Becton Dickinson and Co (BDX) 2013 Q1 法說會逐字稿

Hello and welcome to BD's first fiscal quarter 2013 earnings call. At the request of BD, today's call is being recorded. It will be available for replay through February 12, 2013, on the Investors page of the BD.com website or by phone at 800-585-8367 for domestic calls and area code 404 537-3406 for international calls, using conference ID 87420149. I would like to inform all parties that your lines have been placed in a listen-only mode until the question-and-answer segment.

Beginning today's call is Ms. Monique Dolecki. Ms. Dolecki, you may begin your conference.

Thank you, Jackie. Good morning, everyone. Thank you for joining us (technical difficulty) first fiscal quarter results. As we referenced in our press release, we are presenting a set of slides to accompany our remarks on this call. The 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 first 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 schedule and in the slides. A copy of the release including the financial schedules is posted on the BD.com website.

Leading the call this morning is Vince Forlenza, Chairman, Chief Executive Officer, and President. Also joining us are Suky Upadhyay, Senior Vice President, Corporate Controller, and acting Chief Financial Officer; Bill Kozy, Executive Vice President and Chief Operating Officer; 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. As we stated in our press release, we are off to a good start this year and we are pleased with our performance in the first fiscal quarter. Overall, revenues and EPS were solid.

At the end of December we completed the acquisition of Safety Syringes, Inc., or SSI. SSI specializes in the development of anti-needlestick devices for pre-filled syringes and will be reported in our Pharmaceutical Systems business unit within BD's Medical segment.

Growth in the first quarter was driven by our Medical and Diagnostics segments. Revenue growth was partially aided by an early flu season and favorable comparisons to the prior-year period. In our Biosciences segment, we saw solid growth which was driven by improved instrument placements in the US as well as favorable comparisons to last year.

We also saw a strong continued growth in international safety sales and emerging markets. As we have been discussing with you for some time now, we have spent the past two years making significant strategic investments in our business in the backdrop of a challenging macroeconomic environment. When we provided our full-year guidance in November, we expected to see solid revenue growth, margin expansion, and underlying double-digit earnings growth, excluding the medical device tax.

Our underlying business performance for the first quarter demonstrates that our strategy is delivering results and gives us the confidence to raise the bottom end of both our revenue and EPS guidance ranges. Suky will provide more details on our fiscal-year 2013 outlook later in his remarks.

On slide 5 we have outlined our first-quarter revenue and EPS results, which I will speak to on a currency-neutral basis. The total Company revenues were solid, increasing by 5.2%. Fully diluted EPS came in at $1.35, growing at 15.8% over the prior year.

Now I would like to turn things over to Suky for a more detailed discussion of our first-quarter financial performance.

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

As Vince just stated, our results were ahead of our expectations, with Medical and Diagnostics driving solid growth for the Company. This quarter, we also saw an improvement in our Biosciences segment. After normalizing for the flu, favorable comparisons, and acquisitions, our first-quarter underlying revenue grew at the upper end of our previous guidance range.

As a reminder, when we talk about our acquisitions this year, we are referring to KIESTRA, Sirigen, and SSI. Accuri and Carmel Pharma have annualized and will now be included in our base going forward.

In the quarter, we saw strong gross margin expansion of 200 basis points, which led to improved operating margin expansion of 220 basis points. We are on track to meet our goal of about 50 basis points of underlying operating margin expansion for the fiscal year.

Additionally during the quarter, we completed about $300 million of our $500 million share repurchase plan for FY2013. As Vince also mentioned, our first-quarter results gives us the confidence to raise the bottom end of our currency-neutral revenue and EPS guidance ranges.

Given a stronger euro, we are also raising our reported revenue and EPS outlook, while also tightening the range. I'll provide more details around our outlook later in the call.

Now let's move on to slide 8, where I will review our revenue growth by segment on a currency-neutral basis. As I just mentioned, revenue growth was 5.2% for the total company, which included about 50 basis points of growth due to an early flu season. Pricing erosion was about 70 basis points, which is slightly better than our full-year estimate of about 100 basis points.

BD Medical's first-quarter revenues increased 5.1%. The growth in this segment was primarily driven by Diabetes Care at 9.1%; this reflects continued strong sales of pen needles, which include our Nano and PentaPoint products. We also saw a benefit from a favorable comparison to the prior year, which was negatively impacted by softer international sales.

Our Medical Surgical growth was 3.9%, led by emerging markets and international safety seal sales, including our PhaSeal product. Pharmaceutical Systems growth was 4% in the quarter. As we mentioned earlier, we recently closed on SSI at the end of December, and that will be reported within the Pharmaceutical Systems unit going forward.

BD Diagnostics' first-quarter revenues increased 6.1%. The segment's growth was primarily driven by international expansion, a favorable comparison to the prior-year period, in the Preanalytical Systems unit, and an early flu season.

BD Biosciences' revenue growth was 3.3% versus the prior-year period due to solid instrument placements in the US and from a favorable comparison to the last year. The prior-year period was negatively impacted by reduced US research funding and lower demand for high-end instruments.

Overall, we still see uncertainty in this segment, with the government continuing to work through NIH funding specifics for the fiscal year. We remain cautious about near-term growth expectations for this segment.

Moving to slide 9, I'll walk you through our geographic revenues for the first quarter. Overall, we saw stability in the US and continued strength in the international sales. BD's reported US revenues increased 3% versus the prior year. Growth in our Medical segment was 2.6%; growth in the Diagnostics segment was 2.9%; and US Biosciences growth was about 5.3%.

International revenues grew 7% with strong growth coming from Medical and Diagnostics segments. On a currency-neutral basis, the Medical segment grew 7.1%, Diagnostics grew 9.4%, and Biosciences grew 2.4%.

