Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

CR Bard (NYSE:BCR)

Q2 2014 Earnings Call

July 24, 2014 5:00 pm ET

Executives

Timothy M. Ring - Chairman, Chief Executive Officer and Chairman of Executive Committee

John H. Weiland - President, Chief Operating Officer and Director

John A. DeFord - Senior Vice President of Science, Technology & Clinical Affairs

Christopher S. Holland - Chief Financial Officer and Senior Vice President

Analysts

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Brooks E. West - Piper Jaffray Companies, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

David L. Turkaly - JMP Securities LLC, Research Division

Matthew O'Brien - William Blair & Company L.L.C., Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

David R. Lewis - Morgan Stanley, Research Division

Michael Matson - Needham & Company, LLC, Research Division

Anthony Petrone - Jefferies LLC, Research Division

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Richard Newitter - Leerink Swann LLC, Research Division

Matthew Taylor - Barclays Capital, Research Division

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the C.R. Bard, Inc. Second Quarter 2014 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded, and will be available for future on-demand replay through the Bard website.

Today's presentation will be hosted by Timothy M. Ring, Chairman and Chief Executive Officer; along with John H. Weiland, President and Chief Operating Officer; Christopher S. Holland, Senior Vice President and Chief Financial Officer; and John DeFord, Senior Vice President, Science, Technology and Clinical Affairs. Also in attendance today is Todd W. Garner, Vice President, Investor Relations.

Today, Bard's management will discuss some forward-looking statements. The accuracy, of which are necessarily subject to risks and uncertainties. Please refer to the cautionary statement regarding forward-looking information in Bard's March 31, 2014, Form 10-Q, and the information under the caption Risk Factors in Bard's 2013 10-K, including disclosure of the factors that could cause actual results to differ materially from those expressed or implied.

During the call, references will be made to non -- or to certain non-GAAP measures, which management believes provide an additional and meaningful assessment of the core operating performance of the company and its individual product franchises. Reconciliations of the non-GAAP measures to the most comparable GAAP measures are provided in Bard's earnings press release and on the company's website at www.crbard.com.

All information that is not historical is given only as of July 24, 2014, and the company undertakes no responsibility to update any information. Unless otherwise noted, all comparisons are to the prior year period.

At this time, I'll turn the conference over to Timothy Ring. Please go ahead.

Timothy M. Ring

Thank you. I'd like to welcome you all to Bard's Second Quarter 2014 Earnings Call, and thank all of you for taking the time to join us today. I'd expect the presentation portion of the call to last about 20 minutes, and we're trying to keep the total call to about an hour. The discussion today will go as follows: I'll begin with an overview of the results for the second quarter; John Weiland, our President and COO, will review second quarter product line revenue; John DeFord, our Senior VP Science, Technology and Clinical Affairs, will give you a brief update on our product pipeline; and then Chris Holland, our Senior VP and CFO, will go through the second quarter income statement and balance sheet, as well as our expectations for the third quarter and the full year; and then, finally, we'll wrap it up with Q&A.

Second quarter 2014 net sales totaled $827.1 million, that's up 9% over Q2 of last year on an as-reported basis, and up 8% on a constant-currency basis. The currency impact for the quarter versus Q2 2013 was favorable by about 60 basis points. The royalty payment we received from Gore in the quarter was approximately $37.6 million and the net impact from the acquisitions, less the EP divestiture, was a benefit of about 20 basis points to revenue growth in the second quarter.

All that means that our organic revenue growth improved sequentially over Q1, which was consistent with our expectations.

Net loss for the second quarter of 2014 was $119.4 million and diluted loss per share was $1.59, which included a net charge for product liability. Excluding this and other items that affected the comparability of results between periods, which Chris will cover later, adjusted Q2 2014 net income and diluted earnings per share were $143 million and $2.06, up 22% and 30%, respectively. These adjusted results exceeded the guidance we provided for the quarter, and the first half of the year is coming a little bit better than we projected.

Looking at revenue growth geographically compared to the same quarter last year, second quarter net sales in the U.S. increased 12%. Excluding the royalty payment, U.S. product sales were up 4%. On a constant currency basis, Europe was down 1%, Japan grew 6% and our other international businesses grew 5%. These rates include the loss of revenue from the EP divestiture. If you exclude the impact from the divestiture, Europe grew 11%, Japan grew 10% and our other international businesses grew 11%, all in constant currency.

In Q2, emerging markets represented 8% of our total sales, which reflects an improvement in mix of over 100 basis points, sequentially, compared to Q1. So while we're just hitting the halfway mark of our incremental investment plan calendar, we are seeing early returns in the contribution from emerging markets.

As we've told you, a key objective of our investment plan is to accelerate the growth rate of the company. In Q2, every business performed either at the top or above our stated annual guidance range for each category. While it's good to see improved organic growth this quarter, we're certainly not yet at a level that anyone here is happy with. But we're pleased with some positive data points that we've seen so far this year. We continue to be very focused on executing our strategic plan. In fact, 80% of our incremental R&D investment dollars are targeted in product families that grew double digits or better for us this quarter. The other 20% of that R&D spend is either in new areas or in existing product lines that we believe have the potential for double-digit growth. And of course, our incremental SG&A investment is focused on accelerating our revenue in emerging markets, which are already growing double digits for us today.

