.S. due to a slowdown in the European market and, to a lesser degree, with our distributor in Canada. Our Respiratory business is positioned well, with a competitive product portfolio and a strong pipeline to drive growth over the longer term.

We saw a continued growth in our Infusion business, surpassing the substantial Q1 we had in the prior fiscal year. We exited this quarter with a strong backlog, putting this business in great shape for the year. I remind you that we have a large ramp projected throughout the year in our Infusion sales. We have a lot of work ahead, and we are operating in a very competitive environment. But the early indications show continued year-over-year momentum from Q4 through Q1 and even as we have entered Q2.

In the last 15 months, we have taken an estimated 49,000 competitive channels and only lost 4,500. So we have momentum, and our year is shaping up as we expect it. I continue to feel comfortable with our projections for share gains, with the variable we don't control being the exact timing of the conversions.

There's a similar story in Dispensing. The business is performing as we expected, meaning, competitive wins continued to far outpace any competitive losses as we renew existing customers and build a healthy backlog. We won a record number of new contracts through this period, coming off our strongest Q4 in three years for committed contracts. We have good momentum in our core Dispensing business and are increasing the value we provide our customers through strategic partnerships, like the alliance we created with Cerner. In our first quarter of the Cerner relationship, we are already taking orders moving ahead with our co-development plans and seeing progress in our pipeline.

In Medical Technologies and Services, we had some revenue pressure against Q1 of last year due to the sale of our Research Services business and softness in surgical volumes outside the U.S. We also had a strong prior year period in our International Surgical Products business in both sales and in the benefit of foreign currency exchange rates.

I was very pleased with the continued progress we made in our Infection Prevention business where ChloraPrep, our skin antiseptic product for vascular and surgical procedures, continued to grow substantially despite softness in procedure volumes. ChloraPrep is quickly becoming a standard of care in hospitals across the country, with strong clinical evidence base and a growing number of key opinion leaders advocating its use. We have an active schedule of introductions for the product outside the U.S. beginning in early 2011.

We also continue to make product with the launch of our AVAmax Vertebral Balloon product for kyphoplastic procedures in the U.S. market. We have a modest revenue plan for it in this first year but are encouraged by the market interest and user feedback. Approximately 100 hospitals are now using the product, which we believe to be a positive indicator just three months following our commercial launch.

Overall, we remain in a good position as we navigate several important initiatives through the year. We continue to make progress against the global restructuring we undertook last quarter to deliver more than $100 million of annual ongoing savings. We remain committed to evaluating strategic options and taking action this year with businesses in our portfolio that do not strategically fit or are dilutive to our operating margins.

We also continue to invest in R&D, in our innovation pipeline, with a focus on growth over the long term. We're increasing our R&D spend approximately 10% in FY '11 to strengthen our core franchises, extend our offerings into adjacent markets and connect our existing devices to increase the value we bring to customers as CareFusion.

As you know from our separate news release this morning, I also announced my retirement plans today. The decision about the timing to retire is always a personal one. In my case, I've always had a relatively short time period in mind once we completed the spinoff with an experienced leadership team in place and a solid year behind us as a public company. I'm confident that I'll leave CareFusion in an excellent position to continue to grow well into the future. We established a differentiated vision to lower the cost and improve the safety of healthcare for generations to come and have executed against it with an enviable portfolio of industry-leading medical devices and services for our customers worldwide. I'm proud of the company and where it stands in the industry as I anticipate this new phase in my life.

The board started succession planning earlier this year. Given my decision, and the internal and external search for my successor has been initiated, led by our Presiding Director Mike Losh. Mike and the special committee of the board intend to be disciplined and thorough in their approach, with the target date to have a new CEO in place prior to my departure on February 28.

And before I turn it over to Ed, I want to thank our global employees for the support they've given me and the commitment they continue to demonstrate to our customers and to the growth of CareFusion. We're making progress through a combination of longer-term investments and the shorter-term work we've undertaken to improve our profitability. As I've said before, our portfolio of businesses continues to provide us with a good long-term balance of capital equipment essential for hospitals to deliver patient care, along with procedure-based products.

Now I'll turn it over to Ed.

Edward Borkowski

Thank you, Dave, and good morning, everyone, and thank you for joining us. On today's call, I will be reviewing our financial results for the first quarter and our full year fiscal 2011 guidance. Before I move to our results for the quarter, I'd like to provide some context to these results compared to the guidance we provided in August.