BD Biosciences' international growth was lower than historical averages due to ordering patterns in certain geographies. We saw strong growth in emerging markets across all three segments, while the Medical and Diagnostics segments also benefited from strong sales of safety engineered products.

Moving to global safety on slide 10, currency-neutral sales increased 5.9% and grew to $511 million in the quarter. Revenues in the US were about flat. International sales grew 14.3% on a currency-neutral basis, with Western Europe and emerging markets both growing double digits.

Medical safety sales grew 6%, which benefited from our PhaSeal product. Diagnostics growth was 5.7%, driven by a range of safety engineered products.

On slide 11, I will review our revenue growth in the first quarter. Our reported growth rate increased 3.7%. Performance contributed 5.2% to growth, offset by 1.5% of unfavorable currency translation. Acquisitions contributed about 10 basis points of growth.

Moving to slide 12, we experienced a 210 basis point expansion in gross margin versus the prior year. Gross profit improvement was primarily driven by our ReLoCo programs and favorable raw material pricing.

In addition, gross profit benefited by some one-time items that we do not expect to repeat in the remainder of the year. These items include a larger than expected favorable foreign currency translation as well as certain continuous improvement initiatives.

We expect gross margins to be within our full-year guidance range that we provided in November, which is between 51.5% and 51.7%.

Slide 13 recaps the first-quarter income statement and highlights our foreign currency-neutral results. As I just mentioned, first-quarter revenue growth increased by 5.2% and gross profit increased by 210 basis points.

Moving down the income statement, SSG&A increased about 4%, primarily due to increased investments in emerging markets, acquisitions, and EVEREST spending. R&D increased 5.5%, which is in line with our expectations.

Our operating income increased 13.6% due to solid revenue growth, an improved gross margin profile, and SSG growing slower than sales. Our tax rate was higher in the quarter versus the prior year primarily due to some discrete tax expenses within the quarter. In addition, there were some one-time benefits in the prior-year period.

For the full year, we expect our tax rate to be in line with the previous guidance range of 24.3% to 24.5%. This range accounts for the reenactment of the R&D tax credit in the US. These items resulted in an earnings per share of $1.35, which is nearly a 16% increase versus the prior year.

Turning to slide 14, based on our first-quarter results, we are raising the bottom end of our previously communicated guidance range for revenue and EPS growth. On a reported basis, given the strength of the euro, we are accelerating the top end of our reported guidance range by 100 basis points and EPS by 150 basis points. This assumes a euro exchange rate of $1.32 for the rest of the year.

All other P&L guidance components remain unchanged from what we provided on our year-end call. I will speak to this slide on a currency-neutral basis.

In this revised outlook, which contemplates a stable macroeconomic environment, we now expect revenue growth of about 4% to 4.5%, which is broadly in line with our view of underlying growth for the first quarter. Within the segments we expect both the Medical and Diagnostics segments to grow between 4% to 5% for the year.

With the recent improvement in Biosciences sales, we now expect revenue growth of 1% to 2% for fiscal-year 2013. This assumes about a 3% reduction in the NIH budget. If the budget cut is further, we expect growth to be more in line with our original guidance of about 1%.

We are raising the bottom end of our EPS guidance range to 7.5% to 8%. Excluding the medical device tax, we expect currency-neutral EPS to grow 10.5% to 11%. This contemplates 50 basis points of operating margin expansion.

I would like to provide a little bit more color on our expectations for the second quarter. We expect second-quarter revenues to grow about 4% versus 5.2% in the first quarter. At this time, the second quarter is not expected to benefit materially from flu sales.

In addition, the second-quarter revenue growth will also be unfavorably impacted by the timing of orders in our Pharmaceutical Systems unit. Also, as we have been talking about for some time now, we will have the negative impact of the medical device tax in the second quarter, along with some increases in SSG&A due to timing.

Due to the items I just mentioned, we expect earnings per share for the second quarter to be at or slightly below our first-quarter earnings per share of $1.35.

Now I would like to turn the call back over to Vince, who will provide a more detailed update on our performance in emerging markets and progress against our key initiatives.

Thanks, Suky. Moving on to slide 16, we continue to see strong growth in emerging markets, which accounted for approximately 24% of our total revenues in the first quarter. Emerging market revenues grew 12.7%, currency neutral, over the prior year. We have been making significant incremental investments in emerging markets, which have sustained our strong growth and have delivered a rapid payback.

We saw double-digit growth in a number of key markets, with China growing at about 24% currency-neutral. We are very pleased with safety revenue growth in emerging markets, which was up about 20% over the prior year.

Now moving on to slide 17 we see the program and product launches in our Medical and Biosciences segments. As I mentioned earlier, we recently closed on our acquisition of SSI. This enhances the safety offering in our Medical segment.

In Biosciences segment, we have two analyzers for CD4 testing, which we have been talking about for some time now. We expect our FACSPresto analyzer to launch at the end of fiscal year 2014. Our FACSClearCount analyzer launch timing has been restated due to other investment priorities; we now expect this to launch in fiscal-year 2015.

On slide 18, you will see the various product launches in Diagnostics. This past quarter, we were approved for the RSV test on our Veritor point-of-care device. So far, we have placed several thousand Veritor devices; and given the early flu season this year, we experienced accelerated demand for this product.

On the MAX platform, we currently have over 15 assays in our pipeline in the areas of healthcare-associated infections, STDs, women's health, enteric and respiratory infections, and cancer. We have built up a nice pipeline of orders and expect sales to ramp up in the latter part of our fiscal year. Of course, we will continue to update you as we make progress on our pipeline initiatives.

On slide 19, before we open the call to questions, I would like to reiterate the key messages from our discussion today. First, we are pleased with our solid start to fiscal-year 2013. We continued delivering on our commitment of improved performance. Second, as we are starting to see notable results across the P&L as a result of our investment cycle, we are experiencing solid revenue growth, driving margin expansion, and delivering a higher quality of earnings.

