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Becton, Dickinson and Company (NYSE:BDX)

F1Q09 (Qtr End 12/31/08) Earnings Call

January 28, 2009 10:00 am ET

Executives

Patricia Spinella - IR

John Considine - Vice Chairman

Vince Forlenza - President

David Elkins - EVP and CFO

Gary Cohen - EVP

Bill Kozy - EVP

Analysts

Mike Weinstein - JPMorgan

Peter Lawson - Thomas Weisel Partners

Kristen Stewart - Credit Suisse

David Roman - Morgan Stanley

David Toung - Argus Research

Sara Michelmore - Cowen and Company

Jason Sheer - The Roosevelt Investment

Operator

Welcome to BD First Fiscal Quarter 2009 Earnings Call. At the request of BD, today's call is being recorded and will be available for replay through Wednesday, February 4, on the investor page of the bd.com website or by following 800-642-1687 for domestic calls and area code 706-645-9291 for international callers, using conference id number 81318661. 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. Patricia Spinella, Director of Investor Relations. Ms. Spinella, You may begin.

Patricia Spinella

Thank you. Good morning, everyone, and thank you for joining. During today's call, we will be making some forward-looking statements and it is possible that actual results could differ from our expectations. Factors that could cause such differences appear in our 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 the related financial schedules. A copy of the release which includes the financial schedules is posted on the bd.com website.

Leading the call this morning is John Considine, Vice Chairman. Also joining us are Vince Forlenza, President; David Elkins, Executive Vice President and Chief Financial Officer; and BD Executive Vice-Presidents, Gary Cohen and Bill Kozy.

I will now turn the call over to John.

John Considine

Thanks, Pat, and good morning to everybody. Prior to our brief comments regarding the financial results, which David Elkins, our new CFO will handle. I would like to remind you that we had announced a number of executive changes effective January 1, specifically, Vince Forlenza became BD's President; Gary Cohen assumed responsibility for International Operations in our Preanalytical Systems business unit; and Bill Kozy assumed responsibility for our Medical segment.

Because their responsibilities did not take effect until the 1st of the calendar year, Vince, Gary and Bill will each respond to questions regarding the segments they led during the first quarter of 2009.

I would also note that Vince and Gary are in locations outside of BD where we sit today. Since making those announcements, we have announced additional leadership positions, which I would like to ask Vince to please cover with you.

Vince Forlenza

Thanks, John, and good morning, everyone. I am pleased to announce two key leadership appointments that became effective January 1. Philip Siekman was appointed President Diagnostic Systems. Philip has responsibility for Microbiology Systems, Molecular Diagnostics, TriPath, Genome and Rapid Diagnostics. Philip began his career at BD Biosciences in France in 1988 and joined BD Diagnostics as President of Microbiology Systems in 2006.

Bill Rhodes was appointed President of BD Biosciences. Bill has responsibility for Cell Analysis and Discovery Labware, including the advanced BioProcessing business. Bill's career with BD spans more than a decade. In 2003 Bill became VP, GM for Immunocytometry Systems. His most recent role was President of Cell Analysis.

We are very fortunate to have such too talented experienced leaders with proven track records to take on these broader responsibilities and I am sure you will agree once you have had the opportunity to meet them and speak with them in the future.

With that, I will turn the call over to David to walk us through the numbers.

David Elkins

Thank you, Vince, and good morning, everyone. I assume you have all had time to review the earnings release and the attachment that was sent out this morning. We would like to devote as much time as possible to answering questions. Before beginning, we would like to make some brief comments regarding our first quarter results.

As reported in our press release, diluted earnings per share from continuing operations increased by 18% over the prior year's quarter. Reported revenue growth was about 2% after about three percentage point unfavorable impact from foreign currency translation.

In the Medical Segment, first quarter revenues declined about 2% after about a four percentage point unfavorable impact from our foreign currency translation. On a currency neutral basis, underlying growth increased about 2%.

Strong sales of our insulin delivery devices in the Diabetes Care unit were more than offset by softer than expected Medical Surgical Systems and the expected decline in U.S. sales of Pharmaceutical Systems

Global sales of safety-engineered products and its segment grew about 1% to $193 million, after about two percentage point unfavorable impact from foreign currency translation.

Revenues in our BD Diagnostics segment grew about 3% after about a three percentage point unfavorable impact from foreign currency translation. On a currency neutral basis, underlying growth was about 6%.

