Becton Dickinson and Co (BDX) 2008 Q2 法說會逐字稿

Hello, and welcome to BD's second fiscal quarter 2008 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through Wednesday, April 30th, on the investors page of the bd.com website, or by phone at 800-388-6197 for domestic calls, and area code 402-220-1115 for international calls, using conference I.D. 7bdx. I would like to inform all parties that your lines have placed in a listen-only mode until the question and answer segment.

Beginning today's call is Ms. Patricia Spinella, Director of Investor Relations. You may begin.

Good morning, everyone, and thank you for joining us to review our second fiscal quarter results. During today's call, we will make some forward-looking statements and it is possible that actual results could differ from our expectations. Factors that could cause such differences appear in our second quarter press release and in the MD&A section of our recent SEC filings. We will also discuss some non-GAAP financial measures with respect to our performance. A reconciliation to GAAP measures can be found in our press release and related financial tables. A copy of the release, which includes the financial tables, is posted on the bd.com website.

Leading the call this morning is John Considine, Vice Chairman and Chief Financial Officer. I will now turn the call over to John.

Thank you, Pat. Good morning to everybody. As usual, on the phone with me today is Vincent Forlenza, Bill Kozy, and not in this room but also on the phone is Gary Cohen. And Bill Tozzi, who many of you know, our Vice President of Finance, is also joining us and he is going to take us through the results of the second quarter, after which we will entertain your questions.

So, Bill?

Thanks, John. Good morning, everyone.

I assume you all have our earnings release and the attachments that we sent out this morning, and have had an opportunity to review them. Since we'd like to devote as much time as possible to answering your questions, my opening comments will be brief.

We'd like to address three primary topics. First, since there is one significant item that affects the comparability of our diluted earnings per share from continuing operations for the six months ended March 31, 2007 and 2008, we want to review the analysis of these results provided in the press release. Second, we will describe some of the key drivers of our revenue and earnings growth for the second quarter. And third, we will review our revised guidance for full fiscal year 2008.

Starting with our earnings, for the three-month period ending March 31, 2008, reported diluted EPS from continuing operations were $1.09, and when compared to our fiscal year 2007 second quarter results of $0.92, our growth was 18%. Moving to our six-month results, I would suggest you turn to Table 1 in the press release. For the six months ended March 31, 2008, the reported diluted EPS from continuing operations was $2.16. There are no specific items in the fiscal 2008 6-month results that impact comparability. For the first six months of fiscal year 2007, we are adding back to our reported diluted EPS from continuing operations of $1.44 a charge of $0.45 resulting from the in-process research and development charge related to the TriPath acquisition. This gives us EPS from continuing operations, excluding this specified item, of $1.89. Comparing the $2.16 in this fiscal year six-month period to the $1.89 in the prior year's six-month period gives us an adjusted EPS increase of 14%.

Moving to our growth drivers for the second quarter, our revenue increased by 11%, which included a 5% favorable impact from foreign currency translation. The positive translation effect was primarily related to the Euro, and to a lesser extent the Canadian Dollar and certain Asia/Pacific and South American currencies. As you can see from the tables attached to the press release, all three segments benefited from positive foreign exchange of 4 to 6% for the quarter.

In the medical segment, second quarter revenues grew about 9%, led by sales of refillable drug delivery devices and pharmaceutical systems, and by diabetes care products. Global sales of safety-engineered products in this segment grew about 9% to $175 million.

Revenues in the BD diagnostic segment were 12% in the second quarter. Sales of safety-engineered devices, TriPath products and molecular testing systems, which include GeneOhm, ProbeTec and Viper, also contributed to the growth. Global sales of safety-engineered products in this segment grew 15% to $199 million, due for the most part to the continued success of our push-button blood collection set.

Looking at the combined medical and diagnostic global safety, sales grew about 12% to $374 million. The U.S. growth was about 4% and ex-U.S. was about 33%.

In the BD biosciences segment, worldwide revenue 14% for the quarter. Research instruments, as well as clinical and research reagents, continued to be primary growth contributors.

Turning to quarterly gross profit, our margin percentage for the second quarter was lower than that for the prior year by 40 basis points. As you may recall, in the fourth quarter of fiscal year 2007, we reported the reclassification of certain expenses from SSG&A and R&D to cost of product sold for all four quarters of the year that related to the newly integrated TriPath and GeneOhm platforms. The reclassification was recorded to conform with our historical accounting classification practices to those followed by BD. About half, or 20 basis points, of that decrease in the second quarter's gross profit margin related to this reclassification. While this impacts the compatibility of our quarterly gross margin to the prior year's period, it will have no impact on the comparability of our full fiscal year.

