C.R. Bard (New Jersey) (BCR) Timothy M. Ring on Q1 2016 Results - Earnings Call Transcript

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C.R. Bard, Inc. (New Jersey) (NYSE:BCR) Q1 2016 Earnings Call April 27, 2016 5:00 PM ET

Executives

Timothy M. Ring - Chairman & Chief Executive Officer

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

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

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

Analysts

Robert A. Hopkins - Bank of America Merrill Lynch

David H. Roman - Goldman Sachs & Co.

Michael Weinstein - JPMorgan Securities LLC

David R. Lewis - Morgan Stanley & Co. LLC

Lawrence Keusch - Raymond James & Associates, Inc.

Kristen Stewart - Deutsche Bank Securities, Inc.

David L. Turkaly - JMP Securities LLC

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the C.R. Bard, Inc. First Quarter 2016 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. 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 A. 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 and the information under the caption, Risk Factors, each in Bard's 2015 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 certain non-GAAP measures which management believes provide an additional and meaningful assessment of the core operating performances of the company and its individual product franchises. Reconciliations of 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 April 27, 2016, 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 will turn the call over to Mr. Timothy Ring. Please go ahead, sir.

Timothy M. Ring - Chairman & Chief Executive Officer

Thank you. Good afternoon and welcome to Bard's first quarter 2016 earnings conference call, and thanks to all of you for taking the time to join us today. I would expect the presentation portion of the call to last about 30 minutes, and we're going to try and keep the total call to about an hour. There is a slide deck available on the Investor Relations page of our website intended to help explain some of the moving pieces in our results and guidance.

The discussions today will go as follows. I'll begin with an overview of the results for the quarter. John Weiland, our President and COO, will review first quarter product line revenue. John DeFord, our Senior Vice President of Science, Technology & Clinical Affairs, will give you an update on our product development pipeline. Lastly, Chris Holland, our Senior VP and CFO, will review the first quarter income statement and balance sheet, as well our expectations for the second quarter and the full year, and then finally we'll close with Q&A.

First quarter 2016 net sales totaled $873.5 million. That's up 7% over the first quarter last year on an as-reported basis and up 8.5% on a constant currency basis. The currency impact for the quarter versus the same quarter last year was unfavorable by about 190 basis points. Our organic revenue growth this quarter was 9%, which was significantly better than our guidance of 5.5% to 6%. Net income for the first quarter was $116.2 million and diluted earnings per share were $1.54. That's down 17% and 15%, respectively.

Excluding amortization and certain items that affected the comparability results of between periods, which Chris will cover later, first quarter 2016 net income and diluted earnings per share were $177 million and $2.34; that's up 10%, 11%, respectively. This was also significantly above our expectations and represents a pretty good start to the year.

Looking at our revenue growth, geographically, compared to the same quarter last year, first quarter net sales in the U.S. grew 9% compared to a year ago. On a constant currency basis, in Europe, we were up 5%, Japan was down 16%, and our other international businesses were up 20%. As a reminder, the reduction in Japan is due to the work down of inventory that was recorded as revenue when we sold it to our joint venture prior to the acquisition in the fourth quarter of last year. As we move into the second quarter, that inventory work down is substantially complete, and we are benefiting from recording revenue at the customer level.

Our emerging market geographies continued their impressive growth in the first quarter with every major geography contributing double-digit growth. China was particularly exceptional. Our investments over the last couple of years have strengthened our position in these faster-growing markets. Emerging markets represented 10% of sales in Q1 compared to just 8% a year ago, and that meaningful mix shift is occurring even with high-single-digit growth in the U.S.

Accelerating the revenue growth of the company has been the purpose of our plan for the last several years. As we said many times, we believe investing in faster growth platforms and geographies accomplishes that objective by shifting the mix of the portfolio.

While these aren't metrics we plan to disclose on a regular basis, it may be appropriate as we pass the three-year anniversary of the announcement of our strategic investment plan to compare the growth profile of the business then versus now.

Q1 2013, when we first announced our plan, our organic growth was essentially flat. At that time, between 35% and 40% of our organic portfolio was declining. And between 10% and 15% of the portfolio was growing double digits.

After three years of significant focused investments in these faster growth areas, that mix has literally been inverted. In Q1 of 2016, only 10% to 15% of our organic portfolio is declining and between 35% and 40% of the portfolio is growing double digits. We remain in investment mode, and we believe we are just in the early stages of seeing the returns on our past investments.

Our focus has been and is to build platforms and capabilities that we expect will provide sustainable growth above the sector for years to come. If you've followed us for a very long, you know it's not uncommon for us to have a good start to the year, but we don't typically change full year guidance after only one quarter.

In fact, in my 24 years here, I think we've only done it once. However, given the strong performance in the first quarter and the breadth of the strength, both geographically and from a product perspective, we already expect to exceed the full-year guidance we gave you three months ago.

We're not going to get too far ahead of ourselves because there is a lot of the year left and a lot of work in front of us. Chris will cover the details with you a little bit later. Having said that, we're very pleased with the execution of the investment plan so far, we're moving on multiple fronts across product platforms and geographies. We are growing faster than our peers and we expect that to continue. We like the position we're in and we intend to continue to invest to maintain that position.

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

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

Good afternoon, everyone. Before I start, let me point out that I will be giving all percentage growth data in comparison to the prior year period on a constant currency basis, unless noted otherwise. So we'll begin with Vascular. Total net sales were $239.5 million, up 3% over last year on a reported basis, and up 5% on a constant currency basis. U.S. Vascular sales were up 3% in the first quarter and international sales were up 10%. Excluding the Gore royalty, EP sales to Boston Scientific and a temporary reduction in Japan's sales due to the acquisition, global Vascular sales grew 12%. Sales in our surgical graft category grew 3% this quarter, within the range of recent experience.

