Becton Dickinson and Co (BDX) 2011 Q2 法說會逐字稿

Hello and welcome to BD's second fiscal quarter 2011 earnings call. At the request of BD, today's call is being recorded.

It will be available for replay through Wednesday, May 4, 2011 on the investors page of the bd.com website or by phone at 800-642-1687 for domestic calls and 706-645-9291 for international calls using conference ID 594-68691.

I'd like to inform all parties that your lines have been placed in listen listen-only mode until the question-and-answer segment. Beginning today's call is Ms. Monique Dolecki. Miss Dolecki, you may begin your conference.

Thank you Jackie. Good morning everyone and thank you for joining us to review our second fiscal quarter results.

As we referenced in our press release, we are presenting a set of slides to accompany our remarks on call. The slide presentation is posted on the investor relations page of our website at bd.com.

During today's call we will make 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 fiscal quarter press release and in the MD&A sections 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 its related financial schedules and in the slides. A copy of the release including the financial schedule is posted on the bd.com website.

Leading the call this morning is Vince Forlenza, President and Chief Operating Officer. Also joining us are David Elkins, Executive Vice President and Chief Financial Officer; BD Executive Vice Presidents Gary Cohen and Bill Kozy; as well as Bill Rose, President of BD Biosciences and Tom Polen, President of Diagnostic Systems. It is now my pleasure to turn the call over to Vince.

Thank you, Monique, and good morning, everyone. Before we discuss the results in the quarter, we would like to provide you with an update on the situation in Japan subsequent to the earthquake and tsunami.

We are pleased to report that our business operations in Japan have stabilized more rapidly than we originally anticipated following the earthquake. Order volumes have returned to normal levels and customer service and distribution operations are now also operating at normal levels.

BD's manufacturing plant in Fukushima province sustained some minor earthquake related damage but has recently restarted the production of prepared plated media. We expect the manufacturing of the BD Hy-pack prefillable syringes to resume during the third fiscal quarter.

We also have a distribution center in Fukushima which is now fully operational, and immediately following the earthquake, we established an additional distribution center near Tokyo which is supplementing normal distribution operations in Japan. Our plant and distribution center in Fukushima province are located approximately 60 kilometers from the damaged nuclear plant facility and because of this, we contracted with a company specializing in radiation testing to assess our facility.

The test results to date indicate that radiation levels in our Fukushima facilities are essentially normal and do not pose any reason for concern. Testing will continue over the coming weeks and we will continue to closely monitor the situation at the nuclear power plant.

Overall, we are very pleased with the speed of the Company's recovery in Japan which is a testament to the hard work and dedication of our employees. Most importantly, we are thankful that all of our employees and their families are safe.

From a financial perspective, we did see an impact on our revenue growth from the earthquake in Japan. In our second fiscal quarter the impact to our sales growth was less than $10 million.

For the full year, we anticipate this having a $10 million to $20 million impact on revenue and about a $0.05 impact on EPS which is built into the total year guidance. About half of the EPS impact occurred in the second quarter. As a reminder, Japan accounts for approximately 5% of the Company's overall revenues.

About 1% of our revenues are derived from products manufactured and sold in Japan. Right now it is difficult to assess whether there could be further underlying risk to our business in Japan such as environmental risks that could impact our long-term operations. We will continue to provide you with updates as the recovery process continues in Japan.

We would also like to provide you with an update on Accuri Cytometers. As we announced in our press release on March 18, we completed the acquisition of this Ann Arbor, Michigan based company that develops and manufactures personal flow cytometers for researchers.

The financial impact of the acquisition on fiscal year 2011 earnings has been incorporated into the guidance we that provided on our last earnings call in February with the dilution being less than $0.05 to earnings per share for the total year. The purchase price of the Company was $205 million.

We see this acquisition contributing approximately 1 percentage point to Biosciences revenue in fiscal year 2011 and about 1 to 2 percentage points per year over the next three years. The Accuri acquisition allows us to bring affordable flow cytometry from these estimated 1,200 research core flow labs around the world to more than 70,000 life science researchers who currently access those labs but who do not own flow cytometers.

It will allow us to eventually bring affordable flow cytometry to hundreds of thousands of life science researchers around the world who are not currently using flow but whose research might benefit from its power and utility. This acquisition is an excellent addition to our portfolio and is aligned with our strategy of driving revenue growth through innovation.

On slide 5, we've outlined our Q2 revenue and EPS results. We are pleased with our results this quarter which I will speak to on a currency neutral basis.

Revenues were solid, increasing by 4.6%. Fully diluted EPS came in at $1.38, growing at 7.4% over the prior period on an adjusted basis.

For the six-month year-to-date results, revenue growth was 1.5%. EPS growth was about 5% on an adjusted basis due to the difficult comparisons we discussed last quarter.

Moving to slide 6, I would like to briefly summarize our outlook for fiscal year 2011 as David will provide more details later in his remarks. As I just mentioned and as Ed stated in our press release, we are pleased with our results in the quarter which were in line with the Company's expectations. The current macroeconomic environment however continues to be a challenge.

On the positive side, given our presence outside of the US, we are favorably impacted by the weakening of the US dollar. As a result, we are raising our reported EPS guidance to grow 12 to 14% on an adjusted basis.

However, we are lowering our currency neutral revenue guidance to about 3.5%. This is a result of the challenging macroeconomic environment particularly in Western Europe.

This new guidance continues to assume higher sales growth in the second half of the year but less than before which we believe is prudent in this environment. On a currency-neutral basis, we are revising our EPS guidance to about 10% which is at the lower end of the 10 to 12% range we previously discussed.

We are also negatively impacted by increased resin costs and the earthquake and tsunami in Japan. We continue to manage the Company accordingly and we are confident we are able to deliver on these results. Now, I would like to turn things over to David for a more detailed discussion of our second quarter financial performance.

Thank you, Vince, and good morning, everyone. I would like to begin by discussing the key financial highlights for the second quarter.

As Vince stated, we are really pleased with our results. Revenue growth was 4.6% and we experienced solid growth in the medical and diagnostic segments. Strong growth in biosciences segment was masked by supplemental and stimulus spending in fiscal year 2010 and the impact of the earthquake in Japan this year.

We saw continued strength in emerging markets which grew at about 13% currency-neutral. We continued to control G&A expenses while investing in emerging markets as well as R&D which increased almost 19% in the quarter. This is in line with our expectation as we continue to invest in new products and platforms.

The Company's earnings of $1.38 benefited from favorable currency of about $0.07 in the quarter. Additionally during the second quarter, we completed $221 million of our $1.5 billion share repurchase plan. Our guidance for the program in 2011 remains unchanged at $1.5 billion with $1.1 billion repurchased in the first half of the year.

Turning to slide 9, in our revenues by segment, I'll start with the total company performance. As I mentioned earlier, revenue increased about 4.6% currency-neutral.