The other half of the decrease relates to discrete inventory writedowns that total about $4 million which were recorded in the quarter. Absent these items, our overall gross margin percentage would have been about the same as prior year. SSG&A as a percentage of sales improved 200 basis points, primarily due to disciplined expense management. R&D spending increased by about 11%. Our operating income margin was 160 basis points higher than prior year's suggested margin, due to the favorable SSG&A offset and the slightly lower gross margin profit margin impact previously discussed. In terms of cash flow on a year-to-date basis, we generated approximately $700 million of net cash from operations. $276 million was used to repurchase $3.3 million shares of common stock, and we invested $266 million in capital expenditures.

The last topic we like to cover is our revised guidance for fiscal year 2008. We expect diluted earnings per share from continuing operations for fiscal year 2008 to increase approximately 13 to 14% from last year's adjusted base of $3.84, which excludes $0.48 of in-process research and development charges related to the TriPath and Plasso acquisitions. This reflects an increase from our prior guidance of 11 to 13%. Our full year reported revenue growth is expected to be about 11%. We expect medical to be about 10%, BD diagnostics about 11 to 12%, and BD biosciences about 12%. This would include about 3 to 4 percentage points of positive foreign currency benefit. Our global safety is expected to increase by 11 to 12%, -- U.S. sales of safety-engineered products are estimated to increase by 6% and international safety should grow by about 25%. We expect our gross profit margin percentage to decline by about 30 to 40 basis points below the prior year, and about 10 to 20 basis points below our previous guidance. This reflects the inventory writedowns discussed earlier, as well as the one-time items that impacted the first quarter. Year on year, we expect product mix to contribute about 70 basis points, which is more than offset by higher resin costs of about 60 basis points, start-up costs of 30 basis points, and all other one-time asset writeoffs of about 10 to 20 basis points.

We would like to point out that in fiscal year 2007, BD spend for resins was about $250 million, which accounts for less than 10% of our total cost of sales of $3 billion. While resin prices do not immediately reflect an increase in oil prices, over time, the rise in oil prices has and continues to have an impact on resin prices. Although the weakening of the U.S. dollar contributes to the increase in oil prices, the benefit to BD of the weakening U.S. dollar has outweighed the negative impact of higher resin costs, since more than half of the company's revenues are derived from outside of the U.S., and coupled with our expense control plans, explains why we have been able to raise guidance even when confronted with higher resin costs.

Continuing with our guidance, SSG&A is expected to improve by about 80 basis points as a percentage of revenues. Our R&D spending is expected to increase by about 11%. Our overall income margin is expected to improve about 50 basis points over the adjusted 2007 operating income of 20.8%. Our effective tax rate is projected to be 27.5% for the year, and as you know, can vary by quarter. We expect to generate $1.6 billion of net cash from operations, and invest about $650 million in capital expenditures. We expect share repurchases to be about $450 million, and the average number of fully diluted shares outstanding to be about 253 to $254 million.

I will now turn the call back to John.

Thanks, Bill. And Operator, Kevin, you can open the call for questions, and we'd appreciate it if you'd limit your questions to one plus a follow-up.

(OPERATOR INSTRUCTIONS)

We will take our first question from the line of Rick Wise with Bear Stearns. Your line is now open.

Good morning, John.

Good morning, Rick.

Let me start with SG&A and its sustainability. You are suggesting that SG&A will be down 80 basis points on a full-year basis. Maybe walk us through some of the factors - what disciplined expense management, what have you eliminated? Are we sort of in this 23% of sales range, or 23.5%, 24% of sales range for the foreseeable future, even after things "get back to normal" on the gross margin line?

Well, that's a long question, Rick.

Tried to squeeze a lot in there.

I don't want to get too much into the future because, as you know, we will guide for 2009 and beyond a little later. But if you want to look at our total SSG&A, last year about $407 million, obviously some of that is European based so FX drives that up a bit. But what really has helped us is that when you look at our core spending, and take out investments in immunocytometry, Pharmingen and Infusion Therapy, our core SSG&A, has only risen about 1.3%. So we have placed these controls among all of our businesses within all three segments. And we don't follow in any way a strategy of throwing the proverbial baby out with the bathwater. Rather we are being very judicious in how we look at any increases around SSG&A. We are going to feed the growing needs on a marketing and selling basis, but where costs can be discretionary, we are taking the opportunity to control them. I think without forecasting exactly what we would be, you know, we are intimating a kind of 24 or slightly lower relationship to sales for SSG&A for this year. I think certainly there is a sustainability of costs that will continue to exist, and we should be able to leverage our future sales growth and do that. To be more explicit than that, we are going to have to wait until the time we forecast for the '09 year.

