Becton, Dickinson and Company (BDX) Q1 2013 Earnings Report, Transcript and Summary

Monique Dolecki Vincent A. Forlenza - Chairman, Chief Executive Officer and President Suketu Upadhyay - Acting Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Controller Tom Polen - President William A. Kozy - Chief Operating Officer and Executive Vice President

David H. Roman - Goldman Sachs Group Inc., Research Division Kristen M. Stewart - Deutsche Bank AG, Research Division David R. Lewis - Morgan Stanley, Research Division Jon Davis Wood - Jefferies & Company, Inc., Research Division Amit Bhalla - Citigroup Inc, Research Division Kimberly Weeks Gailun - JP Morgan Chase & Co, Research Division Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division Brian Weinstein - William Blair & Company L.L.C., Research Division Jonathan P. Groberg - Macquarie Research Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division Jonathan J. Palmer - Credit Agricole Securities (USA) Inc., Research Division William R. Quirk - Piper Jaffray Companies, Research Division Eric Criscuolo - Mizuho Securities USA Inc., Research Division Matthew Taylor - Barclays Capital, Research Division Derik De Bruin - BofA Merrill Lynch, Research Division Richard Newitter - Leerink Swann LLC, Research Division

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 (404) 537-3406 for international calls, using conference ID 87420149. [Operator Instructions] 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 to [ph] first fiscal quarter results. As we reference 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 filing. 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 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're off to a good start this year, and we're 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 prefilled syringes and will be reported in our Pharmaceutical Systems business unit within BD Medical's -- BD's Medical segment. Growth in the first quarter was driven by our Medical and Diagnostic segments. Revenue growth was partially aided by an early flu season and favorable comparisons to the prior year period. In our Bioscience segment, we saw solid growth, which was driven by improved instrument placements in the U.S., as well as favorable comparisons to last year. We also saw strong continued growth in international Safety sales and emerging markets. As we've been discussing with you for some time now, we have spent the past 2 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've 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'd 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'd 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 FY 2013. 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're 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 benefit from a favorable comparison [ph] 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 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 U.S. and from a favorable comparison to the last year. The prior year period was negatively impacted by reduced U.S. 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 U.S. and continued strength in international sales. BD's reported U.S. revenues increased 3% versus the prior year. Growth in our Medical segment was 2.6%. Growth in the Diagnostic segments was 2.9%, and U.S. 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 3 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 U.S. 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% [indiscernible] 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 was benefited by some onetime 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 and 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 onetime 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 U.S. These items resulted in 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 the 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 furthered, we expect growth to be more [indiscernible] 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've 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'd 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 had 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 2 [ph] analyzers for CD4 [ph] 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 health care-associated infections, STDs, women's health, enteric and respiratory infections and cancer. We've 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'd like to reiterate the key messages from our discussion today. First, we're pleased with our solid start to fiscal year 2013. We continued delivering on our commitment of improved performance. Second, as we're starting to see notable results across the P&L as a result of our investment cycle, we're 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're 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're continuing to deliver value to our customers and shareholders worldwide. Thank you, and we'll now open the call to questions.

[Operator Instructions] Our first question is coming from David Roman with Goldman Sachs.

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 here that look more sustainable than what you're suggesting, most notably the churn in Biosciences. The comps there remain easy and get easier throughout the year. BD MAX is obviously in its early stages. It 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's reflected in your guidance. And then on the P&L, you referenced currency, the onetime item this quarter. But if you look how things progressed 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 can just help us with those factors.

Sure. So from a top line perspective, we did see a very good quarter, and we saw some, what I'll consider, durable gains in some of our businesses. We're seeing some very strong underlying growth in emerging markets, in Safety sales, and it's quite good to see a return to growth in U.S. 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'll consider very easy comparisons to the first quarter of last year. So once you neutralize those 2 items, we had a small amount of acquisition growth in the quarter, we think we're somewhere in that 4% to 4.5%, which is the top end of our range that we previously provided. That's giving us the confidence. So if you think about our full year guidance last year, 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, in the -- so I agree with everything that Suky said, and 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're a little conservative maybe there in terms of go forward. We'll have to see actually what happens in Biosciences. The other thing that I'd 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're 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. It's still early in the year, though.

