Becton Dickinson and Co (BDX) 2001 Q2 法說會逐字稿

Hello and welcome to the BD second fiscal quarter earnings release conference call. At the request of BD today's call is being recorded, I would like to inform all participants that lines will be on a listen only mode until the question and answer segment of the conference call. Beginning today's meeting is Mr. Dean J. Paranicas, Vice President of Investor Relations and Public Affairs. Sir, you may begin.

Thank you, good morning to all of you. Welcome and thank you for joining us conference call to discuss the results of our second fiscal quarter of 2001. Today's conference call is being simultaneously webcast and will be made available on our website www.BD.com until 5:00 p.m. Eastern Time on April 25, 2001. Also joining us on this conference call are the members of the media. In the course of this morning's discussion, we will make some forward-looking statement and it is possible that actual results could differ from the expectations we expressed today. Factors that could cause such differences appear in the second quarter press release and in the management discussion and analysis sections of our recent SEC filings. With that introductory comment, I will turn the call over to John R. Considine, Executive Vice President and Chief Financial Officer.

Thanks, Dean and good morning. Several other members of BD management are participating with us this morning to answer your questions. They include Gary M Cohen, President of BD Medical Systems, Richard O. Brazer, President of BD Clinical Laboratory Solution, who by the way is in Korea and on line with us, Deborah J. Neff, President of BD Bioscience who is on the line from California, William A. Kozy, Senior Vice President Company Operation and Vincent A. Forlenza, Senior Vice President of Technology, Strategy and Development. By now, I assume you had time to review our press release and the attachments that were issued yesterday after the markets closed. We want to devote most of our time this morning to addressing as many questions as time will permit, however before we begin, I would like to make some brief comments. Our second quarter earnings per share of 44 cents were consistent with our guidance versus last year's reported earnings per share of 45 cents. The 45 cents as we have noted included a gain on the sales and equity investment offset in part by the cost of the voluntary product recall. Our current earnings per share also included an estimated 2 cents of unfavorable foreign currency translation. Our record revenues of 951 million reflect growth across all three business segments. Medical Systems revenue growth of 4%, 7% on a constant currency basis to 507 million include continued strong performance from our Pharmaceutical Systems Product group, which grew about 12% on a reported basis and in the high teens on a FX neutral basis. Bioglass' reported growth was 2%, 5% on a currency constant basis to 298 million and this included growth of 7% of our Preanalytical Solutions and that would have been 10% currency neutral. This was offset in part by slightly down performance by the Diagnostic Systems Product group due primarily to weaker than expected flu season. Both the Medical Systems and Clinical Lab Solutions' growth was fueled by continued expansion in the US sales of safety-engineered products, which aggregated $96 million for the quarter. This represented an increase over the comparable quarter of 2000 of 49% and updates the growth rate seen in the first quarter of this year. Biosciences grew by 10% over the prior year to 156 million and in the mid teen by currency neutral basis putting them on tract for the projected full year growth rate for product categories within the Biosciences making them contribute to that growth. Our growth profit margin of 49.3% of sales represent an improvement over the 46.8% taken for the first quarter of this year. Comparing the quarter of the last year on a proforma basis, which would exclude the impact of the last year's recall, gross margin would have been 50.2% versus this year's 49.3. Several factors contributed to the difference between those two numbers. The impact of lower sales of higher margin flu diagnostic test products, as I have previously mentioned, are some continue pricing pressures in certain regions primarily Western Europe, some startup cost associated with new products, Phoenix and Protec in the diagnostics business and on favorable foreign exchange currency translation which obviously has an effect to the sale plan. On an absolute basis SG&A spending decreased by about $2 million, breaking this down core spending group up 3% which was offset by the favorable affected currency translation and timing some work force reduction program which we introduced in the fourth quarter of last year, who reinvested in company vide initiatives such as blood glucose monitoring and molecular oncology. R&D spending was 54 million, up from 52 million in the first quarter, compared to last years spending overall was down by about $2.7 million. These reflect increased spending in the Biosciences segment of approximately 15% and for other key initiatives such as blood glucose monitoring and advanced drug delivery systems. These were more than offset by lowest spending in certain areas including our Diagnostic Systems product group reflecting now lower ongoing Phoenix and Protec developing cost and in Medical Systems through Electrophoresis 00:06:03, which was spun off at the beginning of this year. Obviously, we are pleased with the increase in our operating profit margin at 18.4% as compared to the proforma operating profit margin at 17.6% for the prior year, which would again reflect the elimination of cost associated with the product recall. ___ 00:06:27 expense was about $5 million lower than last year due to primarily to lower debt and lower short-term rates. Our debt to capital ratio had continued to improve from 47% at the end of fiscal 99 to 41% at the end of fiscal 2000, to 39% at the end of second quarter. We believe that we should achieve our goal of getting to the mid 30% range early in the fourth quarter and we anticipate then by being able to begin again repurchasing shares on an opportunistic basis. Other expense in the quarter was about $5 million compared with other income in the prior year of approximately 36 million, which included the aforementioned gain on sale of equity investment totalling approximately 33 million. Excluding this gain the balance of last year's other income was about $3 million of the income, which results in a year on year negative of about $9 million, the change between the two years. This change is related primarily to 4 million in costs in 2001 related to translation pending expenses in the settlement of a ___00:07:41 dispute and non-operating income items unique to the prior year that netted approximately $5 million. I would now like to move to the subject we indicated we would be addressing today as we initially had said during our conference call back in September of last year. We have undertaken a review of certain of our Medical Systems and Preanalytical Solutions manufacturing operations. The purpose of the review was primarily to assess whether a large scale manufacturing reorganization could result in a significant efficiency in the ___00:08:15 economy given its present configuration, location of functionality, and importantly one which could be cost justifiable. William A Kozy, our Senior Vice President of Company Operations was responsible for leading that review and we have asked him to summarize our findings.