Third, we will continue to look for strategic acquisitions and continue our investments in R&D, new products, and emerging markets as well as our operating efficiency programs. Finally, we are positive about our outlook for the balance of this fiscal year, and we are committed to delivering 4% to 4.5% currency-neutral revenue growth and about 10.5% to 11% EPS growth, excluding the device tax and impact of foreign currency.

Through the hard work and dedication of everyone here at BD, we are continuing to deliver value to our customers and shareholders worldwide. Thank you, and we will now open the call to questions.

(Operator Instructions) David Roman, Goldman Sachs.

Good morning, everyone, and thank you for taking the question. I wanted just to see if you could help us parse through some of the moving pieces here in the first quarter, both on the revenue line and through the P&L.

I know in your prepared remarks, Suky, you thought that the flu added -- I think you said about 50 basis points to growth this quarter. But as you look across the businesses, there do appear to be a few trends that look more sustainable than what you are suggesting. Most notably, the turn in Biosciences; the comps there remain easy and get easier throughout the year.

BD MAX is obviously in its early stages and continues to ramp up. And then you are still seeing a positive return on the emerging markets piece. So maybe if you could tick through those on the top line, about why those wouldn't continue through the balance of the year, because it doesn't look like it is reflected in your guidance.

Then on the P&L, you reference currency is a one-time item this quarter. But if you look how things progress throughout the year, it actually looks like currency turns into a tailwind as we pace through the rest of fiscal '13. And that sounds like it would actually be an increasing benefit; so maybe you could just help us with those factors.

Sure. From a top-line perspective, we did see a very good quarter. We saw some what I'll consider durable gains in some of our businesses. We are seeing some very strong underlying growth in emerging markets, in safety sales. And it was quite good to see a return to growth in US Biosciences.

But as we did mention, we did benefit from about 50 basis points of an early flu season. That flu season and those level of sales were contemplated in our full-year guidance. We expected those to happen in the second quarter, and they actually came through in the first quarter. So that was probably one of the biggest moving pieces as to why we think our top line will moderate going forward.

Also, in the first quarter we benefited from what we will consider very easy comparisons to the first quarter of last year. So once you neutralize those two items, we had a small amount of acquisition growth in the quarter; we think we are somewhere in that 4% to 4.5%, which is the top end of our range that we previously provided.

That is giving us the confidence. So if you think about our full-year guidance last year of 3.5% to 4.5%, we reserved the bottom end for some macroeconomic uncertainties. Those uncertainties are still out there; but again, the fundamentals and underlying business give us the confidence to raise the bottom end.

David, so I agree with everything that Suky said. A lot of things did go well within the quarter, and we are seeing strong underlying business performance in emerging markets, in safety.

Biosciences, we are assuming some degradation in the budget, maybe a 3% impact or so. So we have -- we did see a nice return with customers buying higher-end instruments. We are a little conservative maybe there in terms of go forward; we will have to see actually what happens in Biosciences.

The other thing I would just point out to you on this quarter was that in Diagnostics we had a very good quarter for PAS, the specimen collection business. The impact of MAX is really going to be felt more in the second half of the year because those are reagent rentals, and we have to get customers up and going; and we are just really now starting to ship against a sizable pipeline.

So it was more PAS in the quarter than it was Diagnostics, though other elements of Diagnostics went very well too. So we are encouraged. This is still early in the year, though.

Yes. On your question, David, around foreign currency, you are correct. We do see a tailwind versus our previous assumption, and primarily around the euro. Previously we guided at a full-year rate of about $1.27. We have now got an assumption of about $1.32, which translates to $1.33 for the remaining three quarters.

This translates to about a 4% benefit. So when you take that against the top line, it is worth about $80 million. And that is completely reflected in our new reported growth acceleration of about 100 basis points on the top line and 150 on EPS.

There are some moving parts in other parts of foreign currency. The yen is weakening; but those unfavorable impacts are being offset by strengthening across the peso, rupee, and a few other smaller currencies. So really it is about the euro, and as I said we baked that into our reported guidance going forward.

Okay. Understood. Thank you. I will respect the one-question request.

Kristen Stewart, Deutsche Bank.

Hi, thanks for taking the question. I was just wondering if you could maybe -- you talked about BD MAX, so maybe just give us a little bit more color, just how things are progressing and to what extent you expect that to contribute to Diagnostics for the year.

Sure. Tom will talk to that.

Yes, this is Tom Polen. So, we are continuing -- as Vince mentioned, we continue to be pleased with early customer excitement and demand around the BD MAX. We have built a backlog of orders and are shipping against that, as Vince mentioned.

Also, as you said, we do expect it to take several quarters or into the latter part of this year to see that ramp, and that remains part of our outlook for the balance of this year. But we remain very positive on MAX and continue to get that feedback from our customers.

Tom, how do you feel about the pipeline maybe as well, in terms of assays?

Sure, pipeline continues to progress as we have communicated previously. Of course, we do remain very focused on menu expansion and our third IVD assay in the US, C. diff, remains under FDA review. We are still expecting a launch on that later this quarter, Q2.

Yes.

Perfect. Then, Vince, I guess just a big-picture question for you. Any changes in terms of how you guys are looking at M&A for the outlook for the year?

No, we are still really focused on doing plug-in acquisitions. I think that we are getting more confident as we do more of them and we continue to improve our process.

We are pleased with the progress of the deals that are now annualized into our base. And we feel pretty good about the ones that are -- the new ones that we did, the last three. So we are staying on that strategy for the time being.

Okay, thank you.

David Lewis, Morgan Stanley.

Good morning. Just maybe one quick financial question for Suky, and maybe a quick follow-up for Tom. Suky, just first of all, gross margins. It was the strongest quarter in maybe three or four years.