Sales of safety-engineered devices, cancer diagnostics products and infectious disease testing contributed to the revenue growth.

Global sales of safety-engineered products and its segment grew about 7% to $210 million, also reflecting about a three percentage point unfavorable impact from foreign currency translation.

Looking at the combined Medical and Diagnostics global safety, sales grew about 4% to $403 million after a 3 percentage point unfavorable impact from foreign currency translation, which resulted in an underlying growth of about 7% on a currency neutral basis.

U.S. growth rate was about 1% and ex-U.S. was at 11% after approximately 8 percentage points of unfavorable impact from foreign currency translation.

The underlying growth rate of our international safety was about 19% on a currency neutral basis.

In the Biosciences segment, worldwide revenues grew about 11%, reflecting about a 1 percentage point favorable impact from foreign currency, and as a result the underlying growth rate was about 10% on a currency neutral basis. Clinical and research instruments were the primary growth contributors.

Moving to gross profits, favorable foreign currency translation of about 260 basis points, coupled with product mix and productivity improvement of 40 basis points, were offset by continued start-up costs, unfavorable raw material cost of 80 basis points, resulting in a net gross profit improvement of 220 basis points versus the prior quarter.

SSG&A as a percentage of sales improved to 110 basis points, reflecting continued disciplined expense management.

R&D spending increased about 7% over the prior year's quarter after about 2 percentage points of favorable currency translation.

In terms of cash flow, we generated about $270 million of net cash flow operation after taking into account about $50 million related to an inventory build to ensure continuity in supply, including resin and about $120 million in pension contribution.

Buying back about 4.4 million shares of common stock for approximately $280million. We also invested about $95 million in capital expenditures.

The last topic I would like to cover with you is our guidance for fiscal year 2009. We are revising total company reported top line guidance to the lower end of our 1% to 2% range, reflecting to somewhat softer revenue in Medical in the quarter and solid growth in Biosciences and Diagnostics.

We are raising our EPS guidance for fiscal year 2009 to approximately 9 to 11% from our previous guidance say 10%.

Primary drivers of the improvement relate to the one-time benefit resulting from a lower cost of sales, due to favorable currency translation, the effects of our accelerated share repurchases and our continued cost efficiency programs.

Moving to revenue guidance by segment, BD Medical is expected to be negative about 1 to 2 percentage points on a reported basis, including about 6 percentage points unfavorable foreign currency impact, or about 4 to 5% on a currency neutral basis.

BD Diagnostics is expected to be about 2 to 3% on a reported basis, including 4 to 5 percentage point unfavorable foreign currency impact or about 7% on a currency neutral basis.

BD Biosciences, revenues will be about 6 to 7% on a reported basis, including 2 to 3 percentage point unfavorable foreign currency impact or about 9% on a currency neutral basis.

U.S. sales of safety engineered products are estimated to increase about 5%. International sales of safety engineered products are also estimated to increase about 5%, after about 12 percentage points of unfavorable impact from foreign currency. The underlying growth rate is about 17% on a currency neutral basis.

We expect our gross profit margin to improve about 80 basis points for the full year. SSG&A is expected to improve about 90 basis points as a percentage of revenues. Our R&D spending is expected to increase about 2%, after about a 2 percentage point favorable impact from foreign currency translation.

Our overall operating income margin is expected to improve about 120 to 140 basis points. We expect to generate about $1.8 billion of net cash from operation, and invest about $650 million in capital expenditures. We expect the average number of fully diluted shares to be outstanding in the range of 247 to 248 million.

In summary, despite guiding to the lower end of the revenue range due to the weaker sales in our Medical Surgical Systems products, we have raised our earnings guidance based on continued strong performance in our Biosciences and Diagnostic segments.

Less than expected unfavorable impact from foreign currency, accelerated share repurchases and our continued cost efficiency improvements.

Now, I would like to turn it back to John.

John Considine

Thanks, David. We will now open the call for Q&A. As always, we would ask you to limit your questions to one, plus a follow-up. We would now like to take our first question, operator.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Mike Weinstein with JPMorgan.

Mike Weinstein - JPMorgan

Thank you for taking the questions. Good morning, guys.

John Considine

Good morning.