This includes less than one percentage point of unfavorable pricing. For the first half, the Company grew 1.5% currency-neutral. Excluding the impact of the sales related to the H1N1 flu pandemic and the stimulus and supplemental spending in fiscal year 2010, the Company grew at about 5% currency-neutral.

BD Medical's second quarter revenues increased about 5% currency-neutral. Growth was primarily driven by diabetes care which continued strong sales of pen needles fueled by Nano. Medical segment revenues were also driven by strong growth in our pharmaceutical systems business and international safety sales.

For the first half of the fiscal year, the Medical segment was about flat on a currency-neutral basis. Excluding the impact of the flu pandemic in fiscal 2010, underlying revenue growth was about 4%.

BD Diagnostics second quarter revenue increased 6.5% currency-neutral. Revenues reflected solid growth in our pre-analytical systems safety products.

Our Diagnostic Systems experienced strong growth driven by infectious disease platforms. GeneOhm growth in aggregate and TriPath growth outside the US were most notable. For the first half, the Diagnostic segment grew 3.6% currency-neutral. Excluding the impact of the flu pandemic, revenue was about 4.5% year-to-date.

BD Biosciences revenue growth in the quarter was about flat at 0.4%. As we discussed on our first quarter conference call, revenue growth was negatively impacted by a tough comparison due to the strong stimulus spending in the US and the supplemental spending in Japan in fiscal year 2010.

Additionally, the segment was also negatively impacted by the earthquake in Japan. Excluding these items, underlying growth in the Biosciences segment would have been approximately 12% in the quarter.

Segment growth was primarily driven by strong instrument and reagent sales in our Cell Analysis unit. For the first half of the fiscal year, our Biosciences segment grew about 4% or 2% on a currency-neutral basis.

Excluding the impact of the supplemental spending in Japan and the stimulus spending in the US in fiscal 2010, revenue growth was about 7%. The Japan earthquake and tsunami lowered revenue growth by an additional 2 percentage points which really brings the underlying growth of the business to about 9%. We continue to be pleased by the underlying performance of our Biosciences segment.

Moving to slide 10, I'll walk you through our geographic revenues for the second quarter. Overall, BD's reported US revenue growth was 4.7%.

US Medical revenues increased 4.4% year-over-year reflecting the strong sales of pen needles, our pharmaceutical system products and was slightly offset in our Medical Surgical Systems business. US sales of Diagnostics products grew a solid 6% driven by infectious disease testing, and Biosciences revenues in the US increased 2.5% which was impacted by a tough comparison to prior-year due to the US stimulus. Growth in the segment was primarily again driven by cell analysis which was partially offset by our Discovery Labware products.

International revenues increased 4.6% on a currency-neutral basis. The difficult comparison of flu related sales and supplemental spending in Japan impacted revenue growth by about 2 percentage points, resulting in solid underlying growth of about 7% internationally.

As I mentioned earlier, the Biosciences segment was negatively impacted by several factors as I mentioned earlier for the fiscal year 2010 as the impact of the earthquake in Japan impacted this year. These factors together had a total negative impact of 16 percentage points on the segment. Excluding those items, the Biosciences segment had strong underlying international growth of about 15%.

For the first half, reported US revenues grew about 0.8% with Medical decreasing about 1%. Diagnostics and Biosciences grew at about 3% each.

Total US revenues grew at about 5% excluding the impact of flu in fiscal year 2010. The total international revenue growth was about 2% currency-neutral in the first half and also grew about 5% excluding the flu and supplemental impacts.

Moving to global safety product results on slide 11, reported sales increased about 7% and grew to $441 million in the quarter. On a currency-neutral basis, revenue growth was about 5%.

This growth was driven by international safety sales which increased about 14% on a currency-neutral basis. For the first half, safety growth was about 3% on a currency-neutral basis.

After adjusting for the flu, growth was around 6%. This was a combination of strong international growth of 12% and a growth rate of about 3% in the US.

International safety sales were particularly strong in the Medical segment with the largest gains occurring in our emerging markets. Total safety product sales in emerging markets are now approaching the level similar to safety sales in Western Europe.

In the quarter, emerging markets accounted for approximately two-thirds of overall international safety sales growth. Now looking at the Company for second quarter revenue growth year-over-year, we saw gains from performance of 4.6%. The remaining gain is due to the hedge loss from fiscal year 2010 not recurring in fiscal year 2011 as well as favorable currency.

Moving on to slide 13, our gross margin improved about 10 basis points to 52.1%. The absence of the hedge loss from fiscal year 2010 generated a favorable comparison of 70 basis points.

This was partially offset by unfavorable foreign currency translation in the quarter of about 30 basis points. Overall, performance declined by about 30 basis points.

Positive productivity and mix and favorable start-up costs of 40 basis points was more than offset by higher raw material costs, higher pension costs and the impact of Japan. Slide 14 now recaps the second quarter income statements and highlights our foreign currency-neutral results.

As discussed earlier, second quarter revenue grew by 4.6% currency-neutral and gross profit by 4.1%. As a percentage of revenues, underlying gross profit margin, as I discussed earlier, decreased by about 30 points.

Moving down the income statement, SG&A increased 4.1% primarily due to increased investments in emerging markets, increased pension costs and our SAP implementation. These were partially offset by savings in G&A.

R&D increased about 19%, or 60 basis point as a percent of total revenue over the prior-year period. The acceleration in R&D is in line with our expectations as we're continuing to invest in new products and platforms.

Our operating income was about flat reflecting a difficult comparison due to the flu and stimulus as well as higher resins costs, the increased R&D spending in the first half of the year and the impact of Japan. EPS growth came in at about 7.4% currency-neutral mainly benefited by our share repurchase program and the impact of a favorable tax rate.

Moving to slide 15, revenue in the first half increased 2.6%. Performance and the impact of the hedge loss not recurring contributed 1.5% and 1.1%, respectively. The currency impact in the quarter was negligible.

Now looking at gross margin on slide 16, year-over-year we experienced a 50 basis point improvement. The absence of the hedge loss that occurred in fiscal year 2010 generated a favorable comparison of 60 basis points.

The impact of currency translation was also negligible for the results year-to-date. Overall performance declined by 10 basis points. Positive productivity and mix, and favorable startup were about 60 basis points and they were more than offset by higher raw material costs, pension and the impact of Japan as I talked about on the second quarter.

Slide 17 recaps the six months year-to-date income statement and highlights our foreign currency-neutral results. Revenue growth was about 1.5% currency-neutral, l as I mentioned earlier.

When you exclude the impact of flu related sales and the supplemental and stimulus spending in 2010, revenue increased about 5% year-to-date. Gross profit increased 1.4%.

Moving down to SSG&A which increased about 2.5%, with overall G&A expense savings being offset by increased investments in emerging markets as well as SAP implementation and the pension costs. Similar to my earlier comment on the second quarter results, R&D increased about 18% currency-neutral due to the continued investment in new products and platforms.

We expect a moderated rate of R&D growth for the balance of the year as the investment was accelerated in the first half. We are still guiding R&D to increase about 10% for the full year.