I appreciate there was some FX tailwind there. But you were willing to say that you are comfortable with the upper end of constant-currency guidance. So I wonder if you can talk about the sustainability of margin improvement, both gross and operating. Is it too early in the year to get comfortable with the upper end of your operating expansion comfort for fiscal 13?

Yes, it's a great question, David. First, from a gross margin perspective it is not uncommon in our business to see lumpiness throughout the year. In fact, if you look back at 2012, between the high and low point on gross margin there is about a 150 basis point spread.

So we think we're at the high point for the year on gross margin. We do expect it to normalize for the remainder of the year.

We do think we are confidently at the upper end of that gross profit range that we provided, which is somewhere in the neighborhood of about 40 to 50 basis points of gross margin improvement year-over-year. Again, we are going to see some down quarters coming off of this quarter, because of some one-time benefits.

From an operating margin perspective, again, as we talked about in November, our 50 basis points of underlying growth is primarily driven by gross margin. So as I talked about gross margin, you could basically translate that to operating income.

Perfect. Very helpful. Then, Tom, you talked a lot about the Diagnostics pipeline, but I don't know if there has been a dramatic amount of sizing commentary, and I think about a couple specific products.

C. diff obviously in the US; but I think people really haven't pushed you on international. The Women's Health Diagnostic franchise really starts to come together heading into next year. So if you could just give us a sense of -- maybe thinking about C. diff or the Women's Health Diagnostic franchise in '14, what type of size opportunity here do you think you are chasing? Thank you.

Yes, this is Tom Polen. We have not commented specifically on the size internationally versus US on that. What I would comment perhaps on the Women's Health is, as we have shared, our Viper LT platform is scheduled to launch ex-US at the very end of this fiscal year. That does remain on track.

We actually have started to install the first Viper LTs ex-US as part of our clinical trial. That clinical trial is actually enrolling patients, running samples right now, preparing for the launch of HPV ex-US.

So we do recognize that with that launch of HPV at the end of the year, combined with the launch of our Totalys Front-End Automation system on the cytology side of Women's Health, we will be in a very strong position, we believe, going into (technical difficulty) portfolio.

In terms of the US, (technical difficulty) the only thing I would comment on is we do believe that continues to remain an overall attractive market. It is growing strong double digits as a market overall and remains relatively still underconverted from EIA to molecular. Right? Still under 25% of the market is converted to molecular, and so we see that having a positive growth outlook going forward.

Thank you very much.

Jon Wood, Jefferies.

Hey, thanks a lot. Good morning. So Vince or Suky, obviously the buyback in the first quarter, well ahead of the $500 million pace for the year. Just would like your perspective on what is the -- what holds back a greater amount of buyback this year? Is it M&A, pipeline, or is it foreign cash repatriation? Just give us a sense of how you meter in the capital deployment the next couple of quarters.

Suky will take that question, but it is really a balance of all those things. But, Suky?

That's right. We are still committed to the $500 million of share repurchases for the full year. As Vince quite rightly said it is a balance; we try to take into consideration our US/ex-US cash position, but also maintain enough flexibility to take advantage of strategic M&A, other investments, etc.

Thank you.

Amit Bhalla, Citi.

Thanks. Good morning. I wanted just to get a little more detail from Tom on the Diagnostics side. I think last quarter there was some weakness in the Women's Health side. It looks like it didn't take place this quarter.

So Tom, can you just give us more detail on TriPath, molecular, genome, and just give us some underlying trends there?

Sure, Amit. This is Tom Polen. Specific on molecular and Women's Health, the molecular was flat to slightly positive growth in the quarter driven by STD testing. That is a combination of our STD business, GeneOhm and MAX that I just commented on.

If you think about Women's Health, Women's Health was down in the low single digits this past quarter, driven by negative US growth, which was partially offset by continued strong double-digit growth internationally. That has been a trend that we have reported for the last several quarters.

The extension of Pap intervals in the US really driving that decline in the US market, while expanding access to cervical cancer screening and conversion from conventional to LBC internationally is driving that double-digit growth in the rest of world.

Thanks. And just a follow-up on the Biosciences, any other color you can provide, Vince, on instrument demand, why you saw that pickup in the quarter?

Well, we think that -- and Bill can comment further on this -- what happened was that customers finally could not postpone their research any longer. And that they had money set aside; they came to terms with what their staffing was going to be, and started to spend.

Maybe you are getting more comfortable about the outlook from where sequestration was going to be and boxing that in. Bill, I think maybe on the Pharma side too we saw some good performance. Maybe you want to comment on that.

Sure. The impact, the favorable impact, which Vince referenced earlier was really in the high-end analyzers, where we had Aria placements and LSR II placements perk up a little bit in the quarter. Then as we had I think projected prior, continued strong growth coming out of Accuri.

So the combination of those high-end sorters, analyzers, and Accuri moved our instrument growth back to a little bit healthier level than we experienced at any time in FY12.

Great.

Yes. And it really was US as well, too.

Okay. Thanks a lot.

Mike Weinstein, JPMorgan.

Good morning, everybody. It is Kim here. Question on EU safety. That was a strong number in the quarter; I think you said up double digits.

Can you talk a little bit about what you are seeing in Europe in terms of healthcare providers starting to come into compliance with safety mandates?

Yes we can. Really we are seeing the pickup more in Northern Europe than Southern Europe at this point in time. So we were about 10% or so in Western Europe. Not driven by Southern but by the Northern piece.

So they're moving on the law, is basically what (multiple speakers).

Okay, great. Remind me of the deadline on that. Isn't it by the end of this fiscal year that they are supposed to be --

It was May. It's May.