Mike Weinstein - JPMorgan

There are a couple of key issues that we want to tackle. One is the performance of the Medical business, significantly the Surgical Systems piece. Could you give us a little bit better insight into what you are seeing there in the sense that the economy broadly across the company was not having a meaningful impact. If you could talk about what is impacting that business?

I think everybody wants to understand a little better the FX hedging gains that showed up in the gross margin line this quarter. Why did those occur in a specific quarter? It sounds as if they are one-time based on your gross margin and EPS guidance for the balance of the year? Thanks.

John Considine

Michael, I have Gary first address the medical side and then David will explain the gross margin to you.

Gary Cohen

John, unfortunately my line had disconnected momentarily. I had to call back in on another line. Was the question regarding medical sales, particularly medical surgical in the quarter?

Mike Weinstein - JPMorgan

That is right.

John Considine

What Michael was asking is to give him a little bit more color in terms of what the analysts had heard in the past is that we really weren't seeing a relationship between the economic debacle that we are in and hospital take downs in terms of inventories and like that and could you just talk a little bit more about the Med/Surg business?

Gary Cohen

Sure. Med/Surg sales were softer than we had expected. We expected Pharma Systems to perform as it did. It is not clear it is coming primarily from economic factors. As a series of things, I can explain, one of which is most likely related to economic factors, the others are independent of that.

First, we had been enjoying fairly strong revenues internationally from sales of auto-disable syringes in developing countries and those sales were up considerably in the first quarter largely as a result of a decision that has been made about a year ago of India to pull out of tendering with UNICEF for procurement of those devices.

We have been waiting for some time for results from India's local procurement tender, but that keeps getting postponed, already postponed twice. That was actually the largest single number in the quarter in terms of a shortfall to prior year for a particular product.

We are also in the U.S., as we have reported in previous calls, one of our key product area in safety, Needleless IV Access cannulas, which is one of our older, still very viable, but older product lines, that has been experiencing declines.

That essentially offsets the gains that we are getting in Nexiva. Nexiva sales were quite good, they were up 40%, but they were more than offset by the declines in that product line. Where we are seeing some economic related impact is primarily in the region we call EMEA, Europe, Middle East and Africa, and particularly related to Russia, where distributers who deal with us in dollars have become much more conservative and have been cutting down both their inventory levels and their purchases and that affected international sales. Those were the three primary factors that caused the softness in the Medical Surgical in the quarter.

We were watching trends closely in the U.S., relative to the economy. It is too soon to say whether we are seeing an impact there. We have done some correlation work on unemployment rates, which pretty conclusively showing that increases in unemployment will not have a negative effect on our revenues or not a discernible negative effect.

Those three things that I mentioned were the primary reasons for the softness in the quarter plus the general safety in the U.S. is not growing as rapidly as it had been, although, safety internationally continues to grow in line with what we expected, around 20%.

Mike Weinstein - JPMorgan

That is helpful.

David Elkins

Mike, this is David. In relation to your question, you are right. There is a nonrecurring aspect of the foreign currency movement. That is related to our cost of sales in euro denominated sales, which were purchased in U.S. dollars and if you remember, in November and December there was a significant swing in the Euro/Dollar exchange rate. As a result, the stuff goes into inventory at a higher exchange rate and it comes out where the dollar is now, which is about $1.30, so there is a gain on that is and a one-time gain that we realized that we built in.

Mike Weinstein - JPMorgan

Okay. Let us say the dollar from here goes to $1.35 in the next quarter. Do you have any other one-time gain?

David Elkins

Yes. It will happen, but what is different about this time is that the drop happened in a few weeks, and it happened over the quarter. That is why you saw such a change. Usually you do not have that impact because the exchange rates do not move that quickly. I think it went from about mid 140s to low 130s within a few weeks.

Mike Weinstein - JPMorgan

Okay. Let me just follow-up. If I look at the balance of this year, relative to I think what the Street was at, I think you came in at $0.11, ahead of consensus. You are taking your EPS guidance up by one percentage point. Actually, over the balance of the year, your EPS outlook is pulling in a little bit. You are being a little more conservative about second, third and fourth quarter and your gross margin guidance would be a little bit more conservative for the second, third and fourth quarter.

One, am I reading that right? Two, is that because of Medical or is there anything else that we should be aware of? Thanks.