We continue to believe that executing our investment plan will accelerate the sustainable growth rate of the overall portfolio, and put us in a position to provide above-market revenue growth in the mid- to high-single digits, with attractive returns for our shareholders.

So with that, let me turn you over to John Weiland for a review of our product line revenue.

John H. Weiland

Good afternoon, everyone. Before I start let me point out that I'll be giving all percentage growth data in comparison to the prior year period on a constant currency basis, unless noted otherwise. So let's begin with Vascular.

Total net sales were $233 million, up 10% over last year on an as-reported basis, and 8% on a constant-currency basis. Excluding the royalty payment and the divestiture of EP, total Vascular sales were up 2% in Q2, with the United States business down 4% and international up 10%.

Sales in our Surgical Graft category were down 2% in the second quarter, within the range of recent experience. Our Endovascular business grew 3% in the second quarter, without the benefit of the Gore royalty, which was the best quarter since the second quarter of 2012. This improvement was primarily due to strong results of Lutonix sales in international geographies, which drove our peripheral PTA line to increase to 12% globally with over 30% growth in Europe. We're very pleased so far with the European response to Lutonix, and we're seeing early acceleration in other geographies.

Sales in our vena cava filter line were up 2% in Q2, and our biopsy family of products was also up 2% this quarter. Our Stent business declined 5% in Q2, which reflects a moderation of the decline we've been seeing here for the last couple of years. We continue to see price pressure that hit to this product line.

Now let's go to Urology. Total net sales were $207.1 million, up 8% versus Q2 of last year, on an as-reported and constant-currency basis. The United States business was up 6%, while internationally we grew 10%. The sales of the Rochester acquisition contributed roughly 700 basis points of global growth for the category.

Our basic drainage business was up 7% globally in Q2, with about 400 basis points coming from the Rochester acquisition. Our I.C. Foley business was up 3% globally, and in positive territory in the United States for the first time in 4 years. Our Targeted Temperature Management products experienced a slight decline this quarter, primarily due to softness in Japan and the rest of Asia. We don't believe this quarter is representative of what we see as a long-term attractive growth opportunity. Our continence business was up 46% in Q2, driven by the acquired products.

Excluding the impact from Rochester, continence sales declined 5%. Sales in neurological specialties were down 2% in Q2, as the largest product line in the category, our brachytherapy business, was down double digits. And finally, in this category, standalone sales of our StatLock catheter stabilization line increased 3% in Q2.

So now let's go to Oncology. Total net sales in this category were $224.7 million, an increase of 5%, on both an as-reported and constant-currency basis over Q2 last year. Geographically, net sales in the United States were up 4% and international sales were up 8%. Our port business was up 1% versus Q2 last year.

Our PICC revenue was up 10% this quarter, with continued strength in the United States, Europe and emerging markets. Not only is this our largest product line of global portfolio, as we've said before, we believe it represents our largest outside-of-the-United-States revenue growth opportunity, and we're focused on developing the international markets and advancing lives and the delivery of health care across the globe.

Our Vascular Access ultrasound product line was down 6% this quarter. We believe some customers have delayed orders due to the anticipated full launch of our new Vision II system. And to close out this category, our Dialysis Access product line was up 10% this quarter, with strong performance in both the United States and emerging markets.

So let's conclude with our Surgical Specialties business. Total net sales in this category were $139.3 million, up 16% on both an as-reported and constant-currency basis. United States sales were up 17% and international sales were up 14% this quarter.

About 1,000 basis points of the global growth came from sales of Arista, acquired in Q4 of 2013. We're seeing continued momentum from our BioSurgery business, and we're pleased with the execution in this large and growing space.

Our soft tissue repair business grew 7% in Q2, which is the best result since the Q1 2011. Our healthy double-digit growth in synthetic hernia continues and is now being aided by the sales of our new Phasix hybrid mesh, which is a resorbable synthetic. This accelerated strength in synthetics is offsetting continued softness in our natural tissue products, which declined 18% this quarter, compared to Q2 2013. And our hernia fixation business, which is included in the soft tissue repair subtotal, declined 6% this quarter. Closing out the surgical category in Q2, our performance irrigation business was down 8%.

So this concludes our product line revenue discussion. I'll now turn you over to John DeFord for a quick pipeline update.

John A. DeFord

Thanks, John, and good afternoon, everyone. Since we held our annual Analyst Day just a few weeks ago, I won't spend much time discussing projects, and I'll just provide a few highlights. First in our drug-coated balloon program, we presented to FDA's Circulatory System Devices Panel on June 12, and received unanimous votes for safety, efficacy and benefit risk for the Lutonix DCB. The PMA is under interactive review, and timing remains squarely in FDA's hands. However, we believe we're making good progress and feel we're on track for an early 2015 U.S. launch.