May? Okay, okay. Just a follow-up on the gross margin. I know we've had a couple questions on that this morning, but in terms of the FX benefit in the quarter to your gross margin, is it right -- I am remembering from past years that oftentimes you will see almost a timing benefit as you mark your hedges to market in a given quarter, so that -- did we see some of that here in the quarter? And so that would be I guess the reason why, even though FX going forward remains more favorable for you guys, you're not looking for as much of it on the gross margin line.

Yes, that's exactly it. It has to do -- it is multivariable, very complex, but it has to do with what region product is produced at, when it is produced, what rate it is used opposite, when it goes into inventory, and is released in an inventory, and what region it comes out, and what FX rate it comes out at. So that is one of the reasons that is driving the favorable FX in the quarter.

Again, we expect that to neutralize for the full year. If that assumption changes, we will update you throughout the year.

Okay, great. Thanks, guys.

Rick Wise, Stifel Nicolaus.

Morning, Vince. Hello, everybody. A couple questions. Maybe first on the US safety, Vince.

If I am looking at it correctly, US safety flat; one of the weaker quarters we have seen in some time. Just help us understand what the drivers were there.

And maybe as part of that you could talk about -- give us a little more color on the significance or potential significance of the Safety Syringes acquisition, how it is going to contribute and the timing of products, etc. Thanks.

Sure. I will let Bill talk to both of those. But really, US safety has been I think low single digits for a while, so this is not really a big change in US safety characteristics.

Of course, we did have PhaSeal come into the product mix. But when you pull that out, it has been pretty flat single digit. Bill, you want to talk to SSI?

Sure. This is Bill Kozy, Rick. SSI pulls us into this passive safety syringe market particularly focused on the pre-filled side and gives us a chance to really expand our product array with our Big Pharma customers, who are showing a little increased interest in safety platforms going forward.

So you are familiar with existing product that we had, which was not passive. This rounds us out on the other side and gets us into that new space.

We have got a reasonable amount of strategic interest on our part, but as well as our Big Pharma customers. So we are enthused about bringing that into the BD portfolio.

And when do you think you're going to see some products there, Bill, approved?

Those products are already on the market. That is not a startup scenario. It is a small revenue base business, but already with a customer base and a pipeline of potential new customers which we are inheriting and pursuing.

Okay. One other quick one on China. Up 24%. Vince, obviously outstanding.

Just maybe update us on where you are with your investments and buildout there. What is your focus over the next 12 months or so? I assume we can expect that 20%-plus kind of growth to continue. Thank you.

I love your editorial comment. But listen, we are very pleased with the results there, and it is across the board. Across Medical; it is across PAS; it is Diagnostics; and Biosciences is doing well.

So we built the basic infrastructure. We are now moving into what I would call mid-tier markets in China, expanding our (technical difficulty) and our distribution partnerships. So I think we have built a strong foundation. We do think that there is a lot of runway to go in China, and we continue to see the government investing even as the economy slows down somewhat.

So we are encouraged, and we think we have built a strong organization.

Thank you.

Hey, Rick, just one thing to close out on the safety piece around the US. We did see a soft quarter; but for the full year we expect to be somewhere in about the 4% to 5% range in the US and, as Bill mentioned, primarily driven by the SSI acquisition.

Appreciate it. Thank you.

Brian Weinstein.

Last quarter I think you guys had talked about pricing in general and wanting to be prudent there. But this quarter you saw it a little bit better, down -- I think you said 70 basis points versus the 100 you guys were expecting.

Is there anything that -- well, first of all, why are you expecting still down 100 basis points? Are there things that are going to flow through the back half of the year there?

And then going to the gross margin question again, if pricing is a little bit better, it would seem that there is potential upside on the gross margin side. Thanks.

Pricing was a little bit better in the first quarter, you're right. We haven't gone back and changed the guidance on pricing yet. We are still watching Europe in particular to see what will happen there.

So we will revisit it at the end of the second quarter. But you are right; we are off to a little better start than we thought.

Is there any particular area where you are seeing price benefit that you didn't expect?

Are there areas where we are seeing price benefits? We didn't see the price decreases that we thought we might see. It is not a pricing increase so much.

Okay. Then a quick follow-up for Tom, just on the C. diff delay. Is there anything to read into that, or is that just normal FDA dialog? Are they looking for additional data or anything on that? Thanks.

Brian, this is Tom. Nothing unusual, just normal process, and we have provided an additional information and are in active discussion with them. But we consider this routine.

Okay, thank you.

Jon Groberg, Macquarie.

Good morning. Thanks for taking the question. Congratulations on a solid quarter.

So, Vince, can you maybe -- you mentioned the strength in Preanalytical. Can you maybe just talk on the Diagnostics, maybe just talk a little bit about what you thought drove that?

And maybe -- I haven't really heard any comments, just your latest thoughts on just general utilization trends in more of the developed markets.

And then for Tom, just a quick question. Given the strength in flu, what you expect microbiology to grow for the year. Thanks.

Sure. So two pieces on PAS. One is, they continue to do, as they have the last couple of quarters, very well in emerging markets. As healthcare gets built out, of course we're starting to see more laboratory testing. And that has accelerated over I would say the last six months or so. So we feel very good about their international strategy.

US was more timing and easier comparison. We saw this last year where it was a little lumpy in the first half of the year. We are seeing the same thing this year.

Part of the reason Suky gave the guidance he gave on the second quarter was we thought PAS was a little bit hot in the first quarter and that it would normalize. But overall, the business is performing well. So that was that.

In terms of utilization, I think we are basically still saying pretty stable, not getting worse. We are continuing to see softness because of this move to a larger interval in the US for the TriPath business. Otherwise, I would call it stable. Tom?

This is Tom Polen, just following up on your question regarding microbiology growth. We have not historically commented on outlook on microbiology growth specifically; but what I will say is that we are seeing some favorable growth in that area, driven by new products.

