Becton Dickinson and Co (BDX) 2005 Q1 法說會逐字稿

Hello and welcome to Becton, Dickinson's first fiscal quarter 2005 earnings release conference call. At the request of BD, today's call is being recorded. 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. Ms. Spinella, you may begin.

Patricia Spinella - Becton, Dickinson & Co. - I.R.

Thank you. Good morning everyone and thank you for joining us to review our fiscal first-quarter results. Today's call is being simultaneously webcast and will be available for playback through Wednesday, February 2 on the investor's page of the BD.com Web site, or by phone at 1-800-475-6701 for domestic calls and 1-320-365-3844 for international calls. The access code is 765773.

During today's call, we will discuss some non-GAAP financial measures with respect our performance. The reconciliation of these non-GAAP to GAAP measures can be found in our first quarter press release and the related financial table. A copy of the release and the financial table is posted on the investor's page of the BD.com Web site.

We will also make some forward-looking statements and it's possible that actual results could differ from our expectations. Factors that could cause such differences appear in the first quarter press release and in the MD&A section of our recent SEC filing.

Leading the call this morning is John Considine, BD's 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.

Thank you, Pat, and good morning everyone. I assume you all have our earnings release and the attachments we sent out this morning and have had an opportunity to review them. As usual, we'd like to devote as much attention and time as possible to answering your questions during the call. Therefore, I will be brief in making some comments about the quarter.

Similar to the format for the last earnings call, there are three topics I would like to address. First, we want to ensure that you understand the reconciliation of our reported to pro forma earnings-per-share for the first quarter of fiscal 2005 and 2004. Second, I would like to describe some of the key drivers of our first quarter pro forma earnings per share growth, and third, we will elaborate a little further on our guidance for the second fiscal quarter and the full year 2005.

Beginning with earnings per share, I would suggest that you turn to the table we included in the press release about one-quarter of the way down, immediately preceding the section on shared base compensation. This table was provided to reconcile diluted earnings-per-share from continuing operations to pro forma diluted earnings-per-share from continuing operations for the first quarters of fiscal 2004 and 2005.

For the fiscal 2004 first quarter, there was only one adjustment. Beginning with diluted earnings per share of 48 cents, we add back 11 cents per diluted share recorded in connection with the voluntary recall and write-off of certain blood glucose strip inventory and other actions taken with respect to our blood glucose monitoring products last year. Although that was a total of 59 cents, due to rounding, the pro forma earnings per share from continuing operations in the first quarter of fiscal 2004 are actually 58 cents.

For the first fiscal quarter of 2005, we begin with diluted earnings per share from continuing operations of 74 cents. From there, we subtract the 4-cent reversal of tax reserves related to the favorable conclusion of certain international tax examinations. We then subtract 2 cents related to certain discrete tax events that caused the quarter's tax rate to vary from the expected effective tax rate for the year of about 25.5 percent. The final adjustment is to add back the 3 cents recorded in connection with share based compensation.

As you can see from the reconciliation, these adjustments bring us to pro forma earnings per share from continuing operations in the first quarter of 71 cents versus 58 cents in the prior year's period. The 71 cents was ahead of our guidance by 9 cents and represents a 22 percent increase over last year's first quarter pro forma diluted earnings per share from continuing operations.

Moving to the second topic, that is what drove pro forma earnings per share growth, I will begin with our revenue growth of 9 percent for the quarter. That growth reflected a 3 percent benefit from foreign currency translation in particular due to the strong euro with each of our segments benefiting. More importantly, it reflects the organic growth drivers of safety engineered products, BGM, pen needles, the BD Phoenix and BD ProbeTec ET platforms and the recently launched BD FACS Canto.

Looking at revenue growth by segment, we achieved double-digit revenue growth in our BD Medical and BD Biosciences segments, and as expected, had modest growth in the BD Diagnostics segment due to a tough comparison to last year's exceptionally strong first quarter sales of flu tests in Japan and the United States which did not recur in this year's first quarter.

With respect to safety, U.S. sales of our safety engineered products, which are sold by both BD Medical and Preanalytical Systems of our BD Diagnostics segment, totaled $212 million. This represents an increase of about 12 percent over last year. As we announced in our last conference call, we've begun to report international safety sales, which totaled 60 million this quarter versus 44 million in last year's first quarter. About 10 percent of this increase is related to the strong euro.

Sales of our blood glucose monitoring products totaled 15 for the quarter, which is consistent with the guidance we've provided during our last call and our guidance for fiscal 2005 remains at about 75 million.

In terms of earnings, in addition to the overall growth in consolidated revenues, favorable product mix and our operational effectiveness programs delivered a 60 basis point increase in pro forma gross profit for the quarter. And as you will note from the pro forma schedules we've included in the press release, all pro forma expense numbers I refer to exclude shared base compensation expense, which I will touch on in a minute.

Pro forma SSG&A expense, as a percentage of sales, improved over last year by about 150 basis points for the quarter. Our full-year expectation is improvement of about 75 to 100 basis points. Pro forma R&D spending increased about 5 percent in absolute terms over last year. This reflects 10 percent growth in new programs in each of our three segments, which is consistent with our plans to accelerate R&D spending and is offset by lower spending from molecular oncology diagnostics related to the completion of our cancer biomarker discovery program in the third quarter of fiscal 2004.