While we do not guide on a quarterly basis, we said that we expected our first quarter earnings to be down year-over-year based on several items that positively impacted our first quarter fiscal 2010 results, which we did not expect to reoccur in the first quarter of fiscal '11. In addition, we said that we expected earnings to be weighted to the second half of the year, with nearly 60% coming in the third and fourth quarters of fiscal '11.

Today, we are reaffirming our adjusted EPS and revenue guidance ranges for fiscal '11. We continue to expect that our results will be weighted to the second half of the fiscal year, as momentum in several of our businesses builds throughout the year. Additionally, currency rates have improved since we last provided guidance, which benefits our top line. However, notwithstanding the currency benefit, we would be within our guidance ranges for both revenue and adjusted EPS. Please keep these points in mind as I review the financial results for the quarter in more detail.

Our adjusted net income for the quarter was $67 million or $0.30 per diluted share compared to $87 million or $0.39 per diluted share a year ago, resulting from lower revenue, lower gross margins and higher interest expense and a higher tax rate in the current quarter. Excluded from adjusted net income in the first quarter of fiscal '11 are $40 million or $0.13 per diluted share in one-time expenditures related to our company-wide restructuring, spinoff costs from Cardinal Health, as well as merger and integration costs.

Revenue for the first quarter totaled $908 million, a decrease of 2% on a reported basis and less than 1% on a constant-currency basis compared to the prior year period. On a segment basis, revenues in our Critical Care Technologies segment, which includes our Dispensing, Infusion and Respiratory business lines, totaled $617 million for the first quarter of fiscal '11, essentially flat compared to the prior year period. Adjusted segment profit was $100 million, down 11% from the prior year period due to Infusion and Respiratory results in the first quarter of fiscal '10, which benefited from the unusual items I mentioned earlier.

The Critical Care results were driven by a year-over-year increase in Infusion sales for the first quarter of fiscal '11. We continue to expect that our Infusion revenue will grow double digits to the high teens, driven by incremental growth in the infusion market, our acquisition of Medegen in May of 2010 and the opportunity provided by Baxter's required removal of its COLLEAGUE pump installed base, which we continue to expect to occur in the second half of fiscal '11 and to increase as we move into fiscal '12.

The increase in Infusion sales was offset by lower Respiratory sales, which were lower than the prior year and lower than we had anticipated. We expect the dynamics that Dave mentioned in his remarks to impact our Respiratory businesses throughout the remainder of the year. And as a result, we now expect Respiratory sales to be down mid-single digits compared to fiscal '10.

Our Dispensing business continues to gain favorable momentum as we continue to add to our revenue base through competitive wins, renewals and our agreement with Cerner, which is adding to our yield pipeline. As David indicated, we won a record number of new contracts in the quarter and are on track to achieve our Dispensing forecast for fiscal '11.

In our Medical Technologies and Services segment, which includes our Infection Prevention and Medical Specialty businesses, first quarter revenues were $291 million, a 5% decrease from the prior year period. Adjusted segment profit was $22 million, flat from the prior year. The decline in revenue was primarily driven by the loss of sales from our Research Services business that was sold in May of 2010 and lower International Surgical Products revenues, which were negatively impacted by currency and a benefit from the sales of surgical masks for H1N1 purposes that occurred in the prior year quarter but was not repeated in the first quarter of fiscal '11. These were partially offset by increased sales from our ChloraPrep skin antiseptic product and our Interventional Specialties businesses.

Looking ahead to the remainder of the fiscal year, we are maintaining our revenue guidance of mid-single-digit growth over fiscal 2010 revenue of $3.9 billion. We expect slightly more than 50% of revenue will come in the second half of the fiscal year.

In August, we said that changes in foreign currency were expected to have a negative impact on our revenue results. As the U.S. dollar weakened and several European currencies strengthened since we built our fiscal 2011 budget, the impact of currency on our top line has improved, and together with the strength in our other businesses is expected to offset the softness we are seeing in our Respiratory business.

Our gross margins for the first quarter were 48% compared to 49% in the prior year due to product mix. The prior year quarter included higher gross margins in our Infusion and Dispensing businesses and manufacturing efficiencies as we resumed manufacturing of the Alaris System in the first quarter of fiscal '10. Sequentially from the fourth quarter of fiscal 2010, gross margins are up as a result of the company-wide restructuring and continued benefits from manufacturing efficiencies. For the full fiscal year, we continue to expect our gross margins to be approximately 48%.

Adjusted operating expenses, including SG&A and R&D, totaled $318 million or 35% of total revenue, essentially flat compared to the prior year period. Adjusted SG&A expense of $278 million declined 1% over the prior year period. SG&A included higher spend within the Medical Specialties and Infection Prevention selling organizations to support our AVAmax and ChloraPrep products. The spending was offset by benefits from the August 2010 restructuring, as well as continued cost-saving efforts across all of our business. R&D for the quarter totaled $40 million, up 11% from the prior year.