David Elkins

I think just going on to gross margin, we had originally guided around 51.8%. We are saying that is going to improve, conservatively it is going to improve to 52%. That is where we are on gross profit.

Mike Weinstein - JPMorgan

If I think about the gain you picked up this quarter versus your expectation, the implication would be that the next three quarters gross margin would be lower than you were thinking before?

John Considine

Yes. Maybe I could just shed a little light on it. Mike, as David said, we have that one-time gain and while that popped this quarter substantially, since it is unique to this quarter and for the year, we were only going to get about a quarter's basis of percentage of it.

If it were 100 basis points for the year, it is going to average out to 225 basis points. When we looked at the remainder of this year, you are right that we risk adjusted the Med/Surge business within Medical. The other businesses Pharma Systems was on target with what we projected. Diabetes Care, as we said in the press release was strong, so all that was there.

When we looked at the remainder of the year there is a lot going on. Oil is down, but the resins have followed it dollar-for-dollar, but we think that there is probably an upside there. We do not know how significant other things might be, so we have just kind of given you as we always would, what we think we can all believe in. Therefore, the number is 52, it is a little lighter, as you said, because we were a little stronger in the first quarter than we might have otherwise been.

Mike Weinstein - JPMorgan

Okay. Great. Thank you, guys.

Operator

Your next question comes from Peter Lawson with Thomas Weisel Partners.

Peter Lawson - Thomas Weisel Partners

John, what is been driving the strength in the Bioscience business? Is that strength likely to continue for '09 with the kind of CapEx issues we are seeing out of pharma and hospitals?

John Considine

Bill, why do not you take that please?

Bill Kozy

Sure. The strong contributors in the first quarter were instrument sales. Both research and clinical continued strong performance in the sorter category has sustained itself throughout the quarter. We continue to have a good feel that we will meet our commitments in that instrument category for the year. At this early stage of research and clinical CapEx implications, we have seen a little less on the research side, particularly as ongoing interests in research with topics like cancer, stem cells and so forth have continued. Our pipeline continues to look steady. Looks like it did a couple of months ago, and so we are confident at this stage that '09 is a commitment that we will achieve.

Peter Lawson - Thomas Weisel Partners

John, on the other income line, the $9 million, where did that come from and what is your likely projection for 2009?

John Considine

You may have heard us talk about this. We have a deferred compensation program, and did you say other income or other interest?

Peter Lawson - Thomas Weisel Partners

Other income.

John Considine

Why did David not take it then?

David Elkins

In other income, there are really three things that were driving that. We had some hedge gains that came through under that line. Also, we had a one-time research fee of about $3 million. We also sold a small diagnostic product line which is a few million dollars.

Peter Lawson - Thomas Weisel Partners

Okay. What is that likely to be for 2009? That line item, kind of half a million a quarter or?

David Elkins

I do not see any material changes to where it is today. Those were all one-off gains that we had.

Peter Lawson - Thomas Weisel Partners

Thanks so much. I will get back into the queue.

Operator

Your next question comes from Kristen Stewart with Credit Suisse.

Kristen Stewart - Credit Suisse

Thanks for taking my question. I just wanted to circle back on the safety sales and just ask if are you seeing any push back just from a pricing perspective? Is it kind of unusual to see the slowdown in this quarter? If you could just break down the safety sales growth numbers for us for BD Medical and then the BD Diagnostic as well?

John Considine

Gary, you want to or shall I?

Gary Cohen

Let me take that. On the first part of the question, what we are seeing in the U.S. is not really related to pricing, it is more so related to the high level of conversions that had already been achieved and reduction in sales in the category, I mentioned.

The primary growth, underlying market growth is not as strong as it has been based on the conversion level. Nexiva which will be a growth contributor going forward as is push button set in Preanalytical will continue to contribute to grow and they are being offset by a product line that was once called Interlink, we now call blunt plastic cannula. It is not a pricing impact, it is more of a volume impact.

In terms of breaking out the numbers, do you want in terms of percentage changes or in what form would you like it?

Kristen Stewart - Credit Suisse

Percentage changes would be fine.

Gary Cohen

Okay. In the first quarter U.S. compared to prior year, Medical was down 1.7%, Diagnostics was up 4.6%; so that netted out to 1% for the company, we are expecting it to be stronger than that over the balance of the year.