Let me follow up on a slightly different topic. U.S. growth this quarter at 4%, if I'm looking at it correctly, was one of the slowest growth quarters we have seen in some time, and U.S. diabetes down one percent, U.S. med surge only up 1%. Maybe you can give us some general perspective on the U.S. business and maybe some of the more challenging segments? Thanks a lot.

Gary, why don't you talk on medical and then Vincent and Bill will chime in.

Sure, looking at the U.S. specifically, there were a few things that occurred in the quarter that we're expecting to change in the balance of the year and a few things won't change. To be very specific, on diabetes as you noted we were down about a point year-to-year. That was particularly impacted by the loss of a VA contract last year, where we had a favorable second quarter associated with that contract and didn't have any revenues from it this year. The good news there is that we won the contract back. There were issues with the other supplier and effective April 1 we are going to be regaining business from that. So in fact in the second half of the year, we are expecting U.S. sales for diabetes is going to be quite a bit higher, in fact even higher than they were in the first quarter, and they were up around 9% in the first quarter.

And then in med surge, there is a combination of factors, some of which are going to be ongoing factors, some of which are not. One is we are seeing inventory adjustments at the distribution level, and we know that because we compare our sales through distributors to our tracking of end user sales, and end user sales are up in the normal range for medical surgical U.S., which is, say, the 4 or 5% range. So there is some inventory adjustment going on. We also had a stronger than usual quarter with safety devices last year, and the second quarter was by far the strongest quarter of the year on a year-to-year growth rate. So that was up against a little bit of a tough comparison. We had one safety device that has been in the product line for a long time that is declining, and was expected to be declining, that's the Interlink product line. That will continue. On the other hand Nexiva is doing very well, it's just not large enough yet to make it show up in a demonstrable way but our Nexiva sales doubled year-to-year and that also will continue.

So on the whole med surge, we are expecting better growth in the second half of the year than we saw in the quarter, probably something closer to on average to what we saw in the first quarter, in that range. The other one I might as well mention is pharmaceutical systems. We are expecting lower growth in the U.S. in the second half of the year. On the other hand, we are expecting quite a bit faster growth internationally in pharma systems in the second half of the year. So those two should more or less offset each other relative to the pharma systems growth rate.

Thanks very much.

In diagnostics, our U.S. growth was pretty consistent. We were approaching 7%. PAS safety grew 6.2% and we have been averaging closer to 8, and that's in the U.S. International safety was 27.1, for an overall worldwide of 14.5. So U.S. safety was slightly lower, but not all that much. That was just a mix of smaller push-button conversion accounts.

On the bioscience side, as you saw from the release, the cell analysis business was right in line and actually had a pretty good quarter. Most of our events that were anticipated came in the Discovery Labware side. Three factors. Number one, dealer inventory management, particularly of the core plasticware products, very similar to the comments that Gary made, has impacted us in the second quarter. Number two, some timing on the bioimaging instrument placements was a factor. And then some irregular demand from advanced bioprocessing, one major customer. Those three things happened all at the same time, and really is what's impacting that Discovery Labware second quarter performance. We don't expect that to continue.

Very helpful. Thank you.

We will take our next question from the line of Mike Weinstein with J.P. Morgan. Your line is now open.

Thank you for taking the questions. Gary, spend another minute on the inventory drawdown you saw at the customer level in the quarter. There has actually been some -- we have seen this in a bunch of different businesses in the U.S. as companies are reporting, so I would just be interested in what you think, what's going on there?

It's not uncustomary to have changes in inventory patterns in periods during the year depending how they are doing their own inventory management. And what we saw - and the best way to measure that is by comparing end user sales, and we can track end user sales through the rebating system that essentially is the mechanism that we transact by, where we sell to distributors and they resell and then we rebate to them, and through that we get reporting on end user sales. They were up more or less 5% in medical surgical in the second quarter. So this would reflect that inventories have been taken down a little bit more than we would have anticipated in the quarter. There was also some recently entered into distributor agreements that we believe may, on our side, should be a positive long-term but may have caused distributors to take down their inventory a little bit in the quarter. The other factor is the more efficient we become with our supply chain, the more rational distributors have to take their inventory levels down. That's not a long-term effect, but when they take it down it does affect that quarter.

Understood. And John, the $4 million of inventory writedowns you ran through the cost of goods sold line, do you have any expectations on that for the back half of the year? That cost you a penny this quarter?

That's it. It's a one-time discrete item to this quarter.

Perfect. And then can I get a quick update if you don't mind on TriPath, how that's doing competitively, and if you could just talk about the progress in the pipeline?

Yes. This is Vince. On TriPath, sales were up around 5% for the quarter, which was lower than where we have been. But it's about 9.5% for the six months, and that's pretty much our expectation as we look forward towards the back half of the year. That's where it's going to be. And that's just some fluctuation on instrument orders on a quarter-to-quarter basis.