Our endovascular business was up 9% in the first quarter. Within endovascular, our biopsy products were well above trend at 16% growth in Q1, with strong growth in the United States and emerging markets. There was good momentum in this business, but the strong 2015 we had provides some tougher comps in the coming quarters.

Our peripheral PTA line increased 19% in the first quarter with our Lutonix DCB growing significantly. We are pleased with how our teams have executed here, and we expect that the expanding real-world data around effectiveness and safety will continue to support the selection of the Lutonix drug-coated balloon as the first line of therapy for peripheral artery disease.

I'll remind you that in the first quarter of 2015 was a relatively easy comp due to the significant initial stocking in the fourth quarter of 2014, and the upcoming quarters have some more difficult comps as we saw stocking for Boston Scientific in the second quarter and third quarter of 2015 related to our distribution agreement with them.

Our stent business declined 1% in the first quarter compared to the prior year, impacted by the acquisition in Japan, and our Vena Cava Filter line grew 3% in the quarter.

Now, let's move to urology. Total net sales were $216.7 million, up 5% versus the first quarter of last year on a reported basis and up 7% on a constant currency basis. Excluding the impact from Japan and the acquisition of Liberator Medical, global urology sales were still up 5%, with the United States also up 5% and international up 3%. We saw healthy double-digit growth in our targeted temperature management products again this quarter.

Our basic drainage business was up 5% in Q1. In this category, we benefited from the new sales from Liberator but had declines related to the inventory in Japan. If you exclude both of those, the business was still up 5% globally and up 6% in the United States, with our I.C. Foley business up 4% globally and also up 4% in the United States.

Looking at the last several quarters, we would characterize the results here as stable but not necessarily accelerating on a macro level. We do see specific growth driven by a few new products of ours, both in the hospital and in the home. Our continence business was up 22% in Q1 but would have been flat, excluding Liberator and Japan. I'll remind you that the Liberator platform added ostomy products to our revenue, and those are recorded in continence.

Sales in urological specialties were up 8% in Q1, with our brachytherapy business also up 8%. As we said last quarter, we did not keep significant stocking inventory in Japan on the brachytherapy products, so we began recognizing customer-level pricing in Q4 when we closed the acquisition. And finally, stand-alone sales of our STATLOCK catheter stabilization line decreased 5% in Q1.

Next up is oncology. Total net sales in this category were $241.9 million, an increase of 8% over Q1 last year on a reported basis and up 10% on a constant currency basis. We worked through the Japanese inventory a little quicker in this business and began to benefit from end customer sales in Japan in the first quarter. Excluding Japan, global oncology sales were up 8%, with the United States up 6% and international sales up 15%.

Our port business rebounded from the temporary issues we told you about last quarter and grew 8% over Q1 of last year. Our PICC revenue was up 9% globally. As our largest single product line, we continue to expect PICCs to be a meaningful source of growth for us, especially in international markets where PICC penetration is in its very early days.

And to close out the category, our vascular access ultrasound product line grew 15% this quarter as we launched our new Site~Rite 8 platform, and our dialysis catheter product line was up 12%.

Now let's finish with surgical specialties. Total net sales in this category were $151.4 million, up 11% on our reported basis and up 13% on a constant currency basis. The impact to this business from the Japan acquisition was minimal. Excluding Japan, the global sales growth was still 13% with United States sales up 12% and international sales up 14% in the quarter. Our performance irrigation business declined 6% in Q1 as we anniversaried the discontinuation of certain products in this category.

Our soft tissue repair business grew 13% this quarter, which is the strongest growth we've seen for this category since Q3 of 2010. As we've seen over the last few years, the growth in synthetic hernia and biologic hernia are inversely related as procedures move from one to the other. This quarter saw a significant reduction in overall natural tissue hernia, which declined 19% despite very good growth in our Xen AB platform.

However, our synthetic hernia business grew 19%, which is the strongest growth we've seen in this product line since the first quarter of 2004, 12 years ago. While this business is mostly in the United States, which is benefiting from our new Phasix material, our emerging markets are growing nicely with our legacy portfolio.

Because our mix in soft tissue is more than 5 to 1 in favor of synthetics, as physicians move from biologics to synthetics or hybrids, we typically do well in that exchange, as demonstrated this quarter by the strong performance in total soft tissue repair.

Our hernia fixation line grew 37% this quarter, as our new products are having an impact as anticipated. As we've told you, we have the broadest portfolio in hernia repair across all types of products, from a wide range of synthetics, to hybrids, to natural tissue, and now, antibiotic-coated natural tissue. We are working with physicians to identify the right product for the right patient and provide a wide range of options for them.

Finally, our biosurgery business grew in the healthy double-digits again this quarter and we believe, continues to be a significant long-term growth opportunity for us.

This concludes our product line revenue discussion. I'll now turn you over to John DeFord.

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

Thanks for joining us, and good evening, everyone. With the Analyst Day in about a month, I'm just going to hit some of the highlights today, starting with our drug-coated balloon pipeline, where we've launched our new 7-millimeter diameter products. And in early April, we also launched our full line of 5 French-compatible DCBs. So now, every balloon size for the SFA indication is available in a 5 French-compatible configuration, giving us a competitive advantage.

After our submission last quarter of our long lesion supplement, we're hopeful for a late second half launch for the treatment of lesions up to 300 millimeters in length. In our Below-the-Knee IDE, enrollment is beginning to accelerate after FDA approved the expansion of our inclusion criteria in mid-Q1. At projected recruitment rates, we continue to anticipate enrollment through 2016, putting PMA submission likely in the first half of 2018.

