Becton Dickinson and Co (BDX) 2003 Q1 法說會逐字稿

Hello and welcome to BD's first fiscal quarter earns release conference call. At the request of BD today's call is being recorded for replay and will also be available on the BD website through January 30, 2003. I would like to inform all parties your lines have been placed on a listen only mode until the question and answer segment. Beginning today's meeting is Mr. Dean Paranicas. Sir, you may begin.

Thank you. And good morning to all of you. We welcome you and thank you for joining our conference call to discuss our first quarter results for fiscal 2003. Today's conference call is being simultaneously webcast and as Vicky just noted will be available open our website www.BD.com as well as for play back at 1-800-468-0320 domestic and 1-402-344-6705, international, through the close of business on January 30, 2003.

Also joining us on this conference call are members of the media. In the course of 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 first quarter press release and in the management discussion and analysis sections of our recent SEC filings including our most recently filed form 10-K. Joining us this morning is John Considine, our executive vice-president and chief financial officer, Gary Cohen President of BD medical systems, Bill Kozy President of BD clinical laboratory systems solutions and company operations. Deb Neff, president of BD bio-sciences, Vince Walenza (ph) senior vice president of technology strategy and development, and Kevin Seifert, vice-president and general manager of consumer healthcare. With that introduction I'll turn the call over to John.

Thank you, Dean and good morning. By now I assume you have all had time to review the earnings release and the attachments that were sent out earlier this morning. We'd like to devote as much time as possible to answering any questions you may have but before beginning I'd like to make some brief comments regarding the first quarter results.

Reported revenue of 11% reflects strong growth across all areas of BD medical systems and BD clinical laboratory solutions. Medicals reported revenue growth of about 14% is continuing to be driven by sales of safety engineered devices in the U.S. and globally by our pharmaceutical systems refillable products which were up 30%. You'll recall the pharmaceutical systems growth rate was in the high single digits in the fourth quarter of 2002 due to customer ordering patterns. That year's growth rate was about 17%. For fiscal '03 we continue to look for full year mid-teen growth for pharmaceutical systems. Overall safety sales which include sales recorded in pre-analytical solutions grew about 29% for the quarter. The first quarter total safety sales across both segments were about $164m.

In terms of the U.S. market conversion to safety engineered products we estimate that at the end of 2002, fiscal 2002 that is, approximately 85% of the infusion market, approximately 50% of the injection market, and approximately 60% of the blood collection market has been converted. We estimate that U.S. safety sales will be about $660m for the year which is consistent with our earlier guidance. The overall growth rate in medical was offset in part by the conventional counterparts to the safety engineered products in the U.S. being reduced.

Consumer healthcare also made a positive contribution to the segment growing by 13%. This included growth of 23% in the U.S. As you may recall, last year's first quarter we noted that we had recorded lower sells of diabetes syringes due primarily to the planned reduction of promotional efforts in the U.S. towards sustaining branded syringe sales at the retail level. And as a result of higher -- a higher level of distributor inventory than we had initially assumed. As a result, we have relatively easy comparison to this year's first quarter for U.S. sales of diabetic syringes. That said, we believe the global diabetes injection market’s underlying growth rate is approximately 3% to 5%. Though our reported U.S. sales in fiscal '03 will be higher for the remainder than the year, that is higher than that 3% to 5%.

As you know, -- as you know, we recently launched our blood glucose monitoring products in the U.S. with the U.S. launch actually taking place in January, our second quarter. We ended up spending a little less excess G&A than we had projected for the first quarter as a result and this timing benefited the quarter's earnings by about $0.01 which we expect to spend during the second and third quarters.

As I’ve already said, the clinical lab solutions segment also continues to generate increased U.S. safety sales which was the key driver in the pre-analytical solutions side of the segment. As with medical, these sales were partially offset by reduced sales of the conventional counterparts of these products. Diagnostic systems growth of 13% for the quarter reflected a strong flu season with excellent sales of influenza testing products, particularly in Japan. We also were very pleased with sales of the BD Pro-Tech ET diagnostic platform which achieved sales of $13m versus $7m in last year's first quarter. With respect to both medical and clinical labs we also implemented a consignment safety stocking program during the quarter.

This program which allowed for inventory to be shipped with BD retaining title and therefore not recording sales, placed about an extra two weeks' worth of inventory with major distributors in anticipation of our warehouses being shut down for nine days to facilitate the start-up of our SAP system here in the U.S.

We had already done Baltimore but for the rest of the U.S. other than biosciences. By the way, I would tell you that that go-live has gone very well. Title on these shipments will pass and these shipments will be recognized as sales in our second quarter.

Not withstanding this consignment program we believe some smaller distributors who were not offered the consignment program did in fact purchase additional inventories as a hedge against the SAP go-live. These sales, which we have to estimate obviously, we think were about $5m and divided evenly between medical and clinical and probably contributed somewhat less than $0.01 to the first quarter results.

BD biosciences -- was slightly ahead of last year as we previously had indicated it would be. Growth in the segment came from flow cytometry reagents which grew 13%, immunology cell biology reagents, that's our pharmagen products, which grew 10% and discovery labware which grew 10%. Offsetting these increases was lower sells in our flow cytometry instruments due in part to an unfavorable comparison with the prior year. Sales of instruments were $35m verse $42m the prior year which had benefited from our reducing our backlog of uninstalled instruments at that time.

Also affecting this quarter was the favorable customer reaction to the announcement this December of the new BD [inaudible] cell sorter which caused some order postponement as customers awaited the availability of the instrument later in this year. These two factors impacting the quarter's instrument growth will also impact the second quarter.

The segments quarterly results also reflect continued weaknesses in some portions of a molecular biology research market, that's our clone-tech products, with performance down about 7% to the quarter compared to last year. However there was strong growth in core products, nucleic-acid separation products, custom products, and proteomics. We look for improvements during the remainder of the year for clone-tech as we complete the realignment of the business priorities with market needs.

