Becton Dickinson and Co (BDX) 2002 Q2 法說會逐字稿

Welcome to the BD second quarter earnings conference call. All participants will be able to listen-only until the question and answer session of the call. At the request of Becton and Dickinson and Company this call is being recorded. If you have any objections you may disconnect at this time.

If you would like to ask a question at the end of the presentation, please press star one. To withdraw your question, press star two. Once again, if you would like to ask a question, please press star one.

I would now like to introduce your moderator for today's conference, Mr. Dean J. Paranicas. Sir, you may begin when ready.

Thank you, [Sherry]. Good morning to all of you and thank you for joining us on our conference call to discuss the results of our second fiscal quarter of 2002. Today's conference call is being simultaneously Web cast and will remain available for playback on our Web site, www.bd.com, and at 1-888-568-0381 through the close of business on May 2, 2002. Also joining us on this conference call are members of the media.

In accordance with this morning's discussion we will make some forward-looking statements, and it is possible that actual results could differ from the expectations we express today. Factors that could cause such differences appear in the second quarter press release and in the Management discussion and analysis section of our recent SEC filings. With that introductory comment, I'll turn the call over to John Considine, our Executive Vice President and Chief Financial Officer. John?

Thanks, Dean, and good morning, and thank you for joining us. With me on the call today are Gary Cohen, President of BD Medical Systems; Deb Neff, President of BD Biosciences; Rick Brajer, President of BD Clinical Laboratories who is also on a phone from another location. Vince [Rolenza] will be joining us, Senior Vice President of Technology and Strategy, and Bill [Nichols] our Clinical Lab CFO is here also in the event that Rick for some reason is disconnected. By now I assume you've all had time to review the earnings release and the attachments that were issued at yesterday's market close, and as usual we'd like to devote as much time as possible this morning to addressing your questions, however, before beginning with that I'll make a few brief comments about the quarter. Our revenue growth of 7 percent reflected good performance across all three business segments. BD Medical Systems reported revenue growth of 6 percent is continuing to be driven by safety-engineered device sales in the US and globally by our pharmaceutical systems prefillable products. Overall safety sales, which include those recorded by Preanalytical Solutions part of our Clinical Lab Solutions segment, which generally represents about 38 percent of the total safety sales, grew about 40 percent for the quarter, and almost 47 percent for the six months, which is in line with our expectations. The overall growth rate in Medical was offset in part by reduced sales of conventional devices in the US as the market continues to convert to safety-engineered devices. We normally refer to this as cannibalization. In addition, as discussed on last quarter's call, our Consumer Healthcare sales were essentially flat due to lower recorded sales of diabetic syringes resulting from our ongoing redirection of promotional efforts in the US towards sustaining branded syringe sales at the retail level. It should be noted that diabetic sales were only down slightly this quarter, which represents an improvement from the first quarter when they were down about 11 percent. We expect the diabetes syringe sales will increase in the second half of the year and we'll have achieved a more normalized sales growth for the entire year. As I've already said, in the Clinical Labs Solution segment we also benefited from US safety sales, which was key driver is Preanalytical Solutions. As with Medical Systems, these sales were partially offset by reduced sales of conventional counterparts of these products, again our cannibalization. Overall segment growth was in line with our expectations, although there were two events that affected performance. First, the growth rate of Preanalytical Solutions of 3.3 percent was lowered by a voluntary recall of specific lots of the Safety-Lok collection set products. If you were to exclude the estimated impact of the recall, revenue growth of Preanalytical Solutions would have been about 5 percent. We do not expect the full year's growth rate to be impacted by the recall. The segment's growth rate also reflected a 10 percent increase in worldwide sales of Diagnostic Systems products. Beyond the growth provided by near doubling of BD ProbeTec sales and comparatively stronger flu and respiratory diagnostic product sales, about 3 percent of the quarterly growth rate resulted from a second event, that being an anticipated inventory stocking by distributors in advance of the installation of our new SAP system in our diagnostic hub in the US. By the way, the installation was successfully completed earlier this month. We expect the Diagnostic Systems will show a decline in the third quarter reflecting this stocking, however, we continue to expect full year revenues to be in line with our expectations for this portion of the segment.

Biosciences revenues for the quarter grew 7 percent to 165 million, and year-to-date grew 10 percent to 312 million. Revenue growth for the quarter was driven primarily by strong [flow] cytometer instruments and immunology reagent sales. As discussed in the first quarter, revenue growth again was offset in part by a continued weaker demand for certain molecular biology products and by the US Discovery Labware portion of the segment, where revenues were flat compared to last year. As for the weaker demand for molecular biology products, the trend reflects for the most part a faster than anticipated switch to glass [array] products from our normal nylon product by our user base, and the loss of some OEM business that previously had used our products for validation and have since exited the related businesses.