Thank you John. First, I would like to speak to the scope of our review. This was a comprehensive effort, which took several months to complete, and we proceeded as follows. We focussed our attention on our 35 worldwide Medical Systems and Preanalytical Solutions plans. Key criteria included both current and future analyses such as space, capacity, business focus, sourcing scope, and financial contribution. Factors of conversion to safety engineered products and geographic scale of needs, were also included in our 5-7 year outlook. The 35 plans generally break down as follows. Eight are in tax savings, seven are small specialty-based operations focussed on unique production activity for higher growth business such as ophthalmic or pharmaceuticals systems and may include hand assembly operations and the 20 remaining plans are large-scale high volume operations, 17 are in established high share markets and 3 are in emerging growth markets and represent recent investments by the company. We excluded our Biosciences and Diagnostic plans from this review, since this group of highly specialized operations focussed on customer reagent manufacturing, high-tech instrumentations, our unique microbiology production, therefore, they are not realistic candidates for short-term consolidation efforts. Regarding the facilities that were subjects of the review, we concluded the following. We confirmed that our 20 major facilities are currently highly utilized in terms of both space and capacity for the manufacture of our primary product line. The only exceptions are those sides focussed on emerging markets. As a result no significant consolidation opportunities were identified and no significant restructuring or plant rationalization is anticipated. The manufacturing of safety-engineered products has significant production implications for us. Moulding space requirements are about three times that required for conventional products. Simply stated, moulded products take more loads and more presses: Assembling and packaging space are also running in the two times-requirement ranges. Second and third generation products, which were included in our thinking will not significantly change this requirement. We have identified some manufacturing sites that are at lower scale serving businesses, but are not yet performing to expectations. A few plants are being further analyzed and our candidates for possible rationalization, although we are not prepared to identify them at this time. The financial implications of these moves are manageable. It would be addressed if they are determined in the context of routine operational decision making with our business leaders. We remain highly committed to optimization of our tax saving sites in Puerto Rico, Ireland and, and Singapore. We have plans to continue high utilization of these sites and they are key elements of our global plant architecture. We anticipate some product relocations over the next two years to assign higher value product to this tax saving side while positioning more mature platforms in our most efficient low cost geographies around the world. We do realize our focus on improvement of profitability is critical and then operations play a lead role in this performance commitment. In fact, we expect even greater utilization of our major facilities in the next several years to meet production requirements for the high-volume manufacture in the US of more complex safety engineered devices and scale up needs in other regions of the world. We will of course continue to look for ongoing opportunities to improve operations performance as well as profitability. Our focus going forward therefore will be on high asset utilization, continuous efficiency improvement and introduction of new capabilities and production management tools to maintain inbuilt cost advantage. Therefore, we are fully committed to the following strategic initiatives to maintain and build that cost advantage. 1. Continued focus on central procurement and category initiatives to significantly reduce material on indirect cost. 2. Energize our efforts in the supply chain area, leveraging new SAP capabilities, logistics and distribution capability to improve service, improve quality, and reduce cost. 3. We will get lean in the manufacturing operations with major initiatives to be implemented across all major plans, utilizing new capabilities and production management tools. By lean, we are referring to a high emphasis on new manufacturing capabilities. Cycle times, operating equipment, effectiveness, excellence, 6 Sigma, ______ 00:13:38, MRP, and other identified activities are fully supported in key elements of our operating strategy, be that for its impact on both P&L and balance sheet performance at full implementation. And last we will seek to optimize our work systems across the entire operations creating cost to serve advantage in this leaner enterprise and we will discuss this strategy in greater detail at a future date. We believe that these efforts will enable us to optimize our manufacturing capabilities going forward in a manner best suited to BD's business needs.

Thanks William. And that summary underscores of their own careful assessment of the majority of our manufacturing landscapes of the many. Obviously, it is important that this type of review be conducted periodically to ensure that we are getting the most out of our manufacturing processes. However, as we had emphasized we were not undertaking this review with an eye for restructuring, this one was not warranted and that is what we concluded here. I will assure you that our expectations never included and in are in no way reliant upon any restructuring of manufacturing. And regardless of any restructuring we continue to believe that as the manufacturing view indicates there are significant opportunities to pursue aggressively, many avenues in search of ways to more efficiently manage the company. On the other side of the ledger, if circumstances do warrant we will take necessary actions to achieve that outcome whether it is in the manufacturing __ 00:15:17 or otherwise. Thus we have confirmed our major facilities of being effectively utilized to manufacture our primary products in an very efficient manner. Our key priorities going forward will be to focus on high asset utilization, continuous improvement and unique process technology development in those facilities in order to drive a lowest manufacturing cost we can achieve on manufacturing the highest quality products. Of course, it is still noted. We will continue to look at processes in facilities that are not central to our operations, so that they can either be improved or eliminated. As circumstances require it, we are prepared to take appropriate measures to address any such issues identified. Finally, before I open up the call to questions, I want to speak to our guidance for the third quarter in the year. As Edward Ludwig, our President and CEO stated in yesterdays' press release we continue to look for double digit increases in net income growth in 2001 including expected earnings per share of approximately 46 cents for third quarter and $1.63 for the year. As we said in March this is based on expected sales growth of 5% on the reported basis or approximately 7% at constant foreign exchange rates. With that said, we can now open up the call for questions.

Thank you sir. At this time, we would like to instruct you on how to do that, you may press *1 on your touchtone phone for a question and *2 to retract the question. You will be introduced in the order that you are received and it is the way we will introduce you and at that time please state your company name. Our first question will come from Mr. Bruce Jacobs, please state your company Sir.

Thanks. Deutsche Banc Alex Brown. John, this one question is for you and then one for Deb, I am wondering, John, if you could talk at all about the distribution of sales throughout the quarter and in particular I am wondering if the distributor ___ 00:17:26 changes that you have made have had the desired impact or that is too early to tell on that?