Then international versus last year first quarter medical was up 20.5%, Diagnostics were up 18.7%; so that is 19.3% total. Over the balance of the year, we are expecting Medical to be a little bit higher than that and Diagnostics to be lower than that, internationally.

The total just putting those together on a currency neutral basis, by the way, the international numbers I just gave you were currency neutral, I can give you reported numbers if you'd like them. On the currency neutral basis, the total 3% in the first quarter for Medical, 10.4% for Diagnostics, and then total company 6.7%. Again, we are expecting that to be a little bit stronger over the balance of the year.

Kristen Stewart - Credit Suisse

Just a question on oil and resin pricing, I know last time you had budgeted in about I think it was $90 a barrel. Can you just give us an update on what you are thinking there and why gross margins shouldn't be a little bit better than when you are guiding to given the FX impact in the first quarter and given lower oil throughout the balance of the year?

David Elkins

Hi, Kristen, it is David. In the first quarter we did see unfavorable versus the prior year. You are absolutely right with oil prices coming down resin prices are favorable. I think that one thing we need to be cautious of is that the correlation between oil and resin prices that the correlation hasn't been as strong as it used to be. In fact, we are seeing some further favorability in resin prices, just everything that is going on with the automotive industry that the prices of resins are continuing to come down.

There could be potentially more upside to the margin as you highlight. Right now we are taking a conservative view on that and we will see how it progresses and we will give you an update on that in the second quarter after we get some more experience here in our purchases. We are trying to take advantage of where the price is right now.

Kristen Stewart - Credit Suisse

Last time you gave $1 per barrel that was assumed in your guidance. Are you seeing lower or is that incorporated already or are you still assuming $90 a barrel?

John Considine

What I would say is that the resin prices are definitely going lower, but what we are finding is that correlation with oil is out the door right now, just because the resin market is acting on its own.

Kristen Stewart - Credit Suisse

Can you comment may be on where resin prices are today versus the peak as they come down, in what degree of correlation are you seeing?

John Considine

They are coming down, right now they are coming down faster than what oil had.

Kristen Stewart - Credit Suisse

Okay. Thanks.

John Considine

You're welcome.

Operator

Your next question comes from David Roman with Morgan Stanley.

David Roman - Morgan Stanley

Good morning, everyone. Thank you for taking the question. Could we get an update on some of the new product introduction; did FocalPoint have any contribution in the quarter? Also, just give us some sense as to where we are on GeneOhm and TriPath?

Vince Forlenza

Sure. This is Vince, I will take that. The FocalPoint did not have a contribution in the quarter. The first sales of FocalPoint are taking place within this quarter. No, is the first answer, but we are excited about the product.

Regarding the claims that we got with the product, it appears to be about 25% more sensitive and manual in detecting cancer and has about 20% fewer ASCUS than the competitive imager and that is why we are excited about that.

In terms of the development on the molecular path, we were still on the same path that we discussed last quarter, which was to restart that trial in Q1 FY 10 and on the ovarian trial we expect to start that in Q3 of our fiscal year and '09.

In terms of the growth for TriPath was 9.3% on a performance basis.

Coming to GeneOhm, GeneOhm was up 25.6% versus last year. It was slightly down versus the previous quarter, there were a number of things that were impacting that. Clearly, we are seeing slower market development in these more difficult economic times; which is one of the things that have impacted us.

We also had a problem with some leaking tubes, which cost us during the quarter and some customers end of the year buying, probably also impacted us somewhat.

Those were the things that were happening in the short run. In terms of the product launches, C difficile, which had already been announced in Europe is now launched in the United States as of January 12.

We are hopeful that we will be through the FDA sometime during February. We think we have submitted all the data that they are looking for. Of course, that is subject to their final review.

We continue to expect to have our new chemistry out in the fall of this year and follow that with some off-the-shelf automation.

With all of that and looking how this market is developing in terms of guidance for GeneOhm, we are looking more in the range of around 53 million to 55 million versus the 61 I was talking about last time.

David Roman - Morgan Stanley

On the international Medical Surgical Systems, the issues in India and some of the other regions, could you just walk us through how those get resolved and how to think about the timing of that and sort of connect that to the guidance that you gave?

Gary Cohen

In terms of the volume for auto-disable or immunization syringes in India, the resolution of that is that of our hand, there has been a tendering that used to be done by UNICEF for India, the government of India decided to do that independently. Initially, locally, through U.N. OPs, a different agency and through their own government tendering process.