Overall we expect bioscience segment to grow in the range of 10% for the full year with the majority of this growth occurring in the second half. Our gross profit margin of 47.7% reflected a 60 basis point improvement over the first quarter of last year. Strong sales of our safety engineered devices added about 50 basis points to our gross margin. And as we had discussed on last year's fourth quarter call, the absence of variances in connection with our inventory reduction efforts added another 40 basis points. Higher U.S. sales of higher margin diabetic syringes also contributed to that growth. Offsetting this was among other factors increased pension costs, the effect of lower sales of molecular biology and [inaudible] cytometry system products and biosciences and sales mix primarily with respect to pharmaceutical systems which, as I have before, reminded you has a lower GP than the corporate average but importantly tracks less SSG&A support costs.

Our first quarter gross margin increase is consistent with our overall expectation of full year improvement of about 75 to 100 basis points. SSG&A experiences as a percentage of sales increased by about 70 basis points over last year. Primarily due to incremental expenses related to our genesis SAP implementation. Increased pension costs and the blood glucose monitoring launch in the U.S. and in Canada.

In terms of cash flow for the first three months of the year we generated over $113m in net cash from operations and that was after putting approximately $100m into the pension plan. About $43m was invested in capital expenditures and we repurchased about 1.9 million shares of common stock for about $57m. For to summarize, the resulting diluted earnings per share for the quarter of $0.43 was $0.04 higher than our guidance. This reflected a number of things worth noting. About $0.01 of favorable foreign exchange translation added to the earlier guidance. About $0.01 attributable to the estimated $5m in sales in connection with the SAP conversion.

This is distinguished from those that were sold on a consignment basis which will be recognized next quarter. About $0.01 is related to the timing of blood glucose monitoring spending and about $0.01 attributable to just stronger performance. Of this $0.04, about $0.02 is related to extra -- the extra inventory we purchased therefore --and in connection with the SAP go live and the timing of the BGM spending. We expect the -- these $0.02 to reverse in the second and third quarter.

Finally before I open the call to questions I want to speak to our earning guidance for the second quarter and the year. Our diluted earnings per share outlook is approximately $0.54 in the second quarter, and that includes that additional $0.01 I talked about which will flip from the first mostly into the second --on BGM and on the early buy in of the extra SAP inventory. The [inaudible] improvement in the quarter -- in quarter one should flow through the year and add to our earning guidance. Obviously the strong Euro could also help earnings however we'll wait to see how that plays out before we add anything to expectations. With that said, we can now begin the Q&A. And in order to allow for the broadest participation in light of time constraints, and the fact that there are other earning calls this morning we'd appreciate it if you would limit your question to one plus a follow-up and I thank you for your cooperation in that. So operator why don't we commence with the questions.

If you would please repeat the instructions for those who would like to ask questions.

At this time we're ready to begin. If you would like to ask a question please press star one. You will be announced prior to asking your question.. To withdraw your question you may press star two. Once again to ask a question please press star one. Our first question comes from Rick Wise of Bear Stearns. Sir you may ask your question.

Hi. It's Rick Wise, thank you. A couple questions. Just let me try to boil this into two. First to make sure that I'm clear on your implications for guidance John -- so if consensus is 207 we should be going to 211, all things equal.

Second, if I'm remembering correctly, your year end guidance for the divisions for the full '03 year was 10% growth for bioscience, 6% for clinical lab, and 10% for medical design. But you had a great first quarter it looks like even with all the noise. How do we, you know, couldn't the outlook be conservative and last, there were some issues related to Integra and you have to pay a royalty payment? How’s it doing now and what’s the implications of that royalty payment, if you would help us there?

Well, Rick, it is early and you didn't get the guidance right but I'll give you that.

I get -- it's tough for me on all things.

That is one long question. With all that said let me just go over the guidance again. Again, we did $0.43. We had guided at $0.39. And about $0.01 of that came from foreign exchange. About $0.01 of it was just a -- there were some distributors who did not get this consignment deal.

They actually went out -- some smaller second tier, if you will all though important to us, distributors went out and we think they bought extra inventory just in case something happened with SAP, and as I said, nothing happened. We think that $0.01 will take a $0.01 out of our second quarter. The foreign exchange should flow through from the first quarter. The BGM spending so with timing since we did it late in the first -- early in the second quarter, end of the first, we spent a little less than we had and we'll spend that in the second quarter and then we just have better operations so $0.02 won't flow through, $0.02 will flow through, so if we were at 207 you'd be at 209 now, not 211.

Okay but we were at $0.54 for the second quarter which implies to me operationally that you're doing better John, that's all.

We did do better. The first quarter there's definitely a penny of operational performance in the first quarter, but we have nine months to go and a long way to go and you asked me about the sales and you are correct, medical guidance was around 10, clinical labs was around 6 and bio was around 10. And obviously we are influenced in the beginning of the year with clinical, especially due to the flu season and we're going to have to see how that plays out. Biosciences was effectively flat and while we'll have some improvement in the second quarter to get to 10 we have a big second half of the year. Now we have faith in getting that second half of the year done.

But until we get further down the road, while we feel very good we think this was a terrific quarter, we're not going to up our guidance beyond that. The third piece of that is obviously Euro, we have a big European business as everyone knows. It's about a billion dollars business and if the Euro does indeed stay -- at the end of the year the Euro was near one in round numbers and now it's around 1.05 or a little north of that, that can actually help us for the remainder of the year, but until that happens we're not going to project it. And the third part of your question had to do with Integra which, as you know, was launched in June. I think it would be best if Gary answered that question.

Hi, Rick. Let me just start by just giving a quick sense of what is going on with safety engineered device sales. We did have a good solid quarter in the first quarter which continued to pass trends with safety engineered devices pretty much across the board and the medical side which is fusion and injection devices and in the pre-analytical side. Essentially doing what we had hope it would do in the first quarter. In the medical side of the house, the fastest growing platforms are for infusion the inside auto guard device which is a push-button, spring based retractable product that was first introduced in 1995. And on the injection side, the safety glide single safety needles which is a single activated safety device which were first introduced in 1997.

That's indicative, the fact those are the fast he is growing platforms today indicates it does take time. It usually takes years for a new platform to achieve a high level of customer acceptance. So you asked about Integra which was introduced in June. We also introduced around the same time last year the eclipse, which is another single finger safety activated device for skin injection and our anticipation is it will take time to achieve broader adoption of those products as had been experience with our other devices. In fact for 2003 we would expect both of those new devices to play a small role, overall safety picture, even though our outlook for overall safety device sales is so far this year going as we expected.