Our operating income increased 3.6% impacted by the difficult comparisons to the prior-year, the higher resin costs and pension, as well as investments in operational efficiencies like our shared services and the effects of the earthquake in Japan. EPS increased about 5% driven by the share repurchases and a favorable tax rate.

Now as Vince mentioned earlier, I would like to move on to revenue guidance. We are slightly lowering our revenue guidance expectation.

We expect to grow about 3.5% on a currency-neutral basis. However, the underlying growth of the business is about 5.5% when excluding the impact of flu, stimulus and the supplemental spending. We have modified guidance due to a continuing difficult environment in Western Europe as well as the impact in Japan.

For the Medical segment, we're anticipating currency-neutral growth of about 3% with underlying growth at about 5%. We expect revenue growth for the remainder of the year to be driven by continued strong sales of pen needles and strength in our pharmaceutical systems business, along with the strong growth in international safety products as well as China.

In the Diagnostic segment, we anticipate currency-neutral growth of approximately 4.5% with underlying growth at about 5%. We expect to see further pickup in growth in emerging markets and from our new from our new BD Max and Innova product launches.

We expect Biosciences currency-neutral growth of about 4% to 5% with underlying growth of about 7%. Biosciences growth will be driven primarily by instrument and reagent sales in our Cell Analysis business, including the launch as Vince will talk about later of our new desktop sorter and research analyzer.

Advanced Bioprocessing will also contribute to the growth in the balance of the year with new products launching in that business. As I mentioned earlier, the Accuri acquisition will contribute approximately 1 percentage point to revenue growth, and we expect it to contribute about 1 to 2 percentage points of growth over the next three years to our Biosciences business.

Now moving to slide 19, I would just like to summarize our expectations for the total year. On the top line, as we just discussed, we expect revenue growth of about 5 to 6% on a reported basis aided by currency.

On a currency-neutral basis, we expect revenue growth to be approximately 3.5%. On the bottom line, we anticipate EPS growth of about 12 to 14% off the adjusted 2010 EPS of $4.94.

On a currency-neutral basis, we expect EPS to grow about 10% driven by revenue improvement in the second half, our efficiency gains, a moderated rate of R&D growth and the benefit from our share repurchase programs. These items will be slightly offset by higher resin costs and the impact of Japan.

Despite the challenging environment in which we are operating, we remain focused on driving both top line and bottom line growth and are confident in our ability to deliver these results. I will now turn the call back over to Vince who will provide an update on our product launches and our emerging markets opportunities.

Thank you, David. On slide 21, I'd like to provide an update of our key product initiatives.

Starting with BD Medical, we recently launched ecoFinity, a sustainable disposal solution for sharps products. Our ReKindle program remains on track with conventional reuse prevention and low-cost safety products launching in three plants on three continents this year.

In addition to ecoFinity and ReKindle, we are also planning to launch an extension to our flagship product Insyte Autoguard with a blood control feature, and Nexiva with a diffusion tip in fiscal year 2011, further enhancing our portfolio of innovated infusion therapy products. Within our Diabetes Care business, we plan to launch a next-generation safety pen needle during the back half of this fiscal year and other innovative products beginning in our fiscal year 2012.

As I have mentioned in past discussions, we continued to collaborate with the Juvenile Diabetes Research Foundation and we will be leveraging our expertise as a leader in insulin delivery and acute care infusion to launch new products that will improve the patient experience and therapy outcomes for insulin pump users.

Turning to slide 22, I would like to walk through some of the key initiatives in our Diagnostics segment. We are continuing to invest in the BD Viper XTR with fully automated specimen processing. We recently launched our HSV assay on this platform.

In the third quarter of this fiscal year, we will be launching a new automated microbiology plate streaker called the BD Innova. We are also excited about the BD Max, our new automated molecular diagnostic instrument. We're pleased with the progress of the new 6-color Max. It is performing well and we are on track to launch that as an open system next month.

In fiscal year 2012, you can expect the launch of the BD Max MRSA and C. difficile assays mid-year in the EU. The US launch will be toward the end of the year.

Additionally, in the fourth quarter of fiscal year 2012, we will be launching the Trichomonas assay on the BD Viper. In fiscal year 2013, we expect to launch our molecular PAP test, the BD SurePath Plus. At the end of the year 2013, we will be launching the Viper LT, our next-generation mid-volume Viper platform to replace ProbeTec.

On slide 23, we will review the product launches for our Biosciences segment. We are pleased to announce that we recently launched our BD Recharge Media Supplement for bio-production.

Also this year, we have our BD Mosaic serum-free stem cell culture medium and a new desktop sorter. You can also expect a new modular research analyzer to come out this year.

In the fourth quarter of fiscal year 2012, we plan to launch a new analyzer for CD4 testing for the developing world. Moving on to slide 24, we continue to grow in emerging markets which accounted for approximately 21% of the total Company's revenues in the second quarter.

Emerging market revenues grew about 13% in total over the prior-year with double-digit growth in a number of key markets. Growth in the Asia Pacific region was driven by sales in China which were up about 30%, and in the Eastern Europe, Middle East and Africa region, which grew approximately 18%, with particularly strong results in Africa.

We were very pleased with safety revenue growth in emerging markets which was up about 27% over prior period. Emerging market growth is being driven by expanded healthcare funding and patient access and BD's products, organizational capabilities and geographic reach are well aligned to meet the healthcare needs in emerging countries. We are committed to investing in emerging markets and we expect to achieve continued double-digit growth in these markets for the balance of the year.

On slide 25, before we open the call for questions, I would like to reiterate some of the key messages from our discussion today. First, we are pleased with our results this quarter in all three of our segments.

We look forward to moving past the tough comparisons that have occurred in fiscal year 2010 which impacted our results year-to-date. We believe it was prudent to lower our revenue guidance in this challenging environment.

We are also modifying our EPS guidance to about 10% currency-neutral due to higher resin cost and the impact of the earthquake in Japan. Second, we are encouraged by the progress we are making in emerging markets.

We are building strong businesses in these markets and we believe they are well positioned for future growth. Third, we have many exciting opportunities in our pipeline, and our product development and product launches remain on target.

Fourth, our operational excellence programs are progressing as planned. They are on track to deliver future savings and are already offsetting some of our near-term challenges.

Lastly, we believe our intense focus on these areas positions us well to continue our track record of delivering value to shareholders and to our customers around the world. Thank you, and we will now open the call to questions.

(Operator Instructions) Kristen Stewart, Deutsche Bank.

I was just wondering if you could maybe expand a little bit on your commentary on Western Europe. It seems that that is along with Japan one of the things bringing down the constant currency revenue growth this year.

I'm just curious if this is something that you expect to see -- some, you know, significant level of improvement as you move forward especially with the safety initiatives looking out in the next couple of years and whether or not the revised expectations for this year with constant currency growth really changes the way in which you've looked at the next three years which as I recall was kind of on average 6%. So obviously you'd have to have even a greater acceleration in the outer years in order to achieve that.