Well, they are clearly having the desired impact although we are still working through trade, rebalancing where the trade. BREAK IN THE TAPE 00:17:43 Anyway I said, we were getting and are getting the benefits from changing the way we dealt with the dealers. We still see a pattern in the quarters with the sales tends to trend up from the beginning of the quarter to the end of the quarter. I can only guess why that happens and rather not do that. I think over the long-term this is definitely the right thing. What is the right thing to do is the right thing to do, open the door for better distribution and it offsets things what William was talking about in terms of the entire lean enterprise and of the better make process, the better order for film in process, and as I said in prior reorganizations. So we are there. You had a question for Deborah J. Neff.

Yeah, just one for Deborah. Deb, a couple of companies in the analytical instruments industry of late have reported some weakness in this quarter and in part attributed some weakness in the pharma and in the life sciences sector. I am just wondering if you are seeing any of that, if you expect any of that, particularly on that kind of capital side of your business?

Ya, through the second quarter we have not seen that and I think a lot of our systems serving some of the pharma, you know pharma is a relatively small part of our total instruments based growth. We have really not been seeing that and we are not expecting it to have any major impact for the rest of the year on our products.

Okay, great, that is all, thank you very much. Thank you very much sir, our next question comes from Mr. Ben Lemittry. Please state your company sir.

It is Merrill Lynch. Good morning everybody. Just on the Diagnostics !Systems business which was a little bit below our numbers, John, I wonder if you could help us a little bit the impacted the flu diagnostic products versus what is happening with the Protec and the Phoenix rollout.

I think here we have Richard Brazer. Richard Brazer, do you want to take that and just talk a little bit to that?

Obviously, it has been well published that this is perhaps the lightest flu season in the last six years and when that impacts the Diagnostics Systems' business, it goes well beyond the flu A, and flu AB products that we produce and it also impacts overall hospital machines and therefore blood culturing etc, also tracked with the flu. It had a certain impact on us particularly in the US and that is reflected in the numbers. To your question regarding Protec placement rates back in November during the analyst presentation, I indicated a commitment to 150 placements of the Protec, we are tracking well against that. We continue to see very good growth rates, not only versus prior year, but Q2 versus Q1 and so we feel good about that. Did you have a specific question regarding Protec?

Yeah, I guess, but the only question I had is if we look at the Diagnostics Systems number, which again was light on our numbers, it may not have been like relative to your plan, I just want to get a sense that it was actually the flu impact versus how you are feeling about the Protec rollout and the reagent built into the Protec installed base 00:21:41.

That is a very good question. We do feel good about the Protec rollout and the reagent build. While the reagent build has come slightly slower than we expected that is not the reason for the lower growth rate that you see in the Diagnostic Systems business. It is true that the Diagnostics System business in the second quarter was slightly lower than our expectations for the business in the second quarter. What is important to point out is that our performance is a segment, during the second quarter and during the first six months did meet our internal expectations and based on our own internal forecast as well as commitments that we continually monitor. We continue to feel very confident about our ability to get our externally communicated commitments for the entire year. It may be that some of the strength from the revenue standpoint is a little stronger in Preanalytical Solutions relative to what was communicated in November and Diagnostics slightly less than what we communicated in November. However, you will still see improved strength in the Diagnostics Systems business, both strategically and financially at the end of this year relative to a year ago, so we still feel very good about the progress that we are making with Protec.

And then John, just one followup for you, on your comments on gross margin, you specifically are applying it to the flu products having higher margins and startup cost. You did not mention the impact of safety products. Are we getting to the point where some of the safety products are no longer having some of the same detrimental product impact on gross margins or is that still part of, I think you made a comment about startup cost, is that some of the safety issues there?

We have talked about that so much that I did mention, it is still there. The standard gross margin on these products is getting right at the revel that we fully expected and we still have the situation where we have potentially full automation of these processes as it has been fully ramped up and we are still seeing impact on the gross margin line due to the variance of that are tapered off. There is something that will continue to improve and should be with us probably to the remainder of this year at least.

Okay, great thank you guys. Our next question comes from Mr. John Calcanneti. Please state your company name Sir.

With CIBC World Markets. Good morning guys. I wanted to first talk about your goal of 800 million in advance protection or safety by 2004. If I read your press release correctly, it looks like you had a 400 million run rate right now and if you see that conversion accelerating and could we perhaps see that 800 million level sometimes sooner and then my follow on to that is you know when will we see the gross margin to move back to the historical levels of 51-52% as you are already up to pretty good volumes here in safety and we are really not seeing those leverage to the gross margin line at this point. So, I just wanted could you give us some sense of the timing of when you might restore your margins to historical norms?

Let me think the second and first and then let me have Gary address the safety ramp up and remember that the safety we have talked about is only US so far, that is the numbers we gave you that is US. As we have guided your earlier through the end of last year and earlier this year, we expected and continue to expect this year about 50 basis point increase over last year, again on the __00:25:59 levels basis taking out that recall, improvement on gross margin and we are still there. We think that will happen for that at least for the next couple of years and it should begin to actually get us in a year or two to those numbers that you are talking about. It could be higher than that, but right now that would be our best guidance and our consistent guidance what we have said in the past. I think that the opportunities, I do not want to not refer back what William was talking about, because there is a large amount of engagement around this company in terms of leaning that manufacturing organization. We have been doing an awful lot on the purchasing side, we are doing an awful lot on the manufacturing side to make sure that we are at optimum manufacturing capability and I think that there is a good opportunity there and with respect to safety, Gary, do you want to talk about it?