We expect these results to begin to improve in the second half of the year as we ramp up our production, our glass production, and rebalance our portfolio to respond to the loss of this business. With respect to Discovery Labware, the flat results were essentially due to distributor ordering patterns that caused the last quarter sales to grow by 18 percent and as such this quarter to be flat. For the year we expect growth to remain in the high single digit range. Our gross profit margin at 48.4 percent of sales was just slightly below last year's margin of 48.8. And as we've said it would, this reflects the sequential improvement over the first quarter. Sales of our safety-engineered devices again added about 60 basis points to our gross margin. And this was offset, more than offset in fact, among other factors by the effect of lower sales of insulin syringes, diabetic syringes, by variances recorded in connection with our inventory reduction efforts-and we've talked about both of those items last time-and by sales. And it's primarily with respect to Pharmaceutical Systems, which, as you know, has lower GP than our corporate average but importantly track less SG&A support costs, and lower molecular biology products, which carry very high margins. And as I've said, we're down in the Biosciences segment. Additionally, also as I've mentioned, [immunocytometry] sales drove the sales for the segment, and they carry a little lower margin than the reagents. So that also impacted it. We expect the impacts related to diabetic syringes to begin to turn around in the third quarter, and the inventory variances to have turned around by fiscal 2003, and favorably impact the gross margin. And as we had said in the previous calls, we expect sequential improvement in gross margin in Q3 over Q2 and in Q4 over Q3. Moving on to SSG&A, obviously it benefited from about $8 million from no longer having to amortize goodwill, and after considering that it was consistent with the prior year's quarter at about 25 percent of sales. In terms of cash flow for the first six months of the year, we generated almost 400 million in net cash from operations. As we have previously discussed, about 100 million was contributed to the pension in the first quarter. To date, we've spent about 115 million in capital expenditures, and have repurchased about 3 million shares of common stock, spending about $103 million to do that. With respect to capital, we continue to target about 300 million for capital expenditures for the year.

I now want to speak briefly about our restructuring and divestiture initiatives. Regarding the Medical Systems manufacturing restructuring, we recorded a 2 cent per share special charge in the second quarter for severance and asset impairment costs. We expect the remainder of the special charge, about 4 cents per share, to be recorded in the third quarter. And the reason that they're in two different quarters is the accounting rules call for certain events to have had to have occurred for us to record these sales so we could not- I mean these charges, so we could not put them all in one quarter. Operating results will also reflect other costs, primarily accelerated depreciation, stay bonuses, moving costs, and the like, related to the restructuring, which will be recorded in cost of products sold, and which we currently estimate to be 1 cent per share in each of the third and fourth quarters. Regarding the divestitures, as you all know by now, we've recently entered into a non-binding letter of intent with AorTech International to sell our Critical Care product line for about 52 million. The transaction is subject to the occurrence of several events that we expect to be concluded in the second half of this fiscal year, at which time we will record a substantially non-cash loss on sale that we presently estimate would be in the range of 6 to 7 cents per share. This deal also has a negligible adverse effect on ongoing earnings, less than a penny per share. In addition, we continue to consider the divestiture of another of other non-strategic product lines with aggregate annual revenues of less that 150 million. Although we don't look for a transaction this fiscal year, we continue to expect that full year diluted earnings per share would be reduced by about 5 cents, assuming a transaction closed at the very beginning of 2003. And by the way, if we were to sell these, they would have a significant book gain.

Finally, before I open the call to questions, I want to speak to our guidance for the balance of the year. I refer you to the table in the press release where we tried to lay out all of the elements of earnings per share that would be affected. And our diluted earnings per share outlook prior to manufacturing restructuring special charges and the potential loss on the Critical Care sale, is about 1.88 for the full year, which includes 2 cents again for manufacturing and restructuring costs, which will be recorded in cost of products sold.

So with that said, we can begin the Q&A, and I know the operator is going to remind you again how to get in the queue. Just in light of time constraints, we'd appreciate it if everybody would limit their questions to one and a follow-up so that those who want to get in the queue can. And with that said, Operator, if you would remind them.

Okay, thank you. Once again, if you would like to ask a question, please press star one. To withdraw your question, press star two. Once again, if you would like to ask a question, please press star one at this time. Our first question comes from [Glen Ryson] from Morgan Stanley.

GLEN RYSON]: Good morning, folks. Can you talk a little bit about the divestitures? Are you just taking it off the table right now or are we just pushing sort of- pushing off the possible dilution from those acquisitions maybe from 2002 to 2003?