For the full year, we continue to expect our adjusted operating expenses to total 33% of total revenue due to the restructuring and our continued cost-management efforts. Longer term, we believe that with our continued focus on cost and our ability to execute, we can, over the near and long term, improve our margins by driving efficiencies to improve our cost of goods and continue to decrease our SG&A spend.

Interest expense and other totaled $24 million for the first quarter of fiscal '11, primarily driven by interest on our $1.4 billion of debt, which carries a yield of maturity interest rate of 5.8%, as well as miscellaneous expenses related to nonoperating items that flowed through this line item. During our first quarter, currency negatively impacted our results by approximately $0.02 per share.

Our adjusted effective tax rate for the first quarter was 31.7%, in line with our previous guidance. and compares to a rate of 24.3% for the prior year period. The period-over-period increase in the tax rate is primarily driven by a shift in the mix of pretax income to higher tax jurisdictions, in part as a result of the tax changes we made in the third quarter fiscal '10. The significant increase in our tax rate year-over-year negatively impacted our results by approximately $0.03.

Turning to operating cash flow. For the three months ended September 30, 2010, our operating cash flow used on continuing operations was $7 million. The use of cash during the quarter was expected and was primarily driven by cash payments related to an interest payment on our debt and management and employee incentive plans, both of which were not included in the prior year.

Capital spending totaled $35 million and depreciation and amortization was $45 million. We continue to estimate CapEx to be $160 million to $180 million for the year. And on September 30, we had approximately $1 billion in cash. We continue to expect operating cash flow to be in the range of $425 million to $475 million for fiscal 2011. As I've said on our August call, our cash flow assumptions for fiscal '11 do not include the potential costs or benefits of any divestitures that we may undertake during the year.

I would also like to provide you with an update on how we are progressing against the goals we established at the time we announced the global restructuring in August of 2010. At that time, we guided to expected savings of $85 million to $95 million in fiscal '11 and for that amount to increase by an additional $25 million in fiscal 2012. In addition, we estimate incurring total pretax nonrecurring expenses of approximately $40 million to $50 million in fiscal '11 related to this restructuring.

I am pleased to say that as of the end of September,

we completed Phase I of the restructuring and believe we are on track to achieve our full year savings target. Our savings during the first quarter were on track with our expectations of approximately $90 million and will increase next quarter. During the quarter, we recorded charges of $20 million related to the restructuring.

As I said in my opening remarks, we are reaffirming our full year adjusted EPS guidance of $1.58 to $1.68. In my comments, I've walked through the assumptions we've made in arriving at these estimates, including the positive trends in the majority of our businesses. I would also like to reiterate that we expect earnings to be weighted to the second half of fiscal '11, driven in large part by our upcoming opportunities in the Infusion business and the timing of new product launches.

At this time, I'll turn the call back over to Carol for questions. Thank you.

Carol Cox

Thank you, Ed. Bethany, if you can open up the call to questions from our investors?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of David Lewis with Morgan Stanley.

David Lewis - Morgan Stanley

Two quick questions either for Dave or for Ed. First on gross margins, obviously, given the strength or how much you made last quarter regarding how you wanted to progress in the Pump business or Infusion business, you've obviously taken a significant number of channels to date. The GMs came in much higher than we would have expected. So can you talk about sort of your gross margin guidance for the year and how it relates to your commitment? Do you still want to grow upper teens for the Infusion business? Would you expect to do better on that pace, given the strong strength you had in the first quarter or still think 48% is the right number here as you think about the strength in the Pump business?

David Schlotterbeck

David, I think on the gross margin guidance, I mean, we remain at the 48%. I think the first quarter, because of how we saw the year progressing and with sort of the second half being a little more heavily weighted to taking advantage of, say, the Baxter opportunity, if you will, we expected sort of a slightly higher gross margins at the beginning of the year and then sort of leveling out for the rest. So for a blended rate of about 48% for the year is still where we see it.

David Lewis - Morgan Stanley

And just as a follow-up here, there seems to be some give and takes in the quarter. Our reported guidance remains the same. It seems like the constant-currency guidance may be coming down slightly, which is just that 100 to 200 basis points constant-currency reduction is appropriate? And can you think of any other dynamic other than Respiratory that could explain that slight adjustment in constant-currency guidance?