Yes. And on your question, David, around foreign currency, you're correct. We do see a tailwind versus our previous assumption and primarily around the euro. So previously we guided at a full year rate of about $1.27. We've now got an assumption of about $1.32, which translates to $1.33 for the remaining 3 quarters. This translates to about a 4% benefit. So when you take that against the top line, it's worth about $80 million, and that's completely reflected in our new reported growth acceleration of about 100 basis points on the top line and 150 on EPS. There's 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's about the euro, and as I said, we've baked that into our reported guidance going forward.

Your next question comes from the line of Kristen Stewart with Deutsche Bank.

I was just wondering if you could maybe -- you'd talk about BD MAX and maybe just give us a little bit more color, just kind of how things are progressing and to what extent you expect that to contribute just to Diagnostics for the year.

Sure, Tom will talk to that.

Yes. This is Tom Polen. So we are continuing -- as Vince mentioned, we're continuing 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 he said, we do expect it to take several quarters. We're 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 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?

Yes, pipeline...

In terms of assays.

Sure. Pipeline continues to progress as we've communicated previously. Of course, we do remain very focused on menu expansion, and our third IVD assay in the U.S., Cdiff, remains under FDA review, and we're still expecting a launch on that later this quarter, Q2.

Yes.

Perfect. And 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're still really focused on doing plug-in acquisitions. I think that we're getting more confident as we do more of them, and we continue to improve our process. We're 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 3. So we're staying on that strategy for the time being.

Your next question comes from the line of David Lewis with Morgan Stanley.

Just maybe one quick financial question for Suky, maybe a quick follow-up for Tom. Suky, just first of all, gross margins, it was the strongest quarter in maybe 3 or 4 years. I appreciate there was an FX tailwind there, but you were sort of willing to say that you're comfortable with the upper end of constant-currency guidance. I wonder if you can talk about the sustainability of margin improvement, both gross and operating. And is it too early in the year to get comfortable with sort of the upper end of your operating expansion comfort for fiscal '13?

Yes, so great question, David. So first, from a gross margin perspective, it's 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's 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're confidently at the upper end of that gross profit range that we provided, which is somewhere in the neighborhood of about 50 to -- excuse me, 40 to 50 basis points of gross margin improvement year-over-year. Again, we're going to see some down quarters coming off of this quarter because of some onetime 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. And then, Tom, you talked a lot about the Diagnostic pipeline, but I don't think there's been a dramatic amount of sizing commentary. And I think about a couple of specific products. Cdiff, obviously in the U.S., 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 could you just give us a sense of, if you think about Cdiff or the women's health diagnostic franchise in '14, what type of size opportunity here do you think you're chasing?

Yes, this is Tom Polen. We have not commented specifically on the size internationally versus U.S. on that. What I would comment perhaps on the women's health is, as we've shared, our Viper LT platform is scheduled to launch x U.S. at the very end of this fiscal year. That does remain on track. We actually have started to install the first Viper LTs x U.S. as part of our clinical trial. That clinical trial is actually enrolling patients, running samples right now, preparing for the launch of HPV x U.S. So we do recognize that, with that launch of our HPV at the end of the year, combined with the launch of our Totalys front-end automation system at the -- on the psychology side of women's health, we will be in a very strong position, we believe, going into FY '14 around the women's [ph] portfolio. In terms of the U.S., Cdiff [indiscernible] does [ph]. Maybe just the only thing I would comment on is we do believe that continues to remain an overall attractive market. It's 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.

Your next question comes from the line of Jon Wood with Jefferies. Jon Davis Wood - Jefferies & Company, Inc., Research Division: So Vince or Suky, obviously, the buyback in the first quarter well ahead of the $500 million pace for the year. Just like your perspective on what's 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.