No, [Glen], it's actually just a timing thing. There are a number of interested parties. We had a number of things we needed to do with the product lines that are being considered for divestiture. And it has nothing to do, you know- once you make this decision to sell these things obviously it impacts the people in the divisions and we want to get it done as fast as possible. It just is going to most likely go into the beginning of next year, although I wouldn't entirely rule out this year, but conservatively I would expect it the beginning of next year.

GLEN RYSON]: Okay, just to follow-up. So it sounds like if we were at $1.84, in that range this year, bringing it up by 4 cents this year would be fine, bringing down next year is probably 4, 5 cents, would probably be advisable just to take the full year impact unless you can give us any sort of feeling for deal structure whether that can be changed where that dilution impact is negative.

Well, yeah, we, you know, obviously as I think you've heard Ed say and me, you know, we're not accepting of dilution- of just swallowing the entire dilution. I think if you were going to think about next year-which is your real question-although we're only halfway, just a little over halfway through this year. We haven't finished all our budgets but there's a wide divergence in the consensus right now. I mean, if you think about the $1.88 that we're saying we're [[inaudible]] this year, and you know, 10 cents of that is goodwill so you say your real apples-to-apples earnings would be $1.78 before that goodwill, and you grew that by let's say a, you know, 11ish percent-because it's easier for me to do in my head-that gets you $1.98. You add in the 10 cents for goodwill it gets you to 2.08. Take out about a nickel gets you about 2.03 and then we said we would make up the restructuring impairment that we had this year of 2 cents.

So, you know, around the 2.05ish range, I think, for an early consensus is about where- and that's where most, I think, most of you are now anyway. Some have chosen not to make any changes and may still be at a higher number, but I think most of the analysts are right there and that's about what we- we're comfortable at that range, right around 2.05.

GLEN RYSON]: And that nickel you talked about was the divestitures?

Yeah. Yeah, and over time, you know, we'll try to do better, but I think to be conservative I'd rather you stay there.

GLEN RYSON]: Thank you.

Our next question comes from Dan [LAMERTY] from Merrill Lynch.

Hello?

Hello? Maybe I answered it. Operator?

Okay, our next question comes from Rick [Wye] from Bear Stearns.

RICK [WYE]: Good morning, John.

Hi, Rick.

RICK [WYE]: I guess my question would be maybe on the diabetes. Can you just expand a little more? You had indicated that the second half you expect to see more normalized growth. Can you help us understand what that growth- how we should think about that growth? And can you be a little more, you know, specific on the outlook for Bioscience and how we sort of reflect on the outlook for Molecular Bio et cetera, just some of the pieces that are underperforming. I guess what I'm saying is, does your guidance or outlook for the Bioscience division look different now in light of what's happened the last couple of quarters?

Okay. I'm going to touch on both but then I'm going to ask Gary to really fill in the blanks on diabetes and Deb to take you through the Biosciences. Just on diabetes so you understand, just to refresh everyone's memory we knew that by the changes we made in terms of the accounting for the diabetic syringes as well as the way that we were going to protect our branded share and in fact penetrate more of that share and also the conversion into the pen side of the business that we would have lower diabetic sales, if you will, in the first two quarters.

And as I said, it was down. That piece was down, you know, 10 or 11 percent in the first quarter, and only a couple percent in the second quarter. We expect a rebound in the third and fourth, which will be much higher against the comparable quarters last year, however, for the year, you know, we're thinking in a kind of a two plus percent range for the [[inaudible]] business. As far as underlying growth, I think I'd turn it back to Gary and let him talk a little bit about how that plays out.

Just to reiterate what John said, the second half in consumer driven by diabetes will be much stronger that the first half and we would anticipate that it'll be, you know, around 10 percent growth in the second half of the year. That should bring the full year up to, as John said, low single digit growth. There were a lot of moving parts this year associated with the re-channeling of incentives from the wholesaler to the retail level, and also based on the SAB 101, some of the incentives that have occurred actually last year factor into this year's results with SAB 101.

Those factors tend to wash themselves out in the second half of the year and we'll see more normal patterns in the performance of that business. And we are getting good growth in pen needles as we anticipated. That contributed about $8 million of performance growth on an [FX mutual] basis. In the second quarter we'll expect that to continue, and in general see the business exhibiting its more normal trends beginning this quarter.

Thanks, Gary, and let me just touch on Biosciences and then Deb will. In fact, Rick, the answer is no, we still have, you know, in the same relative range in terms of our expectation as I had said in the comments, we expect those molecular biology results to turn around, although they'll be single digits for the year after the performance in the first two quarters. But for the whole segment, we're still looking at a reported growth of, you know, 10 percent. And this business has a lot of international operations and on a, you know, on a [FX mutual] basis, you know, you're still around the 13 percent. And Deb can kind of take you through some of the more macro factors that are impacting her right now.