David Schlotterbeck

No. I think you hit it right on, the nail on the head there, David. It's exactly what happened. On a constant-currency basis, we're down a point or two that offsets essentially the forecasted decrease for the balance of the year on Respiratory.

David Lewis - Morgan Stanley

Dave, have you advanced further enough in this process where you've identified whether this is going to be an external or internal candidate?

David Schlotterbeck

David, we're actually considering both external and internal, and at this moment, have no conclusions.

Operator

Your next question comes from the line of Mike Weinstein with JPMorgan.

Michael Weinstein - JP Morgan Chase & Co

Just wanted to start maybe with the guidance for fiscal '11. The dollar swing, you touched on that, the impact on the top line. Then on the bottom line, I think you'd said at the start of fiscal year, you assess the negative EPS impact to be about $0.08 for the fiscal year. Do you have what that is now, where the dollar is at today?

Edward Borkowski

Yes. I mean, I think when we gave that, that was versus, obviously, the prior year. It's a few cents right now based on where current rates are.

Michael Weinstein - JP Morgan Chase & Co

Negative or positive?

Edward Borkowski

It's slightly positive by a few cents.

Michael Weinstein - JP Morgan Chase & Co

And so how should we think about your guidance range? I think the comment that you're making in your prepared remarks was that you still would have delivered on the EPS guidance without the movement of the dollar, and now you've had to spend the dollars, let's say that maybe that's an $0.11 swing for your EPS for the fiscal year. How should we think about the range?

Edward Borkowski

Well, we've never really given the exact -- when we gave our guidance, we didn't give an exact point. We gave a range. And that's sort of why we indicated that even without the effective currency, we would still be in our range. So currency helps, on a forecasted basis, helps us a few cents and, well, still puts us within our range. What we are trying to do is just sort of temper the upside impact. Just remember, on the revenue line, even though as we mentions, probably one to two-point benefit. Part of that does come from our International Surgical business, which basically doesn't have any earnings or very little earnings associated with this. Temper your $0.11 with that in mind.

Michael Weinstein - JP Morgan Chase & Co

David, let me just go to Infusion Pump business, and, maybe just help us with your visibility on that ramp that you're projecting, particularly over the back half of the fiscal year and as you're expecting to benefit from the Baxter COLLEAGUE issues. How good is your visibility on that ramp at this point and your guidance for high-teens revenue growth?

David Schlotterbeck

Well, I would say, Mike, that our visibility remains somewhat limited given the outlook for the balance of the year. One important consideration is that the 49,000 channels that I mentioned that we had taken over the last 15 months from competitors, our count is that about 28,000 of those actually came out of the Baxter base, most of those occurring before the FDA indicated that Baxter needed to do a product removal. What we are seeing and being told by customers is that they are going into the decision-making mode. They know that they've got a finite time period to put some other product in place in their institutions. And as a result, our expectation is that we'll see customer decisions begin to build in this current quarter. And I would expect that we'll have some decent visibility about the rest of the year by the time we have our next earnings call.

Michael Weinstein - JP Morgan Chase & Co

So help us think about it, so if customers decide to wait until later in this two-year window to upgrade their pumps and so some of that revenue would slide from your fiscal '11 into your fiscal '12. How would that impact your thinking about your guidance for the year, not necessarily top line to bottom line?

David Schlotterbeck

Well, I don't anticipate that it would have any significant impact on our bottom line because we've intended to compete with very aggressive pricing, which doesn't have a lot of fall-through to the bottom line. And so the only impact, if customers delayed, would be on the revenue line, which would move from the back half of this fiscal year into next fiscal year. And I think I said in my remarks, Mike, that the only thing that we can't really predict is the timing of the conversions by these customers. But what we do know is, and I repeat from what I said earlier, we are seeing an increasing level of activity in the field. And to us, that is a good sign.

Operator

Your next question comes from the line of Amit Bhalla with Citi.

Amit Bhalla - Citigroup Inc

A couple of questions on Dispensing. First, can you talk a little bit about the Cerner wins in the quarter and give us a little characterization of the size of those orders? And second on Dispensing, second half of last year, you had some contracts pushed out. You said they were going start to materialize in the first half of this year. Was there some contribution there in this quarter?

David Schlotterbeck

Well, there was, Amit, a modest contribution of the orders that were pushed out in Q1. I think, and we continue to expect that they will contribute throughout the fiscal year to about where we have seen them move out of the back half of last year, which, if my memory serves me correct, was about $40 million top line. When it comes to Cerner, I can't tell you how pleased I am that relationship has been moving along. It's really pretty amazing, the fact that the two sales forces just got this relationship kicked off essentially in August, but we've already seen roughly $10 million order of magnitude in revenue and a bit more than that in committed contracts that had come in during Q1, along with a pretty good visibility on a pipeline that is approaching $100 million already. If I had to classify this as anything, given that we're 40 days into it, I'd call it a success with those kinds of numbers at the get-go.