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

That's right. So we're still committed to the $500 million of share repurchases for the full year. As Vince quite rightly said, it's a balance. We try to take into consideration our U.S., x U.S. cash position but also maintain enough flexibility to take advantage of strategic M&A, other investments, et cetera.

Your next question comes from the line of Amit Bhalla with Citi.

I want to just get a little more detail from Tom on the Diagnostics side. 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 *GeneOhm and just give us some underlying trends there?

Sure. Sure, Amit. This is Tom Polen. Specific on molecular and women's health, so molecular was flat to slightly positive growth in the quarter driven by STD testing. That's 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 U.S. growth, which was partially offset by continued strong double-digit growth internationally. And that's been a trend that we've reported for the last several quarters. The extension of Pap intervals in the U.S. really driving that decline in the U.S. 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.

And just to follow up on the Biosciences, any other color you can provide, Vince, on instrument demand, why you saw that pick up 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 kind of came to terms with what their staffing was going to be and started to spend. And maybe you're getting more comfortable about the outlook from the -- where sequestration was going to be and kind of boxing that in. And 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 analyzer. We had Aria placements and LSR II placements perk up a little bit in the quarter. And 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 FY '12.

Yes, and it really was U.S. as well, too.

Your next question comes from the line of Mike Weinstein with JPMorgan. Kimberly Weeks Gailun - JP Morgan Chase & Co, Research Division: It's 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're seeing in Europe in terms of health care providers starting to come into compliance with Safety mandates?

So yes, we can, and really, we're 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 happens. Kimberly Weeks Gailun - JP Morgan Chase & Co, Research Division: Okay. Yes. And remind me the deadline on that? Isn't it by the end of this fiscal year that they're supposed to be...

It was May. It's May. Kimberly Weeks Gailun - JP Morgan Chase & Co, Research Division: May. Okay, okay. And just a follow-up on the gross margin. I know we've had a couple of questions on that this morning, but in terms of the FX benefit in the quarter to your gross margin, is it right, I'm remembering from past years that oftentimes you'll 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's multivariable, very complex but has to do with where -- what region product has produced that, when it's produced, what rate it's 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's one of the reasons that's driving the favorable FX in the quarter. Again, we expect that to neutralize for the full year. If that assumption changes, we'll update you throughout the year.

Our next question comes from the line of Rick Wise with Stifel, Nicolaus. Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division: A couple of questions. Maybe first on the U.S. Safety. Vince, it's -- if I'm looking at it correctly, U.S. Safety flat, one of the weaker quarters we've seen in some time. Just help us understand what the drivers were there. Maybe as part of that, you could talk about -- give us a little more color on the significance or potential significance of the Safety Syringe acquisition, how it's going to contribute and the timing of products, et cetera.

Sure, I'll let Bill talk to both of those, but really, U.S. Safety has been, I think, low single digits for a while. So this is not really a big change in U.S. Safety characteristics. Of course, we did have PhaSeal come into the product mix, but when you pull that out, it's been pretty flat single digit. Bill, you want to talk to SSI?

Sure. SSI -- this is Bill Kozy, Rick. SSI pulls us into this passive safety syringe market, particularly focused on the prefill side, and gives us a chance to really expand our product array with our -- particularly our big pharma customers, who are showing a little increased interest in safety platforms going forward. So you're familiar with the existing product that we had, which was not passive. This rounds us out on the other side and gets us into that new space. And we've got a reasonable amount of strategic interest on our part but as well as our big pharma customers. So we're enthused about bringing that into the BD portfolio.

Talk about [ph] guidance. Guidance. Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division: And when do you think you're going to see some products there, Bill, approved?

No, those products are already on the market. That is not a start-up scenario. It's a small revenue-based business but already with a customer base and a pipeline of potential new customers, which we're inheriting and pursuing. Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division: 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 do you -- what's your focus over the next 12 months or so? And I assume you -- we can expect that 20% plus kind of growth to continue.

So I like your [ph] editorial comment. But listen, we're very pleased with the results there, and it's across the board, across Medical. It's across PAS. It's Diagnostics, and Biosciences is doing well. So we built the basic infrastructure. We're now moving into what I would call mid-tier markets in China, expanding our [indiscernible] and our distribution partnerships. So I think we've 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've built a strong organization.