Moving to the publication of the Levant 2 results. The authors informed us this week that they received communication from a targeted journal, which required revisions, as is typical in the process. The authors plan to respond in the coming weeks, and we're pleased with the process and it's moving forward, but we can't predict the timing or the outcome here as it's really outside of our control. And though panel was an important milestone, we're focused on continuing to expand sizes and indications worldwide. We completed enrollment in our Levant 2 Japan study in June, and we expect to submit next year for approval.

Enrollment continues in our IDE below-the-knee and in-stent restenosis studies, and we just launched our coronary and AV access DCB products in Europe. Also in Vascular, we received PMA approval in late-June for the Fluency endovascular stent graft family indicated for the treatment of in-stent restenosis in the AV access circuit. And we launched the product in early July, which was earlier than we've anticipated.

I don't have any other material updates from what we discussed last month, so thanks very much for attention, this has probably set a new record for me today with the shortest presentation in my career. So without further delay, I'll hand the discussion over to Chris.

Christopher S. Holland

Thank you, John. Let's start with the items that affect the comparability of our results between periods. Based on recent developments, in Q2, we took a net charge for product liability of approximately $263 million, primarily driven by women's health product litigation. A small portion of this charge is related to an unusual circumstance in the MDL, where the court has ordered us to work up 700 cases simultaneously. We expect the expense related to that order to increase in the coming quarters, which we will continue to reflect as an item affecting comparability. We also had acquisition-related items of $22.5 million in the quarter. The P&L impact to these items is detailed in the notes to the financial statements and the reconciliation accompanying our Q2 earnings press release.

Now let's go through the statement of income for the quarter. Gross profit was $506.4 million, or 61.2% of sales for Q2. On an adjusted basis, GP was 61.3% of sales, up 20 basis points from the prior year quarter. The Gore royalty represented 180 basis points of improvement, while new amortization of intangibles relating to transactions closed in the last 12 months cost us about 70 basis points year-over-year for the quarter. Price was unfavorable at 90 basis points on the revenue line, and about 40 basis points in GP, consistent with our expectations for the year. And FX was about a 40-basis-point headwind to gross margin for the quarter.

We expect Q3 gross margins to improve sequentially by about 100 basis points and, at this point, we remain comfortable with our full year guidance for GPs. SG&A expenses were $245.2 million for the quarter, or 29.6% of sales. On an adjusted basis, SG&A as a percentage of net sales was also 29.6%, 10 basis points lower than Q2 of '13. We expect to see improved leverage in the back half of the year here.

R&D expenditures totaled $85.4 million for the second quarter, or 10.3% of sales on a reported basis. On an adjusted basis, R&D expense as a percentage of sales for the second quarter was 7.8%, which is down 80 basis points as a percent of sales from the prior year and just slightly below our projection for the quarter. We remain on offense here and continue to fund the projects that we believe provide long-term shareholder value.

With the over-achievement on the sales line, we now expect R&D as a percentage of sales to be around 8% for the full year. Interest expense was $11.3 million for the second quarter and other income and expense was $257.3 million of expense, as reported, and $5.5 million of income on an adjusted basis, primarily driven by foreign exchange and interest income. The effective tax rate for the quarter was 25.7%, down 110 basis points from the prior year. U.S. income, including the royalty payment, represented a higher mix than originally anticipated in the first half of 2014. So we will likely end up with a higher effective rate than we had projected at the beginning of the year, but our strategies to reduce the overall rate are tracking well.

I'll also remind you that our full year EPS guidance does include about $4 million of benefit from the anticipated renewal of the R&D tax credit, which we continue to expect in Q4, but with the current political picture, that timing could slip into early next year. Diluted shares on an adjusted basis for the period were $76.6 million and we repurchased approximately 1.9 million shares in the second quarter. The net result is adjusted EPS of $2.06, above the range we provided for the quarter. The balance sheet as of June 30 reflects cash, restricted cash and short-term investments of $1 billion, consistent with the balance at March 31. For the quarter, accounts receivables days were down 1.6 days, and inventory days were up 0.8 days.

Capital expenditures totaled $32.9 million for the quarter, and on the liabilities side, total debt was $1.6 billion as of June 30, compared to $1.4 billion at March 31. Debt-to-total-capital at the end of the second quarter was about 49% and total shareholder investment was $1.7 billion as of June 30.

Now moving to financial guidance. For Q3, we are expecting constant currency sales growth between 7% and 9%. We do expect continued improvement in our organic sales growth rate through the rest of the year. Though, of course, there is potential variability in the contribution from the Gore royalty relative to our expectations. With regard to the full year, we are now expecting constant currency sales growth to be between 8% and 9%.

From an EPS standpoint, excluding items affecting comparability, we expect the third quarter in the range of $2.07 to $2.11 per share. And for the full year, we're increasing our adjusted EPS guidance by $0.05, to $8.25 to $8.35 per share.

So in summary, the first half of the year has gone well from both a sales and profitability perspective. As we now move to the second half, we remain focused on executing our investment plan and pursuing strategic opportunities with the objective of driving attractive and sustainable revenue growth, profitability and shareholder returns over the long term.