Sure. Couple of things, one is if you annualize the second quarter we had a run rate of about $385 million for the company's safety products sales and clearly that is an accelerating rate. The Federal compliance of which yesterday was April 18, that certainly is driving a lot of activity. If you go back a year or 18 months or so, we were projecting that $800 million gross meaning not net of cannibalizations figure for safety sale, we were anticipating perhaps by 2005. I believe when we spoke in November we did indicate that what will happen sooner now as the result of the passage in the federal legislation. Trends so far this year are slightly ahead of what our expectations are, but not demonstrably ahead, because we were anticipating the impact of legislation and we think through 2002 and 2003 most of our all conversion in the US will likely be attained and international growth will start, probably keep gaining later 2000-2003, but that looks that would certainly extend beyond that. So, I answered your question, trends would indicate some acceleration versus what we have said sometime ago indicating 2004-2005 period. We still think it will take through 2002 into 2003 to get full conversion. We can also decide, some of these will lag, Hospital Service to some degree and things are going and it looks slightly better than expected this year.

Okay you might see that 800 million by 2003. That is pretty much what you are saying?

It looks towards the end of 2003, we can anticipate, but we have been saying it looks like 2005 and 18 months ago, we had been a little less in certainty about the log that would be cast. We can be looking out to get it in 2003 with greater confidence.

Okay. And then in the course of doing business, your manufacturing costs are just simply going to be higher than you had expected with __ I assume. You are still talking about it is going to be several years before you can sort of restore the gross margin back to 51-52% level and our thinking has been that when we you reach that 800 million in sales level in safety that would be able to drive the kind of margin improvement that you are looking for. Is this going to be a more expensive to produce these products than originally anticipated?

Let me have Gary talk specifically about safety, but remember there is a number of things that are going to drive the company's gross margins. The Bio side of the business has gross margins in the upper 50% range and you know that certainly as that business get larger and larger their contribution should be better. The safety is not any more expensive than we thought. The margins are there again and why do not you talk Gary about what you think going forward on that?

As John mentioned before, what we are seeing in terms of safety cost and margins that are on a projected GP basis, _____(00:30:22) basis, we are getting to exactly where we expect to be and those margins will be considerably more than the conventional products that they replace. However, there are substantial startup costs associated with putting the automated line in place. We think those start ups cost will continue through this year, somewhat in to next year, for next year to be just some of the newer platforms such as Spring Base ___ 00:30:42 that will be producing. As John mentioned on the standard cost basis it is coming in pretty much precisely as we had expected and one of thing to keep in mind that if you look at the currency now through the Medical segment of the company, safety represents about 11% of the total sales. So, it is a big impact, but it is certainly not only impact on overall margins, but there is nothing as changed in terms of our anticipation of what are the costs to produce these products.

But there is nothing that has changed in terms of our anticipation of what it will cost to produce these products. We are fortunate that with our network facility that were not having still good plans to build these products that certainly would have had a different perspective on cost factor and investment.

Okay. Let this one be a quick followup. I wonder if you could give us some balance sheet values, the inventories and receivables, and what happens in terms of DSO as an inventory base.

Well, in terms of absolute numbers, the receivables versus, we are looking from the beginning of the year, we had some improvement in receivable. They are still in the $725 million range. Inventories were slightly now, we said that inventories withdrawal at least through the first three quarters of this year. There is some buildup with inventories on safety and outlook. There is a program in the company to address inventories over the long haul. We have to figure, and fix the processes that need to be fixed first before they are going to come down. But between the two we have about a billion for in terms of total investment, our debt outstanding are about 60 at the end of last year. Last year, we are about 75 and future day supply are still high on inventories about the same as where it was it was around 155 at the end of this calendar year, 162 at the end of September, and it is about 154 now.

Okay. Thanks John R. Considine.

Thank you sir. Our next question comes from Mr. Richard Weiss Please state your company.

Richard Weiss Bear Stearns. Good morning John R. Considine. Several questions. I want to go back to the gross margin issue again. Can you just help us understand a couple of things. If you are going to see a 50 basis point pickup in gross margins for the year above the 49 which we did last year, you are starting the first half at 48%. You got a long way in fact. First, why should the second half is going to be better. Secondly, can you take the quarter just reported and you mentioned four factors why the margins were under pressure. Can you just help understand which was the most significant factor and why they get better than second half? Thanks.

Second quarter, starting with the quarter, the flu season as we said those sales not occurring at very high margins sales. I don't have the number. In fact in my head which you are talking about that $4 million of sales and the margins are, there is a 70% kind of range, probably upper side of that range and that certainly can move the number. The startup cost associated with Phoenix growth factor one-time items in that quarter and they should not reoccur, if that should trend down. Foreign currency translation was the third factor that we measured and obviously with the exception of the yen that has been heading in the right direction although somewhat stabilized now and near our budgetary and the pricing pressures, these are nothing new. Pricing pressures in Europe we talked about in particularly with respect to the blood collection business and competition with buyers there and that is something that we have been doing as we go forward. The second half of this year obviously is as we said way back when I had my infamous or famous statement about the first quarter, the second half of the year is a significant amount of income for us. The sales rap up is, the big sea change was this quarter in terms of ___ 35:21 sales, but the sales contribution at gross margin in the next two quarters is substantial and we feel confident about the sales. We don't have anything right now on our radar screen in terms of the unique items. As Gary M. Cohen M. Cohen M. Cohen said, if this safety automation continues to happen, but it is trending in the right direction. So, we feel that we can get those 50 basis points for the remainder of this year. I only add and I didn't know you have this Richard, but I will add it anyway is as we said we put extending controls throughout the company and we will never release this spending controls but we were not going to release any additional spending until we see the benefits in our problem items such as safety and you can see that is what we did this quarter with the level of the SG&A spending. So, we feel pretty confident that we may have free word in this but are not forecasting we will but even if we are in this. We have ample room within our SG&A and you can't just turn that on. That is something that we have already turned on.

Second question. Can you help us understand more precisely when the automation implementation or ramp up probably for safety is completed and may be talk about the stages that are left so that we can concretely understand what is left to be done and when it is completed.