It's a market issue? The market might have been softer this quarter? Inventory? Any thoughts?

I don't think there is -- you know, we sell direct. Haven't seen a lot of change in customer ordering patterns. We are fully implemented at Quest. So there is not a lot of upside there. We think we're gaining about a half a point a share a quarter, somewhere around there, and we expect to see some more growth coming out of international in the back half of the year. In terms of updating on the programs, the focal point, GS, as we talked about -- that submission for the guided screening claim on the instrument has been at the FDA. They have finished their site inspections. So the manufacturing site inspections is what I'm talking about. They are done. We are into our second round of questions. So we hopefully expect one more round of questions in May. I can't say whether that will be the last or not. Hopefully that will be. So that appears to be on track at this point. The HPV trial that is - we are finishing that up and expect to be finished with that in the September timeframe - actually, the summer and then submitting it around the September, October timeframe. That's for the HPV claim on SurePath. The one actually significant change from where we were before is that on the molecular PAP trial we did suspend that trial. We had some sites that we are doing extremely well with that. Other sites that - I will just call them less sophisticated in their abilities to stain cells. We had to go back and change the work flow, the upfront work flow on that trial with an automated stainer, and we expect to restart that trial probably September, October time frame.

What do think that does to your timeline?

Probably pushes it back nine months at least.

Okay. Great. Thanks for taking the questions.

Sure.

We will take our next question from the line of Peter Lawson with Thomas Weisel Partners. Your line is now open.

Maybe this isn't a pert inspect question for Gary or John on the weakness of the hospital markets. Have you seen weakness there from capital spending?

Gary?

This is Gary. I don't think we have a lot of visibility to it, since on our hospital sales we really don't do much in terms of capital. I don't know if anyone else on our team would have some visibility to that.

Bill, have you seen anything --

Wouldn't have much visibility. Only thing we - place is one of the cancer for clinical applications, and we have not seen that in that very -- that's a very narrow area there, a specialized area.

We haven't seen any impact on the diagnostics side.

Great. Maybe some color on the end markets, the life sciences. There's been weakness from large pharma to some of your peers on the life sciences business. I'm wondering if you're seeing that as well?

If you took my earlier comment, this is Bill, we have seen what I call some destabilization in the pharma market. There are a lot of things going on. People are re-evaluating their discovery development process, some people are relocating to other parts of the world. All of these factors simultaneously do have an impact on ordering patterns. We do think that's a situation where we will work our way through in the next few months, and most of our customers are pretty good about sharing their plans about where they are going to end up going forward. So I think we will work our way through this in the next couple of months, but I think it has slowed some orders of some key product categories on instruments. We hope to see that bounce back.

Okay. Thank you for taking my questions.

We will take our next question from the line of Bruce Cranna with Leerink Swann. Your line is now open.

Thank you. I don't know, John, or maybe Vince, can you perhaps part with an actual number for GeneOhm in the quarter?

GeneOhm was around $10 million in the quarter. Just over $10 million. And we have been saying that for the year our expectation is about $40 million.

And what's up with VRE? Was it submitted, did I miss that, or is it still sort of later in the spring timing?

No. VRE has been submitted to the FDA and it was just cleared in Europe.

So submitted - the data was submitted?

Yes.

I'm sorry, the data was submitted in the U.S. was what?

I'm sorry. I'm sorry. What I said was VRE was cleared in Europe. We're just in the process of making the submission in the United States.

But not formally submitted yet in the U.S.?

Not formally submitted, but in the next couple of weeks.

Any change in your thinking about C-diff timing in the U.S.?

We expect the EU would be in June, okay, and then FDA filing in July.

Okay.

No change really.

Thank you for that. Just curious also in the quarter, did you have a big rapid flu season? Can you share any details about that in the quarter?

It's pretty much a nonevent, is the way I would describe it. The U.S. flu season kind of returned to normal, was a little bit stronger than the previous year. The Japanese flu season was absolutely nonexistent in the quarter. We are talking about worldwide sales of like $5 million. It's not real material at this point.

Last for me, can anyone there comment about the announcement from Acceler8 earlier this month. What it means to you guys, that agreement? Where is is it going to fit or potentially fit, that technology in BD?

Yes. This is Vince again. What we have right now is a standstill to negotiate an agreement, and so we do not haven have an agreement in place. It will fit in the microbiology business in certain targeted applications in identification.

Is that really a blood culture technology?

Is it a blood culture technology? It won't replace our blood culture. We are targeting at another application, which I really don't want to put on the table right now.

Okay. That's what I was after. Thank you.