All of this led to strong cash flow of about $250 million from operations, of which approximately $112 million was used to repurchase about 2 million shares of common stock and $50 million for capital expenditures. And by the way, cash flow from operations would have been about $300 million, if you exclude the pension funding that we did of about $50 million in the first quarter.

As I'm sure you have noticed, we have adopted FASB Number 123 as revised, which requires the expensing of stock options in addition to all equity-based compensation. This adoption, which is somewhat earlier than would be required, aligns the accounting for stock options with the accounting for our restricted stock awards which are granted this quarter under the new long-term incentive program. This program includes performance-based and time-vested restricted stock awards in addition to stock options and replaces our prior program, which consisted only of stock options.

To summarize our pro forma diluted earnings per share from continued operations for the quarter of 71 cents, it was 9 cents higher than our guidance. About 3 cents was attributable to favorable foreign exchange and about 6 cents was attributable to better performance, of which we estimate that about half is related to timing within the fiscal year and about half will flow through and benefit the year.

The third and final topic I'd like to cover is our guidance for the second fiscal quarter and fiscal year 2005. Once again I suggest you turn to the table we included in the press release near the end of it and immediately preceding the section on the conference call information.

Beginning with the second fiscal quarter, revenue growth for the Company is expected to be about 8 or 9 percent, with revenue growth for BD Medical being between 6 and 7 percent, BD Diagnostics and BD Biosciences being 10 to 11 percent. BD Diagnostics growth reflects a favorable comparison to the prior year, principally due to expected higher sales of flu products resulting in a year-to-date growth of about 7 percent. These ranges include expected benefit of favorable foreign exchange, particularly due to the euro in the quarter.

Pro forma diluted earnings per share from continued operations is expected to increase in the 13 to 16 percent range from last year's recorded earnings per share of 62 cents. Pro forma diluted earnings per share includes the impact of positive foreign exchange we currently see in the second fiscal quarter with the euro at about 130. It excludes the anticipated 4.5 cents from expensing all share based compensation and 2 cents from the timing of recognizing certain items that cause the second quarter's tax rate to be higher than the expected effective tax rate for the year of 25.5 percent. By the way, in all cases, that 25.5 percent does not include the 4 cents I referred to at the beginning of this talk.

Looking at fiscal 2005, pro forma diluted earnings per share from continuing operations is expected to increase in the 13 to 15 percent range from last year’s pro forma diluted earnings per share of 256. This estimate excludes the 4 cent benefit in the first quarter related to the reversal of the tax reserves and the anticipated impact of 17 cents resulting from shared base compensation expense.

Full-year revenue growth for the Company is expected to be about 8 percent with revenue growth for BD Medical being at 7 to 8 percent, BD Diagnostics being in the same range, 7 to 8 percent, and BD Biosciences being in the 9 to 10 percent range. This projection includes the benefit from foreign exchange again primarily due to the euro that we have seen in the first half of 2005 only.

We continue to look for U.S. sales of safety engineered products to increase about 10 to 11 percent over 2004. We anticipate growth of international safety sales will be at the high end of our guidance, which is in the range of 15 to 20 percent, or about 240 million. Very important to our innovation effort, R&D spending should increase at about 12 to 15 percent. We expect to generate in excess of $1.1 billion of net cash from operations. Again, that is also including the pension contributions. Our capital expenditures are expected to be in the $300 to $325 million range. We expect to continue share repurchases and spend about 400 to 450 million for the entire fiscal year. We continue to expect improvement in gross profits of about 30 to 40 basis points, notwithstanding the current impact that increased resin prices are having on our cost of goods sold.

SSG&A as a percentage of revenues is expected to show a 75 to 100 basis point improvement. And again, excluding the 4-cent benefit from reversing those tax reserves and the anticipated impact of 17 cents resulting from share based compensation, our effective tax rate is expected to be about 25.5 percent. And again, this will vary from quarter to quarter.

And finally, our guidance does not include the impact of taxes that would result if BD were to repatriate certain undistributed earnings of foreign subsidiaries under the American Jobs Creation Act of 2004, which we are currently reviewing.

So in summary, we are off to a very solid start. I think our pro forma expectations talk for themselves in terms of what we think our true earnings increases will be. And with that said, I believe we can begin the Q&A. And in order to allow for broad participation, we would appreciate it if you would limit your limit your questions to one plus a follow-up.

Mike Weinstein, at J.P. Morgan.

Hi, it's actually Kim Weeks for Mike Weinstein. Thanks for taking the question. Maybe we can just kick it off with talking a little bit more about your plans for repatriation (technical difficulty) about -- your -- kind outlined pretty clearly your share repurchase plans. I'm just wondering at this time if you have a good sense of how much you think you will bring back, and maybe to what, if any, restrictions you have?

As I believe we probably said on the last call, we have ample undistributed earnings in foreign subsidiaries. We continue to think that the number that we will repatriate, which is subject to abort plan as you know, would be more in the $500 million range. We're still waiting as everybody else is for a little more guidance on exactly what the letter of the law will mean. But in any event, we do believe by -- within the second quarter, we will have a determination, and we think it is more likely to reside in the $500 million range on which taxes would range somewhere between probably 6 to 8 to percent.