Amit Bhalla - Citigroup Inc

And my follow-up, just two-part follow-ups on ChloraPrep. Can you talk to us about what your assumptions are for competition and ChloraPrep longer term, and in Respiratory, can you just review for us the pipeline? I know that, obviously, Respiratory is going to be weak this year, but you also was supposed to have some new products coming out there.

David Schlotterbeck

Well, first with ChloraPrep, it continues to ramp up. We see, on a monthly and sometimes a weekly basis, new customers signing on and making the decision to implement a whole house because of its effectivity. We do expect, over the next 18 months or so, to see some level of competitors in the marketplace, and we're prepared for that. Our strategy really is to gather up as much of the market while we're alone in it as possible. And so we continue to be optimistic about its ongoing contribution. I'm sorry, what was the second part to your question, Amit?

Amit Bhalla - Citigroup Inc

Just on Respiratory, can you just review the pipeline? I thought, EnVe, we're supposed to have some more products coming out in Respiratory.

David Schlotterbeck

Yes, we do have EnVe coming out, and that is expected to come out this month. It is a modest sales forecast since this is the first partial year that it will have been in the market the entire time. And so we don't have an expectation that other than some, at least early on specialized customers, that EnVe is going to cost a turnaround in the Respiratory business. I think other Respiratory players are indicating that they've seen softness, not only in capital equipment but also in their disposable sales. And I think there's no magic. There's stockpiling that needs to be burned off, and we're expecting that business to rebound in FY '12.

Operator

Your next question comes from the line of Rick Wise with Leerink Swann.

Frederick Wise - Leerink Swann LLC

Dave, I guess I should say simply congratulations on all you've achieved. It has been -- I hate to congratulate you on escaping from us, but maybe you won't miss this process so much. Turning to R&D, I don't know if it's a question for you or maybe for Ed. R&D spend, just in dollars, that this is the -- I look back the last three quarters, this is on the lower end. I mean, I appreciate your view here. Do we annualize this kind of number? Is it going to accelerate as we go through the year? Maybe help us understand, I mean, are there some incremental projects that might start in the second half? How do we think about it?

Edward Borkowski

Yes, I mean, I think, as we think about R&D, it's going to increase slightly during the year and build as we go across. So I think we're still calling it at the original guidance, I think was still around the 4.5% for the year of revenue. We do have incremental spend there, but it will build probably another $4 million or $5 million in the next quarter and stay about there. So as some of these projects come online and actually some of the spending related to it occur. So...

Frederick Wise - Leerink Swann LLC

So shouldn't be surprised to see it more in the mid-40s as we proceed through the year?

Edward Borkowski

I would expect that over the next few quarters, yes.

Frederick Wise - Leerink Swann LLC

Back to Infusion, I may not be remembering correctly, but I sort of remember you saying last quarter that you were thinking about high teens Infusion growth, and now you're saying double digits to high teens. Am I reading too much into the language that sounds like a slight reduction? Any perspective there?

David Schlotterbeck

Yes, let me take that one, Rick. You're reading an awfully lot into some pretty simple words. We're looking at high teens and remain very bullish about that, and let me give you the buildup. Last year, our Infusion business, on its own, not including about $60 million of the ship hold release, grew 9% on the top line. I think in the first quarter of this year, we grew about 11% on the top line for the basic business. And if you add in Medegen to that, you're picking up another two to three points, and so you're nearly at 15%. So high teens, given that there are 300,000 channels out there in the marketplace available to us, maybe less to others, is, in our mind, very doable. And as I mentioned in my remarks, the only thing we can't control is the timing of the conversion because that's really a customer-controlled decision. So we're not coming off of our expectations for our Infusion business one bit.

Frederick Wise - Leerink Swann LLC

On the Respiratory side, you talked about the three factors, the forward buying, the EU slowdown, the Canadian distributor, sounds like it was the least. Can you take us through those three points again and maybe help us understand, one, when does things get back to more normal? As we exit the year, or it's second half 2011? And maybe more specifically on the last two issues, is the Canadian distributor issue resolved? And just general perspective on EU buying and trends. Sorry for the long question, but just trying to get a little perspective there.