Maybe I will go ahead, Gary M. Cohen I think I will take that. One thing I want to share with you in the context of last question is that from the standpoint of readiness to supply the market, we are very strong with this issue now. We describe before we had ample capacity in the blood collection application and physicians therapy applications, we had been piped on the ejection applications. We have made significant progress over the last quarter as expected and we are pretty much at a point now we are able to release nationally the safety _____ 37:29 platform within the next several weeks which is an advanced generation product that performs exceptionally well and had customer evaluations and we will continue to ramp up that platform as demand grows but we are coming out of tight supply situation there. So, from our standpoint relative to current market demands were pretty much there now on injection and we have already have covered these areas. We will continue to ramp up those platforms because demand will continue to build and that is across all of those product lines. So, for example, we will be adding more automated lines for safety glide. We would be adding more automative lines for inside auto guard catheters as demand builds. That is not to catch up to keep ahead. And also, we have new platforms in development which we had communicated. We have an eclipse hyperthermic product that will be introduced just after the close of our fiscal year. We had spring-based syringe that will be introduced with the close of calendar year or just after the close of the calendar year right in that timeframe. And those would be automated lines that were pretty mix of range for new platforms. Also, in view we anticipate continued growth and demand. So, I think it is there to say that on the major expansion programs in the major product lines, we will be going through the close of our calendar year and then as demand grows for those platforms, we will continue to put capacity in place around those new platforms. In addition, there are some other product areas and other geographies that will require scale up. We are scaling up for pharmaceuticals systems business, new safety platforms, we are scaling up safety platforms for surgical business, and that it all good news with additional safety opportunity. And then outside the US, as the European markets develops which clearly lack the US, but we do expect that golden opportunity to develop. We will scale up in Europe; we are beginning that process as well. So, I can't give you a cutoff date, because the scale will continue as the demand grows and the opportunity continues to grow but the main stream investment in automation for the US market should be coming pretty much not to close but pretty much in major elements. It would be through the end of the calendar year including the scale of the spring-based syringe.

And the repercussions of that should be better margin products in the following 12 months?

Margins are better across the board and see for the startup cost which would be declining on a relative basis because the peak of the scale up activity has occurred over the past year including now. So that we had an impact in terms of the start up cost and the margins clearly coming through. There is nothing happening and I am uprising all the cost side to cause any concern.

Thank you.

Thank you. Our next question comes from Mr. Glen Lison. Please state your company.

_____ 40:27 good morning.

Hi. Good morning.

Just a couple of questions. One quick one is the followup in Japan. Anyone interested to give the Protec numbers year-over-year in terms of dollar sales.

This is Richard Brajer. Quite frankly the data that we are not sharing externally what I can share with you though is that we have very strong growth both quarter over quarter as well as quarter over prior year. And generally, the rates of growth quarter over quarter meaning Q2 over Q1. They have been tracking, I will just say over the last couple of quarters, they have been tracking somewhere between 40-60% growth quarter over the immediately prior quarter. But we shared our commitment at the beginning of the year of 150 placements for Protec by the end of the fiscal year and what I would confirm for you is that we are on plan with our external commitment.

And what about the 75 Phoenix units?

We are performing very strongly in that commitment.

Okay. _____ 41:41

It is highly likely.

Okay that is fine. Couple of more questions. In this one I am just trying up to sound like a wise crack. What are your intentions of likely structuring skills as of quick fix, although we are not the one to implement those changes. If you did not get a commitment of a restructuring from the organization John R. Considine, I am wondering did you get a commitment as to what you think optimal operating profits could be for the entire organization out in the future. I am not asking you for any commitment for a date just what is the scenario for operating process in an optimal setting.

Well. The answer is from just the review I did not and not to be to long in this answer but if you think about the expansion of sales as we go forward and the leverage we get on SG&A and some of these lean efforts. I certainly think that there is room for significant improvement in operating margin as we go out in this company for the next three years. I can't put a number on that right now because we have just into it but if there is room for meaningful extension there is leverage. Those sales have improved the margins and in total margin to the company to the lack of reliance on other income items that we exhibited. It should be worth on anybody that we jumped over 9 billion dollars swing in other income in this quarter alone. The leverage we are getting from the cash as debt continues to go down. I think that there is just ample room when both on the operating and total margins of the company. I just cannot give you a number right now.

Can I ask you another soft question? I remember the first couple of years one was to control the company. It was the period of time you had just blown through gross margins. They were just better from one quarter to the next in the opinion of campaign process. Is there any way figuring out a time in which you can envision where you really going to be clicking from a margin perspective where we don't have to hold our breath quarter to quarter and there has been reasonable business in an average. Is it late this year or is late next year any good feeling for that?

Well I think in terms of holding your breath, I think that by the end of the safety scale, certainly the acceptance of the product business the law and any acceptance of the product and investing market would have changed. The second key was scale up and as Gary M. Cohen said into early fiscal 2002 we have got that and so, I am not holding my breath with respect to margin right now because as I said I think any delay that we have in improvement would be a delay not a myth would be offset by the leverage we have gotten on the SG&A line. But I don't hold my breath now but if you, it is interested to hear a question I think that by 2002, you are not holding your breath. Well, through it is not something I would leave you with that weekend grab a 500 basis points on that line. We will not do that, but we certainly can get after as I said reasonable growth on that margin line to the next few years and that is also offsetting like any other business, our products go through cycles and we have some of that where the pricing pressures and other things pushed down the margin and so the geographic expansion of these products is certainly going, it is not a tasty product with conventional products and certainly going to move us so.

Last question is on a product question. I just want to fucus on a couple of trouble area. Can you just have a little bit of perspective of what is happening there? First is the international core medical, if you can get us a little bit of insight of what is happening there and Omeda the second was in the Biosciences business domestically. It seems that they are around from quarter to quarter and if you can talk about.

I will leave it to Gary M. Cohen and sure we can talk to them.