Have you talked at all about your likely uses for the cash?

We have discussed the potential uses, you know, I've stated in the law being R&D and other things. And as you know, we have already reduced debt by calling one issue of $100 million. But until we go to the board with a plan, I prefer not to go much further on that.

Okay, thanks, that's helpful. Actually just one more on the R&D side and then I will drop -- sorry, the gross margin side. Gross margin actually came in at about 90 basis points ahead of our estimate, and I think we talked on the last quarter call about looking for a year-over-year gross margin improvement of about 50 to 70 basis points. And I guess we're just wondering here if we should be thinking higher than that and kind of if so, what do we think is driving, the main driver of that gross margin improvement? Thanks.

Actually for the year, you're right. It is a little hot in the first quarter. Some of that is due to mix, some of that is due to foreign exchange. We also haven't fully felt the impact of our resin prices. As you know, a not insignificant piece of our portfolio uses medical grade resins. Those prices, while they don't exactly track oil, are certainly highly influenced by oil and we are seeing big year-on-year increases, most of which will accrue to us for the balance of the year. Therefore, the guidance that I had just kind of given, and I know there were an awful lot of numbers, that we think that for the year, you would see pro forma same store kind of sales, gross margin, improve by 30 to 40 basis points still stand. Again, the first quarter was a little bit of an anomaly. And as a matter of fact, the second quarter while positive to its prior year, will be somewhat less I think than this quarter. But for the year, we should be up 30 to 40 basis points, and that is our present guidance. I think we can take the next question, please.

Timothy Lee, Merrill Lynch.

Good morning. If I could just get a little better clarity on the R&D spend. I think for the full year, you're targeting 12 to 15 percent, yet in Q1 we were just up 5. Do you see a marked step up starting in the second quarter, or is it going to be more back-end loaded?

It will begin in the second quarter for sure. I mean, if you did kind of the simple math, we'd probably need to be spending $70 million per quarter for the rest of the year. That can vary by a few million either way. But basically, you would look for that kind of spending, which would bring us around in the 270, 275 range for spending, and that would support that kind of a number that I had indicated.

Thank you. Quick question on the new flow cytometry reimbursement rates. They have gone to more of a tranche level instead of a per specific marker level, which I think to some extent, could lower reimbursement rates. Are we seeing or are you seeing any impact of these new reimbursement rates on some of the reagent uses on the flow side?

I think Vince will take that. You're talking if people don't understand on the call or have not caught up with it, this is where the new codes will reduce payment for certain types of testing, particularly with leukemia and lymphoma, right?

That's exactly right, John. We have not seen a significant impact in the business. We're talking about a piece of the business that in the U.S. is maybe about 25 million. We think if we do see a shift, it will occur from small accounts, maybe outsourcing some of this work to the larger reference labs where they may have better economics. But right now, we are not anticipating a big impact.

Great, thank you.

Rick Wise, Bear Stearns.

Good morning, John. A couple of questions. First, can you talk a little bit about the R&D spending? Clearly, you are stepping up, clearly, we're seeing a lot of growth. When we look at the growth drivers for '05, it seems like that's going to be mostly safety and facts among other. Are there going to be any new growth drivers? What is in the pipeline? Can you give us any perspective on all of that?

Right now, first of all, let's take what will continue to give us the growth this year. Clearly, you are right -- safety will do it. There are many other things. ProbeTec is, Phoenix is contributing in Bill's diagnostics business, as is safety in that business. And in Gary's business, and Gary's on the line and he can fill in the blanks here, there are products that people don’t talk much about but particularly flow, which is giving us growth-- not flow, what am I thinking about?

Flush.

Flush, sorry. Flush, which is giving us growth. So there's any number of products. In Vince's, it's the Canto, it's continued strength of the Aria, it's reagent usage. But the important thing about the R&D spend, while it's still early and we certainly don't want to hype its benefit is that these programs reside in all three businesses and not any one singular business. But Gary and Bill and Vince, if you want to just put a little flavor on that.

Sure, I will comment for medical. A few things, one just to concur with what John said. We do expect to get continued growth for safety and we continue to invest in safety. And we were pleased with the international safety growth this quarter and we think that growth will continue over the coming years. John mentioned pre-filled flush syringes as well, which have been a good growth contractor. And the core safety business in the U.S. continues to grow.

Beyond that, we have several areas of significant R&D investment. One in which we have talked about, which are advanced drug delivery devices that are a little further out, there's a lot of interest in that category because those devices have therapeutic benefit in the delivery of the drugs themselves. it's a little bit longer development cycle, but that's an area we're investing in. We're investing in another major technology initiative that we haven't talked at all about yet, but we will at the appropriate time.

So within that overall R&D spend are several chunks of spending on very well-defined initiatives that aren't -- they're not going to have a 2005 impact, for the most part, won't have an '06 impact. But starting in '07 and beyond will be new things for us to talk about.