With that, I'll turn you back to Tim.

Timothy M. Ring

Thanks, Chris. That does conclude the formal part of the presentation. I'll now turn the call back to the moderator to facilitate the Q&A session. Due to the number of investors on the call, I'd ask that you please limit yourself to one question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Bob Hopkins with Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So if we're going to limit it to one question, I just wanted to get a little bit more color on the product liability side. And just -- if you guys could just give a little more detail on the reason for the increase in the reserve and just what's the total reserve now? And I know on the mesh side, there's been a couple of other settlements that have averaged around $40,000 to $45,000 per case. So if could you just give us any color on how you're coming up with that number and just kind of where we go from here? I know historically, you've got an unlimited ability to talk about this, but any other detail you could provide would be helpful.

Christopher S. Holland

Sure, Bob. As you well know, this is a dynamic situation and a lot has happened, I think, in the last quarter, and you referenced a number of the key things that have happened, which we obviously take all of those things into consideration to the extent we have facts that we can then base judgments and assumptions on. So we, as we do every quarter, evaluate what we've seen from others in terms of settlements, any settlement activity, that we are in the middle of or have discussions ongoing. We evaluate the current case count and we estimate what we think future claims will be. And that's what we'll continue to do going forward, and I think as we've always said, based on the information we have at this point in time as we close the quarter, we think we've reflected an appropriate reserve in our financial statements, and that's what the Q2 action reflects.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

And can you just give a sense of the total number of cases now?

Christopher S. Holland

Yes. I think our Q will be out in the next day or so, Bob, and it will be obviously updated and increased disclosure there. So I prefer not to refer to pieces of it, but have you all have the benefit of the full updated disclosure.

Operator

Next question comes from the line of Larry Keusch, Raymond James.

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

I guess, Tim, you referenced in your prepared comments the mid- to high-single-digit sales growth objectives, and you feel like you're tracking towards that. Maybe you could help us understand what timeline you're kind of thinking about for that. And how much does DCB have to play into that to be able to hit the numbers?

Timothy M. Ring

Yes. Well, you know that the plan we laid out for you, what, 1.5 year ago now, basically gave you the timeline through 2015 where we expect it to be. And, I guess, to summarize all the points, we're certainly consistent with that from an execution point of view. DCBs, we're comfortable with the ranges that we gave in that guidance that in any scenario we see with the DCBs where we'll be able to be within that guidance range. So I think that's about as specific as I want to be at this point. But we're comfortable with the guidance we laid out longer term a while back. We're on our way to hit that.

Operator

Next question comes from the line of Brooks West with Piper Jaffray.

Brooks E. West - Piper Jaffray Companies, Research Division

Tim, I wanted to get you're refined thoughts on the home health or alternative site opportunity for Bard now that you've got a little more experience with Rochester Medical. I wonder if you could just update us on your thoughts on the general opportunity, current products, future products, any color you could share?

Timothy M. Ring

Well, we're bullish on the opportunity, generally speaking. I'm not going to layout our strategy in the call for you, but as you know, I think within the U.S. market, pretty much any hospital CEO you talk to they're trying to deliver more care outside of the hospital. So I would maybe expand it to say, just not only home care but care outside the hospital, it could take place in several kinds of setting. Frankly, we think that strategy is the broadest strategy than just U.S. In many parts of the world, there is more care delivered in the home or nonhospital setting than in the U.S., in the acute setting. So we think that the strategy is a global one, not just a U.S. one. We're pleased with the entry point that we have with the Rochester business. We think a lot of our other technologies, although maybe not even intended for that type of application, when developed, certainly are applicable with very minor modifications, maybe even more of an increased service component to it, to fit the nonhospital setting. So we're excited about the opportunity. I'd say, we're still trying to scope it out, though, to figure out exactly where we want to plug into it.

Operator

Next question comes from the line of Matthew Dodds with Citigroup.

Matthew J. Dodds - Citigroup Inc, Research Division

Tim or John, can you just tell us on Medivance, what happened in Japan and Asia? And did the other markets still grow over 10%?

Christopher S. Holland

It's Chris. There is a capital component to that business, I think, as you well know. And as you also I think appreciate, there can be lumpiness with that. And so the timing of certain orders can impact growth rates quarter-to-quarter, and we even see that from time to time in the U.S. as well. So we think Q2 was an aberration, with some of the softness we saw in Asia and some of the timing around certain orders. And we do certainly, though, recognize we're continuing to develop a market, and we're sort of the leader in trying to do that. And that will continue to evolve over time as the appreciation of the technology and its benefits gets to be known more broadly by clinicians. We need to really pave that road. And so, we're continuing to find ways to help KOLs speak on behalf of the technology, and again, over time, it will need to get more broad applications and indications as well. So again, we're very excited about the longer-term opportunity. And again, we think the blip we've seen in Q2 is an aberration.

Matthew J. Dodds - Citigroup Inc, Research Division

Just quick. So the U.S. and Europe, the growth rates were similar to recent trends? Is that fair?