Moving to the AV Access DCB IDE study, we completed enrollment in Q1 and are now in the six-month follow-up window. Though these things are a little hard to predict precisely, we believe we should have results some time in Q4, and we anticipate PMA submission in Q1 of 2017 ahead of our previous schedule. Assuming normal review timing, we expect a second half 2017 U.S. launch. We're also anticipating the submission of our in-stent restenosis PMA supplement in the next couple of months.

Around the world, we're working to expand access to this important technology. For example, our Shonin submission for the SFA indication occurred at the end of Q1 seeking approval in Japan, and we began enrollment in our LEVANT China study a few weeks ago.

Also in vascular, the LifeStream Balloon Expandable Covered Stent trial was fully enrolled in Q3 of 2015. The primary efficacy analysis will be performed with a nine-month follow-up in the treatment of iliac artery disease. Our current projected timeline continues to support submission of our final PMA module before year-end.

Our COVERA next-generation stent graft IDE is under review at FDA, and we anticipate commencing enrollment upon approval. COVERA is designed for use in the AV access circuit. Also in stents, our VENOVO venous stent is doing well in Europe, and we commenced enrollment in our U.S. IDE just a couple of weeks ago. We anticipate enrollment through 2016 with follow-up through 2017 and PMA submission in 2018.

Our biopsy business launched eight new products, including EnCor Enspire, EnCor Ultra, and the mission semi-automatic biopsy family this quarter in Asia, while launching 18 new products in Latin America and the Middle East.

Next, moving to urology and homecare, we exited Q1 with launches in all four of our franchises. First, for the homecare market, we launched our new MAGIC3 TOUCHLESS intermittent self-catheterization platform. We also launched our new PROXIS sheath family for flexible ureteroscopy in our endourology family, and we launched our new Foley daily care kit designed to help healthcare workers adhere to best practices and daily Foley catheter care and maintenance in our basic drainage segment. In targeted temperature management, we launched some new adult pad sizes to support temperate control over a broader range of patient sizes.

Moving to oncology, we're still working with FDA, seeking clearance for the launch, anticipated later this quarter, of our new family of chemical-resistant catheters. We're also making steady progress on our new PICC family, designed to reduce the risk of thrombosis or DVT and remain on plan to begin launching in the back half of the year.

For the difficult stick IV catheter patients, we began the launch of our AccuCath wire guide assisted products earlier this month, with additional sizes to launch over the next couple of quarters. These new products are complementary to our new midline catheter, the PowerGlide Pro, slated for launch upon FDA clearance.

Lastly in Q1, we launched our new dual lumen power centesis catheter, designed for superior flexibility, kink resistance and flow rates in excess of 400 mL per minute, and a small 11 French catheter configuration.

I'll close my portion of the discussion today with surgery. Just a few days ago, we received PMA approval for our new Tridyne aortic sealant and we're preparing to launch this new product around the end of this quarter. We're also working towards the launch of a new Progel sealant configuration designed to improve visibility during minimally invasive and robotic surgery and expect PMA submission this quarter with approval and launch around the end of the year.

We're also expanding our portfolio with Phasix resorbable mesh with additional sizes anticipated to launch in the back half of the year.

And finally, in mesh fixation, we anticipate expanding on our recent permanent and resorbable product launches with two additional resorbable fixation devices slated for later this year.

Now before I hand you over to Chris, I'd like to remind all of you to join us at our Analyst Day on Monday, May 23, at the New York Palace Hotel at 4:30 PM. I look forward to seeing you there. And now, here's Chris.

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

Thank you, John. Let me start by covering certain items that affect the comparability of our results between periods. We had acquisition-related items of $4.5 million pre-tax, a $9.8 million pre-tax charge for restructuring and productivity initiatives, and we booked expense of $48.9 million for product liability matters, which principally is related to litigation on IVC filters. The P&L impact of these items is detailed in the notes to the financial statements and in the reconciliation accompanying our Q1 earnings press release.

Now, let's go through the statement of income for the quarter, and I'll remind you that our adjusted numbers now exclude the amortization of intangibles from the entire P&L and the references to prior year are on that same basis. Gross profit was $553.1 million or 63.3% of sales for Q1.

On an adjusted basis, GP was $581.2 million or 66.5% of sales. That's up 210 basis points from the prior year quarter and better than we expected. FX cost us about 20 basis points in GP for the quarter. Price pressure drove 40 basis points on the revenue line in Q1 and 20 basis points of headwind on GP, which was significantly better than our expectations and the best result we've seen since 2010. We still expect price to be more of a headwind going forward, but we're certainly happy with the Q1 results.

Our cost improvements and other items drove 90 basis points of benefit to GP this quarter, and mix was favorable by 160 basis points, which includes the gross profit benefit from acquiring our Japanese JV. As we look to Q2, we expect gross margin to be over 100 basis points better than Q2 of 2015 and for the full-year, we are comfortable with our guidance for gross profit improvement.

SG&A expenses were $270.6 million for the quarter or 31% of sales. On an adjusted basis, SG&A was $266.5 million or 30.5% sales, an increase of 180 basis points over last year. This is reflective of the timing of the two recent acquisitions and we expect Q2 will also be higher than prior year as well. We still expect the full year to about the same as 2015 as a percentage of sales as we integrate the acquisitions and leverage our infrastructure on higher sales throughout the year.

R&D expenditures totaled $68.3 million for the first quarter or 7.8% of sales on a reported basis. On an adjusted basis, R&D was $66.8 million or 7.6% of sales, up 20 basis points from Q1 of last year and consistent with our guidance. Interest expense was $11.3 million for the quarter. Other income and expense was $60 million of expense for the first quarter as reported and $1.9 million of income on an adjusted basis.