Okay.

We will take our next question from the line of David Toung with Argus Research. Your line is now open.

Good morning. Thank you for taking the call. I want to follow up the references you made to the dynamics in the pharmaceutical industry, as some of the operators may move overseas, and some operators are outsourced to CROs. Can you talk about your penetration into the CROs and how those market share -- how - the market dynamics and how you are adjusting to that? Then I will have a follow-up.

This is Bill. We are looking at our go to market model, particularly in both the cell analysis as well as the Discovery Labware business. We see this - some of this activity may be moving a little quicker in Europe, and we of course created a - kind of a virtual sales organization focused exclusively on calling on pharma and bringing the broader array of bioscience products to the pharma customers. As we see other geographic markets evolve in this kind of way, we will react accordingly. We are using the European model right now as probably our proving ground to say that this is indeed the right way for us to react to this type of research migration.

Okay. And there was a news item about your second facility in Suzhou, a diagnostic facility. Can you talk about, is that selling into China, Asia? Is it exported into other regions? Would there be some point where you would break out your international growth into regions beyond just OUS and maybe breaking down Asia and Europe and maybe giving color now on that?

I will comment on the plant, and John can comment on how we think about breaking things out publicly going forward. We just announced the opening of our second plant. We have a medical device plant in Suzhou. This is about 30 minutes away, and it's a diagnostics plant. It is for rapid diagnostics, and we expect to start -- we are just starting to make product there. This is the flu product and those sorts of things. It's in the export zone so we do expect to do worldwide distribution for that product line out of that plant.

And as far as giving you a little bit more in-depth look at Asia/Pacific, as we call it in the region, we would consider doing that in the future. These things have a historical basis with us, and the five regions, if you will, have existed as this for sometime. So rather than try to give you anything just off the top of my head right now, I think in '09 we'll probably consider breaking that out a little bit more finer in detail.

Great. Thank you.

We will take our next question from the line of Glenn Reicin with Morgan Stanley. Your line is now open.

Good morning, folks. Thanks for taking my call. A couple of follow-up questions. Can you just break down the safety U.S. OUS by business? You said total safety U.S. 4 - 33. Can we just peel the onion here and just go through medical and diagnostics what those numbers look like?

You want me to get that? I got that here. You want to do it?

Billy's got it here.

That's fine.

So U.S. safety medical was about $135 million. Diagnostic was about 112. International medical was $39 million and diagnostic $87 million.

Very helpful. Another follow-up question is the issue of foreign exchange. Maybe really two issues. Can you give us maybe the total bottom line contribution from FX in the quarter and maybe how it compared with the last? And I'm a little bit confused about gross margins. It was my understanding that last quarter gross margins were hurt by FX because essentially inventory is valued at one specific time in time towards the end of the quarter, while sales obviously on an average. At some point in time that catches up and your gross margins actually get better from that. Can you talk specifically why you didn't mention FX in the gross margin discussion, and why that won't help you later in the year?

Glenn, this is Bill. In the second quarter, we didn't give all of the details to it but FX contributed about 30 basis points improvement. It is starting to turn. I think the first quarter we had about a 70 basis point reduction. So consistent with what our experience has been is that over time it zeros out. In our full year guidance we don't believe FX will have much of an impact.

Okay, but it was 30 basis point improvement in the second versus the first?

Versus the first quarter being about 70 basis points of reductions.

Okay. That's helpful. What about the whole bottom line contribution?

Well, you know -

Hate to go there?

We haven't gone there. But if you really think about it, we have about - for the year about 20% of our sales are Euro-based. That's the biggest -- or Euro exposed. That's the biggest piece of the entire foreign exchange side. So that's like a million and a half dollars in - a billion and a half in sales. It depends on a lot of things but we can drop 25% of an increase down on - depending on how the FX falls. So if our -- if we got a benefit of 5%, about 20% [of] 1% of that could hit the bottom line.

All that said, though, it depends on - certain things get rolled up into inventories and the timing is different. But I think if you think about it broadly, the weakness in the U.S. dollar and the strengthening of in particular the Euro has more than offset the resin side. Because as Bill said in his opening remarks, last year we spent about $250 million in resins. We think that additional resins will cost us about 60 basis points this year. The benefits we get in foreign exchange has offset that. The resins kind of are -- if you watch oil and the Euro, they kind of dance together very closely over time. Our resins aren't exactly one-for-one a [proxy] with oil. There is a lot of things that kind of get into that line and that's why I'm hesitant, Glenn, because I wouldn't want to give you something to model that didn't work.

We will go offline for that one. I promise this is my last question. I'm confused about the other income line and the interest expense line. If I take your cash balances and then take your debt balances, the numbers don't seem to work. There is obviously something else happening. Can you give us any sort of guidance how one would model for that, to take into account those other issues?