Christopher S. Holland

Yes. They're continuing to -- so -- and again, the disposable piece of the business grew nicely. And again, the capital piece was somewhat lower in the quarter. But we're continuing to see growth in the key geographies.

Operator

Our next question comes from the line of Dave Turkaly with JMP Securities.

David L. Turkaly - JMP Securities LLC, Research Division

You may have said it but I don't know if I caught it, how much buyback you have left? And I know you mentioned cash and restricted cash of a $1 billion. We haven't seen any big deals for almost a year, I guess. I guess, what your propensity or capacity to look to bring other companies in here?

Christopher S. Holland

Certainly. We have $528 million left under the current authorization as of June 30. We do have the $1 billion, which is largely offshore. And we think we've got a lot of capacity to continue to fund the right strategic investments, and we're certainly actively evaluating lots of opportunities. The fact that we haven't done anything this year doesn't mean that we don't have an interest and we don't have the capacity to do additional transactions. Again, they need to make sense strategically and financially. And when we do find ones that meet these filters that we have, we believe between the balance sheet and access to capital, we can certainly finance what we need to get done.

Operator

Next question comes from the line of Matthew O'Brien, William Blair.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Just one real quick clarification, if I might. Chris, the royalty rate, $37.5 million in the quarter, again above what we were expecting. Should we use that rate going forward?

Christopher S. Holland

Yes. We're not. So I would encourage you not too either. And that wasn't the intention of my comment was to say that we certainly can't predict with any certainty at all what that number will be, which is certainly, for example, why we guide 7% to 9% in Q3, as an example. So we're not going to use a quarter to establish a new run rate that were going to factor into our internal plans, so I'd probably encourage you not to do it either.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Okay. And then just for my fundamental question. If my math is right, it looks like your emerging market performance was up about 20% sequentially. Tell me if I'm wrong there, but it was still very strong. And I know you've added a couple hundred folks in that business recently. Can you just give us a sense for how we should be modeling that over the next several quarters? Is that 20%-ish rate sequentially sustainable? Or should it decline materially? And then, is that really focused in one geography or product line category that's driving a lot of that growth or is it more broad-based?

John H. Weiland

It was a strong quarter for us, I mean, there was no question about it. In the emerging markets, you saw the uptick. We've not been giving out that percentage data for competitive reasons. But I think the indicator of the -- how our mix improves and the contribution of emerging markets is evident. We added, last year, 203 physicians in emerging markets, heavily focused on the back half of the year. And we did that across a number of geographies: China, Latin America, et cetera. We have a more modest number of additions that we're making in 2014. However, I think the important fact is usually it takes individuals 6, 9, 12 months to really get up to speed and be productive in their territories. And we think that will happen in the back half of this year. So our expectation is we'll be getting continued to contributions from the 200-plus people that we added last year.

Operator

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

David H. Roman - Goldman Sachs Group Inc., Research Division

I was hoping you could spend a minute just on spending levels. And I know, on the call, you walked through some dynamics in the P&L, that you'd start to expect to see SG&A leverage increase toward the back half of the year. Maybe you could also just talk about the cash flow side of the equation. I think, if my math is right, you spent almost year-to-date on CapEx what you spent all of last year. How should we just think about using capital for internal investments on a go-forward basis?

Christopher S. Holland

Sure. We had guided $100 million to $120 million of CapEx this year, back in January, which is absolutely a clear step up from where we've been and we've talked about that. That is not a new run rate, there's a couple of years worth of incremental investment around a number of key systems, initiatives, as well as a lot of integration work and capacity expansion around some of the acquisitions. So, normally, we'd be in the $60 million to $70 million range. In this year, through the first half, I think we've spent $56 million, which is very consistent with the $100 million to $120 million full year guidance.

So the application of free cash flow and the priorities continue to be very much consistent. Obviously, we'll do what we need to do from an infrastructure standpoint, and hence, the CapEx spend. We then again are focused on driving strategic addition to the portfolio through M&A. And then, beyond that, to the extent we can't find the right opportunities, we'll return cash flow to shareholders between a combination of buybacks and dividends with our desire to really maintain flexibility to have buybacks be the primary avenue, again, given the flexibility it provides us. So again, the business is continuing to generate very strong free cash flow and we're deploying it consistently with the strategic priorities, I think, we've always had.

David H. Roman - Goldman Sachs Group Inc., Research Division

Okay. And does that -- how long at this elevated level then does $60 million to $70 million become the new normalized run rate after this elevated level or are you permanently higher?

Christopher S. Holland

No, it will -- this is a couple-of-year period of investment. I'm not going to predict 3 or 4 years out our level of CapEx, but I would certainly expect that to return back towards the more normal historical level.

Operator

Next question comes from the line of David Lewis, Morgan Stanley.

David R. Lewis - Morgan Stanley, Research Division

Chris, I just -- you made some positive comments for the back half of the year. I wanted to square as it relates to organic growth. I think 2 comments, one from Tim and one from yourself. The 7% to 9% constant currency growth over for the third quarter, how does that compare with, like, Tim's comment about organic growth getting better into the back half of the year? Because I'm assuming basically you'll be more direct. You basically have to beat that 9% number in our mind to get back to kind of 3% organic. So is it safe to assume you're comfortable at the higher end of the constant currency range for the third quarter?