The effective tax rate for the quarter was 18.7% on a reported basis and 25.8% on an adjusted basis, right in the middle of our full-year guidance. Diluted shares for the period were $75.2 million and we purchased 897,000 shares in the first quarter at an average price $186.57. The net result is adjusted EPS of $2.34 which was well above our expectations for the quarter. This overachievement was driven by the strong sales beat and the slight easing of FX headwinds.

The balance sheet as of March 31 reflects cash, restricted cash and short-term investments of approximately $1 billion, essentially no change from December 31. For the quarter, accounts receivable days were up 1.2 days, and inventory days were up 6.3 days. Both of these increases are related to the recent acquisitions. Capital expenditures totaled $20.5 million for the quarter.

On the liability side, total debt was $1.7 billion as of March 31 compared to $1.4 billion at the end of December. Debt to total cap at the end of the first quarter was about 53% and total shareholder investment was $1.5 billion at March 31.

Turning now to guidance, in Q2, we're expecting constant currency sales growth between 6.5% and 8% with reported sales growth between 5.5% and 7%, inferring an FX headwind of approximately 1% on the revenue line. This assumes organic growth between 5.5% and 6% for the second quarter. From an adjusted EPS standpoint, excluding items affecting comparability and the amortization of intangibles, we see the second quarter in the range of $2.43 to $2.47.

Given such a strong operational start to 2016, along with an easing of FX headwinds, we're comfortable raising our guidance for the full year on both the top and bottom line. We now expect full-year constant currency sales growth to be between 7% and 8.5% with reported sales growth between 6% and 8%, inferring a currency headwind of between 50 and 100 basis points.

On an organic basis, we had originally guided the year to be between 5% and 6% but are increasing that range meaningfully today to be between 6% and 6.5%. It's not lost on us and we're sure it's not lost on you that we did meaningfully better than that in Q1. To be clear, we see good momentum in the business and continued strength in our positioning.

However, there were several product lines this quarter well above trend. China was exceptionally strong, and I just highlighted price headwind was abnormally low. So, before we take the sustainability of some of these factors to the bank, we think it is prudent to get a little deeper into the year. We are also increasing our full-year adjusted EPS guidance range to be between $10.05 and $10.18, which is just about $0.15 above our original guidance range at the midpoint and represents 11% to 12% growth over 2015.

At current rates, we expect foreign exchange to be approximately $0.20 of headwind for the full year. So, on an FX neutral basis, we are guiding to 13% to 14% growth. Given the strength of our operating performance, the success of our investment program and the demonstrated ability of our teams to execute against commitments, we plan to accelerate certain investments in targeted projects and geographies beginning in Q2 and throughout the remainder of the year.

We believe this disciplined investment approach will help provide sustainable profitable growth and value for our shareholders for years to come.

And with that, I'll turn you back to Tim.

Timothy M. Ring - Chairman & Chief Executive Officer

Thanks, Chris. That does conclude the formal part of the presentation. I'll now turn the call back to our moderator to facilitate the Q&A session. To accommodate the number of investors on the call, I would ask that you limit yourself to one question and one brief follow-up. With that, Kathy?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. And once again, we ask that you limit yourself to one question with a brief follow-up. And our first question will come from Bob Hopkins with Bank of America. Go ahead, please.

Robert A. Hopkins - Bank of America Merrill Lynch

Okay. Thanks, and good afternoon. Can you hear me okay?

Timothy M. Ring - Chairman & Chief Executive Officer

Hey, Bob. Hear you fine.

Robert A. Hopkins - Bank of America Merrill Lynch

Hey. Good afternoon. So, two things, Tim, for you. Before I ask a Bard-specific question, one of the other things that isn't lost on all of us on this call is that really the whole med tech space is reporting very strong Q1 organic growth numbers from cardio, to ortho, to general surgery. So, I just wanted to get your take on kind of what you're seeing out there in terms of surgical procedure volumes and trends generally.

Timothy M. Ring - Chairman & Chief Executive Officer

Yeah. I mean, I think there's no denying that the observation you made, it does seem like everyone's doing a little bit better. And I still think there's a lot of things that we're still trying to understand and navigate as healthcare evolves and changes and what that means. The only thing I could point to, Bob, that has been constant and that is that as unemployment rates over a very long period of time historically have improved. Healthcare spending has, for like 40 years, increased along with that. So, it feels like things are getting a little bit better. But again, because it is a different kind of environment with all the different dynamics, it's still a little bit tough to predict, I think.

Robert A. Hopkins - Bank of America Merrill Lynch

And then just to follow up maybe on that same question, so two quick things. One, just sort of the standard question. Were selling days even for you guys this quarter? And then more specifically, Bard had a particularly strong quarter with 9% organic growth. That's a nice acceleration from what we've seen. So, can you just talk from a Bard perspective like what drove the incremental growth? Maybe it seems like emerging markets were maybe even above the 20% level that you've been seeing. Just talk about what got better this quarter and if the selling days were even up. Thanks.

Timothy M. Ring - Chairman & Chief Executive Officer

Yeah. We were strong literally across the board. We did have some easier comps in certain sectors, which Chris can get into more details about, but in general, the investment plan's working, the execution is – the team's doing a great job around the world, executing very well. We had some new products that have hit their stride pretty quickly. Lutonix continues to do well. Surgery, as John noted, the highest it's been in synthetics in over a decade, so it's really across the board. It's not any one thing.