Also, I just want to mention in the area of safety, and I've mentioned this in the previous calls that we're bringing out some new devices that have both health care worker safety and patient safety benefits. One of them was featured in this year's annual report, the BD Nexeva catheter, which is a limited launch this year but will be more significant launch starting in '06. And that device not only affects health-care workers, but our expectation is that it will reduce the potential for bloodstream infections for patients which are a major cause of mortality in hospitals. So the investment's going to good use.

Vince, you want to go, and then Bill can?

Sure. The increase in R&D spending in biosciences is against the live cell imaging area, and that's against the pathway platform resulting from the Atto acquisition. In fact, Atto contributed about 1.7 million in the first quarter. So we'll be working our way through an entire platform and reagent strategy around lifestyle imaging, and so in addition to continuing to drive all of the FACS platforms.

In the near-term, the focus, as John already referenced, is on design. And I would emphasize that safety is both the U.S. and international. It is on the Phoenix and ProbeTec platforms and we are very encouraged by the quarter on Phoenix, though it's very early. And we spent significant time in terms of our international sales effectiveness and performance in the diagnostics segments over the last year or two and we have seen some early signals of improved performance, particularly from Europe, Asia and Japan. So in the short-term, we're focused in those areas. In the longer term, as I think we've mentioned before, we continue to spend reasonable mounts of R&D money on biomarkers and the applications of those biomarkers in diagnostics.

John, if I could have one follow-up. Some calls, you quantify the quarterly performance growth or units or outlook for some of the products. Can you talk to Phoenix ProbeTec and maybe the two effects, the Canto and the Aria, just what happened and what should we look in a little more detail?

I think it's probably better if I have Bill and Vince, they are much closer to it. Bill, you want to start?

Sure. Let me just start with ProbeTec for you, Rick. Kind of characterizing this at a high level, think about us in the quarter as having very strong double-digit growth ex-U.S. on the ProbeTec platform, and that's driven by a number of launches we've described to you over the last year or so where product is now out and being sold. Think about it as having a solid growth again in the U.S. and a combination of those two things continues to create a healthy on-plan performance for ProbeTec on a worldwide basement basis.

Placements were right on target for the quarter. Switching over to Phoenix, here again, you know where we're at in this stage of launches here. We're just out in Japan and the U.S. But given the modest comparison, we still had over an 80 percent sales increase year-on-year worldwide with Phoenix. We did launch the platform in Japan, it's being rolled out to our sales organization right now. The MHLW approvals came through on January 6, so we're comfortable with that. That was a key milestone for us. It's way too soon to assess the U.S. impact at this point in time of the Phoenix launch, but we're right where we want to be with our placements. We've already got double-digit placements underway and we will see how many of those we can contract over the next 6 to 9 months. It is going to be the end of the year, Rick, before we can give you real insight as to the U.S. Phoenix impact. But let's just say that we're encouraged by the response to epicenter, both in the U.S. and Europe, and we're particularly pleased with the first quarter sales of Phoenix in Europe, again driven by higher-than-expected interest in the software capabilities of the instruments.

Okay and Rick, for the Bioscience businesses, I already mentioned the cell imaging contributes 7 million. The total flow business, excluding the Pharmingen business, was up at about 16.3 million and roughly about half of that came from Canto. And the other growth drivers were the LSR2, the FACS count, which is a small instrument that we're selling into really the developing world for CD4 testing. And there's quite a few governments ramping up their monitoring programs, working with the WHO, and that's also driving about 10 percent reagent growth.

Thanks very much.

David Lewis, Thomas Weisel Partners.

Good morning. John, I want to start with a financial question. We've been seeing a fair amount of dramatic SSG&A leverage. I wonder if you could talk about sort of the silos of efficiency you're seeing, whether they be supply chain, cost control and kind of where we are now and where could some of these efficiencies go, either on a relative or absolute basis?

Just to remind you again, we're looking for 75 to 100 basis points there. One of the big things that is benefiting us is we were faced with putting in our SAP system Genesis. We are by that, it's in. As we're kind of fond of saying, we're kind of now at the beginning to really squeeze more and more efficiency out of it. But those kind of ramp-up costs that we've faced at one time are now gone. We have a good deal of expense that we had faced on pension, but you know right now where we are, even that we still can get cost there, we have our estimate return down at 8 percent. The discount rate, which we now have very little control over because it's really a function of -- the interest rate environment actually went down while everyone thought it would go up and that cost us a little bit of money. But we're not seeing as much of an increase in pension as we had before. While we've continued to spend to support BGM, and that's a big -- not a big -- strain on the whole company, but certainly not an insignificant investment. On a year-on-year basis, it's not as big as it had been. And another one that would have to be mentioned is by settling RTI last year, we are out of the business of paying those legal (technical difficulty) so finding its way into the process that we use in SSG&A, and we've continued to drive that process to take waste out of it and take cost out of it.

Maybe a related question either for John or for Gary. Gary, I think last quarter, BGM was gross margin profitable. Do you see that maintaining throughout '05? And how do you see the interplay between gross margin profitability and obviously EBIT profitability through higher spending? But if there are new alternate site indications or what have you, how do you see that playing out throughout '05?