What you saw in international core medical was down 3.8% including foreign exchange up 1.8% foreign exchange neutral. The softness that held back that growth within Asia in the second quarter. Europe actually had a reasonably strong quarter. We had talked in previous quarters about some of the issues in Europe. I will not say those issues will behind or split, but they are stabilizing and we seem to be stabilizing from a pricing market standpoint. Still lot of work to do and a lot has been done there. In Asia, we comment Asia on a number of things, Harvard's Organizational fact list in Asia which were beginning to address. It has always has been and that has not changed. So, Asia was actually down year to year in core medical in the quarter everywhere else we were in reasonably good shape.

For Asia, I did not think there a big business given the historical problems with ___ there but how much was it down year-over-year.

It was down about 10% year-over-year on foreign exchange neutral basis probably in dollars.

Okay and Omeda is fine?

Things are going as expected with Omeda. We have Omeda two parts effect the Physician Therapy side and Critical Care side. The Critical Care side continues to be an underperforming business that is basically the same situation in this quarter we have last quarter, a little bit more stable. Infusion Therapy side in Europe, they mentioned the actions that we taken to stabilize our market position have been working, we are up in Europe in core medical quarter to quarter or second quarter of prior year. So, I think situations are improving.

Gary M. Cohen is there a date that you want to commit that Asia will be set.

We have put him to take significant actions to fix it, to have the actions in place within this fiscal year and to have them having positive financial factors next year.

Thank you.

This is Deborah on the Bioscience side. I think when you see that the quarter to quarter jumping around as you stated that is really based on the instrument shipments and a lot of that is based on the readiness of the customer and the lab preparations failing to receive them and that is a little bit difficult at times just - a kind of the stronger in one quarter but it also depends on our building the build configuration. We tried to balance the quarter bill based on the quarter availability for the configurations and serve the market with that configuration is the right set. In second quarter, we always have a large international growth that is the end of the government cycle in Japan and it tends to be strong quarter generally in Europe, so we really target configuration bills for those markets and versus some of the US markets where we have more flexibility in shipments to schedule.

So, next quarter will be very good.

Yes. We should have a much strong third quarter in the US.

I promise this will be my last question. Last one for Gary M. Cohen, on the 96 million; I think that was the number for safety; can you break that down by product category.

96 million for the quarter.

yes.

I can break it down by major business segments. Blood collection was 38, injection little under 36, then infusional therapy was 22.

Do you have last quarters by chance

Not in front of me.

Okay that is fine. Thank you.

Okay thanks Glen.

Our next question comes from Mr. Scot Davidson. Please state your company.

Good morning. US Banc Corporate for Jeffery. First question is for Gary M. Cohen. Can you talk a little bit of about the pricing side of the safety equation and are you seeing what you expected to see how much push back are you getting from hospitals. Can you talk about those issues.

The pricing side of safety is essentially going exactly as we anticipated. I think it is fair to say that hospitals in general are ___50:59 when they have to get more for anything. But in the context of safety, there are a number of things that are offsetting the general reluctance to pay more. When the amount is not the future movement as I think we share previously, if we consider 300 bed hospital and average sized hospital, their investment being somewhere around 100 to 125000 dollars more for institution which is definitely going to be offset by reduced I think in treatment cost for accidental and legal injuries . So, it is not on absolute basis. Also, the fact that there is an narrow launch takes much of the pricing issue off the table relative to the conventional devices it is not a comparison any longer about how to use these devices. And now the competitive basis, did you think ___51:46 devices are very competitively priced. Again it is other costs in the market, in some cases, where a little bit higher than the lowest end products that were considerably lower and some of the other devices which in many cases are discussed as we have. So, what is happening on the pricing size, pretty much exactly we anticipated we had not seeing reluctance to conversion based on price and frankly the main activity were focussed on keeping up with need for customers to have the service requirement associated with the safety convergence to get profit and get off people so we can train the personnel.

Great. Secondly, can you talk a little bit about the diabetes business and trends in terms of revenues and price there as well.

Yes. In diabetes care, overall consumer healthcare globally was up about 3.5% versus prior year on a FX mutual basis on reported basis, globally was up 1%. US had a recently strong quarter. You will recall the first quarter with a very difficult period in the US. US was up 4.6% and international was up by 1.8% on FX neutral basis was down on 4.4% on a reported basis. We also had top quarter-to-quarter comparison in Europe I had mentioned in the prior quarters conference call. We had a chance from unit measure 40 from unit measure 100 insulin syringe in Europe last year and I gave you some competitive advantage that we are particularly strong quarter first and second quarter last year in certain European countries so that put a little bit of tough comparison. The diabetes care business was reasonably strong in secondary quarter, the home healthcare business and under performer was weaker. The pricing trends in US there is, until you are aware there is continued push in trends with private labels not having a dramatic impact on our business although it is having some impact one of the longer term trend and we are also offering private labeled products in some customers. In general, the conversions private label is relatively low but over time, I think that will increase. We have done very well in the Pen needle segmented business which most rapidly growing segment of diabetes of insulin delivery. We continued to gain share both in the Europe and in US. In US it is earlier stage and we are very well positioned to pick or share a strong position in Europe and US as well. That is the general picture; the underlying growth of the syringe and injection devices is not bit high and we can consider the underlying diabetes business can be 3-4% growth.

Just one last general question. The company has been relatively quiet over the last year in the acquisition front. But with the share price coming up with not getting paid off relatively rapidly and with some of it just in the general market place, it would seem like event can inspire potentially in favor of accelerated passive acquisitions and can you talk a little bit about your appetite there and whether we should look for anything different from what we obtained recently.

Right now, for 2001, I would say that truly our place is smaller one of that position such as we did earlier in the year with the Kenteff acquisition which was of $30 million acquisition. Certainly could be on our radar screen, but our major acquisition we have no tolerance right now for solutions. It would have to be something that we really need it to sell a gap. Our debts are getting down still is at 38-39%, the gap we need to get that down into the mid 30s. Certainly, we stand really if an opportunity to improve the company's long term growth rate and earnings potential is there almost very hard as but right now, we are focussed on the elegant introduction of safety in convergence safety leading with the operating this manufacturing operations and making sure that we have addressed many of the problem sides of the business.