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

Yeah. I'd just add, Bob, I think just a couple of things we tried to highlight that really sort of surprised us as we came through the quarter. Again, price was better than we expected and well below trend. Biopsy, as John highlighted, had a really strong quarter and probably the easiest comp of the year for us, but terrific momentum there, and Lutonix had its easiest comp of the year as well. And soft tissue, as John highlighted, was just clearly above trend, and with the exceptional strength in synthetics. And China had an exceptional quarter, above trend. So, it was really a situation where everybody performed as we expected, and then we got, I'd call at this point several really nice surprises.

And then from a selling days standpoint, it's hard to measure exactly, but there probably was some benefit, Bob. But again, it was a tailwind, but it's hard to be too specific. And we generally don't call it out when it goes the other way either, but it probably helped a little bit.

Robert A. Hopkins - Bank of America Merrill Lynch

Great. Thanks for the color.

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

Sure.

Operator

Thank you. Our next question is from David Roman with Goldman Sachs. Go ahead, please.

David H. Roman - Goldman Sachs & Co.

Thank you. Good evening, everybody. I want to see if you could follow-up a little bit on Japan and give us a little bit more detail about how we should think about that region unfolding as you move to a full direct model and maybe give us some specifics on where you see the biggest opportunities and how we should think about that contributing to growth, both throughout 2016 and as we think longer term.

Timothy M. Ring - Chairman & Chief Executive Officer

Yeah. I think, David, first of all, we're off to a good start, frankly. I mean, the integration has gone very well so far, and obviously, we're dealing with the inventory sell through. But the business actually did a bit better than we had expected anyway. I think we're realigning the sales force a bit and getting them focused in areas where we, to your point, really see more opportunity and that would certainly be both within surgery. We talked about PICCs in general being extremely underpenetrated in Japan. We think that's a really exciting growth area for us. And probably most prominently within vascular, we've got LifeStent and Lutonix approvals coming down the pipeline here in fairly short order.

And having control of that direct sales force ourselves, getting them aligned the right way and getting them motivated and ready for those launches, again, relative to the old ownership structure, we just feel we're in a position to maximize that opportunity in a way we just wouldn't have been able to otherwise.

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

The only other thing I would add, if you were to look on a macro level, the product mix within the global portfolio by urology, oncology, surgical and vascular, where it's fairly evenly balanced, at least amongst the top three with surgical lagging a little bit behind. That is not the way our Japan business looks today. We're very heavily dominated in urology; clearly the faster growing segments are the other three and that's where we have the smallest amount of revenue coming from in Japan.

So it's our expectation that that will get realigned with this structural change as well as our investments moving forward. And we would expect that product mix to shift and look more like over time, what we look like everywhere else.

David H. Roman - Goldman Sachs & Co.

That's helpful. And then maybe just on the spending side, it looks like you took the opportunity to reinvest in SG&A this quarter, given some of the strength on the top line. But it looks like that there's some – what you said at the beginning of the year CapEx is running a little bit lower. So how should we just think about the balance of cash spending through the rest of the year as well as how the P&L discretionary line items should compare to your original guidance? I know you gave SG&A, but maybe just an update on R&D and CapEx would be helpful.

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

All right. We guided to $120 million of CapEx spend for the full year. I think we'll probably still get close to that number. I don't expect it to be materially different either way. And as we highlighted at the end of the comments, we are in the face of this strength really going to accelerate spending on some – several additional R&D projects, several additional sales force expansion projects. Several additional clinical trials and also we're adding additional resources within our health economics infrastructure across the company as well. So, it'll be spread between SG&A and R&D. We'll still be in line with our full-year guidance as a percentage of sales, but we're going to take advantage of this strength again to really accelerate some investments that we think will be helpful as we move into 2017 and beyond.

David H. Roman - Goldman Sachs & Co.

All right. Great. Thank you very much.

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

You're welcome.

Operator

Thank you. We'll go next to Mike Weinstein with JPMorgan. Go ahead, please.

Michael Weinstein - JPMorgan Securities LLC

Thanks. And I would say just following up on that, Chris, if you guys at the Analyst meeting can talk just a little bit more about where you're putting those extra dollars, I think that would probably be helpful to everybody.

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

Sure, Mike.

Michael Weinstein - JPMorgan Securities LLC

Yeah. Let me circle back to, really, Bob's first question, which is you look at some of these businesses, the ones that are above trend. And I just want to understand, you gave numbers on a bunch that were obviously very strong, things that – like urological specialty is up 8%, brachytherapy up 8%. The synthetic hernia repair business, which had been running like 8%, 9% last year was up 19% this quarter. All those businesses that had real above trends, was that – you didn't break it – explain it U.S. versus OUS. Was that U.S. that was significantly above trend? Was it U.S. and then China? Can you just maybe geographically help us there? Because a lot of what we're seeing is U.S. outperformance in a number of different end markets. Thanks.

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

I think U.S. was strong, Mike, in really all of those, so it's – we had 9% growth in the U.S. and 8% organic growth in U.S. So, it was – all the categories we highlighted were strong. China is going great guns for us. And so biopsy in China, the hernia business in China, the PICC franchise in China, and as we talked about last year, I think as an example of where we accelerated some investments, we've started to build a direct sales force in biosurgery in China last year. And this quarter is the first quarter where we're really seeing the fruits of those efforts in China.

The brachy business performed, again in Japan better because there was really no inventory in Japan, and so we're getting direct-to-customer pricing there in the quarter. So, it's really across the board, and the U.S. was certainly stronger. But again, where we had made investments is where we've also seen some acceleration in some of these other geographies.