I will have Bill Tozzi take you through those numbers, and I know you are only kidding about going offline since we couldn't do that. But I will let Bill do that, just for publication purposes.

Glenn, on the other income expense, year-on-year we were - there was about a $5 million reduction. Last year we had small gains on two small businesses worth about $3 million, and this quarter we had a small investment that we wrote down. Year on year, those are the three components, we had a $3 million gain last year and a million dollar loss this year. As far as interest income, our income is unfavorable to last year by about a million dollars. The accounting for some of our deferred comp, not to get too specific, but when you have a reduction in returns on those investments, actually hits our interest income, you offset our SSG&A, and year-on-year there was actually an under $5 million hit we took in interest income. That's probably the single biggest item why year-on-year it looks like it's down versus you might think it would have been up.

So for the year, for net interest expense or - I mean for income, are we talking about 10 or $15 million. Is that sort of the number that you are thinking of?

Net interest expense for the year, I think we have it on a net $4 million benefit. And other -- I'm not really -- give me a minute and I will take a look at that. Other, we actually have it about flat year-on-year. Again, there are a lot of ins and outs there, so we are just assuming it's about the same as last year.

Thank you very much.

We will take our next question from the line of Kristen Stewart with Credit Suisse. Your line is now open.

We will take our next question from the line of Larry Keusch with Goldman Sachs. Your line is now open.

John, I think, if I caught this correctly, you were talking about - or in the prepared comments there was an 80 basis point reduction in SG&A for the year. And if I just run that off of last year, that gets me to 24.4. Then I think, John, you sort of said something that maybe that could be lower than 24 for the year. So I just wanted to make sure I was understanding this correctly.

I was talking about for the quarter, slightly lower. It was 23.8, I believe. Could it be a little lower for the year? Yes. We will have to see how it comes in. But we have not relinquished the spending controls that we instituted across the company. So what I was trying to get across was we are confident that we can continue those controls this year and beyond. So therefore as sales go up, and our leverage of these costs continues, we should get some more benefit in that line, Larry.

Got you. And then just help me think about this. As I think forward from here and obviously not trying to predict where FX is going to go. But if we sort of straight line the Euro, you move across, obviously the compares get less pronounced, so the positive benefits start to wane some here. Where are the levers, as you think about the entire business? Given that you had 5% FX benefit, clearly some of that fell to the bottom line. And let's just assume that oil continues to march up every day, so presumably your commodity cost continues to rise.

Well, you're right. I mean, I'm worst at forecasting FX, but certainly at this base you wouldn't expect it to be incrementally as large as it has been. But it's still -- if it stays at these levels, there will still be some built-in benefit next year, all other things remaining equal, because our average Euro this year is probably going to be in the low 150s, and if it stays at 159, we're going to get a benefit. When you think about the levers we can pull, we've already talked at some length on SSG&A and again, as I said, as we continue to get leverages. So if you think about us spending overall 24-ish percent of SSG&A on sales, and we continue to maintain the leverage that we have through spending controls, you know, that is one of the levers we can pull. Within gross margin, as you know we talked about it at the end of last year and all through this year, that we have a number of discrete projects going on within all three segments that are start-up projects. They don't all end at once, but they all have an end date, and that has the -- that was about 30 basis points of impact on us, which will eventually go away as we finish things like the Hungary plant, which is going to take some time, and other things.

And then as Bill Tozzi said, on resin, while that relationship with oil is certainly significant, last year it was - we spent $250 million of over $3 billion in cost to goods sold on resins. We think it will cost us like 60 basis points this year, so that's like $40 million-odd. That number should be for '08, $290 million, $300 million, something like that. So it still is - while it's significant to us and it does hit the gross margin line, we have other things that we fully expect to be able to, as you say, pull levers against to stave off any increase.

And again, you made one other comment, Larry, that the kind of - oil marches ahead, and indeed it does. But the resin costs don't go one for one. Oil is a reasonable proxy directionally. And as I said, the Euro kind of tracks it. But when you look at resins, there is a lot there, and a lot of that gets around supply and other buying patterns that exist on resins. So right now our resin costs haven't caught up with the more recent last few quarters increase in oil.

Understood. And lastly, I know that you guys said that in the - U.S. pharma systems was a bit tough in the quarter. Any comments as to what went on specifically in that business?

On pharma?