Specifically, as Vince mentioned earlier, Veritor is off to a very good start. We are now at about 4,000 placements roughly on the Veritor platform. Obviously that increased base combined with an early flu season has really benefited that launch specifically.

And as we have commented on in the past, our acquisition of KIESTRA and really that solution as it comes to helping our customers improve lab efficiency and deliver faster time-to-result is also going very well. And we expect continued strong performance in both of those areas through the balance of the year.

Right.

Great. Helpful. Thanks.

Larry Keusch, Raymond James.

Good morning. Two questions, Vince. You mentioned emerging markets continuing to do well and that has been a trend that we have seen over the last couple quarters. It is also -- I think you said in your prepared comments -- that it is a relatively low risk investment for you guys, and you are clearly seeing the results.

So I guess the first question is, is there opportunity to do more in terms of investment than you have been doing? And could we see that begin to perhaps accelerate further over the next year or so?

Then secondly, on the safety deadline of May in Europe, what do you think happens when we approach that date? Do you really expect the countries to comply with that?

I guess what I'm really asking is, given just the austerity issues particularly in Southern Europe, could we see actually some countries, Spain, Italy, etc., perhaps not fully complying with the deadline? Thanks.

It is the latter, which is we think we will see a continuation of the trend that we are seeing, which is Northern Europe moving ahead, Southern Europe lagging and not moving ahead aggressively in safety.

In terms of emerging markets, we think we have it paced right. Because in addition to the fact that we are adding people, there is a very large training component to what we do as we bring on sales force, as we sell value. If we were just going aggressively for share and not really trying to optimize the value of what we are selling, we could probably go faster.

And then there is a whole piece of distributor management that we are putting in place. And lastly, very important to us is compliance. We don't want to get ahead of ourselves from a compliance standpoint, in making sure that we really have the organization trained up.

Having said all that, if we think there is an opportunity to go faster -- because these do pay back in about 12 months or so, 12 to 18 months at the outside -- we would certainly look at that.

Okay, and if I could just sneak in one other one. I think, Suky, you talked about raw materials and a favorable comp. How should we think about raw material costs as you guys think about that going through the year? Thanks very much.

Yes, sure. So raw materials in the quarter from a GP impact were about 40 bps. That is primarily -- if you think about what we were talking about last year, we saw in the first quarter a really big headwind on raw materials. So we are benefiting, one, from underlying improved pricing on raw materials, but also partly due to a favorable comp.

As we think about the full year, we are looking about 20 basis points of gross margin improvement. We are seeing a slight tick up in crude prices, quite recently. But as we have talked about before that could be anywhere from three- to nine-month lag on how those crude prices translate into resin prices. But overall, the upside that we see in raw materials is included in our guidance.

Great. Thanks very much.

Jonathan Palmer, CLSA.

Good morning. Thanks for taking my question. Another follow-up here, Vince, on emerging markets. You're obviously seeing a great performance there. And with more than 20% of sales, you are at the top of your peer group.

So my question is, do you still need to make significant investments going forward to continue that growth trajectory? Maybe putting it another way, at what point do you really get to harvest the bolus of these investments and drive the margins?

We are getting strong performance on the top line and the bottom line from our investments. If you look at profitability across the Company, emerging markets is close to the Company average once you normalize for R&D. So as I said, they pay back fairly rapidly.

But we believe we are still early on in terms of having coverage across all of the segments that we need to be present in and building up our infrastructure. So it's a rolling thing.

What we don't get is aggressive operating income leverage; but we get operating income growth is the way to think about it. Bill, do you want to add anything to that?

This is Bill Kozy. The only thing I would add is that -- to the investment theme -- we have formalized our game plan for R&D investment targeted at emerging markets. And we are just in the startup mode of placing R&D capabilities in the Asia-Pacific Rim. We will give you some more color on that.

But to your good question about how are we thinking about making sure that we can back up the higher growth expectations going forward off a bigger base, this localized R&D competency is something we are enthused about.

Yes.

That was very helpful. If I could just sneak a follow-up in here on Diabetes, very strong quarter. Could you maybe just talk about the underlying dynamics there and how sustainable that growth is?

Sure, Bill can talk to that.

Sure. We continue to see really strong pen needle demand and think about the strategy in the business focused on a couple of things. Number one, we really had tried and had told you a couple years ago we were going to roll out a series of five major new products that were designed to contribute both on volume capture but as well as to improve our price.

Because of the timing here in the first quarter you are seeing the benefits of PentaPoint, Nano, Pearl, the safety pen needle as really good examples really starting to impact that growth rate. We admit that the first quarter was a little bit hot; but we are just comfortable that the new products are allowing us to compete effectively all around the world.

Thank you for taking my questions.

Bill Quirk, Piper Jaffray.

Great, thanks. Good morning, everybody. First off, I guess on Diabetes, I guess building off the last question, another solid performance out of that. We did of course learn that LifeScan has recently launched its own pen needles in the US. It does mark the first material competitor against you guys domestically.

So could you talk a little bit about your response here, or perhaps how to best position the portfolio to hold them off? Thanks.

Sure. Bill will address that.

Sure, this is Bill Kozy. We are aware of the launch and are particularly focused on the US as we understand it at this point in time. So as you would expect us, our sales and marketing plan and our programmatic response to that is in place.

As I just mentioned, we feel good about the number of new products that we have launched in the US market, and as well as the customer acceptance of those new products. So you will see us take I think an assertive position, of course, to try and defend the competitive position we have gained over the last five years and to work with both our diabetes patient as well as our channel to do the best we can to defend our positions .

Got it. Then one last one for me. Just one for Tom on Veritor. Tom, can you give us any estimate -- obviously the launch is going pretty well here. But can you give us any estimate in terms of perhaps what type of share you have picked up? Or given the units out in the field, maybe how we should think about that trending over the next year or so. Thanks.