I would comment briefly that it's correct that BGM is gross margin profitable and there was a pretty, a very positive shift over last year to this year and we would anticipate that to continue to be the case. The largest single expense in BGM is meter sampling and to establish position in the market means you have to do quite a bit of meter sampling. So I think that the bottom-line return will be an outgrowth of doing the sampling to grow the top line and letting the improving margin flow through and that will take some time. (multiple speakers) John, maybe just add to that.

David, just so that we can kind of put some scale on that, last year, we had talked about a total net investment spend, so it took the positive gross margin and then applied against it the SSG&A, which as Gary said, is a not insignificant investment spend in the R&D. Our total investment spend was $57 million dollars last year. So that was, -- I don't want to say negative return, but that's what it was, in terms of the P&L. This year, there's an improvement over that, probably in the range of about 10 percent, and that's because we're getting more margin up there. But we still continue to invest heavily in SSG&A, in terms of the meter placements. And that absolute spend is beyond what we would have spent last year in 2004.

And John, you cut out a bit there. Was that a net spend of 6 to 7 million?

I said a net benefit probably of 6 to 7 million in terms of less investment spending overall, so versus (multiple speakers) 57.

One last quick one for Vince, and I will jump back in queue here. On the FACSCanto, I know it's early and you talked about it being a $20 or $30 million business, but with the Quest contract and the strength of FACSCanto, would you be comfortable at this point saying that there's some evidence that you may be taking share from Beckman in the clinical segment?

Well, I really think it's too early to say that. What I was saying on the 20 million business was that the 20 to 25 was the reagent piece that was affected by the new legislation. But I would say it's too early to say we're taking share. We just got started.

Thank you very much.

Bruce Cranna, Leerink Swann.

Just a follow-up on the Canto question. Maybe it would be a little helpful if you could just give us some color on -- and maybe this is a question really on Canto and also LSRII and FACS. But when you look at your placements let's say year-to-date, can you give us some sense percentage breakout between replacement sales, or how are you doing at new accounts?

I really couldn't off of the top of my head here, but I will kind of give you a little color, though. I would say right now, it's probably heavily weighted towards replacement accounts. Now realize, we're just getting started in the U.S. It was our first quarter and we've been selling the product for a longer time in Europe. I couldn't give you exact percentages. We have picked up some new accounts as in Europe that would be more in Europe than in the United States at this point, just because of the timing of the program.

That's helpful. And then could someone just quickly, John maybe I'll throw this at you. I think you said Logic in the quarter was 15 million, which I think was flat sequentially. But you're thinking still for the year 75 million, so I'm just trying to get a handle on your opinion. What kind of gets us moving from what looks like a little plateau here to 17, 20, 22 million a quarter going forward?

Let me do that, and maybe Gary might want to chime in here. I think the, just as you say, we thought that this quarter would be flat with the prior year's quarter, and it was. We still think our guidance remains at 75. And our look see is about just what you've said. It's going to begin to build in the second quarter and needs to average -- the math's easy -- 20 million over the next three quarters, but it won't be that kind of a flat result, but it will build from the teams and it will build up to over 20 over the year. And Gary, you might want to talk about some of the drivers there.

First, just in general, since this is a new market for us, it is a little bit less predictable than our other areas where the trends are far better established. That being said, what we predicted for the first quarter turned out to be very accurate. There's a number of channels where we are deriving ourselves and they include the retail channel as a result of direct to consumer marketing. The sales would go through Medtronic , and some sales in the DME channel. In any given quarter, any one of those three channels could be doing slightly better or slightly worse. So that for example in the fourth quarter of last year, we had some strong results in the DME channel, which were a little softer in the first quarter, so it had a timing effect in the first quarter. Our retail sales in the first quarter were a little bit stronger than they were relative to the fourth. And we do expect them to ramp through the course of the year. I wouldn't expect the next quarter to be that much higher than this one, but it should be higher than this quarter probably in the $17 million range, and as John said, probably getting up to 20 and then low 20's afterwards to get up to the 75 million, which is what we expect. So that is our outlook.

With a little bit less again predictability relative to businesses that we've been in for decades.

So just to summarize, we should look for slightly better performance on the retail side the next three quarters, you think?

Well, in any given quarter, that mix of sales could shift, but we've been putting a lot of emphasis now into direct-to-consumer marketing, not television advertising, but other means of direct-to-consumer marketing, and that component of our mix to be taking an increasing proportion as we go forward.

And can you remind me the number of I guess wholly devoted salespeople in the Logic salesforce now?

We have been building -- the other thing we're doing this year is reflected in the SSG&A numbers. We have been hiring more people into our sales force. I believe we're increasing it by about 25 percent this year. And I'm not sure I can give you the number offhand, but it will the over 100 people this year that are primarily devoted to diabetes (BGM).

Okay, and then I guess one last question for John. John, you mentioned 50 million I think pension -- or to fund the pension in the quarter. In your opinion, is that now adequately funded for the year? And then if you could just touch on option expense for a second, I know you gave us your expectations for this year, but kind of looking forward from 30,000 feet, any bias in your opinion going forward as to how BD compensates people and perhaps takes another look at option expense let's say '06, '07 going forward?

On the pension, 50 was an early U.S. contribution. We will probably make another smaller piece kind of getting us up to where it's a tax advantage to do it, toward sometime before June 45 to kind of meet the tax guidelines. But it's not much; I'm talking another 30 or so million dollars, and that's basically the U.S. and that's the most of it.