Christopher S. Holland

Sure, David. Again, we're providing a range we think is appropriate. Again, given the fact that I just mentioned, there's parts of the revenue line we can't control and have very little visibility to, with respect to the royalty. So I think, certainly, the middle of the range, we're very comfortable with. And that would -- the middle to the high end of the range over the back half of the year will have us comfortably within the 8% to 9%. We're now telling you that we expect to grow on a constant-currency basis for the full year. So again, we're trying not to make predictions without getting us some flexibility around the fact that there's parts of the business we don't have control over.

Operator

And your next question comes from the line of Mike Matson with Needham & Company.

Michael Matson - Needham & Company, LLC, Research Division

I was wondering if you could maybe give us some thoughts on the Medtronics acquisition of Covidien and how that's going to affect you competitively, particularly in your Vascular business? Do you see that as a more significant threat as a combined entity?

Timothy M. Ring

Well they're both in the business now, so we're essentially competing with them both. And whatever the consequences are of them being combined, it's hard to predict. I've not heard or read of any plans that they've articulated, relative to that business and that level of detail, so it's kind of difficult to comment after knowing that. But they're both in the market today and we compete with both of them today and it will be one business card that we compete against versus 2, I guess.

Operator

Next question comes from the line of Anthony Petrone with Jefferies.

Anthony Petrone - Jefferies LLC, Research Division

Just one for Chris, a quick housekeeping question. The $5.5 million and other income, was that just the FX hedge gain? And then just one quick follow-up on Lutonix.

Christopher S. Holland

Sure. That was part of it, Dave. There's also some interest income and actually income associated with the Boston Scientific TSA. So it's just a handful of factors with FX just being the largest of it.

Anthony Petrone - Jefferies LLC, Research Division

Got it. And then on Lutonix, maybe you can give us an update now with the panel is done, maybe on market development efforts for the product in the U.S. and, specifically, if we go back to the study, the difference between primary patency or TLR, are physicians weighing those any differently? Are they more influenced by primary patency or are they stuck on TLR?

John A. DeFord

John DeFord here. We've had quite a bit of time in Europe with this technology. And I think the sales, obviously, were very active in some of the market development at least market planning activities. The product is not approved in the U.S. so there's a limited amount of work that we can do in the U.S, except internal preparation. That said, we think that the results were strong and demonstrated improvement in primary patency and we think that TLR has been shown to be highly subjective in this class of patients, in claudicants. And I think our study demonstrated that relatively clearly. So that's obviously a part of our story. And at least from the clinicians we've had interaction with so far, seems to resonate pretty clearly.

Operator

[Operator Instructions] Our next question comes from the line of Mike Weinstein of JPMorgan.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Let me try and get 2 in here. And the first is, Chris, just to clarify your comment on repurchasing. I know that it was the new authorization that was put in place in June, which you've already spent more than $500 million year-to-date on buyback. What's your expectation for the balance of the year? Are you done for 2014 or is that to be determined?

Christopher S. Holland

Yes. Mike, it will depend on how the back part of the year plays out. It will depend on what acquisitions we see that we think makes sense. And then, we'll deploy additional free cash flow to the extent we have likely to buybacks. But it's very much depends and we're not going to commit any number one way or the other right now.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Okay. Let me ask then the strategic question. And, Tim, it was a question on your thoughts on Medtronic, Covidien, competitively, Vascular. But my question is more thinking about the opportunities there to create value for shareholders of Bard. There's obviously a lot going on in health care over the last several months with companies looking at larger strategic transactions to try and create value. Obviously, [indiscernible] version. It's all under the umbrella of how do we create value for our shareholders and it's a result of a number of the large announced transactions. Could you just talk about how -- what's going on around June health care landscape with what some other companies are doing? Your thoughts on them and on whether some of those ideas, some of those strategies may apply at Bard?

Timothy M. Ring

I don't know if this snapshot in time that we are in is very different from anything historically. I mean, obviously, all of us are obligated to increase shareholder value and do what's in the best interest of shareholders. I think as companies merge or combined, what have you, there are some decisions that need to be made by, clearly, the board recommending shareholders where they see the future strategic plan of a given company versus what someone's acquisition offer would be, and that's going to be weighed and balanced over a lot other things. So I think that any time that you have a slowdown in growth, which we've seen in the medical device field for some period of time, and where you have less differentiated products, as there has historically existed in certain sectors, those are the sectors where you tend to see more consolidation take place. So beyond that, I don't really have any other specific comment.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Let me just ask because I think most people on the call do view this as being a different time. And part of that is the tool set that CEOs and boards are using to create value is different. There obviously has been the inversion fee, but more broadly they're taking opportunity of the historical low cost to borrow, looking for new ways to try and consider larger transaction, something that Bard, historically, has shied away from. My question is has your thought process a larger transaction or something that might be more transformative change. Is that something you might be open to in the past that you've been reluctant to look at that type of a deal?