David Schlotterbeck

Well, first let me say that in the EU, our Infusion business, our Infusion order rates in the first quarter were slightly lower than what we had anticipated. But our folks do expect those to come back and have a minimal impact on the full year. In Respiratory, a different situation. As we've studied what's happened in the market, people bought forward both in the United States and in the EU. And so in terms of capital equipment, we don't anticipate that recovering until our FY '12. We also believe that disposables were stockpiled. When you combine that with the fact that admissions are down, birthrates are down, both of which use ventilation disposables, the stockpiling they did still needs to be burned off before they get back to their normal buying patterns. So bottom line, as we see it, is that we would expect to see continued softness in the Respiratory business through our FY '11, rebounding to more normal purchase patterns in FY '12.

Dwight Winstead

Dave, could I just also add -- Dwight Winstead here. The other thing that would have helped to burn off a bit that we are seeing is because of a very soft flu season this year. It is also delayed a little bit of the disposable component and the burn off of the stockpile that Dave referenced.

Operator

Your next question comes from the line of Dave Turkaly with SIG.

David Turkaly - Susquehanna Financial Group, LLLP

When you mentioned the Infusion momentum from the fourth quarter, were the revenues actually up sequentially there? And secondly, you mentioned aggressive pricing. Can you give us a ballpark range, sort of what percent discount you'd be offering then to gain on the Baxter recall?

Dwight Winstead

The first question is sequentially, on revenue, we were down Q4 to Q1 because Q4 was a very strong quarter for us on the Infusion side. So it was slightly down. However, not to be confused with the momentum that Dave referred to and what we're seeing relative to the ramp-up of committed contracts. We had a very strong committed contract quarter for Q1, and as Dave said, while we don't have visibility for the entire year and we know our plan was somewhat back-loaded, we are getting better visibility. And we think by Q2 earnings call, we'll have a good indication as to how it's coming together, but nothing would move us away from the overall targets that we've established for picking up volume based on the Baxter opportunity. As far as pricing, I don't think there's a rule of thumb that we're using. As we had indicated earlier, we will be competitive on pricing. We like the model of getting our devices in place because of the continuing and ongoing revenue stream relative to the disposable components. And now with the superiority of our Medegen valve, we believe that's going to just make our disposable components that much stronger as we move forward. So we have factored that in, and the pricing that we've established, as well as what we're seeing to strengthen our Dispensing business, is back to where he gave you assurance early on that we still see 48% gross margins to be on our overall target for the full year.

David Turkaly - Susquehanna Financial Group, LLLP

Just to push that a little bit, if a customer wants to take a Baxter to swap to you and you therefore take the money that Baxter would give them, would there be any out-of-pocket outlay to switch over to Alaris based on your pricing strategy today?

Dwight Winstead

Yes. There would be a differential. However, what we're seeing in the marketplace is most of the customers are viewing the value of the free offer versus the Alaris System, with our system having some features and functions and superiority that warrants a bit of a higher cost.

Operator

Your next question comes from the line of Ben Andrew with William Blair.

Ben Andrew - William Blair & Company L.L.C.

Just wanted to follow up on the R&D side, Dave. And the EnVe now is coming out, I guess, this month, and we do have some other products I think in the pipeline, or you do have. Can you give us some highlights of what you're looking at over the next year that we should be focusing on for the new product pipeline?

David Schlotterbeck

Well, I had mentioned that we will be introducing a series of new dispensing products that will be introduced at the ASHP [American Society of Health-System Pharmacists] Conference in December. We're expecting that those will cause a lot of chatter and position us well for going into FY '12. One of the things that we have been very focused on is connectivity and connecting our products into the customers' HIT system. And I had mentioned about a year ago that we had started a project to provide a common network to our customers, so that even though we have a number of products that can be networked, by the end of this year, they will all be able to be networked over a single network that is purchased by the customer, really designed to feed data from those products into the EMR [electronic medical record] of their HIT system. I think we will likely be the first company to be officially able to help our customers meet the Phase III requirement on the HIT stimulus, which actually doesn't roll around until 2015. But I have to tell you, going in and describing what we are capable of doing and where that is going really seems to have a fair amount of pull-through in making those capital equipment decisions. So we have a number of smaller products that are coming out this year, and to sort of put it into perspective, last year, we introduced a total of 27 new products during the 12 months of 2010. So you can expect about the same this year.

Ben Andrew - William Blair & Company L.L.C.

And a quick follow-up maybe for Ed. Can you describe a little bit some of the SG&A savings that have already come out of the restructuring or other savings and to date, and what we should see over the next few quarters in terms of type and then the magnitude of the dollars, if that's going to change kind of sequentially?