Michael Weinstein - JPMorgan Securities LLC

And tell me how you thought about just the guidance upgrade for the balance of the year? It's just the organic revenue growth of 5.5% to 6% for the second quarter and it kind of – that's what you're basically implying for the second half. Are you just basically assuming that you go back to your prior trend line expectations and just for now assuming that what we saw incremental in the first quarter was a one-quarter event and, therefore, the upside is that if it's not just a one-quarter event then we're going to get the benefit of that?

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

I don't think that's a bad way to think about it. I mean that's really how we saw the year coming in, was 5% to 6%. I think we called out a couple of areas that were above trend and a couple of areas that were easy comps that obviously we're not counting on the rest of the year. And again, pricing was a positive surprise for us as well. So, we feel great about 6% to 6.5% for the full year. And as we said, we're not going to get too far ahead of ourselves. We'll see how Q2 goes, and then we'll take it from there, but I think great start to the year. We think appropriate guidance for the rest of the year. And as I think you've seen from us in the past, we'll try as we move through year, try to make the right decisions, both from an investment standpoint and from a guidance standpoint.

Michael Weinstein - JPMorgan Securities LLC

And, Chris, just one clarification and I'll let some others jump in. On Japan, so you're going to go from a headwind on the top line because of the JV, to buy into a tailwind. Can you just help us with the math on what that might mean to the top line over the next few quarters?

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

Yeah. And so we'll have this sort of interesting phenomena where reported and constant currency growth will accelerate through the back part of the year, largely because of the impact of Japan. But we're pulling it entirely out of organic. So we're not benefiting at all over the course of the year when we're talking about organic growth from Japan. So we guided for Q2. Q3 will be somewhat higher than that, and Q4 will be somewhat higher than that from a reported and constant currency basis. But again, organic should be relatively consistent over the course of the next three quarters, is how we're seeing the business as we sit here right now.

Michael Weinstein - JPMorgan Securities LLC

Got it. Congrats again on the quarter, guys.

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

Thanks, Mike.

Timothy M. Ring - Chairman & Chief Executive Officer

Thank you, Mike.

Operator

Thank you. We have a question now from David Lewis with Morgan Stanley. Go ahead, please.

David R. Lewis - Morgan Stanley & Co. LLC

Good afternoon. Tim, just sticking with this idea of trying to understand the macro versus the micro drivers of the business. If I take the four segments Bard, it looks on the margin, surgical and oncology you did better than vascular and urology on a relative basis. If you think about hospital utilization acuity or U.S. mix or the product pipelines in these business, does surgical and oncology versus vascular, urology make sense, either relative to the products in the businesses or make sense relative to the U.S.-focus or things you've seen in the past on utilization or acuity?

Timothy M. Ring - Chairman & Chief Executive Officer

Yeah. I'm not sure there's a common thread where you can weave them all together. There's different things driving each of the different businesses. Surgical obviously, there's been a lot of investment made in that business over the last few years and a lot of new products are coming out, as John cited out in his review. So that's doing well. That's also one of the key investments areas in emerging markets. So you've got those two things there.

Clearly, oncology, there's always new products kind of flowing through there, but that's one of the biggest drivers in emerging markets, especially in China. So again, you've got kind of both themes there as well.

Vascular continues to do well. The PTA line, Lutonix in the U.S. continues to do well. And urology, even across the board, clearly PTM (46:02) continues to do well. The acquisitions that we've made continue to perform well. And the uptake in the U.S. seems to have become more steady. When you talk to hospital CEOs, I'm hearing more of them talk about some of their issues being things like nursing turnover again being a big issue for them. We really haven't heard that, at least I haven't, from a lot of hospital CEOs for several years now.

So, that's an indication perhaps that volumes are coming back or other opportunities for nurses outside of hospitals, one and/or both of those things. So, just generally those are the themes that would kind of go through each of those areas you called out.

David R. Lewis - Morgan Stanley & Co. LLC

Okay. Very helpful. And I guess the second tenet of Bard these last couple years has been you were going to invest to drive that organic growth and you talked a lot about this 6 and 10 model, 6% organic top and 10% on the bottom. I'm not getting too excited over here with the 12% earnings growth, but I think it bears asking you, as you start getting above 6%, 7% organic growth as you did this quarter, does there start to become any diminishing return where investors can expect better than 10% earnings, if that organic growth is going to be in excess of 7% organic? Thanks and great quarter.

Timothy M. Ring - Chairman & Chief Executive Officer

Just to be clear, I think what you might be referencing is our historical spreads between our revenue and our earnings growth. Having said that, and as Chris pointed out, we also – we don't run this business quarter to quarter. We run it over in the long term. The company was founded in 1907. So, none of us here are doing this on a quarter-to-quarter basis. We're constantly looking and have a very well-tuned process about how we will turn on investments over time, and we've always done that. When we do a little bit better, we're able to turn on more, but it's not like we have to go out and collect ideas. We've got a pipeline of things that we can invest in, it's just a question of when we'll start turning those on.

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

The only thing I'd add, David, is as we've talked about pretty consistently, we do believe the model and especially the product mix and where we're getting growth from does and should allow us to generate 50 basis points to 100 basis points of operating margin improvement annually.

And so, as we grow the top line consistently in the mid-single digits and obviously utilize the free cash flow that we have on top of that, you do get to that kind of math. If we have a year like this year, where we're obviously looking at performing a little bit better than that, you're seeing good earnings growth on top of that as well. So, the importance is the health of the model and continuing to keep it healthy. And we think, again, letting too much drop through when we're leaving good investments on the table is not the right approach from a long-term standpoint.

David R. Lewis - Morgan Stanley & Co. LLC

Well, it's working so far, so congrats.

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

Thank you.

Operator

Thank you. And next we have Larry Keusch with Raymond James. Go ahead, please.