Great thank you.

Thank you sir. Our next question comes from Mr. David Gregor. Please state your company sir.

Lehman Brothers. Couple of questions for you. In terms of the manufacturing review and follow it up our plans started have you established pretax improvement targets on fiscal 01 and fiscal 02 and beyond regarding the potential savings and centralized procurement process deficiencies and supply chain management inclusive of the genesis project and if not, how do you measure progress.

We have targets throughout our business and it would involve all of those effects near targets certainly with procurement, we have targets within procurement and genesis and procurement and certainly interim linked and we have targets as we know down through our six sigma efforts. They all would reside within, however, we set our expectations going forward. Everyone of them we see it certainly outside and we are reluctant to put them in any external numbers until we achieve them frankly. But they absolutely we do measure it that way and we measure just picking on the procurement guys, we measured them very carefully in terms of working our last price paid versus current and measuring it and determining when it will roll for the P&L when much of it is usually in inventory. We also measured in capital. So, yes we have it.

I think it would be helpful if you would give us some guidance in terms of what is inclusive in the guidance and what is the target beyond that because there is no other way to measure this.

Significant service measure, but we have expectation that we sense _____. There is a significant element of uncertainty with respect to any initiative in this company. Be it need or purchasing or anything will let you know. But if not well because it is going to just be something that in fact going to be chased around for no meaning. But we assure that any expectation we said if there is some major element of uncertainly, to it, I don't imagine there will be certainly not within any near to this.

Can you discuss that the foreign exchange, distributor incentive and capital expenditure comparisons between fiscal 01 and 02

You had a couple of questions right there.

Yes, one is just comparisons in terms of the Euro old bottom doubt would be October so that comparisons looks better if this go to. You may comment on distributor incentive progress in the capital spending.

Okay no problem. On the Euro, if you just run quickly through where it was last year in our quarters, it averaged to 105 in first quarter, it averaged to about 1 in the second quarter, it averaged 93 in third and in the fourth quarter. So far this year, the euro for our first quarter average 85% and if you recall, we were extended to about 88%. In the second quarter, it averaged to about 91.5%, close to 92%. In the third quarter, our estimates, our debt rates are at the 88-90% range. With respect to other currency that had some significance to the yen last year our first quarter was about 105, next quarter about 107, next quarter about 106, and the fourth quarter about 107. You know what happened to the yen in the first quarter averaged to about 108 and the second quarter to what we just completed that was 116, we were hedged at 109 and obviously we rested near current rates for our expectations going forward. The hedges have been effective if you will allow to pick up about four to five million dollars on sales line and that as far as the income. So, basically, right now they have come close to thank for themselves and they certainly taken out some fluctuation, obviously, the wage that has crossed in the right now is not advantageous because they tend to be front loaded that means that there are changes to FAS 133 which may compass or pass and just move out ___ cause. But with respect to capital as we had said, I believe last quarter, we due to the safety ramp up and expansion in areas like farm systems, and others we moved our capitals ahead, it will probably be as we say close to the number that we saw last year which was in the 375 kind of range. We are in the process right now, starting our bunch of work and our three-year plan for 2002 and beyond and that will include three year capital plan and once we finished that we will adjust with where we think our capital expenditure will be going forward. And the last thing you asked me was

Just the sales and center program in terms of how much of it was it to the sales line in the prior couple of quarter and when that comparison get easier as well.

I think it is easier now. As we said, it is a little bit like counting angels on the head of a thin cap always determine exactly what it is. We said it took about 15% million more dollars out of the first quarter of this year and we got to took about 40-50 of fourth quarter last year. And right now, I would say that our sales are sales that we are in no longer running against comparison. I guess in the first quarter of 2002, I will have the comparison against first quarter 2001 which had some effect but other than that and that is more is no longer impacts with us. We still have as we said we stopped over certain distributor instead programs and those are more promotion basis that is the care with diabetes and some other less but meaningful promotions. The hard thing to measure on any of this is the trade itself is rebalancing inventories and our effects certainly over the next 18 months will be to move our inventory turn up and we will be happy with that so ,but then, there is no excuse to any promotions any more with us on a perspective basis.

One last question. Pharmaceuticals were 69 million that was above our expectations. Why and could you review for us the other product growth drivers in the fiscal second half of the year.

So far as system business Gary M. Cohen wanted to talk about that.

As we picked up we had a very strong quarter in the pharmaceuticals systems, which grew is reported a 11.5% FX grew to 19.4 and there was strong growth both in US international. US growth was 11%, FX mutual international was 21%. We are seeing strong growth around the world and this is based on demobilization in a growing segment. Still, US are growing to extended use of our core product line Hypack which has been used for particular back pains and viral _____. We also had some incremental sales of nasal delivery devices to avaron for flu vaccine in Europe. Again strong growth in Hyvac business and the primary applications areas. The delivery, we are also getting growth and other segments, we are getting good results from our geographic expansion strategy. We started to have strong growth in Japan, in Latin America, we regained in a customer number of years ago, in Mexico who had gone in their own way and found out that was problematic come back to us. So in a strong performing business consistently for many years, it is continuing to do so and you have to get larger it is regaining its percentage growth rates at a rate above what they historically gain. So, this is just a very strong performer within the overall segment that is now starting at margin ahead.

I think we talked about as a clinic lab solutions business being really driven by the back side offset by Micro which was flu Richard Brazer, do you want to add that?