The other open question is relative price points. As you know, we have multiple platforms within the Eclipse device being on the lower end in terms of price point and the Integra being on the higher end and it remains to be seen yet -- hospitals willingness to pay more for a more highly featured product. All that being said, again with the indications with safety glide and auto guard after a number of years as hospitals move through their extensive evaluation processes, in those cases there has been a high level of adoption so that’s the outlook for Integra. We do pay a royalty. We recently resolved a disagreement that existed between BD Med-Design Corporation on the amount of royalty that was resolved to both company’s’ satisfaction and we're putting a very strong marketing effort behind all these platforms.

Thanks, Gary.

Thanks.

Dan Lemaitre of Merrill Lynch.

Good morning. I wondered if you’ve considered spinning off the slow growing biosciences business as a way to help you PE?

Thanks for laughing.

Hey, Dan, I'm not laughing.

You know I'm kidding. It's great how these cycles work isn't it.

It looks -- it looks like when we're looking at the currency stuff here obviously we're just extrapolating but it looks like you could get as much as a 5% point benefit from sales in the second quarter and clearly currency was one of the reasons you overachieved this quarter. I'm just wondering if we had a number that looked and sounded like a low double digit number for sales because of that much of a currency tail wind, don't you think some of that should have flowed through the bottom line in the second quarter based on current rates if we were just doing the math?

Well as I said, $0.01 did flow through and that's one of the reasons we beat our earlier estimate.

But I mean for the second quarter now.

The second quarter, remember, we never -- the number that the street had was of their own volition. We only guided toward the year and the first quarter. We knew we had spending, for instance, that would be incremental in the second quarter related to BGM. I think at the time we said it was going to be $0.02 incremental now another $0.01 has flipped into there. Indeed since our early estimate we have added $0.01 of foreign exchange benefit there which is in the guidance of $0.54. So that's where we think -- there's a lot of moving parts in this, Dan, you know, we had a couple little buy-ins that $5m in sales so that's where we are right now. You know, currency, you're right the Euro from the end of the year has gone up about 5% and we have a billion dollars worth of business so there is another three-quarters of a billion to go.

All other things remaining equal that could be an upside to us with respect to those earnings. If your question is, “are we going to spend that money?”, the answer is “no we’re not going to spend that money”. If it goes through the P&L, you know, we're going to play it where it lies.

That's what I needed to hear. Just one follow-up, your guidance on safety seems as bit tepid if you're sticking with with 650 which is about a 15% increase I think the simple math would start -- with the start you had the rest of the year safety would only be up 10% or 11%. Do we really want to think about safety slowing from 29% to 10% or 11% or could there been an upside in that 660?

Let's let Gary talk to it and Bill Kozy here.

Yeah, I would say we did have a very strong first quarter and you know, we haven't put our heads together to re-guide the year based on that. As John had mentioned there are some categories that are reaching a very high level of conversion and we're getting some positive flow through of that from the second half of last year so it still comes as incremental in the first half of this year, so I think we want to let a little more of the year move ahead before we consider reguiding that number, but certainly the first quarter was very solid and things continue to go well.

Okay, thank you, guys.

Thanks, Dan.

Glenn Reicin of Morgan Stanley.

Hi, Glen.

A real strong quarter but one thing that has been concerning me for quite sometime is if you looked at penetration of safety it was really sort of driven by a legislative effort that took place two years ago. At some point you're going to need to rely on international markets for safety materializing. I didn't know when that is. It sounds like it's going to have to be next year. Can Gary give us an update on what his expectations are for safety in Europe and maybe give us a little bit of flavor of what to expect here?

Sure. You're correct, that there is additional opportunity and to sustain another part of the growth of the future will require success in markets outside the U.S.

In saying that I would also indicate there's still a loft growth to be attained in the U.S., particularly in the injection market which is only about half converted to date. There are also other categories of safety devices, a number of which we participate in such as surgical blades where the level of conversion is still very low, only around 10%. So there's still quite a bit of growth potential in the U.S., but to turn to your question, there's been a loft activity in certain other developed markets, Europe in particular countries in Europe as well as Canada and Australia and to a lesser extent, Japan.

Most of the work to date has focused on market development and policy activities and there has been positive movement in both of those directions. We do anticipate more regulatory legislative mandates occurring in other countries outside the U.S. over the coming year. It's not fully clear the timing of that yet but as least we would expect two other countries over the next year to implement regulations or laws that require the safety engineered devices. There's a loft activity in Europe, also, on the EU and among trade associations in this direction.

We haven't guided safety outside the U.S. to date because it's less predictable at this point. When we began guiding U.S. safety numbers which was a good 18 months to two years before the legislation was passed, it was easier to predict what would happen.

We won't start providing clear guidance on Europe or other markets until we feel we have a reasonably solid basis to provide that guidance. So I would say the growth will occur. In fact it's even occurring now. How large it will actually get to we need to -- we and everyone else in fact need to get a little bit better predictability and that will come as it becomes clearer which country will be passing laws and when. The other factors here are the platforms that maybe adopted will be among the platforms we sell today, and probably not as broad, and based on what platforms are adopted, that will also affect the ultimate size and growth opportunities.

Just some follow-ups here, in terms of the market outside the U.S., I was -- I had the understand that it really was the pre-analytical business in France. That was really what the safety business is outside the U.S. as of today. Is that correct?

It is not just that, but the pre-analytical business in France is certainly among the larger components of it and part of that was a result of a number of years ago, problems in France with blood contamination in general and the response to just extra protection around blood related medical procedures in France but there's also business systems like Inter-Link in Europe today. There's certainly safety engineered catheter sales in Europe and in other parts of the world. The market is growing already outside of any legislative or regulatory mandate with blood collection if France being the more significantly penetrated market.

So in your three-year plan that you, I guess, had sometime last year, what were you looking for in terms of growth next year in safety? If it was 15% this year, do you maintain 15% worldwide or does it actually come down?

You mean '04?