Lawrence Keusch - Raymond James & Associates, Inc.

Okay. Thanks. Chris, maybe just to start, the GM, I think on the adjusted basis, you did 66.5%, and I think the guidance is 66% for the year. So can you just help us, again, just think through with that starting point why there won't be potentially some upside, particularly as you start to recognize some of the Japan benefits?

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

And some of the Japan – from a gross margin standpoint, Larry, some of the Japan benefits were impacting mix in Q1. So as the sales that we had already previously made into the joint venture then get sold out the door to the customer, that incremental pricing, right, is gross margin. We're obviously no longer booking sales as we fill the pipe into the JV. So mix, as we expected for the full year from the JV, would be a positive contributor. It's actually more prominent in Q1 because there's fewer sales that we're booking into the JV.

So I think the way to think about gross margin over the full year is actually we'll probably be pretty consistent quarter-to-quarter here on out as that – as the normal – as we see the normalization of Japan over time. And, again, we're not expecting to see the kind of pricing environment we necessarily saw in Q1 for the full year. So I expect to see a fairly consistent gross margin trajectory over the course of the year as we're looking at it right now.

Lawrence Keusch - Raymond James & Associates, Inc.

Okay. And then I'll just sneak two other quick ones in here. Just on – staying on the topic of Japan, you had indicated that you had expected dilution of about $0.20, with $0.10 occurring in the first quarter. Again, just given some of the changes in the FX rates, I want to just check back in on that.

And then specifically on price, again, I hear you loud and clear that this is below the levels that we've been seeing as of late. But was there anything specific in the quarter that allowed you to get the better pricing? Or perhaps said another way, is there anything to think about as we move through the year that would influence pricing negatively or you're just trying to stay conservative there?

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

Larry, this is John, let me deal with the price issue first. No, there was no special onetime item that impacted us positively from a price standpoint. We had a pretty good performance across all of our businesses as well as our geographies. And we had annualized a few of the headwinds that we had early last year, we talked about, which was on port pricing; that had an impact as well.

I'll turn you back to Chris.

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

Yeah. On the currency front, Larry, just in general, currency was about $0.02 better than we had expected in the quarter. Probably a little more than half of that was related to the yen. So we were sort of $0.01 better as we thought about Japan – $0.01 or $0.02 better as we thought about Japan coming into the year. And again, for the full-year, we'll expect about $0.20 of headwind at least as we sit here today, given where the yen is and the euro and the rest of the basket which, again, is about $0.10 better on a full-year basis than we had anticipated.

But obviously, as we all know, currencies can move the other way pretty quickly as well. So there will be less dilution in Japan if the yen stays where it's at. And again, we're really focused on executing the integration. And if we execute well, hopefully we'll do a little bit better from an operational standpoint.

Lawrence Keusch - Raymond James & Associates, Inc.

Okay. Great. Thanks, guys.

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

You're welcome.

Operator

Thank you. Our next question is from Ahmed Hassan (53:13) with Citi. Go ahead, please.

Unknown Speaker

Thanks. Good afternoon, guys. Maybe I'll ask the first question on drug-coated balloons and Lutonix. You started out, I think last quarter, you talked about end customer usage. You were pretty positive on that more than doubling versus the prior year. It sounds like you are pretty positive again this quarter. Can you give some color on whether that was kind of a sustainable type of growth?

Timothy M. Ring - Chairman & Chief Executive Officer

Let me deal with the DCB perspective. I think that we feel very good about where we were with DCBs in Q1. We saw great execution from the sales side of things. We like our pipeline right now as we look downstream. John talked about all the new launches we'll talk about, that we have upcoming. We'll talk about more of that again in May when we get together from a pipeline standpoint, but I think if you combine what we're seeing happening in the field from a sales force execution standpoint, combined with what we consider to be robust new indications and product extensions and platforms, we feel great where we are right now.

Unknown Speaker

Fair enough. And maybe this is frontrunning the Analyst Day a little bit, but I'll throw it out there anyway, just a little bit of a mid- long-term question. Biosurgery, you had a slide in some of your recent presentations. It struck me a little bit, it was addressing your kind of long-term market opportunities, and actually, the biggest category you guys cite is biosurgery. You cite it as a billion-dollar opportunity, going to $3 billion in 2020. So, I wanted just maybe get a little bit of your color on what's behind that and what you see in your current pipeline or marketed product that helps you play in what you're essentially seeing as the tripling of that market in the next five years.

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

Sure. John DeFord here. Just a couple quick things. First off, right now, we have a fairly limited product offering. So we've got a lung sealant and we've got a couple of hemostasis technologies.

So based on those initial platforms, we anticipate expanding. So today I talked to you about a new technology that we've developed internally, the Tridyne aortic sealant. We just received PMA approval after a very successful clinical study. We intend to launch that. That's getting us into a brand new space with bigger opportunity.

Like that, we have in our pipeline a number of other technologies and next generations that we think are going to expand the area that we play in. So there's a pretty broad market right now for biosurgery, but we're in a small sliver of that. And over the next several years, we see us getting into some of the larger pieces.

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

Yeah. And Ahmed (56:02), we're looking to do that both internally and externally and we're looking all the time for additional technologies to add into the fold. I think what's important to understand is we now have a great direct selling force in the U.S. and as I mentioned, in China and we're pursuing other geographies. So part of it is just maximizing the opportunity with the existing products, but you should very much expect us to continue to broaden the product portfolio, both through internal and external activities over the coming years.

Unknown Speaker

All right. Thanks, guys.

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

You're welcome.

Operator

Thank you. And we'll go next to Kristen Stewart with Deutsche Bank. Go ahead, please.

Kristen Stewart - Deutsche Bank Securities, Inc.