But the expensing for equity-based compensation, as you recall, if you went back to the November '03 grants, we just took the leadership team, which it was just 17 of us, and changed the makeup of long-term compensation from just options to a combination of options, performance-restricted stock and career shares. And what we did is we took the value of what would have otherwise been an option grant and took 40 percent of that and that stayed in options, and they’re still the plain vanilla, granted at the strike price on the date of grant, and 10-year options, they vest over four years, ratably over four years.

The next 40 percent came through performance-based restricted stock. And what we did there is we looked at a three-year horizon with the expectation that we grant these every year for a three-year cliff, and the cliff payout was based on relative achievement of two different metrics. One was revenue growth and it was real revenue growth, so you could not go out and buy it. So if we made an acquisition, we would have to pro forma it, so we only got the growth in true sales. And against that, we would also have to grow or maintain a target on return on invested capital, so a very strong cash flow metric. And the combination of those two we thought kept us very honest, not that we need to be kept honest, but it kept us very honest and really were the basis for how we were growing. We needed revenue growth and we needed to maintain good cash return on earnings.

If you fast forward to 2004, we took that plan and we did it for the entire company -- let me just step back. And the third piece of that, the other 20 percent of that, were career shares for the leadership. And that was time vested restricted stock. The time vesting was you had to be able to retire to get them, so it was a retainage type of vehicle.

If you go to then 2004, what we did is we took that plan and pushed it through the organization where we for more senior leadership, more senior non-leadership team people, we used restricted -- 40 percent options, 40 percent restricted performance share, and the other 20 percent was time valued restricted stock three-year clip time-valued restricted stock. Then as you went further down in terms of seniority or responsibility, that type of thing, that became a combination of options and restricted stock and in some cases at the lower levels, just restricted stock rather than the options, and overall maintaining a value for the associates. And when we did it on a valued basis, we think that it really aligns our interest better and the employees seem to appreciate it. They have a real ultimate chance of a piece of paper that is a share. It takes a lot of the guesswork out of it. We think it’s going to foster good performance, especially given the two metrics we use with revenue growth and return on invested capital.

When I look a little bit at thank, God you've got me at 30,000 feet, if I could fly a little higher, it might be better. But the 17 cents probably that over the next -- assuming the same value is granted because of the way the accounting goes, which amortizes prior option grants also in here -- if you take these things over the vesting period or the earnings, it will go up by about a penny a year for the next couple of three years, and then it should be pretty much on an even keel. So that is kind of a 4 or 5 percent increase, that penny, if you think about 17 cents. And if our earnings are growing at 10 to 12 percent, we should get good leverage there. And in fact, it should represent even less than it does now of our total dilution. Right now, this is just a little under 6 percent dilution, which if you kind of look across corporate America, is a pretty low relative dilution. So a lot of words there. I'm sorry for that, but I think that might help.

Thanks for the summary.

Glenn Reicin, Morgan Stanley.

A bunch of questions for John, quick questions if I may. This 2-cent benefit from the lower tax rate, when I back into it, I'm using a 23.3 percent effective tax rate, going to 27.7 in the second quarter -- is that ballpark?

That sounds like it’s right off the top of my head. Right now, the accounting profession is much more -- they're guided to try to push these -- put discrete items in discrete periods. For instance, in the first quarter when the Job Creations Act gave us the tax benefit for research and development, that's a discrete item that the catch-up went into the first quarter. In the second quarter, we're working on a deal that will give us a tax benefit for the year that's in our expectation in a foreign jurisdiction. I'd prefer not to say which one it is right now until it's done. But when that comes, that won't be in there in the second quarter, so it will be a little bit higher and then it should kind of even out for the year. So you're in the ballpark.

Okay. Some other quick ones. You mentioned 3 pennies of FX benefit that you had not anticipated in the quarter. Why was the guidance raised 12 cents, as opposed to more like what the upside was in the quarter?

I'm not sure I followed that. When you say why wasn't guidance raised?

For the year. In other words, why wouldn’t we --?

What we did, Glenn, is we took the 3 cents that absolutely happened in the first quarter. In the second quarter, we attributed about 2 cents of foreign exchange which we had seen already. We did not add to the guidance any foreign exchange benefit for quarters 3 and 4 consistent with how we've done it over the last couple of years. If they happen, as they happen, we will add those in. To your point, if we had added in 2-plus cents in each one of those, you would probably get nearer to the 12 that you're talking about. But as it is right now, it's 5 cents that went into our guidance -- 3 from the first quarter and 2 that we've seen so far from the second quarter.

Also, can you talk a little bit about the timing issues? You went to great pain to talk down Q1 expectations. I remember Pat called me and just talking through the guidance that you had given. So personally, I feel a little bit sandbagged here. Can you talk a little bit about what those items are?

There were three things that came in much stronger than we thought. You cannot see it in there because the international operations looked pretty much right on. Japan, in fact, was where we thought it would be versus -- could be versus the first quarter, because the flu sales were not in there. And actually, when you look at Japan, it's down about 14 percent. But Europe was much stronger than we thought it could be and Europe was almost 8 percent up. So that is one thing that we did not see.