’04.

I would say two things. One is we're not prepared to guide yet '04 safety numbers.

I'm not asking for that, I'm asking a flavor for what was in your plan?

You know, I feel uncomfortable -- talking without preparing for the question and having the data, so I don't want to answer that now, but I would say you're not seeing -- we're not reporting on even now the global numbers. So whether or not it will decline 15%, I would encourage you not to draw a conclusion on that yet.

I would add one thing to that. Remember on the U.S. we had guided at 800 total safety. We haven't changed that. Certainly hasn't gone down. It's probably a little bit better than that. We do 660 this year that infers 15 or better for next year anyway just on those base numbers. So there's no bad message here. It's just early, as Gary says, on international and we don't know that U.S. doesn't get any bigger.

Thank you very much.

Okay.

David Lewis of Thomas Weisel Partners. You may ask your question.

Good morning guy, one Question, a quick follow-up. First of all, just following up on some of the medical systems guidance, Gary could you give us, beside growth rates, you initially talked about your five or six principle safety engineered device lines -- what were the penetration rates 80% to 95% by tend of fiscal year 2003 -- have any of those penetration rates increased or decreased since you gave that guidance over a year ago?

I would say the categories we talked were safe IV administration, those are needless IV administration systems, IV catheters, injection devices, blood collection devices and probably plastic tubes. I'm going to defer to Bill in a moment on the blood collection and plastic tubes. The safe IV access certainly has achieved what we said. The catheters have achieved what we've said, probably even a little bit faster than we anticipated at the time. Injection devices have not gone as quickly and that was also expected at the time.

Gary, my question there is, you said 50% injection for this quarter and you were talking about 80% by year end so it sounds like that's been going slower, and you’ve got more room to grow there?

There is more room to grow there. Injection has the largest non-hospital or ultimate side component of any of these devices. In fact the level of conversion in hospital, is higher than 50% and the level of conversion in doctor's office is lower and much of our market development and marketing efforts are focused on the physician market to get that market up to a higher level of conversion. Whether or not we'll be at 80% by the end of the year remains to be seen.

I would not sit here and guarantee we're going to get up to that level of 80% by the end of the year and it's not just us, it's the total market and all the other companies as well. So there is still quite a bit of upside. Over the longer term I have little doubt that the market for all these categories will convert. Does that answer your question?

That's perfect. And then a follow-up would be maybe to Deb or John, in terms of the BD biosciences growth obviously, a little slow this quarter but you're still sticking to your fiscal year guidance – in terms of the back half of the year, can you give us a sense, maybe on a percentage basis, how much of the issue is a comparable issue tied to the backlog in flow as you mentioned, how much is market and how much was some of the new product lines that are being introduced like the Fax Aria and taking time for those new products to get adoption? Maybe give us some more comfort on how the back half of the year shakes out.

I'll have Deb talk to that.

Yeah, I think of the – where it’s coming from, I think about, say three quarters of that would be the impact of the installs, the comparison quarter to quarter. The other quarter would be the change as a result of the Fax Aria launch.

So in terms of clone tech, you know, historical clone tech visibility weakness you see that improving in the back half of the year?

Yes, we do. We're seeing some positive signs -- as I mentioned, I think in the last call we actually had done a fair amount of R&D portfolio work to align the product launches and our investments more with where the growth in that market is going. And the encouraging things we're seeing is that our growth is now starting to show in those same product line areas, so we do expect to see an improvement as we move into the second half of the year.

Great, thank you very much.

[inaudible] of BankAmerica Securities, you may ask your question.

Good morning, thanks. I just wanted to ask you about pre-filled syringes. Your pharm-systems business, a phenomenal 30% growth number in the quarter, that's an acceleration over the 17% growth you did all of last year. I guess the question is how big can this be this year. Was there something that drove a 30%, or do you see a higher sustained growth rate there? And Gary as well, just longer term, what is the potential in this business? Do you really see the sustained higher growth of several years? Baxter put up great numbers in this business he had as well yesterday. I want to get a feel for where this goes in the next several years.

Really we're pleased with the performance in this business as we have been for many years. It's a very nice business that has very stable, you know, relative to be high growth. The first quarter was a fantastic quarter. I don't think you should expect that type of growth rate for the full year. There were some factors that gave us favorable comparison. We had a new customer in Japan, for example, that came on in the second quarter last year so on a year to year basis in the first quarter we would have a favorable comparison. I think you can expect for the full year, the growth rate of this business to be similar to what it has been in recent years. This is a steady, stable, low Double-digit grower. This business typically grows between 10% and 15% on the top line and you know normally when we plan forward we're not looking at FX.

When I give you indications it doesn't include any FX impacts, but I think you can expect low double digits as the full year outlook which would represent pretty much what this business has been doing in the last several years.

Just to clarify, it did grow 17% last year without any help from currency to do low double digits off this 30%, this quarter you're talking about a very sharp deceleration. Is that really what your outlook is for the year? I know you're trying to be conservative with some of these numbers.

Our outlook is not a sharp deceleration. We are trying to be conservative. We thinks that’s the best way to be. We do have the benefits of the favorable comparison in Japan which, for the rest of the year, the additional big customer we took on in Japan in the second quarter will be in the year to year comparison, so it's not a deceleration, it's more of an even comparison.

As you look out a little further at your pipeline and what you sense hospital-customer needs are in this business, I mean, can -- it looks like you're going to do growth in the teens two years running. Is that something we can count on for this business in a sustained basis?

We don't have any reason to believe the teens growth would diminish in future years. Now the further you go out the little less predictable it gets.

Right.

But if you went back in time you would find also mid-teens growth in this business and the basic things that are driving this growth are the quality advantages of a pre-fill. A reduces the potential for medication error because the medications are in the device, reduces potential of contamination with medication filling with an empty device. Also there's some trend in general in the pharmaceutical industry away from multi-dose vials into single dose because of the desire to eliminate the use of preservatives in multi-dose vials. When drug companies go from multi-dose to single-dose, often it makes sense for them to go right into a pre-fill. In addition, if drug development has slowed down somewhat, drug companies look to differentiate their drugs in other ways and device packaging is one of those means of differentiation. So I think the longer term outlook is positive.