Well the only thing I just to say is that we are very pleased with the progress that we have made from our safety perspective beyond safety. There are other aspects that are driving our solutions business clearly, geographic expansion although it does not show up strongly in reported numbers but on FX mutual basis, we had 10% growth outside the US and ___solutions despite the weakness in Western Europe as John R. Considine earlier referred to and so, geographic expansion and safety continue to be important drivers. I know that we had question in prior analyst discussion around our relationship with Kadigen and what does that mean and some of you may have seen that we actually there was an announcement yesterday about the first product actually being launched out of the joint venture with cardigen, so this is out of the pre-analytics joint venture where we now have officially launched the packs gene ___ R&A system and so we feel very good about that. BDID continues to make good progress. On the diagnostic system side is as I shared my earlier comments, we are tracking very well with our external commitments around BDCNX and we are tracking well with Protec as well and so and we are achieving strong profit growth in our diagnostic systems business while striking a revenue growth to the exact level we communicated as well. Today, we had a good performance and we expect that it comes through as communicated on the total segment basis for the total year.

Deb, your business, do you want to expand on that?

Yes. Actually, we just continued to expect to see that through the rest of the year. Our raging growth continues to grow as a percentage of the total business partly because of most reasonable instrument that are using a kind of more of reagents and just that reagent business helps US growing. We will see some additional growth from the beta platform that will start seeing in this third and fourth quarter and geographically around the world, we are seeing the advantage of having our direct sales force now that has replaced in many cases, a lot of our earlier distributors that came along with some of the acquisition. So, we are seeing the direct customers contact driving those regions in some of our regions acquisition companies. Thanks.

Kurt Huber you may ask your question, Sir. Please state your company. ......... Okay Mr. Huber thank you very much. Our next question comes from Mr. Glenn Nevaro, please state your company sir.

First Boston. I am wondering if you can talk a little bit more on when you expect the inventory levels in the trade to become more normalized and is that possible to see the acceleration in sales to about the 10% sale growth when that happens and I was wondering is it possible to comment on what you expect for top line sales growth beyond fiscal 2001, is 10% sales growth still a goal of the company, does the base business have double digit sale growth in its longer term or should we continue to think about BD as kind of a mid-single digit top line grower? Thanks.

Well. let me address in two ways. This is certainly, as you and I have discussed, not the old BD, obviously the brighter side of this business as sales. With respect to our sales, there would be certainly a teens kind of grower and we have not gone beyond that, I am sure, but it certainly has that profile growing forward and as it becomes a bigger piece of our business that certainly lends to the top line. When you look at the Clinical Labs Solutions business and certainly the preanalytical side of that can achieve double-digit growth, especially with the merging markets in safety continues. The Diagnostic Systems' active rate now is not that kind of a grower and until we get a real ramp up in Phoenix and Protec and some other things it would not be out there. Within Medical, Pharma systems certainly has that kind of a business edge in ophthalmology consumer, as Gary said is led by diabetes and is not that kind of a business and that is $354 million business for us and it is a kind of 2-3% grower. In the Core Medical Systems, while it is certainly ramped up with ___01:11:58 has some many items that just are not kind of grow like that. So, I think it would be willing to think about that in the near term and for the same grower. As Edith said on numerous occasions, we are kind of looking for purposeful, profitable growth and that is kind of our monitor right now. And I think that there is an acceleration taking there of reasonable financial growth but not near term 10% and in long term certainly we would want to be 10%, but that is not something that I want to put here on right now. Presently constituted, this year we said , we did about in the 7+ kind of range FX neutral. I think that will improve next year. But we will be setting our expectations for next year on a later date. And we certainly are trying to leverage that growth of Biosciences business and move our sales in that direction. That is really where we are right now.

Right, but do you expect an acceleration next year?

Yes, I do.

And that is something that you will commit to?

Yes I do. We have said that. We thought that we would move forward into 2002. we Had said everything that we are seeing, sales growth being on this year and I think we have not said exactly where that is, but it is not 10%.

Right. Thank you, John.

Thank you sir. Our next and final question comes from Mr. Bruce Graven. Please state your company.

Hi Good morning. It is ABN Amro. If you could guys just to summarize for me again the awareness in Diagnostic in this quarter, would you characterize it as the primary culprit is more slow uptake in Protec placement or were you really pointing the finger at the flu season?

Well, flu alone all that ____01:13:53, as last flu was about $4 million. So that is certainly significant to the company's business and its gross profit. As you know the __ placements, I thinks it is ____ 01:14:09 placements of the instruments are on schedule and in some cases ahead. The uptake probably lagged somewhat our expected uptake on the reagents side. Long term, I don't think there is any takedown in terms of our estimate of how good it would be, but I think the biggest single ___ 01:14:30 this year was flu and Richard Brazer, do you agree with that?

I agree completely with that, John.

Those products would be rapid kids and some microbiology supplies and what not?

Beyond that is as I sought to indicate earlier, when you have the light respiratory season because of flue and other related infectious diseases as well, it impacts hospital admissions, it also affects pneumonia rise, etc. And so, it really impacts more than just our flu-based products. It impacts our ___ 01:15:11 business, which is our growth and blood culturing business as well. So, it is an important impact. I would clearly want to make sure that you understood the negative sales growth rate for Diagnostic business in the US is not being driven by some weakness in Protec, that is not the case at all. It is far more related to the light respiratory season which was by all these clinical standards a very light overall respiratory flu season.

Thanks for the clarification. Secondly, I guess last question if I could, as you recall, in first quarter flow was a little behind expectations and it seems that there has been a fairly reasonable snapback here in this quarter. Given both of those events, are you still comfortable with what I think was prior guidance of growth in that business segment, I guess it was low teens for the year, is that still reasonable?

We are in ___ but firm that we are absolutely for that segment, still comfortable in that mid teens, you know, 13-15% growth rate that is exactly where it is standing and that is exactly what we think about it.

I agree.

Thank you very much.

Okay, we all thank you very much for your attention and your questions within the confines of obviously FD where we can take some question on the phone as long as they are within that confines. Thank you very much to all of you.