Sure. Maybe I'll particularly focus on the molecular biology because that's where really the only place we're seeing any weakness at all in the segment. And it's really related to the two factors that John previously mentioned, both the switch of our [Array] products, where we really had to ramp up our own internal ability to manufacture those products, and secondly from the loss of the OEM business.

And I think third, we are seeing some shifts in pharma from kind of upstream molecular biology research, where there was a lot of focus on target ID, to now looking at what of those targets are actually going to be reasonable compounds. And as such we've been in the process of shifting our R&D portfolio to align with that change, and we will see products being introduced-they started this quarter and through the rest of the year-that are more focused on gene expression and the protein interactions where pharma's work is shifting. So we do expect to see some pickup in the molecular biology business in the second half of the year, but it will still be, as John said, around the single digit area, however, our flow and immunology reagents are performing very strongly so far this year and will continue through the second half.

Thanks, Deb.

Next question please?

Our next question's from Dan [Lamerty] from Merrill Lynch.

DAN [LAMERTY]: Okay, this time I think I've got it figured out. Sorry, guys. I was trying to figure out how to- trying to figure out how to un-mute the phone I was on, which probably says a lot. But anyways, just a follow-up question for Deb. It's hard with the change in the accounting for shipments and the timing that you actually book the sales for installation to get a real sense for what the order rates there are, and you did have a nice pickup here in the US business here. Can you just [[inaudible]] for us what may be is happening in terms of shipments versus bookings so we have a sense of what the actual order rate might look like this quarter, and give us some hint as to what's happening for next quarter?

Yeah, you're right. It's very difficult because, as you said, we're having to shift over from the shipping to the bookings- shipping to the installs as the measure of the revenue growth. And we certainly did see a little bit of an impact in this quarter of working down from installs, actually getting additional products installed this year. However, I think that the growth that you saw in the second quarter we would expect to continue to see that kind of level of growth through the rest of the second half of the year.

DAN [LAMERTY]: Okay. Great. And then just one follow-up on the consumer side. Cutting through all the noise with the inventories and the incentives and the like, is there a way to just give us a sense of what you think that insulin delivery market is actually growing at, and is there any update on your combined glucose monitoring insulin delivery system?

Gary, why don't you take both of those?

All right. I would say on the diabetes, you know, the insulin injection devices, they grew around 6 percent in the second quarter if you factor out all the moving parts that I referred to before. And that's probably a pretty good indication, or maybe a little bit above what the actual market growth for those devices might be, but that's what we felt we on an underlying basis actually grew the diabetes systems in the second quarter. And on blood glucose monitoring, no change from what we've disclosed previously, you know, we are planning to enter the market. The timing hasn't changed. Everything is on schedule, and, you know, we're continuing to not say too much about that until we're in the market.

DAN [LAMERTY]: Okay, thanks you guys.

Our next question comes from [TED HUBBER] from Banc of America Securities.

TED HUBBER]: Gary, just a follow-up for you. First, can you comment on the expected launch date for the Integra syringe, and also how quickly can revenue start flowing from that product if you're talking about say a June launch? Is the expectation that that could be a major driver for the safety business in the following quarter, or does it take a while before all the evaluations can start driving revenue?

Hey, [Ted], I just mention one thing before Gary answers is that if you have a way to get a look at CNBC with the 6:50 spot, Ed was on TV this morning with Liz [Clayman]. And much to her dismay he demoed it and she's still wondering where the needle went [[crosstalk]] barrel of the syringe, but that's said, if anybody hasn't seen it and they can get a hold of it, they'll see what that- that's a pretty neat device. But Gary, go ahead, why don't you answer the real question?

Sure, in answer to the question, we are planning a June launch date. We're building product now. We don't foresee anything interfering with that June launch date, and we'll have a reasonably complete product line, meaning different sizes, to launch in June.

I think on the second part of your question, just given normal hospital evaluation periods, I think it would be overestimating things to expect a big impact in the fourth quarter from any new safety device, whether with Integra or anything else. It takes some time for people to move through their evaluation process and make a selection.

As we pointed out in the past, it is one of many different safety platforms we have, not only in the injection category, but also more broadly the company. It's clearly a very important platform, but it's one of many. We anticipate it'll be successful in the marketplace. It'll be the highest quality, most highly featured product in the retracting syringe category. But I wouldn't look for any big gains in the fourth quarter for a product that'll be introduced in June.