In both circumstances they went through the process and then didn't work the tenders, with all of the bids coming in and so forth and for quite substantial volume. We have been awaiting the results for both of those tenders in which case we would have emerged successfully based on what we had offered in our tender. We are waiting, we have really no control over what happens in that process.

Other than that, and then as I mentioned in Russia where the distributors, we use two significant distributors that both pay us in dollars, one is based in Germany, one is based in Russia for our sales into that market. In Russia, they have been more conservative in terms of managing their inventories and we are being little more conservative also in managing our receivables in that respect.

Other than that, international sales in medical are more or less where we expected them to be. Diabetes has been particularly strong; more so than even it is reflected in the numbers you will see because we actually had negative revenues in the smaller home healthcare, the elastic goods product line which is nonstrategic for us. The core product line of insulin delivery devices actually had faster revenue growth than was reflected overall.

If you want to think about the year on a currency neutral basis, of course, we are getting hit by the changing currency. We are looking at Medical Surgical growth in 3 to 4% range, both U.S. and internationally, that is what we are expecting over the course of the year, neutral currency, of course, with the currency impact the international revenues go negative.

David Roman - Morgan Stanley

All right. Lastly, if you look across both Medical and Diagnostics, whether it is Nexiva or Push Button Blood Collection Set, are you just talking about where we are on penetration in each of those businesses? When will those respective products become big enough to be growth drivers here?

Gary Cohen

I will comment on Nexiva and then perhaps Vince who want to comment on Push Button. They are two products on two different places. Push Button had been on the market several years earlier and I would say and Vince I am sure will verify it is significant.

Nexiva is still in an earlier stage, as I mentioned, we have 40% growth in the quarter versus prior year, so we are getting very solid growth. As I mentioned in previous calls, I would say it is going to take several years for it to start to reach its true revenue potential. It is going more or less as we expected. It is a fairly significant change for hospitals relative to the insertion procedure, it requires a lot of inservicing. When hospitals convert one-by-one, we do know something is going to happen rapidly.

Vince Forlenza

Adding on Push Button. Push Button did well in the quarter, it was up about 25%. It is in the range of 25, $26 million in the quarter, so it is substantial. The reason that you didn't see more of an effect from Push Button is in the PAS business, last year one of our distributors lost a major customer. They did not adjust their inventory in time. They did that adjustment in the second quarter. There was some double ordering which did smooth out over two quarters but it gave us a tough comp and that impacted the safety numbers this quarter.

David Roman - Morgan Stanley

Okay, great. Thank you.

John Considine

Next question, operator.

Operator

Your next question comes from David Toung with Argus Research.

David Toung - Argus Research

Yes. Good morning. Thank you for taking my call. I want to dive into a little deeper on a couple of things. One is on you talked about instrument sales. Are you seeing any different tones since the research community spending has been down the last couple of years given that the new administration is really talking about increased spending in the sciences? I also have a question on pricing.

Bill Kozy

At this point we have not seen a change yet in the customer tone. I think your question is a good one. I think this is all fairly fresh news. The administration has gotten real public about possible NIH spending increases and moving them to a tangible discussion really in the last two weeks. We have not seen any customer response other than the same buzz that you have probably seen in some of the media.

It would be too early for us to say that there has been any impact at all on people's outlook or how they might spend. There is high interest, particularly in the U.S. with NIH funded grants to see what is going to happen.

David Toung - Argus Research

All right. On pricing, well, within your growth margin, how much of effect was pricing and do you see any opportunities across your product line for pricing increase given the economic situation we are in?

John Considine

As I said before, we get about 0.2 built into gross profit for price increases. Right now as far as what we are been able to accomplish, we are not changing that view. We have been successful in taking some small price increases. We do not see any significant changes to that for the remainder of the year.

David Toung - Argus Research

Okay. Thank you.

Operator

Your next question comes from Sara Michelmore with Cowen and Company.

Sara Michelmore - Cowen and Company

Thank you for taking the question. Maybe, Vince, could we get an update on ProbeTec and Viper in the quarter and maybe a timeline update on the Viper XTR? I do not know that you mentioned it, but if you could also talk about the timing of the new HAI instrument platform? Thanks.