Kristen, first off, good morning. Talking about Western Europe, let's focus on this year.

Western Europe -- the issue in Western Europe is really one of utilization and some rationing of healthcare by the governments in Western Europe. And it's not the same across all of the countries.

Some countries are more severe than others. But we expect -- Western Europe grew about 1 to 2 percentage points in the first half of the year. We expect it to be around 2% for the total year.

So it's kind of a consistent trend we have seen the last two quarters. Our expectations were a little higher for Western Europe going into this year, but we see the situation as stable.

We are seeing progress in safety and in fact, safety grew 7% in Western Europe. As we also mentioned on the call, we're seeing higher safety growth in emerging markets and Gary can comment on that.

Biosciences had a good quarter as well in Europe. So we are lighter than we thought in Western Europe primarily due to the environmental factors. We expect it to get a little bit better in the second half of the year.

In terms of the longer-term guidance, we are in the middle of our strategic planning process. So, I'm not going to get into what we see in the out years right now.

I would rather give you an all-in answer based on our latest strategic planning which is started but will continue for the next couple of months and come back to that with a more informed answer. But let me ask Gary to just comment on safety for a minute here.

Yes, maybe also I'll add a little more couple color on Western Europe because we thought there would be some questions about it. Probably it's not any surprise to anyone that the economic environment in Western Europe is constrained relative to other areas of the world.

And we grew around 2.5% in the quarter in Western Europe and we are projecting to grow a little under 2% for the balance of the year. There's not much of a pandemic or stimulus impact there. So that's pretty much the same FX neutral or adjusted.

So more or less, our outlook for the rest of the year in Western Europe relative to the quarter is similar or slightly more conservative than what we had in the quarter. When you look by country in Western Europe, it's really concentrated just in a few countries.

France is one of them and that has been impacted more by Pharm Systems because all of our Pharm System sales in Western Europe are recorded in France because that's where we ship from because that's the headquarters of the global Pharm Systems business. In Greece, our sales this year are down by about half because we made a deliberate decision to go from a direct to a distributor distribution model to reduce collection risks in Greece. That was a deliberate decision anticipated from the start of the year.

And then Nordic, our sales are a little bit light. But the other countries in Western Europe are growing at a low- to mid-single-digit rate which is pretty much what we would expect given the economic environment there.

And as Vince mentioned, safety sales are growing about 7%. They did in the second quarter. That's pretty much our outlook for the rest of the year in Western Europe, and that is quite a bit above the underlying base growth rates, so we are getting good contribution from safety.

Then the other side of the international story is that emerging markets are growing really solid. As Vince mentioned, we had about 13% growth in second quarter. That's pretty consistent with our outlook for the year in emerging markets and we're getting very strong safety growth.

As had been mentioned during the formal comments, emerging market safety in total is basically going to be around the same level as Western European safety for the year in absolute dollar terms. And we are expecting mid-20% growth over the balance of the year.

So essentially what we're seeing is an economic impact in Western Europe which is being more than offset by this strong growth we are getting in emerging markets reflecting the diversity of our sales around the world.

So we just raised the forecast a little bit on the back half of the year in Europe. So thank you very much.

Okay and then just real quickly I guess for David just on the higher resin costs, obviously takes a little bit to see the impact of higher oil and resin flow through the P&L. You guys didn't give an update on ReLoCo savings or whatnot, but how can we think about higher resin cost going forward?

Is there an ability to maybe see some acceleration of some of the cost savings with programs like ReLoCo and EVEREST that could possibly help to offset higher resin if we continue to see oil where it is at today?

Yes, I mean, that's exactly what we are doing. I think we had some headwinds of about 30 to 40 basis points on resins. We have also had some headwinds of about 20 basis points from the pension.

And actually ReLoCo year-over-year is favorable. So the reason why it's only about 30 basis points from a performance perspective is as I was talking about, we do have some -- the operational efficiencies are starting to deliver as well as the favorable comps that we had. So, we're really excited about the underlying operation efficiency programs and they are helping to offset the higher resins cost.

From a guidance perspective, we're looking at resins, as we said it's about three months before that comes through. So we have a pretty good view of where resins will be for the remainder of the year, and we are assuming that oil will be slightly over $100 a barrel for the remainder of the year.

Bill, would you like to remind us about the projected savings from ReLoCo in the schedule?

Sure, well the ReLoCo program remains on track with the prior previously discussed commitments that we made expected to start delivering very positive impact in FY12. Additionally, ReLoCo II is underway in the business and that will be kick-started by a focus on revisit globally of all of our procurement activity, as you would expect, everything from base raw materials to our supply-chain activities. So to your question about next steps designed to offset some of this challenge ahead, we are underway with that planning and we're probably about six to nine months away from any detailed discussion about that.

On ReLoCo II.

ReLoCo II is new as far as I can remember. Is it the first time you are mentioning it?

That's the first time we're mentioning it, you're right.

Perfect, thank you.

Okay, great, you're welcome.

Have a good one.

Amit Bhalla, Citi.

I wanted to ask you a couple questions on the Diagnostics business. Can you give us a little bit more detail on molecular testing performance and also comment about the strong overseas performance of Diagnostic Systems? I think that was up 11% constant currency.

Sure, we would be happy to do that. I'm going to ask Tom Polen to comment.

Amit, this is Tom Polen. So in Molecular, I'd really break that into two areas. Our GeneOhm business, we saw very strong growth both internationally and in the US. As Vince mentioned, we were up 22% for the quarter in GeneOhm driven both by double-digit growth in both MRSA and C. diff testing there.

Our GCCT Molecular business, the Viper and the ProbeTec, was up 4.5% globally driven by solid performance primarily in the US. As we think about internationally, certainly we saw particularly as Gary had reflected in safety, we saw very, very strong growth in the developing markets in the Diagnostic Systems business, particularly in our TriPath Women's Health business as well as in our Infectious Disease Core Microbiology business.

Can you comment also about just what you're seeing out there in discretionary patient testing volumes? Are you seeing a pickup that's starting to take place that's reflected in these growth rates?

We're not seeing any specific increase in overall patient test volumes but I would say we are seeing an increase in some sub-segments of testing volume such as screening for MRSA and C. diff. We see that segment of the market continuing to grow particularly as it converts from traditional methods over to molecular diagnostic methods.

Tom, do you want to comment on maybe the US market from the standpoint of overall testing and then women's health?

So from an overall -- both for the Diagnostic Systems and the PAS business, we see overall lab testing volumes relatively flat year-on-year (inaudible) for the second quarter.

Women's health (multiple speakers) OB/GYN visits may be off a little bit, better than they were before, right?

Right, so women's health, we specifically track OB/GYN and overall Pap volumes. We see those in the US down about 4%. We saw our US TriPath business, consumables were down about 2% for the quarter driven by that overall trend.

That overall trend of 4% down in overall Pap testing is really driven by a change that was made last year in the recommended testing intervals for women for Pap testing. As I mentioned earlier, internationally we see very strong double-digit growth for cervical cancer screening particularly in the developing markets and that's bringing overall TriPath globally to about 5.5% for the quarter.