TED HUBBER]: Great, and then, John, this is follow-up on the cash side, the cash generation is certainly impressive here. Should we expect the share buybacks to continue? And can you comment as well, could we see acquisitions as a way that you cover some dilution from the divestitures and as a use for the increasing cash flow, and can you comment on where that, you know, what parts of the business are most likely, if that in fact is part of the strategy in '03?

Sure. On the buyback, yes, absolutely they will continue. You know, we had set a rough target of about 5 million shares this year. You know, we're obviously a bit ahead of that pace. We're going to continue to be opportunistic in buying. We still have in mind our rough kind of 35ish debt to cap rate. We're actually a bit below that right now. So we will- the answer is we will continue doing that. In terms of acquisitions, the only adjustment I'd make to your statement is that we certainly wouldn't do it- we're going to try to attack that dilution, if we do indeed sell these product lines, through normal operations. However, that said, acquisitions are still a part of our growth strategy, although it is not reliant upon that. And if I were to just [[inaudible]] what Ed has said to everyone is that in fact the Biosciences area is the one where you'd be most likely to see acquisitions.

You know, that's a very fractionated-if that's a word-market that we deal in. You know, there're a lot of companies out there. We obviously all, you know, look at them all and there would be chances of acquisitions there. But obviously, you know, our internal development, our licensing, and our partnering, which you've seen in Biosciences, and also, you know, that exists in the other divisions will also continue, but if I were to guess where it could be spent it would be in Biosciences.

TED HUBBER]: Great. Thanks very much.

You're welcome.

Our next question comes from Steve [LICHMAN] from Credit Suisse First Boston.

STEVE [LICHMAN]: Good morning. John, what should we look for for a gross margin for the full year, and can you remind us what factors should help drive that sequential improvement in the back half of the fiscal year?

Okay. It should be around what we had last year, maybe a tad under due to things like the restructuring, which gets recorded up there, but you know, 48-1/2, you know, probably maybe a bit higher. But the things that really start to drive- and that would be the average for the year so, you know, that would call for us getting, you know, 49 or 49 plus in the next two quarters, but on that for the whole year we'd be about, you know, that 48-1/2.

And remember there are a couple of things. One is diabetic- the turnaround in the diabetic sales. These things attract a lot of gross margin, and you know, we had the complication of having paid fees on them and the fees will have gone away so we'll have higher gross margins due to that in the second half of the year in particular. [[Inaudible]], some of the higher instrument sales in the first half of the year become replaced by a higher reagent sales in the second half of the year and you're going from the high forties, fifty kind of margins to, you know, sixties and seventies on some of these things so that also in the second half of the year will help us. You know, we still- the inventory reduction doesn't turnaround yet. It's still, for this quarter, you know, it costs us about 30 basis points. Also in this quarter, you know, the recall of that Safety-Lok [[inaudible]] actually hit us in the gross margin line and cost us 20 basis points. Well that's gone. The division did a terrific job in getting after the problem and getting the product back, and we've got all the costs behind us there. So those things go away in the second half of the year. Safety continues to add to our margins and, you know, the rest is just mix. So that's basically what you would see this year, and then next year the inventory reduction turns around. So that's kind of a quick look at how that gross margin should react.

STEVE [LICHMAN]: Okay. Thank you, John.

You're welcome.

Our next question is from Scott [Wilkins] from SG Cowen.

SCOTT [WILKINS]: Thank you. Just a question on the diagnostic systems business. You talked about strength in the respiratory flu season. Maybe if you just could elaborate on what drove that given the weak season.

And then I just had a follow-up on the consumer business. You talked about stronger growth there, but if I recall, you didn't put in place the promotional changes until September. I'm just curious year-over-year why you would see the uptake.

Okay. Bill- I'm sorry, Rick, do want to handle that first one?

Yeah, just to give a brief answer, you're right, while it was a- well, it was not a strong flu season. It was certainly stronger than last year, and so there was some favorable comparisons versus prior year. Prior year, last year, if you recall, it was, according the CDC, the weakest flu season in over six years. And so what we have is really a more modest but normalized flu season relative to a weak one. What was accounted for year-on-year was roughly an incremental $3 million in sales in flu products. And so that clearly was built into the diagnostic systems growth number and probably contributed close to about 2 points of growth to the worldwide diagnostic systems growth numbers that we released today.