Vince Forlenza

Sure. Let me do molecular first. Molecular was up a little bit over 13% for the quarter. Meaning, the Viper, the ProbeTec, and the Affirm product lines. We continue to grow a little bit faster than the marketplace.

Coming to your question on the Viper XTR, has been approved by the FDA. We are starting the sales. Europe actually has converted a couple of accounts to the Viper XTR. Things are going well, continue to go well in that business and we continue to take some share on the margin.

Coming back to GeneOhm in the [instruments], so let me clarify a little bit. In the short run, our plan is to come out with the chemistry in the fall and add some off-the-shelf automation. Now, as we do that, that chemistry is going to be first put on the current thermocycler.

We are doing that to take advantage of the menu that we now have on the system and to significantly upgrade the work experience for the current customer base. Also, because of the slower ramp in the market, we have the ability to time this conversion a little differently.

On the new more automated system, we are looking at more of FY 11 for more of a fully automated system at this point in time.

Sara Michelmore - Cowen and Company

Great. Just a follow-up maybe for Bill on the Biosciences, I just want to clarify your comments. What were the key drivers for that business kind of tracking ahead of expectations in terms of product lines, both Cell Analysis and is the international Labware business, were ahead of our views?

Bill Kozy

Sticking with the earlier theme, it was instruments and it was ARIA, the sorter category, ARIA II and it was also the special order research products, the sort products, all performing modestly above expectations for the quarter.

On the Labware side, we have seen a little stronger global demand for fluid handling, as well as our ADME/Tox products.

We had some good international contribution particularly from Asia/Pacific with some favorable timing from China and Singapore contributing significantly to what you noted as a slightly improved growth rate for that business.

Sara Michelmore - Cowen and Company

Okay. Remind me, I think the ARIA II was launched in fiscal year '08. However, we got to be getting on the back-end of the ARIA product cycle. What does the outlook look like for the instrument?

Bill Kozy

It came out exactly a year ago. Just about a year ago, and by the way, we are not always the expert of predicting the growth curves for these new products, plus given the interest in sorters, we do think that ARIA II has got some momentum and a good chance to contribute significantly to the year in '09.

Sara Michelmore - Cowen and Company

Okay, that is helpful. Thanks.

Operator

Our next question comes from Jason Sheer with The Roosevelt Investment.

Jason Sheer - The Roosevelt Investment

Hi, actually my questions have just been answered. Thank you very much.

Operator

Your next question comes from Robert Ralston with Banc of America Securities.

Unidentified Analyst

This is actually [Brandon] in for John Wood this morning. Can you give us a sense of how much of the Bioscience revenue is tied to government academic budgets and would you expect the NIH stimulus to materially boost that business as to flow cytometry growth rate?

Vince Forlenza

Let me come out from the latter part of the question. We think it is little too early to think that the stimulus package is going to have a factor because everybody seems to be really lacking some details and specifics on what could happen.

Most of the researchers who were calling on have read the same media launches that we have about the possibility or the feasibility of maybe as much as $1 billion being added to the NIH budget.

There has been no targeted focus of that money. It is a little soon on our part to make any assumptions about where that might go. We are just taking a cautious position on that one.

Now, in terms of your bigger question about how much flows through government funded, probably the only reasonable guess we can give you is U.S. based and remember, a big part of this business is outside the U.S. For sure the NIH can have a 60 percent-ish impact on funding in just the U.S. market as we look across all the businesses in Biosciences.

Unidentified Analyst

Great. Can you give us a sense, has anything changed on the M&A landscape over the last two months, especially in the Diagnostics or in the Bioscience franchise?

John Considine

Not more than what you have seen across the broad industry. Obviously market values have come down across the board. Other than saying what you are well aware of, I could not point anything specific at this point in time.

Unidentified Analyst

Okay. That is great. Thanks.

Operator

Your next question comes from [Jim Baker with Newburger Burman].

Unidentified Analyst

Yes. I wanted to ask if you could repeat that breakdown of how you had the 225 basis points improvement in gross margin, so we could understand a little better, which elements of those are likely recurring and which are not? I also wanted to observe that kind of what Mike Weinstein was saying. You seem to be projecting gross profit for the rest of the fiscal year of 51.5% versus 51.14% for the calendar nine months of '08. That just seems like an extremely modest appraisal, I mean, you are really talking about the 35 basis point improvement for the balance of the year.