Rick Wise, Leerink Swann.

Let me start off with the guidance if I could. Obviously I appreciate currency helped, but really the underlying businesses basically did pretty well in the quarter, a little better on almost every front than we expected.

The second half -- the easier comps. It sounds like Japan is resolved, listening to you. ReLoCo is kicking in.

I'm still not quite sure I understand why the extra incremental conservatism. I view it as just a very conservative stance given all the moving pieces.

I will let David comment on that.

Yes, there's just a couple of things. If you think about it from an EPS perspective, the underlying performance is up about a nickel. What we're having to absorb on the bottom line is Japan is about a nickel for the full year as well as resins being about another nickel, so that's around the $0.10 that we are absorbing.

And remember, through our operational efficiency programs, we're able to offset the lowering of the top line guidance because the operational efficiency gains that we're actually getting in the business. So to really just summarize for the full year from a guidance perspective, we are really incorporating impacts of Japan and the higher resin costs and that's why the underlying EPS is around the bottom end of the range around 10%.

Yes, maybe on sort of a strategic basis then, you guys are doing a great job with the operating efficiency. It seems like there's a lot in the pipeline.

But there's still sort of a long-term growth challenge not just for Becton but for all companies. Do you think that Becton needs to be even more aggressive on the acquisition front and/or even more aggressive in stepping up R&D to meet that challenge?

So I don't think we have to be more aggressive in stepping up R&D. I think we are making excellent progress on our R&D programs and I think you will see in the short run that moderation of the spending and it will come in at about 10%.

And we will continue to aggressively fund R&D as I look forward, but in line with the step-ups that we have been doing. On the acquisition side, our acquisition strategy hasn't really changed.

We are still looking for things that are strategically complementary to where we are today, generally plug-in acquisitions. We're being very systematic, we're looking in all three of our business areas for new opportunities.

And I think we are developing and increasing our business development capabilities. So it's something from a capability standpoint we will be working on over the next couple of years. And acquisitions will continue to be part of our strategy as we move forward.

Let me just sneak in one more. If you look at the next couple of quarters, I appreciate the concerns that you highlighted, David, but what could go right? If we're talking after the next quarter and after the fourth fiscal quarter and if you would do -- Becton would perform better, where would that come from? Would it be -- is it rolling out the products? Is it the cost reduction? Is there something specific that we could think about? Thank you.

I think the two things that we are most excited about as Vince highlighted are the new product launches that we have. The underlying performance of the Biosciences business has been phenomenal and with the number of launches that we have going there.

The BD Max platform and the opportunities we see from expanding the menu there is very exciting for us. And as we talked about with the emerging markets, as Gary highlighted as well as Bill Kozy highlighted for the Medical business, I would say that those are some of the areas that we are very, very excited about.

And lastly, as Vince talked about on the last call, is our operational efficiencies, our ability to get these shared services centers up and running to take out overhead costs so we can continue to invest in these new opportunities is what is enabling us to move forward and why we are excited about the business.

I was just -- Rick, I would just add on the emerging market side, for us, it's not just China which is doing very, very well or India which is doing well. But Latin America is going well and we see other parts of Asia now as opportunities.

So I think you are going to see us as we look out continuing to invest in those markets and building capabilities. And I think that provides a platform for upside.

I appreciate that.

Mike Weinstein, JPMorgan.

It's actually Kim in for Mike. So my first question is on the US side of the business.

I don't think that you commented broadly on the health of your US markets and utilization trends in the quarter. You did indicate that pricing was off just under 1% worldwide and I'd be curious if you could break that out US/OUS and whether that has changed at all over the last couple of quarters.

So I can't break it out but there aren't big differences between the US and the other developed markets. In terms of utilization in the United States, we are indicating pretty much a stable situation.

On the lab testing side, we really haven't seen much of a change. I think Tom commented that the lab volumes were around 1% up, somewhere there for general testing and that's where they have been from our perspective. We haven't seen much change in doctor's visits or anything. So we're really looking at a -- pretty much a stable business.

In the US we had good Diabetes Care performance, we had good Pharma Systems performance which helped our medical business and Diagnostics, our Infectious Disease business did well. You might recall that last year was a very light flu season. We had a bit of a flu season this year.

So a little bit of a tailwind there. But as we mentioned that TriPath was a little soft because of the intervals but GeneOhm did very, very well. And then lastly, Biosciences -- and maybe I'll ask Bill Rhodes to comment on Biosciences in the US because I think they had an excellent quarter.

This is Bill Rhodes. Yes, we had a good performance in the US. We actually saw -- in terms of utilization we saw our clinical reagent sales do quite well. And of course the bulk of our products for cell analysis are in the research markets and did quite well with that.

So, the opportunity last quarter and the opportunity going forward in the US frankly is -- continues to be and is quite good.

Okay, great. Just a quick follow-up.

You had a number of areas outperform relative to our expectations in the quarter. You put up nearly 7% organic growth after we adjust for the items in the quarter which is well above the outlook for the year. So I'd just be curious if there were any specific one-time orders that might have helped any of the business segments in the quarter?

I'll have Bill Kozy comment because in Medical, Pharma Systems continues to be lumpy and it was a strong quarter. But, Bill, maybe you want to comment?

Sure, let me -- this is Bill Kozy. In terms of the one-time sales impact related to global Pharma Systems, we had about $7.5 million of some one-time sales events. It is a combination of some inventory replenishment and some validation testing and clearing backorder, a bunch of miscellaneous topics, but clearly about $7.5 million that won't repeat.

So that's pretty much it.

David Lewis, Morgan Stanley.

This is actually James in for David. My first question is a follow-up on the increased pressure you are seeing in Europe.

Could you try to break down how much of this is related to volume and how much might be to price? Specifically last quarter you mentioned that you are seeing some slight escalation in pricing pressure in pockets of different world markets.

I wonder if you could comment on how that's developed.

We said that pricing is less than 1% for the Company and the way to think about that is that if some of the more mature product lines -- and you'll see it more on the device side -- you are going to see more pressure because you've got more competition. And you see that in Europe with its tender system.

But you also see some of that in the United States as well. Where we have differentiated products -- I'll give an example, like the launch of the Nano pen needle where we have some great clinical data, the customer feedback is fantastic. You can actually go out on a premium. So that's kind of the breakout. Biosciences with the new technology, you tend to see less there as well.

So it sounds like on the pricing front, not a big change relative to last quarter?

It's not a big change.

Okay, and then secondly, just on R&D spend from a long-term perspective, obviously 2011 is an investment year. If we look at where spending is going to end up this year, it is probably going to sit slightly over 6% of sales which is certainly a step higher than it's been historically.

Over the long term, do you think that this is the appropriate level of investment or could we see some moderation in the future as project timing starts to be a little less intense?