Okay. Let me just take a shot at what I think you were asking on the diabetic syringe sales, and then if you want a little bit more on that we can have Gary try to give you some more on how the branded syringe side works. But remember that when we were making these sales as we discussed way back in the fourth quarter of last year and the first quarter of this year, we were paying fees to the distributors as we made these sales and the fees were increasing over time. We stopped that completely as we went into this year, into fiscal 2002. So the sales that we were comparing against in the prior year, you know- when we made this change under SAB 101 we didn't allow a sale to be recorded until it went basically let's say to the ultimate customer. So you still had a mismatch because fees were attached to those sales so you had lower margins on this year's recorded sales versus last year's because they had higher fees. As of the third quarter, that inventory has pretty much washed out of the trade and the trade we're dealing with sales that we're making with no fees attached to them. We've taken our promotional dollars- and these were promotional fees.

Our promotional dollars are now being directed at the branded side. And so on the one hand the SAB 101 has all cleaned out and we should start seeing- and we have sales this year going in are being recorded now as they leave the distributor and go to the customer and have no fees attached to them so higher margins versus what will be prior year sales with fees and lower margins. So that's one of the improvements that you'll begin to see in the third quarter. And Gary, you respond better than I at the branded side.

I think John really captured the- the third and fourth quarter of last year was the highest promotional period relative to the incentives that we provided at the wholesaler level, which you can think of as being the promotional pricing type incentive. They peak then as a result of the SAB 101 they were restated into the first and second quarters of this year and that's the factor that I referred to earlier as washing out in the third and fourth quarter. Therefore, there's less of a promotional fee burden on that business the second half of the year.

There are some incentives to the retail level, but they're not of the same order of magnitude. And that will end up in improvement in gross margin. And the true underlying growth, which is being driven by pen needle in particular but also stability in the diabetic syringes, will begin to show through.

SCOTT [WILKINS]: That's very helpful. Just last question. Just top line growth for the second half of the year, what would be your guidance in light of the current currency situation?

Well, for the entire year, you know, we were guiding at a reported growth of around 7-1/2 percent and we're still comfortable with that. I think in the third quarter you're going to see kind of closer to the eight, nine range and a little bit less since we have a tougher comparison in the fourth quarter probably in the six, seven. But it's going to- it's going to- it should be right around 7.5 for the year. And we, you know- a little bit higher in the third quarter, a little bit less maybe six in the fourth.

SCOTT [WILKINS]: That's very helpful. Thank you.

Okay. Thanks.

Our next question comes from Scott Davidson from US Bank Corp Piper Jaffray.

Scott?

KELLY [KLINS]: Good morning. It's Kelly [Klins] for Scott. Just looking toward what will drive some of your projections a bit further out, can you talk about some of your longer term goals for [advanced direct] delivery, especially on the large molecule side, you know, what drugs or categories of drugs might make sense to move to prefillable syringe from bio? And just as a follow-up, great to see the 8 million in pen needle growth, wondering if you expect that to expand further as supply expands, understand since you're still having a hard time getting your hands on these?

Why don't we take the latter first and let Gary talk first about the pen, and then he chooses he can talk about advance drug delivery. And Vince is also here. He can fill in some of the [[inaudible]].

Just to comment briefly on both. Maybe I'll start in the order [[inaudible]]. The advance drug delivery, keep in mind we're looking at things that are fairly far out on the horizon, will be very important as part of the company's long-term growth strategy, but not things that are going to happen in the next several years. The best candidates tend to be vaccines because these devices we anticipate will enhance immune response and that lends itself particularly well to vaccines.

There are also certain therapeutics that lend themselves to [[inaudible]] administration and these will be very user friendly devices so things like injectibles [[crosstalk]]. Yeah, hormones. I don't want to give details of categories because we have entered into development agreements and we probably shouldn't disclose the categories that we're developing the devices in quite yet.

On the diabetes side, the pen needle growth has been strong. We anticipate it'll continue to be. It's being driven not only by the market, but also by our bringing additional capacity online. And you may know that we've been in short supply up until right around now. We're now coming out of short supply with new pen needle lines that are coming on. So we'll anticipate that that'll continue to drive growth, although when we sell pen needles it offsets the sales of syringe so it does drive some growth but there is a fairly high capitalization rate associated with that.

KELLY [KLINS]: Thank you.

Our next question comes from [GLEN RYSON] from Morgan Stanley.

GLEN RYSON]: Hi, just a couple of follow-ups here. If I play with the numbers on the guidance you gave us, [[inaudible]] number, the impacts of the recall from a negative perspective was around negative three million and the stocking that took place from the other side of the business was around five million. Does that sound right to you, John?

Yes, I think the recalls were a little higher than that but you're not that far away.

GLEN RYSON]: Okay, so at three to four versus five, do both those numbers sound right to you?

Yes.

GLEN RYSON]: Okay, and then in the quarter where do the hedging gains show up?

What we had of hedging gains would be up on sales so all the costs are recorded up in the top line.