I wonder, is it just so much less than what you did. I am wondering if you could explain that again?

David Elkins

Sure. I will just walk you through the foreign currency. Foreign currency to the margin was 260 basis points. Of that, 160 basis points relate to the one-time nonrecurring improvement, that we talked about earlier. Of the remaining 100 basis points that relates to the net impact of our FX movement as well as our hedging program that we put in place.

If you think about the other components-mix and productivity it is about 40 basis points positive and then we have start-up in raw material costs in the quarter which is negative 80 basis points, so that gets you to 220 or for a total gross profit of 53.6 for the quarter.

Unidentified Analyst

Okay. Now about last thing you mentioned the start-up in the raw material, could that conceivably go to zero for the rest of the year? Or not be a negative anymore?

David Elkins

I do not think it would conceivably go to zero. We're always going to have the start-up cost for the year. Previously, we said that is around 40 basis points, the start-up costs. The raw materials, I believe it was Christine that asked about that. When it all comes down to what happens with resins. You could see further favorability there but we are not banking on that at this point in time.

Unidentified Analyst

Okay. I also wanted to mention there were some inventory write-offs last year 4 million in the March quarter and 6 million in the June '08 quarter which effected gross profit negatively. Are you expecting inventory write-downs this year or is that not necessarily in your guidance or you are not anticipating that?

David Elkins

We always anticipate having some inventory write-downs. I think that the levels that we have this year, I do not see any reason, why they'd be different than the levels that we had last year.

Unidentified Analyst

Thank you very much.

Operator

Your next question comes from Kristen Stewart with Credit Suisse.

Kristen Stewart - Credit Suisse

Hi, thanks for taking my follow-up. I just wanted to ask real quickly on the other income or other expense line item you had mentioned again on the sale of something. What was that specifically again?

David Elkins

It was a small diagnostics product that we had sold in the quarter. It was only about a million dollars, it was ACE glass.

Vince Forlenza

This is Vince. This is a very non-strategic product line. We had sold another piece of it in a year, and as David said that it was only $1 million in this quarter about in terms of sales. It was a $5 million revenue product line.

Kristen Stewart - Credit Suisse

Sorry if I missed this. How should we think about that line on a go-forward basis. I realized there is little bit of hedging in there as well, I mean, how should we think about that other operating income or other expense income item should churn for the full year.

Vince Forlenza

Kristen, I wouldn't see any material changes to that from where we are today, other than the ups and downs that we have from the hedge gains. Any one off things that occur will go in there but we are not anticipating any further one off at this point in time.

Kristen Stewart - Credit Suisse

Therefore, most of the hedging really will flow through more of your cost to goods sold line, if I understand how you are accounting is for your hedge right now.

Vince Forlenza

Yes. That is correct.

Kristen Stewart - Credit Suisse

Okay. In other words, they are not netted against revenue or included with the other income and expense line item?

Vince Forlenza

Sorry. Could you repeat the question?

Kristen Stewart - Credit Suisse

Is hedging only in cost to goods sold and then smaller portion in the other income and expense line item?

Vince Forlenza

No, hedging does hit sales and it does flow through to gross profit.

Kristen Stewart - Credit Suisse

And it hits sales?

Vince Forlenza

There are some translation hedges that occur in a company that come down through the other income line.

Kristen Stewart - Credit Suisse

Right. The hedges do not go through sales they go through cost to goods sold.

Vince Forlenza

They do.

Kristen Stewart - Credit Suisse

Perfect. Thanks for clarifying.

Operator

I would now like to turn the floor back over to John Considine for any additional or closing remarks.

John Considine

Thank you all for calling in. Glad to be with you. Just to summarize, we think obviously is strong quarter. We believe of the 11 or 12 businesses we have, we had one with some risk in it that we took out in terms of Med/Surg. I think the margins improvement of 80 basis points is solid. Could there be more, I think the resin is probably an upside. We continue our strong cost control measures and as you can see on our SG&A line in terms of leverage there. We have used our cash to support the stock and repurchased those shares early so that will give us benefit.

All in all, we are happy with this quarter. We think it is a good start into '09. Certainly a lot on horizon in '09 and we will update you again at the second quarter. Thank you.

Operator

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

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Source: Becton, Dickinson and Company F1Q09 (Qtr End 12/31/08) Earnings Call Transcript
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