I don't see us going back below 6% of revenue again. We did have some big clinical trials but I would also expect as some of the things come through the pipeline -- some of the longer term things that we're working on, we're going to see some significant clinical trials for those, as well. So I think if you use 6% around that number, maybe a little tiny bit above that, you would be in good shape.

David Roman, Goldman Sachs.

I wanted to come back to the comment you made in your prepared remarks regarding TriPath outside the United States as being a source of growth in Diagnostics Systems. Could you expand a little bit more on what the key drivers are there, whether you have entered new markets, what you are seeing from a market share perspective and any change on the reimbursement front that might have contributed to the strength in the quarter?

Sure, Tom Polen will take that.

Hi, Dave, this is Tom Polen. So I think specifically what we're seeing is in many of particularly the developing markets, what we're seeing is a transition from traditional Pap testing to the liquid based cytology technology which of course is what we offer in TriPath.

We certainly are investing from a channel and a market development perspective to help drive that growth. So it's primarily a technology shift to an improved method for doing cervical cancer screening.

I would say the other thing that we also see is particularly in areas of Asia Pacific, to a lesser extent in Europe and Latin America, increasing focus of maybe the governments on expanding the screening programs for women to help improve the early diagnosis of cervical cancer.

I just want to add a point to that that cervical cancer is the leading cause of death among young women in many developing and emerging countries. And the way you saw the world respond to HIV in particular a decade or a little more than a decade ago, we're starting to see some building momentum towards dealing with this particular source of mortality among young women in developing and emerging countries which complements what Tom had indicated, and we're well prepared based on our experiences working with international organizations on dealing with infectious and non-communicable diseases on what business models are most appropriate to be able to address such needs and opportunities.

We're really at the beginning of that. Tom?

I just add, one of the governments that is really leading in that forefront very aggressively expanding cervical cancer screening is Japan and we see very strong performance there in that market.

Tom, in some of your comments regarding the investment for market development and education, from a competitive perspective, is that something that you see BD leading the charge on? And how has your performance from a share perspective been in those markets when you compare it to some of the more developed markets like United States?

Certainly in several of those markets, Japan being a good example, we do see ourselves taking a lead in helping to develop those markets. And we are from a category position perspective, we certainly see we are gaining ground in the developing world.

In general -- this is Gary again -- from the standpoint of focus and experience, that educational element, the collaborative element of working with governments, international agencies, we are deeply experienced in those areas. It's a particular area of sense of purpose for the Company to collaborate on addressing the health needs of the society, not just to try to push product or technology into the country.

We've been doing that for over a decade in the infectious disease area and those same types of the principles are being applied to non-communicable diseases which also aligns the trends that are happening globally. The UN is going to have a major summit on non-communicable diseases in September. These are all areas we are involved with as a trusted partner.

Okay, and then I know you sort of touched on Europe a number of times from a revenue perspective but maybe you could sort of talk about anything you're doing on the cost side. I understand that Europe represents a relatively large percentage of revenue. That obviously as a relative contribution is going to go down as the emerging markets grow faster and you start to penetrate some of those opportunities more fully.

How are you thinking about Europe from a cost perspective? And at what point do you start thinking about running that business more for cash rather than growth?

Well, I don't think we're going to think about running it for cash. We think we have growth opportunities and as new things come through our pipeline, we think they're not just US opportunities or emerging market opportunities. We think we are going to have opportunities in Europe with them well, as well.

Gary has been very proactive in addressing some of these issues. Even as we were entering into this year, we reorganized Europe and changed the organizational model and took some cost out, but at the same time, knowing some of these things that we are working on such as women's health and cancer, we are investing in some policy work.

We still think that there is an opportunity for safety in Europe, even though we're talking a lot about how fast the emerging market piece is picking up and all of that is true. But to grow in Europe and increase the growth rate as we come out with the GeneOhm products which are starting to get traction -- it's not just the product, it's the market development effort. So it's not just a cost basis in Europe which as I said, we are attacking, it's also some market development efforts.

Larry Keusch, Morgan Keegan.

David, on the hedging program for the Company, obviously the weak dollar has been a benefit as you mentioned. You picked up roughly $0.07 in EPS from the FX benefit this quarter.

But given what the dollar has done, I'm just wondering if you have any sort of thoughts as you think about 2012 and perhaps directionally the dollar going the other way, what you might think about your hedging program.

Larry, I think the first thing is we continue to see as you know significant volatility in the currencies. And just the change in the currencies from Q1 to this quarter is pretty significant.

I think the notable thing this quarter about the dollar's weakness is it really wasn't the Euro that was driving the currency improvement. It was a lot of the other currencies, particularly Japan, Brazil, Australia, and Canada. So it's other currencies that we have exposure to. I think it's the dollar's weakness versus those currencies that really had driven it.

As far as any longer-term comments, I think it's anyone's guess, there's a lot of moving variables, particularly we will see what Bernanke says later today. But I think there's too many variables to make any kind of comment right now on where we think exchange rates are going to go longer term.

Okay, perfect. And then just a question on GeneOhm. Obviously you mentioned multiple times it did very well and there were specific comments about MRSA and C. diff.

I'm just wondering, is there something different you're seeing out in the market? Could you point to -- because we have had all these deferrals in patient procedures that perhaps patients are sicker and more susceptible to some of these HAIs as they come into the hospital setting that is prompting more testing. Just any color as to what is going on above and beyond obviously, you mentioned, the market development activities.

Would you like to take that?

This is Tom Polen. So I would say we certainly continue to see hospitals and states recognize that MRSA and C. diff are significant issues. And particularly I'd say more recently we are seeing growing -- C. diff is growing at a faster rate than MRSA.

That's really been on the radar of healthcare practitioners. I'd say from a broader macro-market trend and what we see happening already and look forward to seeing in the future is, at this point, we do see 11 states have already passed comprehensive HAI prevention laws including mandates for targeted screening.

We have got another 31 states that mandate HAI reporting, and there's at least five states that are in active discussion to mandate screening. The other thing that you may have seen which isn't impacting necessarily the quarter but we see it as a positive sign moving forward, is earlier this week, CMS did come out and recommend to implement [pay for reporting metrics in 2015 for MRSA and C. diff.

And that recommendation is part of the federal [paper] reporting and value-based purchasing program. We certainly think this is -- this recommended performance incentive for hospitals to reduce HAIs is a very positive move. And should that proposal be accepted, we expect that hospitals would need to scale up for MRSA and C. diff reporting in 2013, so of course we also see as well timed with the launch of our Max platform.

Jon Groberg, Macquarie.

Could you maybe just give me a quick -- I'm not sure if I missed it, I'm sorry if I did. Lots going on.

But with the updates on the top line and the bottom line guidance, did you give an outlook for kind of what you expect for gross margins given the changes around FX and organic growth rates?

No, we didn't. But I'd be happy to provide that.

For the full year we are anticipating our gross margins to be at the bottom end of our guided range. It's about 52.2%, and really currency will be neutral for the full year and performance will be slightly positive about 30 basis points.

So that takes us from about 51.9% last year to 52% this year. True underlying performance is increasing about 70 basis points.