Actually, the quarter for U.S. pharma systems, the second quarter was pretty strong, grew about 18% overall. We are anticipating - grew 19% overall. We are anticipating that will slow down in the U.S. in the back half of the year and that's based on a series of factors, one of which is some customers are ordering from us in Europe rather than the U.S. now. There are a few customer trends in the U.S. that are impacting our -- will impact our revenues for the balance of the year. And on the other hand, international pharma systems, which had a very slow quarter in the second quarter is expected to bounce back pretty considerably in the back half of the year. This business is bumpy by its nature. When there are new market launches or conversion from vials to prefills, we will see a boost, and we get good visibility to that and we anticipate those will continue in the future. They weren't really happening that much now in the second quarter, and there are a few customers in the U.S. whose business is impacting our business. So that's the outlook.

But you expect that to come back?

Expect it to come back. I think the U.S. will probably - will be low through this year and through '09, and then strong again in '10. That's our outlook, to take that a little further. International looks like it will remain strong from what we can see

Thanks very much, guys.

We will take our next question from the line of Jeffrey Frelick with Lazard Capital. Your line is now open.

Thanks. First question for Bill. If I look at the clinical segment only for immunocytometry, what percent of revenues are the reagents, and is that growing significantly?

I want to make sure I got it. Just the clinical piece of the reagent portion of immunocytometry as a percentage of the total company? Total business?

Just the clinical segment of flow, leaving out the research business.

Yes, reagents?

Yes, what percent of the total revenues?

Give me a second here. Just looking at the IS business on a worldwide basis, it's about a third.

Okay. And growing well or slow?

The clinical reagent was a strong double-digit contributor for the quarter. The combination of the HIV and CD4 reagents, as well as the leukemia and lymphoma, the reagents, a combination of those two things that are setting that double digit-growth.

Thanks. For Vince, with respect to preanalyticals, two quarters in a row now growing double digits. What's driving this? Volume? Price?

Well, what's driving the growth in preanalytical is two things, as we have been talking about. One is safety, and that's - you know, U.S. and international that we talked about before. And the other's geographic expansion that continues, you know, especially in Asia/Pacific. Now, remember that there is some FX in that PAS number, too. So PAS was on a performance basis 7.3 for the quarter. It's pretty much in line with where it's been.

Okay. Thanks, guys.

Okay.

We will take our next question from the line of Kristen Stewart with Credit Suisse. Your line is now open.

Sorry about that before. Can you hear me okay?

Yes.

Perfect. I just was wondering you mentioned a little bit about the cost of goods sold line there being a writeoff. And I know there was one also in the previous quarter. What exactly is that related to? Are those expected to continue?

No. The one this quarter was about $4 million discrete on a product that we had --

Two products.

Two products where we had found an issue with a product in our quality efforts and there was -- it was not retrievable, so it's a one-time item that we wrote off. The first quarter, Bill, remind me how much that was?

First quarter was around 7 to $8 million, and again there was some asset writeoffs, again very, very small numbers. And again, there were a couple of inventory - individually they are all under probably $2 million.

And nothing to signal that there is any issues from a quality systems perspective or anything like that?

No.

No. Actually, positive. Actually, the system worked. We caught the issues before these products ever hit the market.

Very true. I was wondering if you could comment a little more broadly speaking following Medicare's proposed reimbursement plans, specifically for the hospital-acquired infections. What are your thoughts on those? Has it changed your view at all on the MRSA opportunity, or just kind of broader hospital adoption of molecular diagnostic testing?

Well, I don't think that the recent conversations have changed our view on the market. If you go back to conversations we were having on this subject six months ago, I think I was indicating at the time that CMS was saying that they were not going to include MRSA in the first six categories that they were going after. I know there is a lot of conversation out there around the issue that, well, you have this catchall clause for going from not reimbursing for a healthcare-acquired infection, and MRSA will be part of that. So I just see this as another area where it's continued pressure. I see the hospitals taking this issue more and more seriously, which I think is the right thing. I think another thing there is a lot of conversation about is that it's not just MRSA. That MRSA is actually, from a diagnosed perspective, right now a small percentage. C-difficile is important. VRE is important. So I think from our standpoint, moving ahead with the menu, you know, is the right thing to be doing because I think hospitals will be going after this broadly. But I do think that - to your question, that it does push people towards the direction of molecular and getting more rapid answers.

And when do you think you will be able to provide us with an update on what the GeneOhm MRSA is going to be running on from an instrument platform perspective? I know your agreement with Cepheid does end and you were working with a partner. Any updates there or when can we hear?

I don't have anything new to tell you. The program remains on track and we are going to be showing the product to customers, and we have a whole list of them, in a couple of months from now at the ASM.

Thank you very much.

You're welcome.

We will take our next question from the line of James Baker with Neuberger Berman. Your line is open.