Sure, this is Tom. We don't comment on share specifically. What I can say, as I mentioned, as you think about Veritor, of the 4,000 roughly placements that we have made to date the majority of those are going into the physician office, which is a new market for us. We have traditionally had rapid test only, CLIA moderately complex for the hospital market.

Veritor is a CLIA-waived product, our first-ever CLIA-waived product. So a large number of those are new markets for us.

The other thing I would say is that the growth that we are getting with Veritor today is driven primarily by flu, as Vince mentioned. Recently we launched RSV. We do have Strep A under active FDA review right now and we are expecting that to launch later on in the quarter, in Q2 we expect approval there. Of course, strep will help provide a bit less seasonality to the product as well as that tends to be a condition which can occur at different times than just flu itself.

So overall, though, we are very pleased with the progress of Veritor and expect continued progress moving forward.

So it is a small amount of share because we are right in the beginning of this.

Right.

Just really starting to ramp up.

Got it. Thanks for the color, guys.

Peter Lawson, Mizuho Securities.

Good morning. This is Eric filling in for Peter. So on the BD Biosciences, I know you had said that customers really couldn't put off purchasing instruments anymore. But have they actually changed their outlook? Has it improved any since maybe three months ago?

I would say there is less uncertainty than there was three or six months ago, and that the head of the NIH has been doing conference calls with the industry, with the customer base, talking about his expectation in terms of how he sees things going forward. So I think that people are beginning to understand what the future is going to look like in terms of funding -- not exactly, but over a smaller range.

I think that helped the market in terms of moving ahead. So we will see if that plays out or not, but that is what I see is different from where we were six months ago.

Thank you for that. Then on the Diabetes business, do you have any exposure to the Medicare competitive bidding program that is out there now?

No.

Perfect, thank you.

It is not durable medical supplies.

Matt Taylor, Barclays.

Hi, thanks for taking the question. Just wanted to ask a follow-up on BD MAX. I want to be clear that I understand what you feel the gating factors there are for the launch. And then as we start to see it ramp in the second half, do you view that as a linear ramp, or are there going to be multiple inflection points over time as you add assays or you get critical mass behind the product?

Matt, this is Tom Polen. Just to answer your question, we expect that there are certainly going to be reflection points as we have series of assay launches. Right? The launch of any platform like this is highly dependent upon menu expansion, which is an area that we are very, very focused on.

So today we have GBS and MRSA as approved products in the US. As I mentioned before C. diff is under active FDA review. And then we have a series of assays which are expected to launch in early FY14, including enteric bacterial assay and our GC/CT/Trich assay among those.

So we are, as Vince mentioned earlier, shipping now against a nice backlog that we have built. We are seeing positive customer demands and are expecting to see that ramp in the second half of the year.

So the next big event really is C. diff for us, and that is an important one.

Okay, great. Then can I just ask in terms of the year-over-year basis point change in the gross margins, could you parse out each of the factors this quarter that bridge you from last year to this year in terms of the puts and takes on the improvement?

Suky will do it.

Yes, so first -- the first quarter of 2012, overall 210 basis point increase, 90 driven by foreign currency. We talked a little bit about that, based on Kim's question earlier. So I will really talk more to the underlying drivers, which were about 120 basis points of improvement year-over-year.

So resins this year, we talked a little bit about it, accounted for about 40 of those basis points. ReLoCo, again we are still firm on $40 million to $50 million of incremental benefit in FY13; that accounted for about 60 basis points.

And then we had other continuous improvement and other benefits that were worth about 50 basis points. So those are, by and large, the biggest moving pieces.

We also had price erosion of about 30 basis points. But again, it is more than offset by some of those more fundamental underlying gains.

Okay. That's great. Thank you very much.

Derik De Bruin, Bank of America.

Hi, good morning. A lot of my questions have been answered, but I just wanted to do a couple of housekeeping questions. Realizing that it varies from quarter to quarter, what is your expectation for full-year net interest income expense?

Sure. Interest income expense? Just a minute, let me --

As we look it up.

Interest income we expect for the full year to be at about $25 million to $30 million. Interest expense we expect to be somewhere around $130 million to $140 million for the full year.

Great. Then just to make sure that I got this correctly on the M&A contribution that you are implying for 2013. It seems to be between 50 and 100 basis points of top-line contribution for M&A.

For the year, that's right.

For the year, yes, yes. I'm sorry?

50, 50.

About 50, great.

Great.

10 in the quarter, 50 for the year.

Which is the last three, remember; the others have annualized.

Right, right. Great. Thank you very much.

Doug Schenkel, Cowen

Hi, good morning. Thanks for taking the questions. Suky, I guess my first question is for you; and thanks again for all the detail on puts and takes in the quarter and how that impacts full-year guidance. But with that in mind I guess I have another bridge question.

You increased EPS by -- I think it is about $0.095 at the midpoint for the year. Could you just bridge how much of that is better than Q1 results, changes in thoughts on FX, increases in expectations for the balance of the year, and/or any other dynamics that came into play in adjusting guidance?

Yes. Primarily that $0.08 relates wholly to FX on the reported line. So if you think about -- I talked about the euro improvements of about 4% versus our previous guidance; that translates to about $80 million for the full year from a revenue perspective.

Internationally about 25% of that drops to net income. If you take that across our average shares outstanding you get to about $0.08 for the full year, which is what we have taken our guidance up on the midpoint.

Okay. So almost solely FX driven at this point?

That's right.

Okay. Then I guess a high-level Biosciences question. This was clearly the best quarter you guys have had in a while. Over the last several quarters, you have talked about funding challenges as a headwind.