Edward Borkowski

Yes. I mean, I think, like I said, I think we are on track. We achieved what we had budgeted essentially in the first quarter. I mean, just to put it in perspective, a portion of the restructuring did in August was essentially not filling jobs that had been planned to be filled. So we allot the savings really effective July 1, a fair amount. That's how we got to the $19 million. We would expect that probably to go to probably $22 million to $24 million in the next quarter or so and stay at that rate for the year. And then I think we get to the $85 million to $95 million that I mentioned for this year and then another $25 million the year after. So all looks on track relative to what we expect. So that looks like a pretty good shape there.

Operator

Your next question comes from the line of Kristen Stewart with Deutsche Bank.

Kristen Stewart - Credit Suisse

I was just wondering, you had commented on AVAmax, the balloon kyphoplasty that you were in 100 accounts. Can you maybe give us a little bit of perspective on the number of accounts that you were in, with the vertebroplasty system? Are these more competitive account wins, or are those just kind of replacing what you had for vertebroplasty?

David Schlotterbeck

Unfortunately, Kristen, I can't, off the top of my head, give you the number of vertebroplasty accounts other than to say that we were number two in the market. What I can tell you is because these are different sell points and a different type of physician generally uses the kyphoplasty product, I look at it as essentially a new sale. And because this is a physician selection as to what type of system that they want to use, my view is that these 100 accounts that have signed up really represent 100 new opportunities that we really did not have before. So that's how I would think about that.

Kristen Stewart - Credit Suisse

And then you had said last quarter that your expectations for hospital CapEx spending was low to mid-single digits. Do you continue to view that to be a reasonable assumption? Or should we think of hospital CapEx perhaps being a little bit lower in thinking about some of the Respiratory CapEx, just kind of frame how the market's doing?

David Schlotterbeck

Well, no. We continue to stick with low- to mid-single digits. I think the reports and surveys that have come out have been in the 3% kind of a range for this calendar year. Our expectation is that, that's going to continue. Frankly, we're seeing Infusion devices be pretty high on the list of where CapEx money is going, and Ventilation equipment, frankly, continue to be in the top 10. But if you've already got what you need for the moment, you're probably not going to be buying that, which is what we're running into. At the very top of the list is healthcare IT. And that's no surprise because of the incentives that are out there. But the short answer to your question is probably about where we had called it earlier in the year and stabilizing there for a while.

Kristen Stewart - Credit Suisse

And then the last question, can you give us an estimate for what the underlying growth in the quarter would have been if we exclude out Medegen and Research Services? Do these kind of -- I forgot if those offset one another?

Edward Borkowski

Yes, they essentially did. They were essentially offsetting each other both in the quarter, Kristen.

Operator

Your next question comes from the line of David Roman with Goldman Sachs.

Nikhil Hanmantgad

This is Nikhil for David. For the first question is just that given that the top line came in a little bit weaker than, I think, where most of us expected in the quarter and obviously with the full year growth targets maintained, is it correct to think that the primary driver to get back to the guidance will come from strength in Infusion pumps? Or are there other areas of the business, maybe in Dispensing or Infection Prevention, that you expect to kind of incrementally improve from here as well?

Dwight Winstead

Yes, it's a great question there. I think, as Ed made the comment, we, basically, are seeing two things. Certainly, Infusion in the second half is still in our plan. We are seeing good committee contracts as Dave indicated on Dispensing, which is good. And then we've got a bit of tailwind from FX that was previously discussed as well.

Nikhil Hanmantgad

And just the last question, the longer-term global restructuring that you guys have in place, would you be able to approximate what percent of that is tied to growth in the top line versus what percentage is fixed or that you have control over?

Edward Borkowski

Relative to what we announced in August, that's all controllable by us. And again, I think I'd mentioned just previously that we are on track. We achieved what we had targeted for the first quarter, and we see that continuing through the year, building slightly but that it's really not interdependent to the revenue line.

Dwight Winstead

Yes, and by and large, I would just echo what he had said, in that, most of the restructuring, very limited, I guess, very limited interaction with our selling organizations relative to the restructuring. We kept our customer-facing resources pretty much intact.

Operator

Your next question comes from the line of Lennox Ketner with Bank of America.

Lennox Ketner - BofA Merrill Lynch

First, if we could just go back to the Infusion business, I know you said you're still comfortable with your high-teens guidance there, but I just want to focus on the timing of the Baxter recall. You said that the timing is somewhat unpredictable there. And one of your competitors has said that hospitals are taking a longer time than expected to make a decision. I guess I just wanted to see, one, if you agree with that statement that hospitals are taking a longer time than expected. And then also, if you could just kind of help us think about if hospitals do make a decision by year end, kind of when you would expect to start seeing those revenues. Is that a process that's likely to take three months, six months longer, just kind of help us think about the timing there?