Good morning, everyone. I just have three quick questions. One about operating margins into the three segments. Were they higher in all three segments? And could you comment on gross margin on the segments as well? That's the first question. Also those two writeoffs that the other caller referenced, the $7 million in the first quarter and $4 million in the second quarter, which business segments did those pertain to? And then finally, can you give us some thoughts on your thinking for where CapEx may be going in fiscal '09 and '10 compared to what we have seen in the last couple of years?

Let's see-Let's take the easy ones.

The $4 million that hit this quarter were both in medical. That's the $4 million that was in medical.

That's this quarter, Jim

That's this quarter. And the first quarter probably split 50/50 between medical and diagnostic.

Okay, that's helpful.

CapEx, we kind of underspent our budget last year. We think we will be about $650 this year. We haven't rolled up next year. But next year I would expect to be around -- in the $600 million range again, Jim, as we finish off these major projects, but we'll be more definitive with that and beyond that, when we do the end of the year guidance.

Okay. Would you see that as front-end loaded? In other words, most of that in the first half and then maybe tailing off in the second half fiscal '09? Is that how that might work?

I'm reluctant only because of the timing of the Hungary plan, actually some it may be more toward the back end and we historically tend to be back-ended. But when we do that, I will give you an idea how that will look.

Okay. And then the last question was just on the margin. I mean I know in the 10-Q I'm sure you will discuss all those matters, but if you could give some sense of how the operating gross margins went within the segments this quarter, that will be great.

I will get it from around the table here, to see if we have it. Bill Kozy can start.

We had a quarter, Jim, that had a very favorable reagent mix. So you looked at biosciences broadly, the margins for quarter year-on-year would have been up and just modestly ahead of expectations.

Okay. What about the other two?

Well, I will give you some, without putting these guys through heck. Biosciences is definitely positive a little over 1% plus. Medical is slightly below, about a percentage point down, and that mainly reflects the writeoffs that we talked about in the first and second quarter, which were a bit over $10 million in the aggregate.

Okay.

So that's where you come up with the 51.1.

Okay. And then diagnostics, which really should have an easier comp by now because you had TriPath in there last year?

Yes, they are slightly under last year, and part of that was the reclassification that Bill talked about, where we took costs that were resident in - TriPath had them recorded, and to lesser extent GeneOhm in SSG&A and in R&D. We caught it up at the end of the year and put them all in the fourth quarter. So now you have this quarter running against a vacant quarter, if you will, last year because it all is in the fourth. So we will get - I know this sounds convoluted, but we will - it will hit us this quarter and next quarter, and then it will be a benefit in the fourth.

Okay. I think I got that. Thank you very much, gentlemen.

All right.

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We will take a follow-up question from Glenn Reicin with Morgan Stanley. Your line is now open.

Thanks, folks. Quick follow-up on the share repurchase line. The $450 million, is that a gross or net number?

That's a gross number. It doesn't net out anything against it.

Okay. Very good. And then we had conflicting data on MRSA this past quarter. I'm very confused whether this is going to be used for universal testing or really active surveillance. Can you give us perspective what you've built your models on? What you think is a realistic outcome here?

So we haven't changed in terms of the percentage. We have been building our models on the 100 million admissions, and in the range of 30, 35% adoption. So some mix of some people are going to do universal. Some people are doing targeted and you are seeing, as we are seeing, that debate continues to go on.

When do you think we are going to get some clarity here? I thought the Evanston study was probably a bit more meaningful this time around, but is there a set of studies that we should be looking at that will give us a definitive answer here?

Well, I think some of the studies that I can point you to is Wilson et al. and the British Journal of Surgery, they are talking about the benefits. Nicholson et al. with the Journal of Infection Control. Perl et al in the New England Journal of Medicine. Those are some of the studies. But there was this other article. There are some people who still are arguing for targeted. We continue to say this is only a piece of the bundle, that you can't do this in isolation. But, Glenn, I think they will continue to argue over this for at least another 12 months.

If it's 12 months, that's great. So that does mean then there is going to be some sort of additional publication?

A lot of people are working on this. I can't say any more than that.

Okay. Can you talk about the new platform, in terms of whether it's random access or batch, and how that compares with the existing platform?

Glenn, as I said, the biggest change in what we are doing is going to be in the sample processing piece of this. And if you walk through the workflow it's going -- so that's where major improvements will be and it will be more of a batch instrument than a random access.

Okay. And that's because you think customers prefer batch?

It's because we think when you do the overall workflow, you can get a more cost-effective solution by doing it that way.

Perfect. Thank you.

Thanks for that last call, Glenn and everyone else. We kind of just gone a little bit over our time. I know we have some other calls that are competing with this. So we are going to thank you, and look forward to your questions next quarter. Thank you. Operator?

This does conclude today's teleconference. You may disconnect at any time. Thank you, and have a great day.