I think that being said, it is fair to say you guys performed a bit worse than a lot of the Biosciences peers for several quarters. Again, last year you divested Labware; you put up a really great quarter. So it seems like it is a good time to ask -- how are you feeling about your competitive positioning?

Specifically as you think about your portfolio, is it where it needs to be right now? And how important a role would M&A potentially play in augmenting this portfolio versus really enhancing organic efforts to drive growth?

In terms of Biosciences and competitive position, we feel very good about the core business and its competitive position. I think we feel better about it than we did six months ago, now with the acquisition of Sirigen and the technology and product array that that brings in the reagent space. So we feel very good about the core flow business.

If I look at BDAB which is a small piece of it, it is still very embryonic for us. It is under $100 million. It is making progress; it has a long way to go. So still much to do in that piece.

You would expect that, as across the entire Company, we will continue to look for plug-in acquisitions. We don't feel the need to do something real large in that space.

We think we have adjacencies that we can move into and build out very nicely in the Biosciences space, as funding comes back into this space. And we think that has to happen over the long run.

Great. Thanks again.

Rich Newitter, Leerink Swann.

Good morning, guys. Thanks for taking the questions. Just maybe on emerging markets and China, I know we've touched upon it a little bit. Clearly you guys have been a little bit earlier than your peers and you have a head start there.

But just -- we have been hearing about a number of companies within the sector targeting the mid-tier. I was just wondering if you could talk about your competitive advantages there, what dynamics you are seeing play out as companies get more aggressive on that focus segment of the market.

The competitive advantage is going to be different by product area. I will let Bill comment on what we are doing in the Medical side of things. (technical difficulty) nice (technical difficulty) story. (technical difficulty) start there and we can talk about the rest of it.

Sure, I can give a couple of quick ones. We right now have got a little over 500 people trained and in the field, and we think that is one source of potential advantage.

Number two, we have ramped up particularly our medical production, making products in China for China. We think that is another source of advantage.

We have significantly expanded our capabilities to sell the Diagnostics products, and I may ask Tom to talk about that in just a second. And we have done the exact same thing down the Biosciences side.

So we are at a stage where we have got sales competence across all three segments. We've got reasonable scale established in the Tier 1 market. And as we have historically done, we try and get that capability established before we move into the more challenging segments, which is the reason we are now pushing the button to move to the next tier.

We think we are at a stage both in field sales, product supply, and by the way internal infrastructure in China to be able to go after that segment in a very definitive way. Let me ask Tom to comment on the Diagnostics.

I would just echo -- this is Tom -- echo Bill's comments. We have made some significant investments in channel in Diagnostics really over the last 24 months.

The other thing is I think that as we look at really offering our solution in China and other emerging markets, really making sure that we are very careful on what products we are focused on and are launching there. So, for example for us, we recognized that emerging drug resistance is an important issue to the healthcare system in China, and we were specifically focused on launching our products that help combat that issue in those markets.

So I would say that is building relationships with clinicians and key opinion leaders and experts in very deep ways, as we are combating issues which are very important to them, that make us a partner not only now but give it some legs going forward as other competitors may enter the space.

Just to add to that, in addition to all the focuses that were just mentioned, we do a lot of work on clinical knowledge transfer and training of our customer base. In fact we have signed three different Memorandum of Understanding with the Chinese government on infection control. So this is not just about product for us. This is about bringing knowledge.

And lastly, we had a very nice innovation story going wrapped into that knowledge transfer as we develop products on the Medical side, in particular in infusion therapy for the Chinese market. As Bill mentioned, not only were they made for that marketplace, but they are produced there, so we have an excellent cost base.

So we feel pretty good about our position, and we are gaining share.

Thank you. That's helpful.

Kristen Stewart, Deutsche Bank.

Hi, thanks for taking the follow-up. Just on the flu, you had mentioned that the timing was a little different. I just wanted to double check on that, that you had anticipated, I guess, previously about a 50 basis point impact. I guess it sounded like it was more of a 2Q event versus 1Q.

That's right. We expected it in Q2. It came more in Q1, which is a little unusual. Mostly it comes in Q2. So you hit the nail on the head.

Can you maybe just break out where you saw that benefit? How much of it was within Medical relative to Diagnostics?

We really -- there is no way for us to actually quantify that, Kristen, because it is just general demand, it's people going into hospitals. The primary benefit, of course, we see in Diagnostics. We see it in the flu testing categories; and we do see it somewhat in BACTEC sales, bottle sales. Because once you see the elderly in the hospital there will be other infections, and those sorts of things that happen along with it. So it is more in Diagnostics than any other place.

Okay. Then just lastly, I think you had mentioned that ReLoCo savings are on track to be around $40 to $50 million for the year. Is EVEREST spending still tracking I guess in line with your expectations? And should we look at that as plateauing this year and perhaps going down next year, or how should we just frame that?

EVEREST for the year we expect to be tracking along with our guidance. Suky?

Yes. We talked about $10 million increase year-over-year into 2013; and as we have said, this will be the plateau. We don't expect a major tailwind into '14 as the depreciation then kicks in.

Then you are absolutely right, Kristen, on ReLoCo. It is $40 million to $50 million. That is the incremental portions year-over-year; so just wanted to make sure that that was clear as well.

Yes. That is right on target.

Okay, and emerging market investment still around $40 million this year as well?

Emerging markets?

Yes, correct.

Yes, you've got it.

Thanks very much.

That was our final question. I would now like to turn the floor back over to Vince Forlenza for any closing remarks.

Sure. Thank you for your participation on our call this morning. We have strong business and product performance, along with excellent performance in emerging markets. We are very happy to see the ReLoCo benefits really kicking in from a cost-reduction standpoint and our efficiency programs moving forward.

And lastly we are continuing on the strategy of our plug-in acquisitions in deploying our capital. And we really look forward to updating you on the year next quarter. So thanks very much.

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