David Schlotterbeck

Well, Lennox, I think the word that I've heard is frozen, and our business is anything but frozen. Our business came very close to, on its own, exceeding last quarter or a year ago quarter, which included north of $50 million of ship hold products. And so clearly, momentum is growing in that business. We saw a very strong booking quarter in Q1 in our Infusion business. We are expecting that to grow substantially in the second quarter. And so maybe some folks are having trouble out there, but we're not one of them. And just to help put it into perspective, as orders are booked and contracts are signed, about the fastest you would see the installation take place and customers allow us then, give us the approval so that we can recognize revenue, is about 120 days. So you'll be seeing some of the orders that were booked in Q1 being installed in Q3. And that's why Q2 is such an important indicator for us because those will begin installs and recognizing that revenue late Q3 and Q4 of next year. So we'll pretty much have a wrap on what the Infusion year is going to look like, as we said, by the time of the next earnings call in February because we'll be at a point where everything that will have been committed to by that point in time can be installed by the end of the year, and so I think we'll be able to have a pretty good sense on things. What I can say is that we're seeing a lot more activity amongst this Baxter base than we saw just a few months ago. And interestingly, I think, each of the manufacturers has a completely different view of what's going on in that base. I think ours is pretty positive. And whereas others are going from not positive to, we're pleased with the results. But as you look at the history, when we say we're pleased with the results, we deliver.

Lennox Ketner - BofA Merrill Lynch

And then just one follow-up on the EnVe product in Respiratory, I know you said you're planning to launch that soon, and that you don't have aggressive expectations there. But I think in the past, you talked about pricing that product at a discount to potentially gain shares? Is that still your pricing strategy there?

David Schlotterbeck

Not really. I had mentioned, if I were running that business, I might be doing that. But I'm not running that business. And just one of the hard things about being CEO is you can't do everything, so we'll be competitive with price. And our folks in that business really are planning on its high level of differentiation to carry it in the marketplace as a success.

Carol Cox

I think we just have time for one last question please.

Operator

Your next question comes from the line of Thomas Kouchoukos with Stifel, Nicolaus.

Thomas Kouchoukos - Stifel, Nicolaus & Co., Inc.

Dave, just one follow-up on the earlier AVAmax question. I think you'd mentioned you're in 100 hospitals. Sounds like you're keeping your expectations from a contribution standpoint pretty modest at this point. Looking at those 100 centers, can you just characterize what you're seeing in terms of maybe early trialing versus full conversions in those hospitals to this point?

Dwight Winstead

Let me answer that. I think clearly, as you would expect, it's a mix. But if you look at what we had anticipated in our overall plan for the year, those customers that have already converted are annualizing at a good run rate, so we still feel confident that the numbers that we baked into the plan while modest, as you described, are still on target for the full year.

Thomas Kouchoukos - Stifel, Nicolaus & Co., Inc.

And maybe just some color on what is it -- to get a customer over the hump to convert, are they asking for data? Or is it a matter of timing in a couple of cases? What gets them over-the-top to say, "Okay, we're going to go ahead and switch from the competitor?"

Dwight Winstead

I would say probably a bit mixed. But I would say in most cases, it's actually using the product. And as Dave indicated, many of them are already familiar with our vertebroplasty product, which is similar. So it's a pretty normal thing to get trials, occurring where there is already some product knowledge into the account.

Thomas Kouchoukos - Stifel, Nicolaus & Co., Inc.

And then I just had one follow-up, most of the others have been asked. I think you mentioned that you had your full release of EnView, the camera holder, in Q1. I'm just wondering if you could talk about maybe some initial takeaways from that product.

Dwight Winstead

Yes, a quick update on that, we did introduce it in Q1 in a couple of the early sites. We determined that we wanted to make a modification on that product. We're in the process of making that modification, and we will be relaunching at a little bit later date, full commercialization.

Carol Cox

Great. Thank you, everyone, and I'll turn the call back over to Dave. This is the time for a quick follow-up.

David Schlotterbeck

Yes, and thanks for joining us. I think the real sign-off for me is going to be next earnings call. And I do appreciate everybody's interest in the company and following us so closely. I think you made a good call in deciding to build interest in CareFusion. It's a company that's going to go a long way, and I'm looking forward to seeing many of you in the near future. So thanks for joining us.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.

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