We also have favorable comparisons because of the improvements we're making on the ReLoCo program, and that is being muted a bit by the resin and pension, as well as Japan is hurting our margins. So the key takeaway there is the underlying performance is actually doing really, really well and it's some of these one-off things that are muting it this year and that's why we're getting to 30 basis point improvement year-over-year.

Okay, perfect, thanks for the clarification. And then just one more kind of on guidance. From a cash flow standpoint, any changes in earnings, any change on the cash flow guidance?

No, cash flow remains strong and we are holding our $1.9 billion for the full year from a guidance perspective. So cash flows are right in line with our expectations.

And then if I could, just one market one since those are some quick guidance questions. Were there any market share shifts in STDs? I know you said that grew some. I know oftentimes there's certain contract wins in certain geographies, etc. Anything like that going on in this particular quarter?

I'll ask Tom to comment on it.

This is Tom Polen. So no significant share shifts on a global basis in STD testing, no.

Bill Bonello, RBC Capital Markets.

I have a couple of questions on the Biosciences outlook. One, I'm wondering, it was helpful to get the growth that you are expecting from the acquisition, but I'm wondering if you could talk a little bit bigger picture about what you think the bench-top flow market opportunity might be, how big of a market is that and sort of what are the competitive dynamics in that market today? And then two, if you could provide any color on the potential for the other new products that you're launching in Biosciences such as the desktop sorter and the research analyzer.

Bill, I will ask Bill Rhodes to comment on those things.

Glad you asked. The personal flow cytometry space, the best way to put color around it in terms of market opportunity is really to talk about -- we are developing the market. Accuri was a leader in that.

So the way we look at is how many people around the world and how many laboratories can we move that technology into. And as Vince said in the introduction, there are hundreds of thousands of people in laboratories around the world. So we see that as great opportunity.

It makes flow cytometry affordable. It's a powerful tool. There are 70,000 or so life sciences -- the researchers now who are accessing core laboratories in order to do that type of work, who now have an opportunity to do that within their own labs, and then there are hundreds of thousands of others.

So we obviously see this as a very substantial market that we are developing around the world. It also makes it affordable for emerging markets where flow cytometry can be used but has not before been affordable. In terms of the desktop sorter --

Before you go -- how about the competitors, Bill?

I'm sorry, in terms of competitors, there are certainly other companies that are in this space or trying to be in this space with relatively lower cost instruments and technology. Although to be perfectly frank, Accuri was the leader and remained the leader at the time we acquired them in being at a price point and technology capability that we think is excellent around the world.

The other companies that are involved are companies like Millipore through Guava, Partech which is a small company in Germany, and several others you probably know that -- and we have talked about this Bill, that Life-Tech has a product called the Attune. There are a variety of companies that see this as an opportunity area. We're the leaders in flow cytometry around the world, so we see this as our space.

But then moving onto the desktop sorter, again, it's personal flow cytometry for cell sorting, making it available to the world.

Anything else, Bill?

No, nothing else.

Thanks.

Jon Wood, Jefferies.

Bill, just to follow up on Accuri, is this a transaction where you think you can get back your cost of capital in say three years, or have you assumed a longer discount horizon? Just basically, you commented, this is our space. Is this a necessary pool you needed to fill, so more of a defensive type of strategy with this asset?

This is Vince. As Bill mentioned, as the leader in flow cytometry, this was a natural move for us into a new segment of flow cytometry that was developing.

So it is a smaller market today. The reason we see that it's not just the price point on this instrument and the performance, Bill's group has done some interesting strategic planning work that shows other applications from other areas of science that appear to be potential application areas for us with this new instrument.

So as the technology leader in this space, we have to be there. And I think that is what Bill was talking about as we see genomics and other things starting to bud up with flow cytometry to create new value.

Now in terms of capital, a small acquisition like this, it's not something that returns your capital in three years -- in the first three years. But certainly it's setting us up for enlarging the flow cytometry market significantly and bringing new capability. That's the way we're thinking about it.

Thanks, Vince. And one follow-up for Dave on the resin side.

We talked about cost offsetting some of that pressure. Are we at the point or when do we get to the point to start putting in some opportunistic price increases similar to what you guys did in FY09? Is there a pressure point you think about in terms of when you need to start increasing price?

We continue to evaluate that. It's not just the resin cost as you rightly point out. It's also other commodity costs that are currently increasing.

And that's why our efficiency programs are so important. And also some of the things we are doing on the greening of BD and trying to get some of these resin costs out of our products is another thing. So our reliance on the use of these commodity type products we're looking to decrease through that.

As you know, Jon, traditionally as we look at price as we launch new products, that's where we'd look to get the premium for the better product that's out there. But we'll continue to evaluate that and keep you guys updated.

Brian Weinstein, William Blair.

Another question on TriPath. You mentioned in the US it's down due to some interval changes or recommendation on interval screening.

How far into the structural change and the demand curve are we there? Does it get worse from there? Is there any chance this affects other women's health tests if women are not coming in for this basic testing and maybe putting off other testing as well?

This is Tom Polen. Good question, Brian.

So we certainly see this interval change went into effect last year. And as you look at OB/GYN office visits and even Pap testing last year, you saw more significant declines last year from that interval change.

So more in the 10 to 15% depending on the quarter of comparison last year. So we're actually seeing the slope now start to come to a smoother level as that interval change is now getting into a full year of its cycle impact.

Another one here for you, Tom. What percentage of the market do you think is converted to molecular MRSA and molecular C. diff testing at this point?

We would say it's still certainly less than 20% at this point in time.

Doug Schenkel, Cowen and Company.

I guess one more margin question. You guys continue to see a higher mix of emerging market revenue. What is the trade-off if any of having a higher mix of emerging market revenue at the gross margin and operating margin line? Is it materially different from other geographies?

No, it's not materially different. When we look at our operating margins in those areas, in the emerging markets versus developed, they are basically the same. So we have been able to sell value and do it very effectively.

Okay, and then if I could go back to Pharma Systems for one more loose end, as it's been discussed a couple of times, you guys had a very good quarter in US Pharma Systems. You highlighted the &7.5 million order I think in response to Kim's question.

How should we think about it? Was that incremental relative to what you had incorporated into full-year guidance? Is it demonstrative of potential improvement in this business or is this simply consistent with what you are expecting in the inherent lumpiness of this business?

I will let Bill Kozy answer that.

This is Bill Kozy. I think the comments I made were one-time events related to the third quarter.

We can see these types of events -- excuse me, the second quarter, excuse me. We can see these recurring but they're unanticipated and they just go with pharmaceutical needs related to inventory or validation testing of new potential products. So it's not a constant flow of these types of things. It's up and down.

It's up and down.

Last loose end, moving forward is this -- will we not be breaking out H1N1 and stimulus anymore? Is this the last quarter for that?

I hope so.

Tony Butler, Barclays Capital.