On the other hand there's also -- because of the growth more competition entering -- so there's always some unpredictable factors, but we do look at this business as a stable low to mid-teens double digit grower.

Last quick question on this. If you had to think about where you are and your competitors are in terms of developing the potential of this market opportunity, is this still early innings or do you feel that you're well past half penetration in terms of the likely candidates for pre-filled products?

Gary Cohen It's a good question and I -- I'm not sure I want to give you an answer that's not as well thought out as it should be.

We don't see anything really diminishing the growth. The two factors of growth, one would be the underlying growth rate of the drugs that are prepackaged in prepackaged devices.. If that market is growing low to mid-teens, then we’re going to grow with it. And the other is, as you bring up the level of conversion. I don't have data to share with you right now on level of conversion relative to market potential, but suffice it to be said that we continue to open up new markets that are relatively untapped for pre-fills, entering Japan a few years ago was an example of that, so I think there's still good upside potential.

There's also more competition that will impact some of that potential and overall I think to give awe more general answer in the absence of more data now I would say we continue to expect the type of growth we've seen.

Okay, great, thanks.

Larry Keusch of Goldman Sachs.

Good morning. Just a couple of quick questions for you. First off if I did my math right you should have about a 1.6m shares left in the share repurchase authorization that's remaining so any comment there in terms of keeping the velocity of share repurchases that you guys have been doing? I think in the past you said sort of think about it as 5m shares for the year.

Secondly interest expense was a little bit lower than we were looking for. It was my impression you were going to have less capitalized interest in '03 and so should we still be thinking of $44m in interest? And then the last question is, on the --I think in the past you said 4% to 5% core growth for the U.S. diabetes business it sounds like you are thinking that could be north of that, I'm just sort of wondering what has changed to give a little bit higher growth expectation there?

Let me take the first two and have Gary comment on the diabetes. Your math is right. That's about what we have left. We'll buy that in the second quarter, likely. 5 million is still our target. You know, as these things require board approval and we need to get board approval if, you know, to go on with the program and that would be something considered by them. Although our expectation is with the amount of cash -- precash flow that we're going to generate, if you look at the next few years we start generating $500m to $600m precash flow, that's a lot of money and it's two ways to go back to the market with it. One is dividends and one is share repurchase, and we historically participate in both. So without giving you a whole answer because there's board discretion here, I would stop at that.

As far as interest expense, you know, the rates are comparatively in the first quarter, you know, were just so low, you know, our CP being A1, P1 is sub 2. It's about 1 1/2, something like that. We do have less capitalizable interest as these big projects come on-line and you can see that our spending is well under control there. I think from a conservative standpoint I'd stay around where you are at the kind of the 44ish but we did, in fact, benefit by about $1m in the first quarter. Now, with respect to the diabetes – Gary.

Sure, I think I can explain more clearly now some of the factors not only happening now but what saw last year because sometimes it's easier to understand things in retrospect. First looking at the overall diabetes injection device market syringes and pen needles. As John indicated, we believe the underlying growth of that market globally is in the 3% to 5% range.

I would say underlying market growth this year from what we've seen so far will probably be on the lower end of that range outside the U.S., and probably to the higher end of that range inside the U.S. So 3% to 5% is what we see the whole market growing and that's been pretty consistent. We expect it will remain so going forward. What is happening now -- the reason you saw such a large growth in our first quarter here relates to factors we did talk about last year and there were two things.

One is up until the end of 2001, we had been providing volume discount incentives to wholesalers, as you know we discontinued that practice at the end of the 2001. However, when -- under the SAP101 methodology, the discounts that were provided did carry into 2002 because they were recorded with the sales and that would have showed up as price discounts. So we have a favorable comparison in the first quarter to discounts that were in last year's numbers that are now out of the numbers because that was a carry over from SAP 101, it didn't carry over into 2003. That was about, you know, $4m to $5m.

Also, as we indicated in the third quarter of last year, we had discovered that there was one wholesaler that was holding an additional amount of inventory, a significant amount that we had not been able to identify in previous audits of our wholesaler's inventory and that, indeed, did hold back order demand throughout all last year, even though we didn't discover it until the third quarter. In fact it affected the first and second quarter as well. That was about another $5m positive impact in the year to year comparison. What we're seeing now does reflect the true market. Last year our sales actually were less than what the true market would have reflected based on the factors I just described. We had about a $10m favorable year to year comparison in the first quarter and those effects, not to that degree, but those effects will continue through the remainder of this year and that's why John indicated our reported sales this year will be higher than the underlying market growth. They won't be as high as they were in the first quarter. We're probably looking at, you know, in the 8% range globally for the year in terms of our outlook for the consumer healthcare business.

Okay, great, thank you.

Bruce Cranna of Leerink Swann. You may ask your question.

Good morning everyone.

Good morning.

On a real macro basis, would you still characterize safety pricing as holding steady? If it is, are you finding it harder to maintain pricing as conversion rates top out so you're kind of doing better at the lower penetration rate products?

The safety pricing does -- is holding steady. There's a lot of activity going on in the market. A lot of evaluations of different products. Hospital are very involved in making choices based on clinical preference in the institution based on evaluations. That is what is really driving the market today. We would say in general in all of our device categories there's always pricing pressure in the U.S. and worldwide and, you know to that degree there's pricing pressure for safety devices as well but no more so than would be for any other devices.

So generally the picture is still holding steady and you expect that to continue for the remainder of the year?

Yes, yeah.

Okay. One Pro-Tech question if I could, are you guys factoring in any possible upside from Abbott’s departure from sexually transmitted disease?

Well Bill Cozy is here, we'll have him talk to that.

Okay.

I just became aware of the Abbott situation a week ago, actually January 15 I believe was their announcement to customers, so we have not had a chance do any true analysis on that. We don't have that factor in.

And $13m I think was the Pro-Tech number. Can you give us some sense as a breakout on the equipment versus the consumable side?

Well we can tell you that the quarter went -- was successful relative to another 53 placements, instrument placements. That brings our total base now to about 650 which is right on the track we had talked about last year. We also have had some success with Viper and we've got six Viper placements in total now and another one this quarter. In terms of a breakout with the consumables I believe the last time we indicated that each account tends to generate on an annualized basis somewhere between $50,000 and $100,000 in consumables. That's the guidance from the last call. I don't think we've changed that.

Okay. Lastly, just one flow question. Reagent sales I think the number was up 13%. That's pretty solid number. I'm just curious. It seems somewhat counterintuitive with the research spending slowdown that everyone is talking about and you guys having fewer box sales in the quarter. I guess my question, is do you think you're taking share of testing volume sort of broadly, or are you really just doing better on the clinical side? Any color there would be helpful.

I think it's kind of a combination of things. One, if you think over the past several years, we've continued to increase the number of total boxes in the field and it's kind of that classic razor blade, we just continue to get increasing flow through of reagents through the number of boxes we have out there. Secondly, we do believe as kind of both the market and technology leader, we are being effective in the market and gaining position. And, third, on the clinical market growth over the past couple years has increased a little bit, so we are capturing some of that growth, as well.

Okay. Thank you.

Brian Rouche of Adams Harkness & Hill.

Just a couple of quick questions. What is your total debt position today and your corresponding debt to capital? How is Phoenix placement and corresponding disposable sales going?

Why don't you take Phoenix? I'll come back on the debt--.

Brian, it's Bill. We had a quarter in sales of about $2m that was just modestly ahead of our plan. We have 136 routine users out there and we've got about 162 placements which, of course, includes people that are in evaluation. As you know, the product is still launched fully only in the European market. We're still not scheduled for the U.S. launch until the late in calendar year '03.

Right.

As to the other question, debt to cap is about 32% right now. We have about $1.2b in total debt and we have in cash and other investments globally and in excess of $200m.

Okay. Then finally maybe I missed it, what was the cannibalization of safety versus conventional syringes in absolute dollars in the quarter?

That's not something we absolutely do by virtue of the calculation it's an estimate. What we say is that we think that safety cannibalizes on both businesses and we've used a broad stroke of like 35%. Gary or Bill, both of you want to put some flavor by business on that you can.

First I would agree with John that we wouldn't want to say specific dollars, but in medicals it's been running a little lower than that but in that range. I think you can figure it's in the 30% to 35% range in any given quarter. The first quarter sort of on the lower end of that.

I wouldn't add anything different.

Okay. Thanks a lot.

Stephen Lichtman of Credit Suisse First Boston.

Hi, guys just a couple of follow-ups. On SSG&A over the next couple of quarters should, we expect to see the same increases year over year as we saw in the first quarter or will that trail off? In the second quarter, John, any early take in terms of sales growth by segment on an actual basis?

On SSG&A you're going to see it if you just kind of bring you back, I know you guys listen to a lot of different calls but as we said, you know, we have the turn-on of the ERP system this year and IT and all that that's with it, it's going to put incrementally about $50m in our P&L this year and then we had the same stuff that everybody else did only a little earlier on the pension where our U.S. pension expense went up $25m to $30m.

So -- one-third -- the third thing is, you know, as we've said with blood glucose, we're going into that market with a solid plan to get after the share. We're not going to make money this year. We're -- it actually has a cost to us. Next year we about break even and some of that is on the SSG&A line. A lot of it is in the gross profit line. So without getting the exact number I think you can expect that number to be higher than the last year's number because in particular because of those factors.

You indicate in the first quarter that you spent maybe a little bit less than you anticipated. So I was just wondering, will that spread evenly over the next couple of quarters or kind of trail off?

Most of that, that was BGM that we spent less on.

Right.

It's worth about a $0.01 so you can think in the $3.5m to $4m range.

Okay.

That will be in there. I don't think you're going to see wide variances in there, but I don't think it will trail of in SSG&A.

Right.

In terms -- in terms of the, you know the second quarter, we haven't, you know, the currency aside, we haven't changed our sales expectations for all the businesses. We're still looking at double digits, you know, kind of a 10% for medical, for the year. And clinical still in the -- in the -- with 6ish, now that's gotten a benefit from currency since then. And bio is about 10. Right now I think the second quarter, you know, you should think -- you should think about high single digits to 10% in that range for the second quarter for the company-wide and I think you'd be safe.

Okay. Thank you.

Scott Wilkin of SG Cowen, you may ask your question.

Thank you. Just a couple questions on Biosciences. Just -- you talked about your guidance there of 10% and pick-up in the balance of the year. Could you maybe just talk to potential slow release of NIH funds and also relative to ‘04, you know there's some concern that the budget for NIH could be flat and what impact that might have on the ongoing growth rate of that business? And then I have one follow-up.

Yeah, I'll have Deb do that. Just remember, too, while budgets go down, it's still which products do they use and there's still more research going on but I think you can put a lot more flavor on it than I, Deb.

We're clearly aware and also understand there's questions about the NIH funding for maybe the rest of this year and certainly what is going to happen with the budget for '04 and as John mentioned, I think for us, what is important to an extent is how big that budget is is where those funds are being directed.

And certainly, the expectations and the current situation is that funding is very much in line with the product lines and portfolios that we've been launching and are -- will be launching this year. It's in the area of AIDs, cancer vaccine research, including bio-terrorism, vaccine research and immune function diseases. I think the market in technology leadership position we have, the new platforms we've launched which are actually truly productivity enhancing tools which are demanded by that customer set, the fact that some of these products we really think will help us expand the market, and the fact that the portfolio is in line with where spending is being spent is what is making us feel confident that we can get that growth as expected in the second half of the year.

Okay. That's helpful. Just on flow cytometry, your competitor, Beckman, seems to have gained some traction. Can talk about your view to the competitive situation there?

Sure. You probably are talking about the FC 500?

That is correct.

The FC 500 was launched really and to compete with our LSR products and subsequent to the launch of their instrument we launched the second generation of that product the LSR2 which actually outperforms that product. In addition we think we have a pretty strong position now with a launch of our Fax Aria that we launched in December which is really a very unique high performance, easy to use sorter and as has been reported as being very well received in the market place. We believe the portfolio of products is going to continue to support our market leadership position.

Thank you very much.

Scott Davidson of Piper Jaffray, you may ask your question.

Hi, good morning. A couple of questions for Gary, please. Gary, could you talk a little bit about the competitive environment in safety, how that's evolved over time? Have you seen any, you know, major responses out of your key competitors? And related to that, you know, as the conversion has taken place, are you gaining unit share in these categories?

Okay. Relative to competitive environment, as I'm sure you know there are many competitors for these safety devices and we would consider it could be an intensive competitive environment. We are engaged in head to head evaluations in hospitals, pretty much all the time where safety product decisions are made. In fact, the Needle Stick Safety Act requires hospitals to conduct clinical evaluations.

Our experience was those clinical evaluations were going on prior to the safety act, because these are new technologies that are being adopted and clinical preference has a big impact on product selection and therefore it's very important that our products perform exceptionally well in the hospital environment. One advantage we have is literally in these categories over 100 years of experience in knowing how these products are used, and therefore, having the ability to anticipate the wide range of applications that these products have to be effective for. So I think that we do -- I don't Think -- we do incorporate that knowledge into the design of our products and for that reason we do well in competitive evaluations.

We also participate in all the platforms. The market is -- is much less -- it's more segmented in a sense if you went back 10 years in time before the introduction of or 15 years of safety engineered devices, the product designs were pretty standardized across manufacturers and also pretty standardized in general. A syringe was a syringe maybe different level of quality, but a similar design. Now for safety injections, there are four different platforms. We participate in each of those platforms because as the market leader, we were not in a position just to put all of our bets on one horse, so to speak. We focused on having the best in class performance in each of those platforms based on our experience in the market and based on our position in the market, and that has enabled us to do well as the market has transitioned.

We also invested well before anyone else. We were in this market beginning in the late 1980s. We developed the broadest array of products and made the most substantial capital investments over that 15 year period. Relative, we don't really disclose share positions. I think it's safe to assume that we're essentially keeping -- holding our share – it varies by product category. In some categories we may be a little lower on safety. Some categories maybe a little Higher, but our focus has been on developing the best products and servicing our customers, not necessarily on share, per se, but we're essentially retaining our position as the market transitions.

Okay. Great. And then just a second question as well. A number of years ago, I think you put some infrastructure in place in India and China and had looked to some of the emerging markets as a potentially important source of growth. Can you just give us an update maybe on your thought process there? What is going on with those Plants right now and will there come a point -- in Latin America -- has been challenging -- but will there come a point where those types of market opportunities play kind of a more important role from a growth standpoint?

I think since a large piece of that is medical business, let's have Gary talk to both those.

You're correct that we had built manufacturing facilities, and made investments both in India and China in the late '90s. The way it stands today is we're getting really good growth in China in particular. We had some issues there several years back that have been corrected.

We're getting good stable profitable growth. We've also invested in some unique platforms, for example, we have an infusion therapy device that was designed specifically for the Chinese market. It also has applications in the other countries and it is produced China. We're getting really good growth there. We announced a year or so ago a manufacturing restructuring. The China plant was actually part of that manufacturing restructuring. We decided that we would be better off producing more labor-intensive products in China because really the manufacturing advantage you can get there is low labor cost. In fact the things we have been producing there were very highly automated and it actually cost us more to produce, things like needless and syringes in China than it did in other facilities that had higher volume and therefore lower manufacturing cost. So part of that manufacturing restructuring effort we shifted the more highly automated production out of China into other locations, and we are emphasizing now the higher labor content products and on that basis we expect to get better long-term utilization out of the China facility.

Things in India have gone a little more slowly. We had the facility there and it's not fully utilized. One of the sources of growth that we anticipate in the future in both of those areas are for [inaudible] injection devices that cannot physically be reused because of the problem of the spread of disease due to device reuse. It's another area we began investing in, longer before most other companies. We had products in the market in the early 1990’s and we’re the leader in that category today. We anticipate that will be a good source of growth for the future. So I would say the contribution of growth in both those countries is small because the base is small relative to our global businesses and we've had more growth in the last couple years out of China than in India but good outlook and continued commitment to both markets.

Thanks.

Rick Wise of Bear Stearns you may ask your question.

John, a couple of follow-ups. Can you talk in a little more detail about the initial reaction to the logic in latitude launch, just how the marketing plans in place, -- and I know we went over to the diabetes educators meeting and it seems like you are getting a very good reception there. And second, on the pension front any update, can you give us any thoughts about will we need to see further contributions in incoming quarters and maybe Deb could talk in a little more detail about the Fax Aria, and help us quantify in a little more detail, the opportunity and what kind of contribution we could expect from the product. Thanks.

Okay. Pension is easy to let me do that. And then we'll have Deb and then Gary and Kevin address the launch question. On the pension, you know, we get into this a little earlier being a this company, we did make a contribution of $100m this year and we made one last year. Prior to that, we had not had to make a contribution for seven years. And our returns were pretty terrific unlike everybody else just about everybody else out the last couple years were very difficult on the market and that's no new news for anybody. Whether or not you have to put any more money in the pension will depend on a number of things. How this market performs this year, what happens to discount rates, and how our performance is versus our expectation. That said, it would -- if a market stayed where it -- where it is now or came back somewhat, I doubt that you would see much of a contribution. Certainly not in the magnitude of a $100m as we did, but from time to time companies normally put some money into pensions, but you won't see them over the quarters and that was part of your question. So I can't tell you whether there's going to be anything next year, but based on where we are at this point in time, it would not be a significant contribution. You want to take the launch?

Yes, we did launch the Aria globally in December and we're pleased so far with the reaction from the customer base, actually have orders in house and the majority of the revenue from that product will occur in Q3 and Q4 and should for the year somewhere in the range of $30m or so.

So a third part relative to the BGM launch. As you know we had our launch event around two weeks ago. Since that time there's been very extensive media coverage. Literally national media coverage on television, on the radio, and print and internet so there's been a lot of broad exposure of our launch. We have begun shipping in the U.S. so we're officially making sales in the U.S. now. The response from retailers has been very positive and in addition, as you know based on the relationship with Medtronic, we will be through their direct access to the --most intensive --people with the most intensive therapy and therefore highest frequency blood glucose testers are going to have, through that relationship, a very direct access to that market. So early goings as you know but we're very encouraged thus far.