Rick, just one thing to close out on the Safety piece around the U.S. 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 U.S. and as Bill mentioned, primarily driven by the SSI acquisition.

Your next question comes from the line of Brian Weinstein. Brian Weinstein - William Blair & Company L.L.C., Research Division: 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 kind of the 100 you guys were expecting. Is there anything that -- well, first of all, why is -- why are you expecting still down 100 basis points? Are there things there that are going to flow through in back half of the year there? And kind of then going to the gross margin question again. If pricing is a little bit better, it would seem that there's potential upside on the gross margin side.

So 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're still watching Europe, in particular, to see what will happen there. So we'll revisit it at the end of the second quarter, but you're right. We're off to a little better start than we thought. Brian Weinstein - William Blair & Company L.L.C., Research Division: Is there any particular area where you're seeing price benefit that you didn't expect?

Are there areas where we're seeing price benefits? We didn't see the price decreases that we thought we might see, not -- it's not a pricing increase so much. Brian Weinstein - William Blair & Company L.L.C., Research Division: Okay. And then a quick follow-up for Tom just on the Cdiff delays. Is there anything to read into that? Or is that just a normal FDA dialogue? Are they looking for additional data or anything on that?

Brian, this is Tom. Nothing unusual, just normal process, and we have provided any additional information and our active discussion with them, but we'd consider this routine.

The next question comes from the line of Jon Groberg with Macquarie.

So Vince, can you maybe -- you mentioned the strength in Preanalytical. Can you maybe just talk on the Diagnostics? I mean maybe you can just talk a little bit about what thought drove that. And maybe -- I haven't really heard any comments, kind of 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.

Sure. So 2 pieces on PAS. One is they continue to do, as they have the last couple of quarters, very well in emerging markets. And as health care gets built out, of course, we're starting to see more laboratory testing. And that has accelerated over, I would say, the last 6 months or so. So we feel very good about their international strategy. U.S. was more timing and easier comparison. And we saw this last year where it was a little lumpy in the first half of the year. We're 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're basically still saying pretty stable, not getting worse. We're continuing to see softness because of this move to a larger interval in the U.S. for the TriPath business. Otherwise, I would call it stable. Tom?

Yes. And this Tom Polen, just following up on your question regarding microbiology growth. So 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're 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've commented on in the past, our acquisition of KIESTRA and really the -- 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.

Your next question comes from the line of Larry Keusch with Raymond James. Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division: Two questions. Vince, you mentioned emerging markets continue to do well, and that's been a trend that we've seen over the last couple quarters. It's also -- I think you said in your prepared comments that it's a relatively low-risk investment for you guys, and you're clearly seeing the results. I guess the question, 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? And then secondly, on the Safety deadline of May in Europe, what do you think happens when we approach that date? Do we -- do you really expect the countries to comply with that? And 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, et cetera, perhaps not fully complying with the deadline?

So it's the latter, which is we think we'll see a continuation of the trend that we're 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're 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're selling, we could probably go faster. And then there's a whole piece of distributor management that we're putting in place. And lastly, very important to us is compliance. And we don't want to get ahead of ourselves from a compliance standpoint and making sure that we really have the organization trained up. Having said all that, if we think there's 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. Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division: Okay. And if I could just sneak in one other one. I think, Suky, you talked about raw materials. How should we -- and the favorable comp. How should we think about raw material costs as you guys think about that going through the year?

Yes, sure. So raw materials in the quarter from a GP impact were about 40 bps, and that's 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're 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're looking about 20 basis points of gross margin improvement. We are seeing a slight tick up in crude prices quite recently. But as we've talked about before [indiscernible] anywhere 3- to 9-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.

Your next question comes from the line of Jonathan Palmer with CLSA. Jonathan J. Palmer - Credit Agricole Securities (USA) Inc., Research Division: Another follow-up here, Vince, on emerging markets. You're obviously seeing a great performance there and with 20% of -- more than 20% of sales, you're 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? And maybe putting it another way, at what point do you really get to harvest the bolus of these investments and drive the margins?