Hey. Thanks for taking the question. I was just wondering if you could give us the components to get to your organic numbers, the Gore and then I think you had mentioned also something with Boston Scientific and then I guess the total adjustments for the joint venture?

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

Kristen, there's actually a slide in the deck that we posted to the website, which provides the combination of those items.

Kristen Stewart - Deutsche Bank Securities, Inc.

Okay.

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

So you can see, vascular was negatively impacted by 7 points, and that's both the Gore Royalty, the decline in the EP sales to Boston Scientific, and the impact of the Japan JV. So vascular grew 12% organic, adjusting for those items.

Urology, we're taking Liberator out, and there was a big impact in Japan, which sort of offset each other to a large degree, and urology grew 5% organic. Oncology grew 8% organic, which is the adjustment associated with Japan. And then surgical, there was a very minor impact there. So both constant currency and organic in surgery were 13%. So that's the level of granularity we're providing for you.

Kristen Stewart - Deutsche Bank Securities, Inc.

And then Gore is 38.4%, I guess, on the slide?

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

Right.

Kristen Stewart - Deutsche Bank Securities, Inc.

Okay. All right. And then just with respect to the Analyst Day, I know last – or three years ago, as you mentioned, you gave the three-year plan, and clearly congratulations. You've gotten there. Will you be providing another kind of outlook, I guess, for the next three or anything with longer-term goals at the Analyst Meeting? Is that what we should expect?

Timothy M. Ring - Chairman & Chief Executive Officer

No. This will be kind of an update overview of the investments, to the question that was asked earlier, that we're making now, a little more detail on portfolio review, some of our geographic plans, that kind of thing, but we will not be providing any additional guidance at that meeting.

Kristen Stewart - Deutsche Bank Securities, Inc.

Will you allow John to make his jokes? At least make me laugh?

Timothy M. Ring - Chairman & Chief Executive Officer

No. John is working already. That's why we had to schedule it so far in advance -

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

I think he -

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

They keep cutting them out. They won't let me. Even when I try to sneak it in, they like throw the hook out.

Kristen Stewart - Deutsche Bank Securities, Inc.

All right. Well, you can make those off line.

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

I'll have to.

Kristen Stewart - Deutsche Bank Securities, Inc.

All right. Thanks, guys, and congratulations on a great quarter.

Timothy M. Ring - Chairman & Chief Executive Officer

Thanks, Kristen.

Operator

Thank you.

Timothy M. Ring - Chairman & Chief Executive Officer

Operator we're – Kathy we're approaching the top of the hour. I'm going to apologize to everybody else in line. We're going to do one more question and then we're going to wrap it up.

Operator

Okay. The final question will come from Dave Turkaly from JMP Securities. Go ahead, please.

David L. Turkaly - JMP Securities LLC

Hey, thanks. Back to the gross margin, just quickly. I know that mix was 160 basis points, and I think you mentioned cost improvements of 90 basis points. Can you just remind us where you are in those cost improvement programs? I know in the past, you talked about material input cost as an area of focus and potentially as a lever moving ahead. But do you think we'll have improvements like that as we look forward? Where could the gross margin head based on those?

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

This is the improvements that we talked about in the P&L is not about one big program. And it's our normal organic way of operating the business, focused primarily on both materials costs and on improvements in our variances that flow out of our manufacturing operations and efficiencies. And as you could see, we had one small charge that Chris talked about for efficiencies that will help us in the future. But it's not one big program. This is the normal way we operate, year in and year out, and we're focused on constantly improving our cost positions and our products.

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

Yeah. So, David, the only thing I'd add is we guided for the full-year cost of 80 basis points to 100 basis points. And, really, the team is tasked with achieving 50 basis points to 100 basis points year in, year out. And so in a moderate FX environment and a more moderate price environment, we feel really good about our being able to control our destiny to drive GPs higher and then obviously mix. Everything we've done from an investment standpoint to shift the portfolio to higher growth and higher margin products are both tailwinds to gross margin. Again, if we execute, those are two things we can control. And then, FX is obviously something that we can't.

David L. Turkaly - JMP Securities LLC

Thank you for that. I had one really quick follow-up. I'd just actually like to get your thoughts on the biologics in the hernia repair area. Is there a functional problem there, and do you think the synthetic business can remain that strong? I guess I'd like your thoughts on what is actually driving that. Thank you.

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

Yeah. I don't think there's any functional problem. I think what's really happening is that as these hybrid technologies get into the market and as a better understanding of what product works best in what patient, you're beginning to see some of the shakeout here. So, I think it's nothing sort of structural, but more greater knowledge, greater science and just a normal shakeout of when is it best to use a biologic, when is it best to use a pure synthetic, when is it best to use some of the hybrid technologies that we now have.

And so we're beginning to see some of that shakeout, and I think as that information comes together, we're also doing everything we can to help our customers determine what's the best product for every patient that walks in the door.

Timothy M. Ring - Chairman & Chief Executive Officer

And the key to success there is to have the best product in each of the categories for every patient. And we're the only one who has that. So, we're clearly taking share, given our portfolio right now.

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

Exactly.

David L. Turkaly - JMP Securities LLC

Thanks a lot.

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

Welcome.

Operator

Thank you. Then, I'll turn the call back over to Bard's management for closing remarks.

Timothy M. Ring - Chairman & Chief Executive Officer

Thank you very much, Kathy. And I'd like to thank all of you for joining us this afternoon. We will see you hopefully at our Analyst meeting. And if not, we'll talk to you again at the end of the quarter. And I'd also like to thank all of Bard's employees around the world for all their hard work and a very strong start for the year. Thanks. Good night.

Operator

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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