GLEN RYSON]: So what was in that other income line?

The biggest single difference is we had a settlement last year for a couple million dollars and the rest of it is a bunch of things going in and out, nothing significant.

GLEN RYSON]: So do you expect it to be positive for the end of the year or does it go back negative?

Oh I think it's inconsequential for the remainder of the year.

GLEN RYSON]: Okay. And then you did mention some issues with [SAP], you're implementing it now on the diagnostics systems side of this. Could you just give us an [SAP] update? It's been a while since we've talked about Genesis.

Yeah, I actually- it wasn't an issue. What I did is I acknowledged that they had completed it and its implementation, and that's basically a complete soup to nuts implementation. And you know, that's the Baltimore operation, [Glen], and we remain on target with [SAP]. I mean, we're still looking at April '03. You know, it's, you know, we have go-lives scheduled around the company, including Franklin Lakes. You know, they're all scheduled out and, you know, I'm quoting from [[inaudible]] your remarks, no news is good news. You know, we're on target with it.

You know, it's kind of become- it's in the bones of the company now and it's not sitting out there as, you know, a wish list. It's just something that we're dealing with, you know, by the end of '03 it just becomes, you know, the [SAP] part of it just becomes essentially our IP infrastructure, our EIP reporting system, all of that. And, you know, our legacy systems begin to go away.

GLEN RYSON]: Maybe if you could just tell us by function what's been implemented, what remains to be implemented. Maybe that's a better way of looking at it.

That would take forever. You know, it goes by location and it's not yet here in, you know, Franklin Lakes, which will be the consolidation in the financials.

GLEN RYSON]: So are we 50 percent completed, 60, 40, what's sort of the number there?

Well, we're, you know- it's hard to look at- we're in April 2002 and I'm telling you we're going to be, for your purposes, done in April 2003. So we've got another year to go. But if you've ever played football, the last 10 yards is always the toughest. So you know we've- you know, people dig their heels in. So we've got a lot of work to do but we don't have a lot of watch-outs. We've got a lot of green lights, a few yellow lights, but no red lights on this thing.

GLEN RYSON]: Okay. One last very painful question because it sounds like these are painful questions. Can you describe a little bit about the special charge, what that is exactly, and what that is going to be in the third quarter?

You mean on the restructuring?

GLEN RYSON]: Yes. Well, the special charge of 10 million, the 2 cents this quarter, the 4 cents next. What is that exactly? What are you writing off?

That's essentially 22 million, and if you remember our earlier guidance, we told you it would be 28 million. We've improved that. It's really two pieces. It's some asset write-offs because, you know, we're closing down- and I'm not telling you the exact locations because of some sensitivities, but we're closing down a couple, three plants. We're also getting rid of some equipment.

And in terms of getting, you know, unfortunately a not insignificant number of people exit, and so you have severance costs that go along with this. And some of them are high priced numbers. And the reason that some of this gets recorded one quarter versus the next is because when you have these programs and you're severing people the impacted groups have to be notified in a certain way according to the accounting rules and they have to be able to determine their benefits and such. And these are international locations and you get involved with workers councils and the like and so it just doesn't happen overnight. So that's why they go into two.

So in effect, it's those things. You know, a big piece of it is non-cash charges, the severance is obviously a charge. And that's what that is- that are one-timers that you can take. You can't put everything in the one-time so where you're going to continue to use an operation over time you have to accelerate the depreciation. And that's why there's certain things going through operations that cost us the 1 cent in the third quarter and the 1 cent in the fourth quarter. So if that helps, that's what that is.

GLEN RYSON]: Thank you very much.

You're welcome.

Our next question comes from Robert Goldman from Buckingham Research.

I'm still looking for a few additional pieces of guidance for the year, if we could. One is net interest expense. Second would be the number of shares at yearend.

Well, those are the things we- let me just see if we can get you some of that in terms of the shares. I'm going to have to just dig out a number. Just bear with me for one second. Yeah on a fully diluted basis, okay, for the year you're probably looking at 270 on a fully diluted basis this year. And that would obviously take into account what we think we're going to do at least on a budgeted basis now in terms of share repurchases and options and the like. In terms of interest expense, you know, you're in the-I'm not going to try to get this down to the very last nickel-but you're in the lower $40 million dollars ranges. And, you know, obviously we have some thoughts about what interest rates might do, but we'll leave it to Mr. Greenspan to determine them. We're about 60/40 on a fixed floating ratio right now. So, you know, we do- when he moves it we do get some movement there. And third for the sales growth in the Americas versus the international, let me- I'm going to have to get out a number and look, but, you know, basically- again on a reported basis, you know, we're looking at around 7-1/2 for the year. Total, we're looking around an eight in the third and around a six in the fourth on a reported basis. If you look in terms of currency-and this may be enough to help you-if you took the currency out of that, that would be about a 9 percent in the third and a- I'm sorry about a 10 percent in the third and about a 8 percent in the fourth, and so about 9 percent on a currency neutral basis. And for the year, reported growth, again, 8 percent for the US, sixes reported growth for the international. And again, I gave you the [FX mutual] numbers.