So 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're 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'd add is that to the investment theme, we have formalized our game plan for R&D investment targeted at emerging markets, and we're just in the start-up mode of placing R&D capabilities in the Asia-Pacific rim. We'll 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 that higher growth expectations going forward off a bigger base, this localized R&D competency is something we're enthused about.

Yes. Jonathan J. Palmer - Credit Agricole Securities (USA) Inc., Research Division: That was very helpful. And 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 I told a couple of years ago, we're going to roll out a series of 5 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're seeing the benefits of PentaPoint, Nano, Pearl, the safety pen needle, as really the examples really starting to impact that growth rate. We admit that the first quarter was a little bit hot, but we're just comfortable that the new products are allowing us to compete effectively all around the world.

Your next question comes from the line of Bill Quirk with Piper Jaffray.

First off, I guess on Diabetes, I guess kind of 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 U.S. It does kind of 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?

Sure, Bill will address that.

Sure, this is Bill Kozy. We are aware of the launch and are particularly focused on the U.S. 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 U.S. market and as well as the customer acceptance of those new products. So you'll see us take, I think, an assertive position, of course, to try and defend the competitive position we've gained over the last 5 years and to work with both our diabetes patient, as well as our channel to do the best we can to defend our position.

Yes, got it. And then just 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've picked up or, given the units out in the field, maybe how we should think about that trending over the next year or so?

Sure. This is Tom. We don't comment on share specifically, but what I can say, as I mentioned, the -- as you think about Veritor, of the 4,000 roughly placements that we've made to date, the majority of those are going into the physician office, which is a new market for us, right? We've traditionally had rapid tests 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're getting with Veritor today is driven primarily by flu, as Vince mentioned. We recently, we've 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, we're very pleased with the progress of Veritor and expect continued progress moving forward.

Yes. So it's a small amount of share because we're right in the beginning of this right now. We're just really starting to ramp up.

Your next question comes from the line of Peter Lawson with Mizuho Securities.

This is Eric filling in for Peter. So on the BD Bioscience, 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 3 months ago?

So I would say there's less uncertainty than there was 3 or 6 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. And I think that helped the market in terms of moving ahead. And so we'll see if that plays out or not, but that's what I see is different from where we were 6 months ago.

And then on the Diabetes business, do you have any exposure to the Medicare competitive bidding program that's out there now?

No. It's not durable medical supplies.

Your next question comes from the line of Matt Taylor with Barclays.

I 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 multiple inflection points over time as you add assays or you get critical mass behind the product?

So Matt, this is Tom Polen. Just to answer your question, we expect there will be -- 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're very, very focused on. So today, we have GBS and MRSA as approved products in the U.S., as I mentioned before. Cdiff is under active FDA review, and then we have a series of assays which are expected to launch in early FY '14, including enteric bacterial assay and GC/CT Trich assay among those. So we are, as Vince mentioned earlier, shipping now against a nice backlog that we've 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 Cdiff for us, and that's an important one.

Okay, great. And 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?

Sure. Yes.

Sure, Suky will do it.

Yes. So versus the first quarter of 2012, overall 210 basis point increased, 90 [ph] driven by foreign currency. We talked a little bit about that based on Kim's question earlier. So I'll 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, accounted for about 40 of that basis points. ReLoCo, again, we're still firm on $40 million to $50 million of incremental benefit in FY '13. That accounted for about 60 [ph] 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's more than offset by some of those more fundamental underlying gains.

Your next question comes from the line of Derik De Bruin with Bank of America.

So 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's your expectation for full year net interest income expense?

Sure. So interest income expense -- just a minute. Let me...

As we look it up.

So 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. And then just to make sure that I got this correctly, on the M&A contribution that you're implying for 2013, it seems to be between 50 and 100 basis points of top line contribution for M&A.

Year.

For the year, that's right.

For the year, yes, yes, yes.

All right.

I'm sorry?

Yes. 50.