Secondly, flu did not come in in the first quarter. We thought it might; it didn't come in. Rather, we did not think it would come in, and it's still hanging out there. It has not shown its head yet in the second quarter, so we're still unsure about that. And so that has given us a little bit of concern. And then there was diabetes in particular to your point why it got a little stronger in the first quarter is, diabetes sales were a little hotter than we had thought they would be. And as you know, that has a higher gross margin in the high 60s to low 70 kind of percent, and they were up a little bit more than our expectation. So the combination of all the those pushed performance into the first quarter.

Without much great pain, I will tell you that that 6 cents we I think, we think about 3 cents of it for sure it will hold in the year, and that is part of the guidance increase that we have offered. And we still think that the other 3 cents is in question, primarily because of those items, that flu still is out there, diabetes was a little hot in the first quarter, and as was Europe in the first quarter.

When you mean flu was out there, what do you mean? In terms of the benefits?

Has not happened yet, so there's still that risk there.

Alright. Then lastly, you said you were going to use 400 to 450 million of cash for share repurchases. I assume that's a gross number. And if you take the cash -- I guess I don't know what to assume in terms of share count, but there will be some gross dollars or some dollars you get from the exercise of options. So is the net benefit like 270 total cash used? So maybe you can help me reconcile share count with the amount of dollars actually used for the year?

We will actually spend buying shares back in the open market of about -- just using 450 million for the year we spent in the first quarter about a quarter of that, a little over 100 -- $110, $112 million. We bought back about 2 million shares. We assume that we will continue to do that. If the price does not move a whole lot, you'd end up buying back the same amount for the year. In terms of option exercises, I can't get that, but you will have some option exercises. But over time now with our new plan, you're going to see less and less option exercises over time because we are granting less option and using less net shares. But until those things happen, it is hard to give you any (multiple speakers).

So what share count are you using for the year? The effective share count.

Probably around 262 for the year right now.

So most of that benefit from the repurchases is offset by exercise of options at this point?

Of prior options, you're going to get some of that. I think also what happens is that when you buy back the shares, you will remember when you do the accounting for it, you don't get the whole benefit that year. It takes 12 months before the benefit fully gets in there, because your average them over time. Okay?

I lied, one last question. Pharmaceutical systems, you've been cautioning us about tougher comparisons. What happened this with that business? What should we expect, in terms of growth this year?

I can give you the numbers, but it would probably be better if Gary talked a little bit about that first.

I think what we had guided previously, meaning that the growth could be lower, we're staying with that guidance. There will be particularly there was a tough comparison in particular in the U.S. first quarter because it came out of a very, very strong fourth quarter. Also, some of our customers that were supplied from the U.S. for various reasons were beginning to supply from Europe, so that will be a little bit of a shift from one location to the other, in terms of how we report the results. I think the U.S. will probably look pretty flat for the year in pharm systems and some growth but modest growth in Europe.

Thank you.

Aaron Geist, Robert W. Baird.

Good morning. Can you provide a little bit more color on the diabetes care in the quarter? Is this inherent strength ordering patterns? Do you anticipate that Q2 will fall off due to temporary stockpiling?

There were a number of factors that contributed to the strong first quarter in diabetes care. BGM, even though it was flat quarter to quarter, had good growth year-to-year. Pen needles were particularly strong and we had some favorable results in Japan where our pen needle business is growing rapidly. We also had good results with pen needles in Europe. We had taken a few countries direct late last year from having previously gone through distribution, and that had a positive impact. We actually had a reasonably good quarter in our home health care franchise, which it's elastic goods primarily, and it does not get a lot of focus and that it had been net negative over the past several years. It actually was up in the first quarter, although we don't think that will last through the year. And a small component of the safety sales that were reported in the quarter actually fall in the diabetes care unit, safety insulin syringes fall into that unit.

So it was a combination of those four, that led to the very strong quarter. We don't expect to grow at this rate for the full year, although diabetes care overall will be one of the better growers in the medical segment for the full year.

Historically, you've seen sort of a down quarter in the first quarter. How should we look at the second and third quarter? It seems like most of these issues, the four issues you pointed out Gary, are not stockpiling, are not onetime in nature, but more an acceleration of your base business?

I think that you may see -- the second quarter is probably going to be the softest of the year. If we were to look out for the full year for diabetes care, we would say quarter 2 probably will pull back a bit, and then obviously, 3 and 4 be stronger than that. But what's happening with pen needle seems to be sustainable, it seems to be business gain. BGM, we've already gone through. Home health care, we indicated we think that the benefit we had in the first will probably reverse and taking so syringes will continue to grow. And so I would summarize it that way.

Thanks. Second question, if I could, on international safety. You talked about 15 percent growth in the quarter. You grew well north of that. Can you talk about pricing in international markets? Can you talk a little bit about geography, in terms of adoption? Is there a change happening now that you're starting to see an impact on accelerating growth in that segment?