Timothy M. Ring

Well we haven't been reluctant, frankly. We're -- every year, when we go through our strategic review with our board, we tend to layout for them as broad a scenario as we possibly can. Both of the external landscape and where we -- obviously, our internal plans and then where we see ourselves fitting in those. Historically, I've always said we wouldn't be afraid or shy away from doing a big deal. It would just have to be so strategically compelling to us that it would make sense to us and then, thus, to shareholders. So I -- we're not gated at all by what's going on in the external environment, we'll stick to our strategic plan. And we're obviously keeping our eyes wide open at what goes on within the external environment. And frankly, inversions are not new. That technique, if you will, has been around for a long, long time. And we've had our eyes wide open to that as well. So I wouldn't say that anything that's happening in the external environment today has dictated a change of course in our strategic plan at all.

Operator

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

Richard Newitter - Leerink Swann LLC, Research Division

I just wanted to ask one on Lutonix, I think you gave a little bit of color on what had transpired with the journal publications process. If you just -- I think I might have missed that. If you could just repeat kind of where that stood in the process? And then also, if you could just describe to the extent that, that gets delayed further. How does that impact your ability to go and market this device? Or how does that change the conversation, potentially, with physicians, given that the kind of the rigor of the trial was so important to the kind of to the product's differentiation?

John A. DeFord

Sure. Let me go back and reiterate where we are in the process. We did learn this week that the authors have received some feedback from the targeted journal that they've gone to. The targeted journals asked for revisions, again it's pretty common process, and so they're working on getting those revisions in. Frankly, we don't feel like we got a lot of leverage at this point. Certainly, we, personally, as Bard don't, this is being driven by the investigators and authors. And there's -- with the data effectively out there through the panel meeting, I'm not sure that any particular journal would feel pushed to try to time this with an upcoming meeting or something like that. So we think that this is happening in due course. We're actually pleased with the process and feel like we've -- it's headed where we think it's ought to go. But timing is not within our control. I think as far as commercialization goes, we would think that our plans of commercialization, as we reiterated today, we think we're on track for an early-2015 launch. With that timing, I think we believe that publications should be reasonable within that kind of a time period. So as far as commercialization goes, we feel like that should help. That said, I think there's been a lot of discussion in the clinician community around the study designs. And I think people are really getting their head around how we conducted the study and some of the unique aspects of it. So we're beginning to get, I think, a good understanding that clinicians have grasp the way that the study was done. And maybe that helps explain to them why TLR, for example, wasn't where you'd see in some other studies.

Richard Newitter - Leerink Swann LLC, Research Division

Great. And maybe, Tim, just one for you. Just taking kind of a step back, if you could just provide your view of the kind of utilization and pricing landscape. Any major or significant trend changes from last quarter to this quarter?

Timothy M. Ring

No, I wouldn't say any significant changes. The major timing of contracts, and specifically in U.S., kind of varies throughout the course of the year. So it's very difficult to gauge from quarter-to-quarter what's going to happen with either one of those things.

Operator

And our next question comes from the line of Matthew Taylor with Barclays.

Matthew Taylor - Barclays Capital, Research Division

So not to take away, I think, from a good quarter, but I just was curious, given the revenue, I thought you might have done a little bit better on the margin side. You did point to a lot of benefits here in the back half on gross margins and SG&A. So I guess I was wondering, a, could you walk us through what's changing there to the positive? And then going back to your strategic guidance, you talked about getting back to 2012 levels by 2015. And I was wondering if that's still the case or if it could take a little bit longer?

Christopher S. Holland

Sure, Matt. Again, we're pleased with the quarter. Again, this as I think we said a number of times, what we're trying to do is not about this quarter or 2014 or 2015. We're not trying to drop through everything we can to maximize a given quarter. I guess, with what we delivered on the top and bottom line, there's always -- there's some timing around our cost improvement initiatives. FX was a bit more of a headwind for us in the quarter. That all abate a bit in the back half. So we feel good about where we are. We're certainly where we thought we'd be relative to our plans, and we feel good as we continue to grow the top line and see some benefits from some of the ongoing initiatives on the cost side that will affect gross margin. We feel good about getting leverage in the back half of the year as well. I think in terms of the longer-term objective, we did a couple of times now, I think, note that the original objective of 2015 operating margins back to 2012 levels were before the acquisition and divestiture activity that we undertook last year, which as we've talked about, is diluted during this period of time. So we're working hard to drive the margin higher. We will continue to show, we think, very good trajectory and improvements in margins next year. But we're not going to say we're going to get all the way back to the 2012 level by 2015. But we will be making very good progress towards that objective.

Matthew Taylor - Barclays Capital, Research Division

And just a follow-up on that, if I could. So just my math, I'm surprised with that leverage trajectory at the back half. You did raise it a little bit more. Is there something else I'm missing?