If I could just follow up quickly on the Americas. The reason that I ask is a number of companies are reporting weak sales in Latin America for obvious reasons, in Argentina and Venezuela, et cetera. And I'm just wondering, is this a source of concern for BD? Are you seeing any weakness? Are you protected against any weakness or are you in fact not seeing the weakness that some other companies are?

Well, we're protected against weakness in Europe about 60 percent. We have 100 percent of Japan hedged in terms of the translation effect on income, you know. In Latin America, you know, we certainly saw it in the first half of the year on a reported basis. We don't have that much- we don't think we have that much exposure in Latin America, and that would be, you know, a fairly sizable region for us in the second half of the year. We still think that that's strong or that it'll layout okay for us. I think in Japan we're going to continue to see it with the Yen because it's kind of built in despite our hedges we're going to still see a little bit there. And we should have- we probably will have reported growth down in that region for the second half of the year. In Europe we'll be up, and in Latin America we should be up. Beyond that I'd be just getting into a little bit more detail than we normally go into.

Okay. Thank you.

Okay.

Our next question comes from Rick [Wye] from Bear Stearns.

RICK [WYE]: Hi. A couple more questions, John. First of all, just want to make sure I understood. I was just looking back through our notes on the retractable syringe. The last conference call I think you all were saying that it was going to launch-and if I'm reading my notes correctly-the February, March timeframe. Now we're talking about June. And I know there was some manufacturing validation issues. Can you just help us understand what happened and how confident we should be about the June timeframe? Just give us a little perspective on that.

I'll let Gary do that but our most recent-and this goes back months-as June, July, Rick, but, you know, not saying that that isn't what you had in your notes, but there were some things that we went through and Gary can expand on those.

The original launch, [Glen], you know, you're right. We were originally looking at the January timeframe. That, you know, if you go back six or eight months, we had been saying that, and as often happens, I would say as generally happens with the introduction of new devices particularly since we were going to full scale automation with what we're going to call the BD Integra syringe, our retracting syringe, as opposed to scaling up in a semi-automated mode and then going to full scale automation. During the validation process we noted a few things that we want to make sure were properly taken care of prior to releasing the product. We would not in this case or ever release a product until we were completely satisfied that everything in the automated process was working exactly right. And that set us back a few months. In retrospect, once the product is on the market just a few months delayed, it'll be a non issue. Of course with everyone waiting for the product to come out, it is an issue now. We have very strong confidence in the June release date. And that's not to say that something else couldn't go wrong between now and the time that we release it, although at this point the reason for our strong confidence is we were moving through the process validation very, very successfully. So we are anticipating a launch in June.

GLEN RYSON]: Okay, and the- a separate question. Did I miss it? John, maybe Rick could address this. Talk about the update on ProbeTec installations and Phoenix installations. I think last time you were saying that you hoped to have an incremental placement of 100 ProbeTecs this year, [[inaudible]] fiscal year, and 50 to 60 Phoenixs. Are we on target with that in the most recent quarter?

Rick, do you want to go ahead?

Yeah, this is Rick. We are doing well. Just starting off with Phoenix, customer conversions continue to accelerate in Europe. Relative to our full year commitment for Phoenix, the 50 placements, we've made 26 placements year-to-date. So I describe that as on track.

The key focus of the team in addition to really getting that reagent pulled through on those instruments is also finalizing our ongoing FDA drug submission plans. Good news in the second quarter and a little bit over in the beginning part of April is that we cleared our first two drugs through the FDA. And so, if you will, we're on the march towards a US launch, which will occur in late '03.

With regards to ProbeTec, I would say that we're making very strong progress against our communicated goals. We made 44 placements in the quarter, and I would feel confident in improving our full year commitment from that 100 number that you mentioned, which we did communicate in the past, and bringing that up to closer to about 120. Since launch we've had 495 placements in the field and we continue to feel very good about the progress of this platform.

GLEN RYSON]: Thank you very much.

The question and answer session of the call has concluded. I will now turn the call over to Mr. Paranicas.

Okay.

All right. Well, we thank you for participating in the call this morning. And we'll look forward to speaking with you again soon. Thank you.