Thanks very much for your patience. Tom, there's a lot of commentary around (inaudible) decline and the decay curve in the US. Are you just shifting investments from the US to non-US assuming that pickup in demand?

Is that exactly what's happening on the cost side? And if we asymptotically get some steady state in the US, is there any way to consider reinvesting in the US to maybe gain share? Thanks a lot.

So, two things. We have not significantly reduced investments in the US in our TriPath business. So we do see that this interval shift is something which is happening now but will stabilize in the future.

International, we are significantly investing in our channel in those markets but it's not coming from a trade-off specifically within the TriPath portion of the diagnostic business. As we think about shifts in category position over time, we really look forward to our SurePath Plus product which is in clinical studies which we really see as a breakthrough technology that offers potentially significant improvements in sensitivity for detecting cervical cancer. That is -- that product continues to progress to our expectations in clinical trials and we are on track to launch that in FY13.

Robert Goldman, CL King.

I wanted to go back to a little bit the discussion of emerging markets and safety devices. A couple of questions on it.

First, to the extent you have the sales in the emerging markets, can you just remind us what percent of those sales are products manufactured in the same market? And then second, the opportunity in the emerging markets are obvious enough.

What I don't have a great visibility on is what threats you might face in the emerging markets. There do seem to be a number of local manufacturers now in China and perhaps you can give us some detail on where they are in their own corporate development and when they might pose a real threat to you in those markets?

So Gary can comment on those issues, both the competition in emerging markets. We don't get into the details of our sourcing but, Gary, maybe you want to make some broad comments there.

Sure, this is Gary. First, in terms of where we manufacture, we manufacture safety devices, safety engineered devices in many different plants around the world; US, Singapore, Europe, Brazil and China. So we have a fairly diverse portfolio of manufacturing locations and it varies by business unit, it varies by device type. Many of those are global sourcing facilities or at least regional. In some cases they are specific to the country again depending on the device.

In terms of competition, I would say in general we are keeping a very close eye on emerging market competition. We see local manufacturers strengthening over time. It's really two things that are happening.

The lower quality manufacturers we expect will drop by the wayside over time and there will be consolidation among manufacturers toward the leading manufacturers in emerging markets. And there's a few -- there's one in particular that's strong in China, there's one that's strong in India.

We as part of our efforts around projects such as ReLoCo and given how closely we are working in the emerging markets, we set our sights as being competitive on every aspect on cost, certainly on quality. And we tend to be differentiated in our institutional knowledge that we bring to the market in terms of training to upgrade medical practice.

That's actually harder to copy than the products themselves because that's based on many decades of knowledge that also comes from us having been the underlying pioneers in most of these categories. So as we look at competition in emerging markets, we look at it from a total of perspective of both product, price, quality, but also of our ability to bring necessary knowledge into the market which is very much valued by the customers and governments that we are working with in those markets.

And we seek to be competitive in all segments. So today a lot of our business in emerging countries is in the top-tier hospitals but our strategy will be taking us into mid-tier and lower tier hospitals over the coming years also to be fully competitive with where the local competitors tend to be stronger, which is in the lower tier hospitals.

So I hope that gives some color to the questions. It's something that we watch very closely and we anticipate that they will continue to emerge. But BD's got a long time being very effective at low cost high quality and innovation around these core device categories.

Jaimin Patel, Greenlight Capital.

It's Vinit Sethi along with Jaimin. A couple of specific questions.

One is, are you expecting the tax rate to maintain itself from the second quarter level of 27.4% for the rest of the year? And the second question was, are there any changes to what you're expecting in terms of the selling and admin percentage for the year?

So first on the tax rate, what we're saying is from a guidance perspective, it's going to be at the low end of the range that we originally provided. So it's going to be about 27%.

So we'll see some improvements there particularly from our mix of business and a lot of that is driven, particularly if you think about the dollar and its weakness, when that occurs, you have more profits coming from lower tax jurisdictions, so we'll get some benefit from our mix of business. So that's why we're around 27%.

As far as the SG&A, there's no real change in our guidance from an SG&A perspective. We continue to invest in the emerging markets and we've got these product launches.

So we want to make sure we put the resources behind that and we're making very good progress on the G&A side of things with our shared services as well as our functional transformations that we have going on to take costs out there. So that's enabling us to invest in those growth drivers.

So all in, with the currency movements and then the negative issues like the resin cost in Japan, all in there's not much operating leverage impact one way or the other from the overall higher revenue?

The operating margins overall we're guiding in that 22.7% to 22.9% range. So really hasn't changed that dramatically.

Okay got it. And then finally --

And I think the story there is that again we're being hit by things that are impacting our operating margins. The resins, Japan, those have all been negative pressures this year and we have overcome that with our efficiency programs that we have put in place.

Right and then I guess the final question on that is at this stage, why aren't you expecting whether it's some of the R&D investments of this year, whether it's Japan, resins, other sort of investing things, when are you -- at this stage when are you now expecting to be able to get through that in terms of operating margin leverage? So when would you expect to start showing kind of the improvements all the way down to the bottom?

Well, I think there are a couple of things that we talked about on previous calls. One is that this is the year where we are getting to the breakeven point on our ReLoCo programs and we will start to see benefits next year and in particular fully in 2013.

As we also talked about from a pension perspective, we are hopeful where interest rates are going that that will stop being a drag as we go forward on the business. And those are probably the two biggest items. Also the last one is our SAP implementation. The big go-live for us is next year in North America, so we still have another year of investment in that in 2012. So the operating leverage is more towards the 2013 as we still have some investments occurring as we go into next year.

Peter Lawson, Mizuho Securities.

Bill, just wondered if you could talk further on the Bioscience business. Beyond flow, where else are you seeing the opportunities?

So remember of course the Biosciences is not only our flow business but includes our advanced Bioprocessing business as well as Discovery Labware. So moving -- and there are opportunities in our Flow business to address new markets that are contiguous with flow.

But what I'll answer is that our advanced bioprocessing businesses is releasing two products, has in fact released one and is releasing a second product this year which is really to provide reagents to support pharma and biotech companies. And within DL, we're looking at cell therapy enablement as one of the more exciting areas for growth.

Thank you. And then just a question for Tom on GeneOhm. I wonder if you could give us the contribution to revenues either in the quarter or the full year and the mix between C. difficile and MRSA?

On a (multiple speakers) we wouldn't break out specifically MRSA or C. diff independently but we -- again, we see both having strong double-digit growth in the quarter.

And the total number for GeneOhm?

For the quarter, we were at (multiple speakers)

For the full year we're guiding around a 20% increase in GeneOhm for the full year.

Okay, thank you. Oh and just OB/GYN channel, did you see any initial better pickup at the initial weeks of Q3?

We don't comment on that.

We are still seeing that OB/GYN visits were down I think Tom said earlier in the call around 4%. So not much change.

Okay, thank you for taking the questions.

You're welcome. So I believe we have no more questions.

I want to thank everyone for their questions today. We are pleased to report a strong quarter. We look forward to updating you at the end of next quarter. Thank you very, very much.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.