Christopher S. Holland

Again, Matt, we're not going to get ahead of ourselves here. We're not looking to maximize any individual quarter or maximize 2014. We're trying to get the engine in a position where we're in very good position over the longer term. And so we're doing everything we think we should be doing, day-to-day, week-to-week, month-to-month, quarter-to-quarter, trying to deliver results to the shareholders that we think are attractive, while we try to manage the business the right way for the longer term. So I'd probably characterize it that way.

Operator

And the next question comes from the line of Josh Jennings with Cowen and Company.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

I just first wanted to just check in with you your Stent business. And with the increased traction of drug-coated balloons in Europe, have you seen any impact to the stent market or to your international Stent business, specifically? And then assuming drug-coated balloons are, including Lutonix, are launched in the United States, how should we be thinking about the LifeStent trajectory?

John H. Weiland

Well, let me talk about the Stent business first. Individually, we had pretty solid quarter in Vascular. One of the aspects of that was the Stent business. Now we have had some pressure in the stent business over the last number of quarters and, in fact, you may remember it decreased by 11% in Q1. Q2 we were down 5%. So we saw that pressure abate somewhat. We had a key launch FLUENCY PLUS, which will be important for us, which we think will be an offensive weapon in the stent category as we move through the remainder of the year. And the way we are focused on Lutonix, we think a rising tide raises all ships. I mean, we will be at a very important -- even a more important partner with vascular surgeons, cardiologists, interventional radiologists with this offering. And as a result, we think we'll have the ability to really have a more important position in all those important laboratories. So we're not planning on one side of our business declining to support another side of our business, we're trying to make sure we position ourselves that we're full-line supplier of all these products.

Timothy M. Ring

The only other thing I would add, and I don't think there's anything necessary to take away from this, the decline of the Stent business in Europe was less than it was in other parts of the world and of the average. So it wasn't more of a decline there, which is where the bulk of Lutonix is being sold currently.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Chris, are you -- you're talking about the organic growth rate in Q2 and building from there in the back half of the year. Just in terms of what your internal math is, what was your organic growth rate in Q2?

Christopher S. Holland

It's just a smidge over 3%, Josh.

Operator

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

Kristen M. Stewart - Deutsche Bank AG, Research Division

I just wanted to go over just the guidance. And I guess just a follow-up on the last question. So I think, Tim, you've mentioned you saw an improvement sequentially within the organic growth rate. And I think I have the first quarter at 2.6% and this one would be like 3.1%, does that sound about right? I think 50 basis point improvement?

Christopher S. Holland

That's right, Kristen.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. And then the net acquisition divestiture contribution this quarter was a little less than last at 20 basis points, last quarter it was 40. Was that just more divestitures or how are the acquisitions performing relative to plan?

Christopher S. Holland

Yes. It is related to the divestiture.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay, great. And then the increase in sales guidance. How much of that is Gore versus the organic? I know Gore for the past 2 quarters is higher, it looks like coming in closer to the 140. So how much of that, I guess, raising a full year sales as just specific to the higher Gore so far in the first half?

Christopher S. Holland

Yes. It's a -- we're not assuming again that kind of run rate in the back half of the year. So we're -- it's obviously contributed to the front half to the extent you know, right the 37.6%. So it's really again -- we would have gotten to 8% on our own. And obviously, with the contribution we've seen in the first half from Gore, we're comfortable in guiding 8% to 9% for the full year.

Kristen M. Stewart - Deutsche Bank AG, Research Division

And what does that imply from the total company organic perspective, that range, with the acquisition and divestiture activity as well as Gore?

Christopher S. Holland

Yes. Again, it's continued sequential improvement in the organic growth rate. I'm not going to give you an exact number, but it's sequential improvement in Q3 and in Q4.

Kristen M. Stewart - Deutsche Bank AG, Research Division

And I'll sneak one more in. Just on the -- a topic, I guess, of taxes and cash outside the U.S. With the settlement, and I can appreciate there's no probably ability to predict timing, but the settlement on pelvic floor would that be something that you would have to use or U.S. cash or could you use o-U.S. cash? And just how do you think about balancing where your cash is generated relative to that payment, as well as acquisitions down the road?

Christopher S. Holland

I'm actually glad you brought that up, Kristen, because we've -- I've highlighted that point about this which is I think very important is that any of that obligation around women's health to the extent turns into a cash liability can be funded with o-U.S. cash because those were manufactured outside the U.S., those products. So -- and that's why we've always consistently said there's nothing about this exposure that we see that, in any way, implicates our ability to execute our strategic plan. And so, to the extent we end up having to fund settlements, et cetera, it will be all with o-U.S. cash and it would be obviously over a period of time. So again, it doesn't implicate our U.S. cash flow and it doesn't implicate our ability to pursue strategic opportunities as we find them.

Operator

And we have no additional questions. This does conclude our Q&A session. I would like to turn the call back over to Bard's management for closing or additional comments.

Timothy M. Ring

Thank you. I'd like to close simply by thanking Bard employees around the world for their commitment to excellence and a strong quarter, and I'd like to thank all of you for taking the time to join us today.

Operator

And ladies and gentlemen, this does conclude today's conference. I want to thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: CR Bard's (BCR) CEO Timothy Ring on Q2 2014 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts