Becton Dickinson and Co (BDX) 2004 Q2 法說會逐字稿

Hello, and welcome to BD's second fiscal quarter earnings 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 at BD.com/investors for April 30th, 2004. I would like to inform all parties that your lines have been placed in a listen-only mode until the question-and-answer segment. (OPERATOR INSTRUCTIONS).

Beginning today's meeting is Ms. Patricia Spinella, Director of Investor Relations. Ma'am, you may begin.

Thanks, Michelle. Good morning, everyone, and thank you for joining us to review our fiscal second-quarter results. As Michelle indicated, the call is being recorded and is also being simultaneously webcast, and is available for playback, not only on our website, it is also available by phoning 1-800-283-9732 for domestic calls, and 1-402-998-1159 for international.

During today's call, we'll discuss some non-GAAP financial measures with respect to our performance. A reconciliation of these non-GAAP to GAAP measures can be found in our second-quarter press release and the related financial table, which are posted on the investor page of the BD.com website.

We'll also be making some forward-looking statements, and it's possible that actual results could differ from our expectations. Factors that could cause differences appear in the second quarter press release and in the MD&A sections of our recent SEC filings.

Leading the call this morning is John Considine, our Executive Vice President and Chief Financial Officer. Also joining us today are Gary Cohen, President of BD Medical; Bill Kozy, President of BD Diagnostics; and Vincent Forlenza, President of BD Biosciences. I will now turn the call over to John.

Thanks, Pat, and good morning to everyone. By now I assume you have had time to review the earnings release and the attachment that we sent out this morning. We would like to devote as much time as possible for answering your questions, but before beginning, we would like to make some brief comments regarding the second-quarter results.

Overall, we had a very strong quarter, marked by double-digit sales growth and continued improvement in gross profit. This translated to solid operating earnings growth and an earnings per share increase of nearly 15 percent. From a revenue standpoint, we achieved growth of 12 percent, which includes about 6 percentage points benefit from currency translation, due in particular, to the strong euro. Each of our three segments benefited by between 5 and 8 percent, due to currency.

Looking at our Medical segment, we grew about 13 percent, driven in part by an increase of 9 percent in sales of safety engineer devices in the U.S. Our company-wide U.S. safety revenues, which you will recall include sales in the Preanalytical Systems unit of BD Diagnostics, grew about 10 percent to $183 million.

For the first half of the year, company-wide safety revenues increased 12 percent, and we estimate that for the year, they will increase by about 13 percent.

Also adding to the Medical segment's growth were increased sales of pre-filled products and diabetes-related products. DDM strip sales were about $11 million, up from 6 million in the first quarter. At the present run rate, sales are expected to be near our guidance of $50 million for the year.

The strip (ph) call we announced in the first quarter has been going very well. We replaced all of the product with minimal, if any, disruption to distributors and end users. At this time, we're receiving a very small number of calls, and our market research indicates that we received high marks on our handling of the recall. As a result, we consider that recall as being behind us.

Moving on to our diagnostics segment, overall sales increased by 7 percent, led by 11 percent growth in safety sales in the U.S. Preanalytical Systems unit. This segment's growth was offset, in part, by comparatively lower sales growth in the Diagnostic Systems unit, where second-quarter revenues increased by 3 percent.

As you will recall from our last call, the U.S. and Japan purchases of respiratory and flu products during the first quarter were exceptionally strong and drove the Diagnostic Systems unit sales growth to 31 percent. We continue to believe that some of those sales would have normally occurred in the second quarter, although we can't estimate exactly how much that might have been. One way to look at that Diagnostic Systems unit growth is to take the first half increase of 17 percent and exclude the respiratory and flu diagnostics sales growth. This would result in year-to-year revenue increases of about 12 percent. Also contributing to this segment's growth were sales of BD ProbeTec ET, which increased to 20 million in the quarter from 16 million in the prior year.

In the BD BioSciences segment, revenues for the quarter were 17 percent ahead of last year. Immediate Immunocytometry systems, as anticipated, were strong, up 24 percent, which includes the 9 percent currency benefit and reflected very favorable broad market acceptance of the FACSAria instrument platform, which was launched at the end of the second quarter 2003.

Also contributing to growth were strong sales of flow cytometry reagents in both the Immunocytometry Systems and Pharmingen units. Reagent revenue growth continues to benefit from our increasing installed instrument base, as well as the introduction of new reagents.

Overall sales of Clontech Molecular Biology products in the quarter were 16.8 million versus 17.3 million in the prior year. While these sales continue to be negatively affected by a slowdown in some research segments, as well as by competitive pressures, we believe that this impact is lessening.

Turning now to our gross margins. We achieved an 80 basis point improvement over the second quarter of last year. For the first half of fiscal 2004, our pro forma gross profit margin of 50 percent, which excludes the $45 million pretax charge for blood glucose products recorded in the first quarter, showed an improvement of 160 basis points over the same period a year ago. Contributing to this performance were benefits from the 2002 medical restructuring, foreign exchange, incrementally-higher margins from safety revenues and diabetes-related products, as well as ProbeTec.

SSG&A expenses as a percentage of sales increased by about 40 basis points over last year in June. Core spending grew at a rate consistent with inflation, and as expected, the remainder was primarily due to incremental expenses related to investment spending on BGM.

R&D spending grew at about 4 percent over the prior year, and it is in line with our internal plan.

In terms of cash flow, for the first six months of the year, we generated in excess of one-half of a billion in net cash from operations, which is on track with our annual guidance of one billion. Capital expenditures of 63 million in the second quarter and 108 million for the first six month are also in line with our budget.

We also repurchased a little over 2 million shares of common stock during the quarter for about $100 million. At present, we have 9.7 million shares available under the 10 million share authorization that was announced in January of this year. Our diluted average shares outstanding increased to 265 million, from 262 million in the first quarter. That increase was due, for the most part, to our average share price increasing by over 20 percent in the first quarter, which gave rise to more stock options being exercised and relatively more common stock equivalents being included in the diluted shares outstanding calculation. For the balance of the year, we estimate that diluted shares outstanding will be in the 265 million range.

Finally, before I open for questions, I want to speak to our guidance. We are expecting sales growth the second half of the year to be in the 7 to 8 percent range for total company revenues and for each segment. The range includes expected favorable benefits of foreign exchange, which is positive, but much lower than what we had experienced in the first half.

EPS guidance for the second half is a 10 to 12 percent increase over the pro forma prior year EPS, which excludes the 8 cents of non-cash charges related to the write-down of the intangible assets and inventory in the BD Biosciences segment that we took in the third quarter of fiscal 2003.

Turning to the full year, our total company revenue should increase by about 10 percent. BD Medical revenues are expected to increase by 9 or 10 percent. Revenues is BD Diagnostics should grow between 10 and 11 percent. And BD Biosciences revenues should grow by about 11 or 12 percent.

We expect diluted EPS for 2004, including the $0.11 BGM charge taken in the first quarter, to increase in the range of 10 to 12 percent over the prior year's pro forma EPS of $2.15. Excluding the charge, pro forma EPS is expected to increase in the range of 15 to 17 percent.

In summary, quarter 2 was a strong quarter with solid sales growth, continued year-over-year improvement in gross margin, strong cash flow, and EPS that was slightly ahead of our guidance. So with that, we would like to open up for our Q&A. And in order to allow for broad participation, we would appreciate it if you would limit your questions to one plus a follow-up.

Thank you. And with that, operator, we can open for questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Rick Wise of Bear, Stearns.

Good morning everybody. Just a couple questions. You talk in the press release about the offset of the shift to safety from reducing conventional devices. I don't remember you calling this out before in both the BD Medical and BD Diagnostics segment. Can you elaborate on that and maybe quantify the impact?

Yes, Rick, we actually have done that every quarter since I have been here.

That shows you I can't read press releases.

All we are getting at is, we estimate that for every one safety device we sell, we don't sell a conventional device.

It is about a 25 percent capitalization rate approximately.

And maybe just on the topic of safety, just update us on where you are in Europe? And what is happening there in terms of timing of various country approvals? Thanks.

Gary will do that.

Sure. There's not a lot that has changed since the last quarter. There has been good progress being made in efforts to address the necessary policy changes that would be a precursor to building a more significant growth rate and demand for safety-engineered devices. And where things stood last quarter and where things stand this quarter are pretty much the same. I had mentioned last quarter that the first European regulations that went into place did go into place in Germany. They specifically call out higher risk settings, which is still subject to some interpretation.

There has been a law ready to be passed in Spain for some time and it seems like each time it comes very close, there's a change in government. And although the factors that cause a change in government are much more important than this particular issue, it probably will delay things a bit as the new government comes in. But we don't think it will fundamentally change the direction.

And there has been some progress toward a guidance document being issued in the U.K. That also had gotten delayed a bit for reasons that are a little beyond anything that we can be personally involved in. But we are expecting that still to happen. Demand grows at a rate that is less -- in the meantime, demand is growing at a rate that is less than would happen if these policy actions were all in place.

And we are getting some growth, also, in some countries in Europe that do not have any policy action in place, such as France and Italy. We're getting some reasonable growth there. But the type of growth that we saw in the U.S. would likely be an outcome of these policy changes going more firmly into place than they have to date.

A quick follow-up, John. You gave the second-half comment and the year, but can you give us more specific details on the third-quarter guidance? Top and bottom line? Any comments there?

Not really beyond that range. I think we're going to have another strong quarter. The range in sales is probably in the 8 to 9 percent range for the quarter. And on the bottom line, I think you'll see double-digit increases.

Thanks a lot.

Dan Lamaitre of Merrill Lynch.

Good morning. John, before I get into some specifics on the quarter here a little bit, just -- the R&D number is only up 4 percent. I guess I'm having a hard time understanding the thought process, because you guys clearly have a year where, I think, you have had some upside surprise at the sales line, some terrific earnings momentum -- Why there wouldn't be a (indiscernible) to ramp R&D spending? And I am wondering if some of what appears to be some conservative guidance for the second half of the year, in fact, implies that you are going to crank R&D spending as the second half --

Well, there are a number of things in there, Dan. First, the 4 percent increase is one thing, and also when you look at it as a percentage of sales, it has not moved. You have to remember all that, for argument's sake, all of our R&D is done in the U.S., so we're not getting that same kind of inflated inflation that you get from higher currency that is (indiscernible) in our sales.

Secondly -- and I would like to certainly have Vince, since he wears more than one hat here, talk about this -- but we are not just starting out. We've got a program ramp-up of -- (technical difficulty). I think somebody might have their line open and they need to put it on mute -- a ramp-up of programs, and we can't just start these things. There are programs that are expanding, such as advanced drug delivery, which you will begin to see. And Vince, you might just want to put some more --

Well I think, John, that programmatically we are moving ahead aggressively versus our strategy. I think you're right, some of this is just the change in currency. But in addition, some of the earlier term programs that we have started, such as advanced drug delivery, are also partnered. We have partner funding that is offsetting some of the spending. So, it is not internal spending; its external spending.

But in the Bioscience segment, we are aggressively moving ahead on the new instrument platforms, on the Canto (ph) and on the FACSAria. But you know, we're seeing the slowdown in spending against the Aria. So, you have that kind of offset that is going on in the numbers. And I think Bill could -- the Diagnostic business, the R&D is actually up 10 percent. So I think we are seeing aggressive growth there. And then, Gary does have some new programs. But it's really the segment where you do have this outside funding that is complimenting what he is doing.

If there is no other response, just one operating follow-up. Could you just remind us what you think the impact of glucose monitoring was on the gross margin in the spending levels? Obviously, a nice sequential ramp in sales. I was just wondering what you have been doing on the spending side in support of that?

Well, in the quarter, the gross profit impact of the BGM was -- BGM was actually in our second quarter was actually positive for us until last year. When you look at it, though, the timing in the third and fourth quarters, as we said in the first quarter's call, will ramp up significantly and probably -- there's probably 3 cents of incremental spending over last year in those quarters, more in the fourth quarter than in the third.

And when you look at our gross margin increases, on the overall company, we got a little bit of actually an increase this quarter from BGM, but for the year, you would see a decrease probably equal to about -- the charge would be incrementally about $10 million over the prior year, maybe slightly higher than that, with a large difference going to SSG&A, where more of the meters are being recorded. Now, that number is probably, for the year, going to be in the 30 to $40 million range.

Okay.

By the way, Dan, one other comment on R&D. Long-term strategically, the direction that we will take is to add more dollars to R&D. There is no doubt that we, as a team here, believe we need to spend more. That's going to be a planned ramp-up. I don't have a target right now, but it's clear we're going to do that. We need more money in certain of the research programs that we want to get into. But it's too early to talk about them right now. But it is in our medium-term planning.

Okay. Thanks.

Mike Weinstein (ph) of J.P. Morgan.

Just a couple of questions -- on the safety product side, you mentioned you're expecting 13 percent growth for the balance of the year. I know the range, previously, had been 12 to 15 percent, and it is definitely obviously still in that, but sort of close to the low end. Is there anything that is happening in that market that is causing adoption, the U.S. is slow a little bit?

I will let Gary answer that.

I would say that when we guided the range of 12 to 15, it was with the intention that it would be within that range. A little bit of this is beyond our ability to precisely predict to that degree. We did anticipate that the topline growth was slow from what it was previous years. And we've indicated that we think over the next several years it will be in that 10 to 15 percent range, with probably slight declines in the growth rate each year.

In the second quarter over the first quarter, we had a very strong growth in injection, and infusion had moderated a bit on the medical side. In the second quarter, we had very strong growth in infusion, and injection moderated a bit. But, we did have very good growth in injection of the newer safety-engineered needle devices. The moderation more (indiscernible), had been on the market for some time, like needle (indiscernible). That market had largely transitioned through the '90s. That had slowed in the second quarter. So I think that each quarter, obviously, the predictability goes higher based on the second quarter results, where we had 9 percent year-to-year growth. We thought that projecting in the 13 percent range makes sense. And the projections for the rest of the year are higher than that.

Okay. I just wanted to push a little bit on the Diagnostic business. The U.S. business was actually down 1 percent in the quarter. Obviously, there was heavy sales in the food business in the first quarter. Is there anything that may be happening with Abbott (ph) potentially relaunching into the market now? I know it's a small business with the ProbeTec, is there anything else going on that we could maybe point to?

This is Bill Kozy. Not that we are aware now.

Okay. So, it's just that sort of layover from the first quarter?

We really do have a timing impact that was a little for us to experience, but we certainly have experienced that.

And then just one last question on the FACSAria. I think in the past you've given some indication of how the penetration of that was going. And I know we're coming up against the anniversary of the launch. Do you expect that to slow? Or is that going to have a nice tail for the next few quarters as well?

I think we're going to continue to see strong sales of the Aria in the second half of the year. Our pipeline continues to build on it. What you just have to realize is that the comparison is going to be different because we did not have the Aria in the first quarter of last year, and we only sold 14 units in the second quarter of last year. So, now we are into, as you move (ph) into the third and fourth quarter, we will have the instrument out there. But in terms of fundamental demand, it's still very strong for the instrument.

Can you give us any idea of how many were sold in this recent quarter?

We are not giving out actual numbers on the product.

Okay. Thank you.

John Calcagnini of CIBC World Markets.

John?

Sir, please check your mute button. He will check his line. Our next question comes from Glenn Reicin of Morgan Stanley.

Good morning, folks. Nice quarter. As I usually am, I just want to focus on some not-so-encouraging things in the quarter and try to get some explanation. The first is -- if you look at the FX mutual growth of the medical products division, it was overseas up less than 5 percent. And I know that those guys have a goal of growing certainly in excess of 5 percent. Can you talk to what is happening overseas that would explain that?

Gary is going to address that, Glenn.

Sure. I will touch on a few things. One, as we had previously indicated, the Pharmaceuticals Systems growth internationally has moderated quite a bit this year. We were pleased to see that the U.S. growth in Pharmaceutical Systems was very strong in the quarter, even stronger than we had anticipated. But overseas, among other things, we had an unfavorable comparison to last year, whereas (indiscernible) needle sales for smallpox administration were particularly strong, particularly strong in Europe, in fact. And those were essentially one-time opportunities. So that distorts a little bit the ongoing comparison in Pharmaceutical Systems.

And then, otherwise, we had a very strong quarter in Latin America, which probably benefited from the favorable comparison because it had a difficult year last year. Europe growth was fairly moderate, even outside of Pharmaceutical Systems. Canada was soft. Japan was pretty much where we would expected it to be. And on the whole, looking forward, the market opportunity for safety in Europe, clearly, would be at key growth driver going forward. We also do not have the level of growth in IV plush (ph) syringes in Europe anywhere near the level of growth that we are experiencing the U.S. And that has been helping the medical/surgical business in the U.S. Overall, the quarter in Europe for us was not a great surprise; it's pretty much what we had expected, particularly given that bifurcated needle impact. Another thing that has been going well are pin needles. Both U.S. and Europe have been growing a little bit faster than we expected this year.

So, can we get a commitment from you that (indiscernible) growth, whether organic growth or internationally for this business will improve in the coming quarters?

Just give me a second, and I will --

I always like putting you on the spot.

That's okay. That's what we're here for. On an FX mutual basis, our outlook for the year internationally is pretty consistent, a little bit better then what's been year-to-date, but not much. It's pretty consistent with what we have seen a little bit year-to-date, neutral of any foreign currency.

So what is it going to take? Is it safety or Pharmaceutical Systems that improves that growth?

I think Pharmaceutical Systems, we expect, looking a little further out over the coming years, will begin to improve a little bit again. They have had some challenging comparisons to last year, as we had mentioned before, and some customers who had seemed to be taking down some inventory levels. And safety, clearly, if that market develops the way we would like it to, that will be a key growth driver. But it is still a little bit early to predict that in a definitive way.

Okay. And then one follow-up to Dan's question earlier on glucose monitoring. Obviously, you have made some progress, very good progress, in the last quarter. If I add up your numbers, you are saying you're targeting 50 million in sales this year, which is unchanged. But then you said for the year, gross margins are impacted by 10 million, and then SG&A, R&D, 30 to 40 million. Does that mean we are at a breakeven for this year?

No.

So maybe you can elaborate a little bit.

No, we will still be investment spending on BGM. Overall for the year, it is probably going to cost us about 14 to $15 million in OIBT.

So what was the 10 and the 30 to 40 that you were referencing?

Incremental spending over the prior year. The total spend in BGM is much more. We are spending probably $60 million dollars on BGM for the year.

Okay, but you are saying the loss is only 14 million this year?

Incremental.

Incremental over last year?

Yes.

So as a business unit, how much does this business lose?

Well, as I said, I kind of view it as investment spending, Glenn, but it's probably in the 50 to 60 -- probably $60 million.

Okay. And then at what point will you reassess the spending levels, given the amount of effort that you put in this business?

Well, we look at the -- in the normal course -- when you say reassess, you know, this is a business that we're committed to. And it does require heavy investment spending early on, which is, for the most part, the spending on the meters and the placement of the meters, out judiciously, though, in the market that we're going after, particularly with Medtronic and with some of our DEM business. So, we're going to make those investment spending decisions. And we do that just in our normal course.

So up until now, it hasn't been a big deal because of your benefits from FX. So I'm just wondering, in the back half of this year, you're not really -- it doesn't seem to different this quarter than last quarter that you're stretching too much to make the guidance that you've given. Is that a factor of being conservative regarding the P&L in this business in FX? Or is there something else there?

Well FX, you're right, it has been a benefit for the Company as a whole. But I don't really draw the parallel between that and this. I think we have these numbers in our plan. We have our targets and I don't feel uncomfortable about them, nor does anybody else, or I wouldn't have projected them. Or we would not have projected them.

I think one of the things worth mentioning is that this will be, from our projections, the peak year of incurring an investment loss for BGM. (indiscernible) that decline, so it is about a third of their drag (ph), so to speak.

So, Gary, when in your P&L do you have this thing breaking even?

We're not going there, Glenn.

That's fine. I appreciate it.

Quentin Lei (ph) of Robert W. Baird.

Good morning. Nice quarter. I had a couple of questions -- on the Diagnostics side for BD ProbeTec, could you give an update on the atypical pneumonia panel in Europe and talk a little bit about the U.S. competitive environment, now that a competitor has put out a high-throughput instrument?

This is Bill. Let me give you a quick update on the first question. You may have not caught it in the press release, but we have already gotten FDA approval for the Legionella (ph) element of the atypical pneumonia panel, and we did a press release about 4 or 5 weeks ago on that. The FDA submissions for the other two elements of the panel will be done before the middle end of May. So, we are right on track with our submissions. And the product, as we speak, of course, is being -- Legionella is being launched in Europe, followed closely by the microplasma (ph) and the Chlamydia pneumonia panel.

And with respect to the environment in U.S. with a competitor coming out with a high-throughput instrument, is that increasing the sales cycle for system placements for Viper?

I think your question is a good one, and it may be a good anticipative type of question. We've not seen any impact as of right now due to Tigress. John mentioned our Q2 sales and that they were awfully healthy. On a year-to-date basis, our sales continue to be real healthy. Or evaluation stream continues to be healthy. This could be something that comes up for sure in the next six months, but right now we haven't seen that.

And then on Phoenix, what is the update on Phoenix in the U.S.?

Phoenix in the U.S., we have 50 of 54 drugs approved. We have four pending. We still believe that those four pending will be approved some time in the fourth quarter. I would say, we assume that; we're working as closely as we can with the FDA. But our assumption is approval on those last four in Q4, followed by an immediate launch of Phoenix in the U.S.

Thank you. Great.

Jessica San Philipo (ph) of Thomas Weisel Partners.

Good morning. In the Pharmaceutical Systems subsegment of BD Medical, I expected to see a little slowdown in growth. And if looks like growth is actually stronger than expected on a tougher comp. Do you expect to see that for the remainder of the year, and can you give me a little more color on what is going on there?

Sure. This is Gary. I will be happy to do that. As I mentioned before, we also were pleasantly surprised by a stronger U.S. growth in Pharmaceutical Systems, and had been anticipated for the quarter. And that was strength in the core product line, which are glass pre-filled syringes with several U.S.-based customers who came in stronger than they themselves had forecasted to us.

Going for the remainder of the year, we don't anticipate remaining at that level overall. And you're right, we did have a tough comparison. International growth, as I mentioned before, was essentially flat on a currency neutral basis, and there were some tougher comparisons -- Europe bifurcated needle, also Japan had very strong year last year with new customers that came on and that moderated. So our outlook for the year is -- we reported 19 percent growth in the second quarter for Pharm Systems. And our outlook for the year would be low double digits.

Okay. Great. That is helpful. And then just to clarify on ProbeTec -- I want to make sure I have my numbers correct. Are ProbeTec sales actually down a little bit sequentially or flat this quarter? And is that more of a result of easy share gains being over, and like you said, not being driven by Tigress?

Are you talking about the first quarter to the second quarter?

Yes.

Yes, that is really just timing. There's a series of public health events in the U.S. and some related, just purchase habit activity that have had that impact. If you were to look at the underlying activity around placements and contracts and so forth, you would feel awful good.

Okay. Thanks very much.

Steve Hamill, Piper Jaffray.

Good morning. I was wondering if you could talk a little bit more about the strong cash flow results here in the quarter, particularly on the balance sheet side? If you can give us any sense as to where you were better than expected.

We're pretty much right on target, Steve. Our balance sheet data is looking good. Our days outstanding on our receivables are at 52, which is quite low. Our inventory turns continue to improve. And our inventory, future day supply, is right around 150 if you look at it. So, the operating numbers were really good. There were no big surprise, no big single numbers that were outside of our expectations. We should be comfortably over $1 billion in cash, total cash flow, operating cash flow for the year.

Okay. And then just going back to some of the questions on ProbeTec. I'm curious as to whether or not the pneumonia test, in your mind, can give you the continued strength that you've seen there. It seems like the big share gains from Abbott's departure from the Chlamydia and gonorrhea market -- a lot of that movement has to be behind you at this point. Is it really the pneumonia test that carries ProbeTec at these kind of growth rates into the future?

No, the pneumonia test -- there's probably 6 or 7 million cases worldwide in terms of the market that we're going after. So the pneumonia is not going to bring the kind of impact that we got from the Abbott exit. But we continue to feel good about market expansion and molecular placements of the existing instrument. And we think if you couple that with the atypical pneumonia, those two things together can still create a pretty healthy growth momentum.

Are there any other tests that you can talk about that we should be thinking of in terms of menu expansion there?

Not at this time, but maybe a question for a few quarters from now.

Okay. Thanks.

Bruce Cranna of Leerink Swann.

Good morning. Just to follow up a bit on that question on ProbeTec. Any chance we see data or some sort of publication or abstracts at ASM with respect to Legionella or the others?

I tell you, I suspect -- I don't know the answer to that. That is a very fair question and I don't know what is scheduled. Sometimes there are poster sessions, but I have to say I don't know. We can follow up and we'd be glad to get you a response through Pat, if that is helpful.

That would be great. Thank you. And then, just as a quick follow-on -- John, I think in your opening comments you talked about Clontec just kind ticking things off. It sounds to me like you are implying that it kind of bottomed, that you thought things looked reasonably good on that sales line. And I am just kind of wondering, looking at the release, you're still struggling against some tough trends here, certainly O.U.S and U.S. to an extent. Did I misunderstand your comments? Or if, in fact, you think there is a bottoming going on there, what are you seeing that perhaps other folks aren't seeing?

Let me have Vince give you some information on that, Mike. My take-away was, or should be, is that we think we are nearer to the bottom in terms of the downward trend that we experience. It has lessened, but it has been prolonged, frankly. We do think that there's an end in sight. Vince, you might just want to talk to that.

Well, that's right. On and reported basis, it was down about negative 3 percent, and on a performance basis, more like negative 8 or so, which is half of the decline rate from previous. It is clearly that the strategy that we have been implementing this year, in terms of a focused key account strategy, focusing the sales force on product lines that have continuing revenue and are not one-time sales, is starting to make an impact on the numbers. And that's why we're seeing that rate of decline starting to drop. We expect it to continue to improve in the second half of the year, and if things go well, it could be pretty much flat in the second half of the year. So, as John said, I think we are getting close to the bottom. And there's an improving -- I just think that what we call the industrial business, which is kind of pharma/biotech, is starting to buy again in a more normal pattern, and that's starting to help the results.

Okay. And one last sort of broad macro question on the in BD logic. And John, maybe this is for you. Do you feel, from a standpoint of where you are -- I know retail is not overly important today, but in terms of shelf space and seeing the meter on shelves in retail locations across the country and/or where you are with respect to various formularies, and I would imagine that there are several score of important formularies with which you would care to show up upon, or certainly have a compelling position in. Where do you think you are? And I guess I am more interested from a formulary perspective, because we keep hearing from some of our folks in the field that maybe you're not quite as visible. If it does come down to economic choice for the patient, from a formulary perspective, you might be still at a bit of a disadvantage there. Can you to talk to that a little bit?

I think we can. I think Gary would be best.

I would be happy to. We've actually been making a lot of progress on managed care coverage and getting to the level that we would hope to be at. And before I talk more specifically about that, let me also mention that -- because you had mentioned the importance of retail, vis-à-vis the Medtronic relationship. Roughly 60 percent our revenues are coming outside of Medtronic-derived sales, and roughly 40 percent at this point, a little bit over 40 percent, coming from Medtronic-derived sales. Included within the Medtronic-derived sales number are sales that do go through the retail channel, but as far as we can track, are coming through Medtronic’s customer base. And over time, we would anticipate that the Medtronic-derived sales would be a lower percentage, just based on the size of the pump user base versus the overall market. Clearly, it has been an important part of our initial entry strategy.

On the managed care side, just to start a bit at the top there. Roughly 288 million people in the U.S. and about 200 million people out of the 288 have some form of managed care coverage. PBMs, pharmacy benefit managers manage approximately 170 million lives out of the 200 million. As of now, actually as of about mid-March when we had signed a number of additional agreements, we've achieved second-tier coverage, which is what we have been shooting for, because first-tier tends to be reserved for generics. Second-tier coverage, which should put us pretty much on equal footing with the other players, for about 65 percent of those 169 or 170 million lives. As of March, we had signed three additional new agreements with nationally-known PBMs for strip coverage. And that's becoming, at this point, more of an enabler now than a barrier. Early on, it was a barrier because we did not have the coverage. Once you have it, it becomes an enabler for sales.

Among the HMOs, there's about 80 million covered lives nationally. Some of those are managed by PBMs as well. And we are about 50 percent now at the second-tier level. And we have some major HMOs where we are at 100 percent second-tier coverage within those HMOs.

We've also been making good progress on that DME side. Some of the sales growth that we saw in the second quarter was driven through DME and we have access to 100 percent now of the 40 million Medicare lives that are reimbursed through Medicare Part D. We also have broader coverage in managed care in general for the length products, the Paradigm products, than we do in base product, because they tended to adopt that pretty quickly. So, there's been a lot of progress there. There's still a few that were a Tier 3. But relative to our market goals, we are satisfied that this is not standing in our way. And as I mentioned, I think it's really becoming more of an enabler for us.

I had just one final comment. One way of not measuring our progress would be just visually looking through the retail stores and seeing where we are on the shelves, because that's not been a conscious element of our strategy. Our meter sampling has been much more targeted than that.

Thank you.

Lawrence Keusch of Goldman Sachs.

Hi. Good morning everybody. A couple quick questions. I guess a bigger strategic question for John -- obviously, the cash flows continue to be very, very solid, and you're confident of better than a billion from operations this year. How should we think about the uses of that cash as we move forward here? Clearly, you increased the dividend and you're going to be repurchasing stock, but how do we think about what the focus is going to be?

Clearly, those are two of them. I always say this, while the dividend is in the hands of the Board, our earnings, if we're going to keep our payout ratio where it is, which is about 28 percent, and our earnings go up 15 percent, we're going to have to increase the dividend commensurately, or we would have that drop. And that's not in our planning.

Share repurchases are still a big part of the strategy to return dollars to shareholders, so that will still be there. Obviously, with all that said, there's still excess cash flow that's a nice problem to have, of the half a billion to more in this year and future years -- that we have the opportunity to look at. We are not -- I think, we as a team, have learned a lot about acquisitions. And just having the cash doesn't mean you are going to make the acquisition. So, while we will look for specific opportunities, they are much more likely to be plug-and-play kind of smaller targets. That is no change from the past. We said we would do that. And we'll look at opportunities also to potentially increase share repurchases and continue to drive earnings per share with that. Beyond that, Larry, I really couldn't say much else.

Okay. Great. Thanks. And then just two quick diabetes, blood glucose meter questions. For of all, I can't remember if we ever saw an FDA clearance of alternate site usage for the product. And then, separately, are there any visible milestones that we should be thinking about in terms of the Medtronic agreement? We obviously have the linked product, but any thoughts you can give us on, sort of, the Next Generation to the product, or things that we should be looking for?

On the first part, your memory serves you correctly, there has not, to date, been a clearance for alternate site testing. And that's not a result of any issues, but more so as we were working through the recall, which as John mentioned, has gone -- we never like to have recalls, but it went very smoothly. We don't see that being an issue going forward, but it did require us to redeploy our technical focus and resources to that activity, (indiscernible) vis-à-vis the submission. But we are working on the alternate site submission and that is, we believe, more a matter of when. Of course, with final determinations being made by the FDA.

On the Medtronic side, there's really not (indiscernible) I would be at liberty to talk about looking forward, other than to say that we continue to collaborate technically with Medtronic and that the technical collaboration has worked very well to date. And both within and beyond the Medtronic relationship, we are working on future generation systems.

Okay, Gary, I take it you have not submitted it yet for alternate site. Would you make an announcement on that when that happens?

I don't see any reason why we would not announce the submission.

Okay. Thank you.

James Terilli (ph) of Capital Research.

Good morning, everyone. Just following up, John, on your earlier comments for the cash flow. Could you feel in the blanks for me -- I missed what that quarterly cash flow was. But more importantly, what CapEx will be this year and what you're spending it on? And then maybe a quick outlook going forward there? And if I heard you correctly from Larry's question, there's 500 million excess this year after the dividend and repurchase? I just wanted to clarify that. Thanks.

Hi, James. Good to hear from you. For the first six month, we have about $525 million in total cash flow. The first quarter was about 175, if I remember. I will have one of the guys here check on that. Our guidance for this year in CapEx has been at 275 to 3. We are tracking -- we've spent 108, so you might say "how the heck could these guys continue to spend." But some of the programs that we're in -- for instance, very (ph) successfully has been the pushbutton blood collection line. We've just recently, as a matter-of-fact, approved more spending on that, which will be absorbed within this budget. So there are big direct projects. I think what the Company has been able to do, is really get at some of the smaller amounts that added up to a lot of dollars going out. So when we look forward, if you use that 275 to 3 for us in terms of CapEx, that would be about right.

When we think about where we're going in the future, that should take care of that. And this year -- I mean, when you talk about the dividend is about $150 million, and repurchases should be in the 350ish, or maybe slightly more, dollars -- so that's about 5, and that leaves you a half a billion dollars. Now, we do spend, you're right, on capital, but there's an awful lot of free cash flow that resides after that.

Thanks very much.

Spencer Numm (ph) of SG Cowen.

Just one quick question about the topline for the rest of the year. If I remember right, the guidance was 7 to 8 percent including FX. I was just curious what percentage of that 7 to 8 percent would be FX? And also, assuming the FX trend will have some impact, I see a little bit of a lower guidance at the topline. And I was wondering if there's any specific segment that you feel is going to be growing less than what has happened over the last couple of quarters?

Just starting from that, no I don't. I think that same-store sales, if you will, of the businesses are about the same, with the exception of probably Biosciences, slightly different. But there's probably 2 to 3 percent FX in that number, versus the first half of the year when we were getting like 6. And that's mainly the euro. At the end of the day, the euro is the key for us. Even though we have significant operations in the rest of the world, that is the one that tends to move the foreign exchange.

Thanks.

I guess we can take one more call, please, operator, if there is one.

And your final question comes on Glenn Reicin, Morgan Stanley.

Just a follow. You talked around Phoenix. Did we talk to Phoenix exactly, in terms of how it did internationally? In terms of either placements or sales?

We did not, Glenn, but I will let Bill talk. We have not been talking placements, but certainly we would talk sales.

The sales for the quarter are up about, quarter-on-quarter -- this is Q2 '04 versus Q2 '03 -- are up about 40 percent. That is, of course, just driven primarily by what is going on in Europe. New launches in the U.S. and Japan, once again, do not come until Q4.

Okay. So you're happy with that launch that's on target?

We're really comfortable with where we are at right now. Just as a reminder, this product is targeted at the automated market. By far, the most sizable part to the automated market are the U.S. and Japan. So at this stage, given the opportunity we had, we're pretty comfortable. But we really are focused heavily on the Japanese and U.S. markets going forward.

Okay. And then just one final question for Gary. Are you totally comfortable right now with quality of the BGM systems that are out there? I had spoken to one user, in fact, last week who said he was having some problems with false ratings. And I don't know if that was just by chance or what -- (indiscernible) anecdotal. How do you know that Nova is producing a quality system here?

A couple of things. One, just a comment on the condition that caused us to do the recall, just to clarify. The system wasn't giving false readings, but rather giving E-3 (ph) error codes, which is no reading. It is a fail-safe that is designed into the meter to not give a reading if certain conditions for getting an accurate reading are not met. That fail-safe condition was at a higher level than our specifications would have called for, and that we felt was appropriate. And that is why we initiated the recall, even though the potential for patient hazard was extremely low. And our definition of "patient hazard" would have been if people, after many tries, were unable to get a reading and they sort of gave up, which would be something of a remote circumstance.

That being said, the interventions that we made have been effective at bringing down the E-3 readings to a level below what the specification would call for. It was not designed to eliminate those readings entirely, because there is a purpose for those readings. And one of the challenges we face is that, because the blood sample is so tiny relative to what people are accustomed to, there is some adjustment to the sampling because you're dealing with a smaller sample in the strip.

Beyond that -- so, the short answer is yes, we're satisfied that the action's we've taken with the recall and the replacement product, which is being rigorously quality-tested both at Nova and at BD, is within the proper specification. We also will be making some further changes, some further revisions to the software and the meter going forward that should bring the potential for an E-3 reading even down further to well-below what our original specification was. So everything that we're shipping today is meeting rigorous requirements, including testing that is occurring post manufacturing. And that should further improve going forward.

Perfect. Thank you.

Okay. Well, thank you very much for your calls and attention, and we will be back to you again next quarter. Thank you very much.

Thank you for participating in today's conference call.