John, maybe I'll just take this, and Bill, if you have anything to add on the diagnostics side. We did have a very good quarter in the first quarter in safety. We are pursuing safety pretty much everywhere in the world now, not only in Europe, but also Japan, Latin America and even in developing countries, we're developing specifically designed safety devices to reflect the economic realities in those areas. As we've said in the past, we won't be able to as precisely predict the growth patterns and safety internationally as we did in the U.S. because once California and then others states started passing national laws in the U.S. and ended up resulting in a national law , the patterns of adoption were fairly predictable. It's less predictable outside the U.S., although it is growing nicely.

Pricing for like items is very similar internationally as in the U.S. We don't want to create a circumstance where there's an incentive for someone to buy in another part of the world and then just send the products back to the U.S. So we're adhering to fairly uniform pricing. Where there will be a difference in some cases is in mix, because we do have different safety products at different price points and we try to tailor the devices as appropriate to the market, particularly in the developing world where we try to keep the prices much lower. But that will be through devices that are designed for those markets, rather than selling the same devices at lower price.

Would say that the growth that you saw was generally from many different geographies beginning to adopt safety products, or a specific area of geography that puts safety initiatives in place that kicked in during or right before the quarter?

It was fairly broad based. I did not point to any one area and say that was the critical driver of growth, at least from the medical side. Answer again, Bill may want to comment on the preanalytical.

Sure. One thing I could add is to the second part of the question there is that the conversion of plastic evacuated tubes continues to be quite healthy across all geographies and the conversion to the preanalytical systems sharps-based product, the safety blood collection needles, safety wing collection sets, has been healthy in Japan, Europe and Canada.

One last question, if I could. You had $2.9 million cost on the other income line. Can you give a little bit of guidance for the remainder of the year, a little more color on what that specifically was?

Most of that represented the write-down of -- we made some small investments in companies. Most of them tend not to be public companies inside, and they're looked at as really part of our innovation research and development project that they need to be recorded on that line where the technologies may have would have definitely relevance to one or more of the three segments. That was that one charge I mean for the year, this number could run probably about $10 million for the year, in terms of total other income. The other things you have seen on there are transaction gains or losses where we're hedging specific foreign currency transactions.

I would add one thing too on that safety international sales, kind of the law of smaller numbers. Although not in most people's eyes a small number, but in relevance to BD, the sales of 44 million that it's running against for this quarter, foreign exchange added 10 percent to those sales. So if you took that out, these sales, while still robust at 25 percent, are certainly less than what you would see without that foreign exchange in there.

I appreciate that. Thank you.

Sara Michelmore, SG Cowen.

Just two questions, most of my questions have been answered. First on Phoenix, obviously, all the placements for this instrument have to come from competitors. So I'm wondering as you roll it out to customers, what the most differentiated features are in the customer's eyes of that product versus the product from Dade and BioMerieux? And then for Gary on the blood glucose monitoring business, I'm wondering if you've given any thought to international expansion. Obviously, that market for blood glucose products is a lot bigger than the U.S., a lot faster growing. And just with your global reach in some of these emerging markets, I'm wondering if you have any plans to take that product on a broader scale?

Just in terms of the message to customers on Phoenix, we have commented all along that our focus would really be on performance of the instrument, in terms of microbiology capabilities. Number one, you now have capability on Phoenix to identify over 300 organisms. Now the competitors are always a moving target, but by some of our most our best and most recent estimates, we don't find many competitors much above 200, 220 or so. So we have a significant array, in terms of ID side.

The other than point which I just briefly referenced is that customer interest and the software capability of the epicenter package, which is comarketed with the Phoenix instrument, and this is its ability to manage internally nosocomical infection, help the physician in a laboratory to be aware of any unplanned or unexpected outbreaks in their institution or geography, is getting a very high level of interest from customers and probably even a little bit higher than we have seen to date.

If you combine that with a fully dedicated sales capability, particularly in the U.S. launch area, we think those three things will be real important to helping us perform effectively against the competitors.

Relative to BDM internationally, the U.S. represents about half of the global blood glucose monitoring market in dollars, less than that in units. But the pricing of strips in the U.S. is more attractive than just about anywhere else in the world, which is why we concentrated our efforts here. And also given the competitive environment that we're moving into, we saw value in keeping our efforts concentrated. So we just launched as you know in Canada, but also the U.S. We are looking internationally. We would anticipate beginning international launches probably around the end of this year and we're looking country by country. We're really analyzing the market conditions in each country, both from the standpoint of competitive factors, as well as market pricing to determine where the best place is to enter. So don't expect a broad base like the entire continent for us to enter at the same time, but rather to go country by country, beginning the places that seem to be more logical for us to go into.

Operator, why don't we take one more call since we're after the hour and there may be other calls these folks need to go to.

Actually, that was our last questioning in queue, so we have no further questions, sir.

That's good timing. Thank you very much for your attention and we'll talk to you next quarter.

Thank you, and ladies and gentlemen, this conference will be available for replay starting today, Wednesday, January 26 at 2:30 PM Eastern time and will be available through Wednesday, February 2 at midnight Eastern time. You may access the AT&T executive playback service by dialing 1-800-475-6701 from us in the United States or Canada, or from our outside the U.S. or Canada, please dial 320-365-3844 and then enter the access code of 765773. That does conclude our conference for today. Thank you for your participation and for using AT&T's executive teleconference. You may now disconnect.