50 for the year.

[indiscernible] the quarter, 50 for the year.

Which is the last 3, remember. The others have annualized.

Your next question [Audio Gap]

For Suky, I guess my first question is for you. But with that in mind, I guess I have another bridge question. You increased EPS by, I think it's 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. So primarily that $0.08 relates wholly to FX on the reported line. So if you think about -- I talked about the euro improvements of the 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 shares, average shares outstanding, you get to about $0.08 for the full year, which is what we've taken our guidance up on the midpoint.

Okay. So almost solely FX driven at this point.

That's right.

Okay. And 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've talked about funding challenges as a headwind. I think that being said, it's fair to say you guys performed a bit worse than a lot of the bioscience peers for several quarters again. Last year, you divested Labware. You put up a really great quarter. So it seems like it's a good time to ask, how are you feeling about your competitive positioning? And 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?

So 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 6 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 BD AB, which is a small piece of it, it's still very embryonic for us. And it's under $100 million. It's 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'll 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 bioscience space as funding comes back into this space. And we think that has to happen over the long run.

Your next question comes from the line of Rich Newitter with Leerink Swann.

Just maybe on emerging markets in 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've been hearing about a number of companies within the sector targeting the mid-tier. And I was just wondering if you could talk about your competitive advantages there, what dynamics you're seeing play out as companies get more aggressive on that focus segment of the market.

So the competitive advantage is going to be different by product area. I'll let Bill comment on what we're doing in the Medical side of things [indiscernible] nice [indiscernible] please start there, and we can talk about the rest of it in a bit [ph] .

Sure. Just a couple of quick ones. We, right now, have got a little over 500 people trained and in the field, and we think that's one source of potential advantage. Number two, we have ramped up our Medical production, making products in China for China. We think that's another source of advantage. We've significantly expanded our capabilities to sell the Diagnostics products, and I may ask Tom to talk about that in just a second. And we've done the exact same thing down the Biosciences side. So we're at a stage where we've got sales competence across all 3 segments. We've got reasonable scale established in the Tier 1 market. And as we've historically done, we try and get that capability established before we move into the more challenging segments, which is the reason we're now pushing the button to move to the next tier. We think we're 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 Bill's -- this is Tom -- echo Bill's comments. We have made some significant investments in channel and Diagnostics really over the last 24 months. The other thing is I think that as we look at really offering our solutions in China and other emerging markets, really making sure that we're very careful on what products we are focused on and are launching there. So for example, for us, we recognize that emerging drug resistance is an important issue to the health care system in China, and we're specifically focused on launching our products that help combat that issue in those markets. So I would say it's -- that's building relationships with clinicians and key opinion leaders and experts in very deep ways, as we're 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 the [indiscernible] also focuses that were just mentioned, we do a lot of work on clinical knowledge transfer and training of our customer base. And in fact, we have signed 3 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've 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. And as Bill mentioned, not only were they made for that marketplace, but they're produced there. So we have an excellent cost base. So we feel pretty good about our position, and we're gaining share.

Your final question comes from the line of Kristen Stewart with Deutsche Bank.

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 Diagnostic?

We really -- there's no way for us to actually quantify that, Kristen, because it's just general demand as 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's more in Diagnostics than any other place [ph] .

Okay. And then just lastly, I think you had mentioned that ReLoCo savings are on track to be around $40 million 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 kind of plateau-ing this year and perhaps going down next year? Or how should we just frame that?

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

Yes. So we talked about $10 million increase year-over-year into 2013, and as we've said, this will be the plateau. We don't expect a major tailwind into '14 as the depreciation then kicks in. And then you're absolutely right, Kristen. On ReLoCo, it's $40 million to $50 million. That's the incremental portion year-over-year. So I just wanted to make sure that, that was clear as well.

Yes. It's right on target.

Okay. And emerging market investment still around $40 million this year as well?

Emerging markets, yes.

Yes, correct.

Yes, you got it.

That was our final question. I'd 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 had 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're continuing on the strategy of our plug-in acquisitions and 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.