Gary, this is Brian, this is a follow-up to that question for you going back to your guidance on the consumer healthcare business for this year, you were sort of suggesting low double- digit growth. But if I take your report, last year, and just add on a $50m or so -- I think was your guidance for sales in physical '03, that gets me to sort of a low double-digit growth and of itself not including the organic that you will see off your diabetes injection business. How should we think about your guidance? Is it just you guys being conservative or is there some opportunity for the upside or actually [inaudible] could be doing a little better than that guidance originally.

That's an easy one that I should have clarified before. What I was saying earlier was not about the BGM (ph). I was talking about the consumer business which is potentially a diabetes injection device business, being in -- for the year -- we would expect globally to be in the mid to high single digits not including -- I say mid to high, in the 8% range. Not including BGM (ph). Does that answer the question?

It does, thank you.

Let me add one thing. You said meter sales. I think what you meant is strip sales because remember the meters are seeded out there while we sell them, they are rebated and some we actually give away. The ones that are sold are on the sales line and out in cost of sales. There's no effect on net sales there. And the other ones that are just given away without any cash changing hands are SSG&A, so don't ever think about us selling these things. Think about the strips. This is the over-used analogy to Gillette. The razor and the blade.

Certainly with BGM, which is part of consumer business, we anticipate being double digit growth. The other thing I want to mention relative to the diabetes injection devices the second quarter has the least favorable impact of the year to year comparison I mentioned before. So we'd expect the second quarter to be certainly, not only a lot lighter than the first, but probably the lightest of the year. Again this excludes BGM. Do you have a next one, operator?

Glenn Reicin of Morgan Stanley.

Just a couple of clarification questions. On the consumer business, Gary, I know you mentioned upper single digit, low double digit kind of growth on the core needle and syringe business, but you can no longer book sales distributors, so where is the growth in excess of the market coming from? I guess there's a little bit of disconnect. You mentioned that last year you grew under the market rate. This year you grew over the market rate but if you're no longer booking stocking sales to distributors, how does that work out?

We're not growing faster than the market this year. This year's reported numbers reflect the growth in the market -- reflect the sales for tend customers. What occurred last year, remember now we're dealing with year to year comparisons and growth rates. Last year our reported growth was actually lower than -- despite our best efforts from the SAP101 methodology to estimate dealer inventory at the end of 2001 and use that as the basis for estimating actual sales to end customers in 2002, the combination of discovering a big chunk of unknown inventory in the -- during the year last year actually caused last year's sales to be lower than anticipated. And that's why last year we tried -- we did our best to explain it during the year last year but there was another significant amount of inventory out there.

Now we didn't go back in time and re-estimate based on that. We had done a very extensive effort to estimate inventory at the end of 2001. Literally this additional inventory was, you know, sort of kept out of our view at that time. So I don't know if you want to add anything to that.

The second piece of the comparison, some of the fee, too.

Fees are carried over.

Which made those lower net sales.

The discounts last year carried over because of SAP 101 from ‘01 into '02 and went with the reported sales. So last year's sales were discounted based on discounts that had actually been paid out in 2001 as part of the SAP 101 methodology and that now is behind us. What you're seeing now is not higher. It is actually what the sales are.

Right. You're saying it's an issue of comparisons because you had to actually reverse sales last year.

We couldn't book sales -- inventory -- when we did the SAP101 which was pushed back to the beginning of the year, when we adopted it, in '01, fiscal '01, you took a cumulative charge and that was based on how much inventory we thought out there was in excess of their normal supply. Since there was actually more there that they didn't tell us about, even that they were making sales that we thought they would be or they were shipping out, we couldn't record that as a sale because we didn't -- we hadn't accounted for that as being inventory there which wouldn't have mattered to us. We would have been glad to put that in there but, you know, certainly -- in particular, one, distributor had excess inventory. So I think that, you know, at the end of the day, that's why we're say saying versus kind of a global -- injection market, we're going to be probably more like eight this year on that.

Okay, two other nitpicky questions. Phoenix you through out a $2m number this year. What was the number last year?

I didn't hear the first.

Oh, Phoenix.

Bill has that.

Last year's quarter was $1.8m..

So not a lot of growth year over year just yet. Finally can you explain the restatements the way you're moving around product lines here?

Yeah, well, they touch two businesses. They touched Gary's business and that has to do with diabetic device -- injection devices I believe, and safety devices, so you want to talk about that?

That was really more of an internal issue but it reflects in the external numbers. We had certain products that were recorded on the medical surgical P&L last year that we moved to the consumer healthcare P&L this year. So that's just basically a shift from one business to another.

That was determined by institutional customers versus consumer?

Yes John, I looked at a wrong number.

FY '02 Phoenix was $1.5 million.

Okay.

The other thing, Glen, was in Deb's business clone tech -- certain clone tech sales from Japan were being booked through the U.S., and they actually are -- should be attributable to Japan, so all we did is to get it apples to apples, is restated 2002, because we had corrected that this year. No difference in the sales. Just from where they were generated.

Thank you, very helpful.

We'll get one last question in now?

Our last question comes from Larry Keusch of Goldman Sachs.

John, could you just give us an update on how the genesis sort of launches is going which I think you indicated would be in the second quarter?

Yeah. You know, there's always a lot sleepless nights before this happens. We've had a lot of turn-ons or go lives but this by far was the largest for us. It impacted what we call hub 1 which is all of our business other than Deb's business. Part of hers is actually in there, the lab business, and the Baltimore business, which is Bill's diagnostic business. And it's going absolutely excellently. We had teams of people you can't imagine tracking 6,000 line items and you know you have little glitches and stuff going but, it's operating. We're shipping. We're transacting. Just an excellent job. We still have work to do because we have launches in Japan, for instance, but Mexico, some of these internationals. But we are now turned on here in the U.S. with the exception of Deb's business, but Deb is not SAP in part anyway, and they are going to be going into this version of it next year. If that helps.

Yep, thank you.

Well that about wraps that up. We thank you very much for your attention and we look forward to talking to you next quarter. Thank you very much.